How Fit for 55's unmatched ambition has raised the bar

ESG expert unpacks how the latest stage of the European Green Deal and the IPCC report can inform sustainable investors

How Fit for 55's unmatched ambition has raised the bar

The European Green Deal set an ambitious goal – to reduce net greenhouse emissions by at least 55% by 2030. The details of how this will be achieved, recently outlined in the EU’s Fit for 55 legislation package, sent shockwaves across the globe because of its scope and potential impact.

The proposals are designed to translate targets into concrete action. It includes the application of emissions trading to new sectors and a tightening of the existing EU Emissions Trading System, and a faster roll-out of low emission transport modes and the infrastructure and fuels to support them. The Fit for 55 document also aligns taxation policies with the European Green Deal objectives and measures to prevent carbon leakage.

It’s just one example of how 2021 has shifted the landscape through several major climate-related developments, which also included the IEA’s Net Zero Scenario and the Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment Report.

Traditionally, when it comes to sustainability, the world follows the EU’s lead. For that reason, Jamie Bonham, NEI Director, Corporate Engagement, told WP the Fit for 55 presents a bold vision of the future and how we get there. For sheer ambition, it’s unmatched.

He said: “Whether all the proposals land remains to be seen. But from a vision perspective, this is miles above anything we've seen in any jurisdiction. It has set a bar that no one else is really close to.”

Making pollution expensive

The caveat to the plans is that it must be debated by the EU and could take up to two years to finalize. It may look very different in its final form.

Nevertheless, it’s a serious statement of intent, including a carbon border adjustment tax which has really caught people’s eye. This will put a carbon price on imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to “carbon leakage”, which is when, for example, a company switches operations to a different country to avoid climate-related tariffs.

This new mechanism is designed to contribute to a global emissions decline, instead of simply pushing carbon-intensive production outside of Europe. Crucially, it also aims to encourage industries outside the EU – North America, take note – to take steps in the same direction.

The whole point, explained Bonham, is that the legislation proposals make pollution expensive. “[Fit for 55] was a real shot across the bow for a lot of countries,” Bonham said. “It makes it very real for everyone outside of the EU because this is basically an extension of the EU’s climate agenda into the world.”

If successful, he believes it could drive some real change. Canada, for example, might feel it doesn’t need to implement exemptions if companies can pay the full rate. Opposition has already risen, questioning whether this is compliant with World Trade Organisation rules and rigorous debates are likely. Bonham added: “A lot of water will go under the bridge before they're done figuring it out, but it is relatively visionary.”

But while this will ruffle feathers, what should shock investors is the ambition required to meet the 55% target exposes the fact that the world has not done enough to combat the climate crisis. If this push had started 20 years ago, such grand goals would be unnecessary. And if policymakers kick the can further down the road, the solutions required are going to become more stringent and extreme because we'll be facing more pressure.

The risk of standing still

Another proposal that could have a wide-reaching impact is the change around the EU Emissions Trading System (ETS), which puts a price on carbon and lowers the cap on emissions from certain economic sectors every year. In the past 16 years, it has brought down emissions from power generation and energy-intensive industries by 42.8%. Fit for 55 wants to reduce the overall emission cap even further and increase its annual rate of reduction. It’s also proposing to phase out free emission allowances for aviation and include shipping emissions for the first time, and set up a new ETS for road transport and buildings.

These are seismic potential changes and, for investors, can inform where the opportunities and risks are. Airlines, for example, don’t have a lot of easy options, while the market for more efficient building technologies should grow.

“If you already believe in the opportunities that will come from the transition, [the Fit for 55] is a seal of approval,” Bonham added. “If you're not already thinking that way, it would highlight the risk of standing still.”

Where debate will likely rage more intensely is in the dangers of the transition having an inequitable impact on low-income consumers. Is expanding the ETS going to hurt those segments of the population who proportionately spend more of their paycheck on energy and transportation? Making sure there are no knock-on effects will be crucial to gaining broad buy-in, said Bonham, who stressed that this issue must not become even more of a political football.

He added: “The justice equity aspect has to be top of mind if we want buy-in and we don't want to create deeper inequalities, which is what’s already threatening to tear us apart right now.”

While the Fit for 55 announcement was an example of the boldness required in global policy if we are to have a chance of meeting the goals of the Paris Agreement, the IPCC report showed just how far off we are from limiting global warming to 1.5C above preindustrial levels. The latter report’s overarching message was direct: human-induced climate change is an unequivocal reality.

There is also good news in the report. Bonham said it makes it clear that constructive actions now will have a positive impact but that “we all need to step up our game” to make that happen. The report, however, is a sign we might finally be ready to treat climate change as the existential threat that it is.

His optimism lies in how clearly the IPCC connected human-induced climate change and extreme weather events.

It’s not the only finding that should spark action. Some of the impacts of climate change, even if we achieve our net-zero goals, will take millennia to reverse, while our window to avoid exceeding the 1.5°C climate threshold is roughly 10 years shorter than we thought.

The principal question remaining is whether the blunt language of the Sixth Assessment Report make any difference? NEI’s assessment is a qualified yes. Language matters and scientists have gone from previous expressions like “very high confidence” or “very likely” to now using the term “unequivocal” to describe the link between human activity and climate change. This is monumental, Bonham said.

“The report is absolutely clear—the longer we wait, the more extreme future policy actions will need to be, and the greater the risk that we start to encounter dangerous tipping points.

“We anticipate much bolder government action as a result. Companies and investors should be prepared to protect themselves from and embrace the opportunities of a rapidly shifting policy environment. We hope that the Sixth Assessment Report will remove the uncertainty surrounding the permanency of climate policies and lock in certain foundational principles – such as carbon pricing or the low carbon fuel standard.”

For NEI, as change agents, part of its job is holding companies accountable and making sure they go beyond lip service. In light of these reports and proposals, it’s concerned that Canada, despite some supportive policies, is simply not moving fast enough and wants to ensure its companies stay viable as we move into a greener future.

For investors, they must think of their portfolio through a zero-carbon lens. As Fit for 55 and the IPCC report starkly laid out, no one can afford to be left behind.