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Europe wants to achieve climate neutrality. Find out what this means for investors.

Climate neutrality by 2050 – that is the target under the European Green Deal. The 26th UN Climate Change Conference, held in Glasgow, has set the course for an economic transformation on a massive scale. Find out more about the challenges the EU is bracing itself for, and the new opportunities for sustainable investment that are opening up.

Climate neutrality and growth: The European Green Deal is changing the world

Europe aims to become the first climate-neutral continent in the world by 2050. That is the ambitious goal the EU has set itself under the European Green Deal. It will require nothing less than the greatest economic transformation in Europe's history.

The parameters look promising for a transformation without large-scale economic losses. The EU possesses the largest and most mature market for CO2 certificates, for example, and is a leader in the growing renewable energy business. Furthermore, its powerful position in the global economy gives it political weight in the area of climate policy which far exceeds its geopolitical standing.

The European Green Deal: Climate neutrality within 30 years

Under the European Green Deal, Europe aims to become climate neutral by 2050.

Sources: European Environment Agency (EEA), Credit Suisse

National differences pose the greatest challenge to the European Green Deal

The differences between EU member states pose the greatest challenge to the Deal's implementation in practice. While the requirements for the European Green Deal are set on a centralized EU basis, implementing them is up to the individual member states. It is precisely here, at the national economic level, that CO2 intensity and thus levels of political interest diverge considerably.

The reasons for this are largely structural. Poorer EU countries are often unable to afford "cleaner" energy if their products are to remain competitive. At the same time, companies from wealthy EU countries with stricter emissions regulations often outsource their CO2-intensive production to foreign countries with comparatively permissive CO2 regimes.

CO2 intensity varies across individual economic sectors

In addition to differences in the reduction of CO2 intensity at the national level, there is notable disparity between sectors within the EU. While the CO2 intensity of the transportation sector has remained essentially the same over the past 20 years, certain successes have been reported in the manufacturing, service, housing, and agricultural sectors. The CO2 footprint of the construction and mining industries, on the other hand, has grown significantly. A major share of these developments is attributable to the EU's changing energy mix.

Change in CO2 intensity by sector

Changes in CO2 intensity within the EU by sector

Last data point: 2019

Sources: International Energy Agency (IEA), Credit Suisse

Towards climate neutrality with offsetting measures

The EU therefore faces the question of how it will succeed in achieving its ambitious climate goal by 2050 without abandoning individual sectors or member states economically, and without simply moving CO2 emissions overseas.

The route to achieving this is provided by a sensitive expansion of its world-class "cap and trade" system, accompanied by socioeconomic offsetting measures: The EU Emissions Trading System (EU ETS) is an effective market mechanism to facilitate the energy transition in the private sector. It promotes innovation, efficiency, and substitution on the basis of a simple and scalable principle:

  1. The EU defines the maximum volume of emissions per year.
  2. This amount is allocated across member states.
  3. Member states auction the corresponding emissions certificates to private-sector actors in the individual economic segments.
  4. Companies that need to release more emissions must buy more certificates on the emissions market.

This iterative process allows caps on emissions to be reduced gradually without directly interfering with businesses' commercial decisions. Most of the EU's CO2 emissions are not captured under the certificate system at present. Thus far, it has only been applied to power generation and heavy industry. In the future, however, the system is also planned to limit emissions from transportation, buildings, construction, agriculture, and other sectors.

Achieving climate neutrality through emission limits and emission certificates.

Achieving climate neutrality through emission limits and emission certificates.

Last data point: 10.12.2021

Sources: EEA, Refinitiv, Credit Suisse

The UN Climate Conference and the energy crisis: An opportunity for climate neutrality

In the view of Credit Suisse, the current explosion in prices for gas, coal, and oil – which some are also referring to as "greenflation" – is likely to accelerate the energy transition. This is also a matter of relevance for the 26th UN Climate Conference, which was held from October 31, 2021, to November 12, 2021, in Glasgow, Scotland. Topics included progress and shortcomings in global efforts to combat climate change since the Paris Agreement, as well as priorities for the years to come.

Sustainable investing: The winners and losers of decarbonization

With the pursuit of decarbonization in mind, investments falling under the supertrend of "Climate change – towards a greenhouse gas-free economy" are likely to rank among the most promising opportunities in the coming years. The energy transition stands to become one of the largest mobilizers of capital in the 2020s. The best investment opportunities are likely to come from innovative companies with experienced management, useful patents, and pricing power.

Commercial banks and property insurers can also be expected to benefit from this newly mobilized capital. The energy transition is bringing subjects such as smart mobility and digitalization to the forefront, not to mention how technology can best serve humanity as a whole.

The most emissions-intensive companies may well end up on the losing side, with some stocks finding their wings clipped by the expansion of the EU ETS to the transportation, construction, and housing sectors.

Another loser from the energy transition is likely to be its temporary winner: inflation. While energy prices are currently rocketing worldwide, this inflation driver will probably disappear just as quickly as it appeared. This, in turn, could result in a tailwind for global equity markets.

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