The quicker the EU economy can transition to a green economy, the cheaper it will be than if the move were delayed, the European Central Bank (ECB) said on 6 September.
“We need more decisive policies to ensure a speedier transition towards a net-zero economy in line with the goals of the Paris Agreement. Moving at the current pace will push up risks and costs for the economy and financial system,” said ECB vice president Luis de Guindos.
The ECB’s second climate stress test found that a longer transition period would be costlier for households, companies and banks. While an accelerated transition initially requires greater investment and higher energy costs, it would save European firms billions and limit bank risk, the study found.
Using data from 2.9mn companies and 600 banks in the eurozone, the study looked at three different transition scenarios. In the first, green policies and investments lead to a reduction in emissions by 2030 in line with the Paris Agreement. In the second scenario, the transition continues at its current pace but doesn’t speed up until 2026 to reach the 2030 emissions target. And in the third scenario, the transition is delayed until 2026 and the Paris goals are not reached by 2030.
In an accelerated transition, green investment rises to €2tn by 2025, but only €500bn for the longer transition scenarios. Meanwhile, energy costs in an accelerated transition would rise 10% for households before stablising in 2025. This would see annual losses for banks peak at €13bn in 2026 before declining to €6.6bn by 2030.
A scenario in which the transition is delayed to 2026 would result in a need for swift investment and puts firms at higher risk, the study found. Annual costs would steadily rise to €21bn in 2029.
Banks also face higher credit risk and losses if the transition is delayed, as they are more vulnerable to transition risk, the ECB found. In the late-push scenarios, bank credit risk rose more than 100% by 2030 compared with 2022, while the risk was only 60% when the transition was accelerated.
Meanwhile, the study found that bank losses would be concentrated among a few large banks, which would suffer a loss of 0.7% of their loans by 2030 in an accelerated transition, or 0.9% if the transition is delayed.
The stress test builds on the ECB’s first exercise, which found that banks are failing to incorporate climate risk into their risk management frameworks.
This page was last updated September 18, 2023
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