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Earlier this year, we saw the profound and positive impact the Covid crisis had on greenhouse gas emissions as entire economies locked down and travel was halted. There are hopes that this period will inspire people to follow more environmentally friendly, sustainable lives. But the reality is that it’s government policy that will be crucial in determining the impact of this crisis on the green agenda. And, at the moment, the response around the world has been mixed.
Europe stands out for its strong climate commitments. Its 2030 emissions reduction targets are more stringent than elsewhere in the world, and there’s been no desire to loosen these in the face of the crisis. Indeed, the green agenda has been boosted by the requirement that at least 30% of the EU Recovery Fund be directed at climate protection and emissions reduction goals.
On top of that, some individual countries are topping up their green commitments with local fiscal boosts. In Germany, of the €130bn stimulus package announced, €50bn is dedicated to reducing emissions, and research and development into low carbon industries such as electric vehicles and hydrogen. Meanwhile, France’s €100bn recovery plan dedicates €20bn to climate change investments, including encouraging increasing electric bike usage and old building renovations.
These actions contrast sharply with the lack of ongoing commitments from the UK. The UK has made significant strides in improving environmental outcomes over the past decade, in part thanks to its EU membership, which incentivised emissions reductions. The challenge facing the UK government will be maintaining momentum in emissions reduction outside the strictures of European regulations. This will include ensuring that the planned acceleration in public investment spending is consistent with long-term environmental goals.
From this perspective, it’s worrying that climate change has temporarily fallen to the wayside in political discussion. For example, the UK government’s fiscal support package didn’t include a meaningful climate component unlike its European neighbours.
Across the Atlantic, coronavirus relief has been a boon for corporates in Canada, including oil and gas firms. While the funds they’ve been given technically have a climate requirement, it isn’t clear how it will be applied. Longer term, the pandemic probably won’t substantially shift the green agenda in Canada either way.
This is particularly obvious in the US, where right-wing voters are less inclined to see climate change as a pressing issue (or an issue at all). Meanwhile, for voters on the left, the environment is central to their political ideology. Before the pandemic, environmental policy wasn’t front and centre for the Republican administration, and the fiscal support passed so far has no clear environmental component. As such, the US election in November, rather than the pandemic, is the key driver of environmental policy. If Democrat Joe Biden wins, the outlook for green policy is set to be a lot more positive.
For the two largest markets in Asia, the outlook for green policy is more mixed. China has made high-profile commitments to significantly increase the share of electrical vehicles in transport fleets and target net zero emissions by 2060. But in reality, the de-carbonisation of the power sector and industry is progressing very slowly and new investment in coal-fired power stations continues to increase.
Meanwhile, India’s stimulus package disappoints on the climate front, containing support for both coal and oil industries, as well as giving the go-ahead to clear forests for industry. Although ‘green’ jobs are to be created in some rural communities, there’s a risk of land conflict between the people and the forestry departments.
In Japan, in general climate change isn’t a top voter concern, which is reflected in the ruling Liberal Democrat Party’s unambitious climate policies and continuation of coal funding. Japan only has $74million of its $2.2 trillion economic stimulus package set aside for renewable energy-powered factories for companies moving their manufacturing back to Japan and eco-friendly public ventilation systems.
Investors need to understand these country-level trends because the companies they invest in don’t operate in a vacuum – they’re subject to the regulatory and legal environments in which they operate. So understanding which regions are leading on climate change and which are lagging can help investors understand the potential risks and opportunities in their portfolios.
Stephanie Kelly is Senior Political Economist at Aberdeen Standard Investments