Picture Credit : Copernicus
Global warming presents Europe with a twofold challenge: adapting to its impacts and staying the course of the energy transition. Nearly ten years ago, in 2015, the Governor of the Bank of England, Mark Carney, warned of the tragedy of time horizons and the risks that climate change poses to financial stability[1]: since the time horizon of financial market participants and regulators does not exceed three to five years, they ignore climate risks, which were and still are too often greatly underestimated[2]. Mark Carney insisted that ‘it will be too late when the risks materialise’. Since then, regulatory agencies have been trying to force financial operators to take these risks into account. Some progress has been made, although according to the ECB[3] it is still not enough. What about the consistency of the emergence of climate risks with the time horizon imposed on politicians by the new European budgetary rules?
This horizon is divided into two phases: a period of adjustment of the budget balance of 4 to 7 years, adaptable to the electoral cycle, followed by a period of ten years during which the ‘adjusted’ balance should make it possible to reduce the debt ratio and then stabilise it at a level deemed to be sustainable. However, by refusing to introduce a golden rule clearly excluding investments to mitigate or adapt to climate change from the calculation of the deficit, and despite a certain amount of flexibility over the length of the adjustment period, the legislator has rendered these rules blind to climate risks and above all to the means of mitigating them. Is this consistent with what we know about the timing of these risks?
The urgent need for investment in climate adaptation between now and 2040.
In the long term, the uncertainties surrounding global warming and its impact beyond 2040 mean that we need to apply the precautionary principle. If a sea wall has to be built to contain the rise in sea level, a cautious assumption is necessary. Assuming global warming of 3°C (4°C for France) in 2100, as in the draft French Adaptation Plan currently under consultation, is a reasonable option. It corresponds more or less to the assumption that the policies in place around the world will continue (before the election of D. Trump). However, this assumption will have to be regularly subjected to critical scrutiny.
The horizon for fiscal rules is limited to the next 10 to 15 years and the 4 to 5 year electoral cycle for politicians. The inertia of the system means that global warming during this period will depend only marginally on the mitigation policies implemented. Whatever the scenario, average global warming compared with the pre-industrial era will fluctuate around 2°C by the end of the 2030s, compared with 1.5°C in 2024. According to the IPCC[4] critical thresholds, particularly for human health, agricultural production, ecosystems and infrastructures, have already been crossed or will soon be crossed in Europe.
The European Environment Agency[5] has identified 21 risks generated by global warming that require urgent action. Urgency is determined by two factors: the time it takes to plan and fully implement investments (adapting heavy infrastructure, transforming agricultural production, insulating buildings to protect the population from heat stress, measures to cope with rising sea levels); or the need to prevent risks that are already materialising and are set to worsen. Without prevention, the consequences, both human and political, both economic and on public budgets, will be severe as of now, as a study by the European Commission recently showed[6] The recent floods in Valencia, in the Pas-de-Calais and in Germany (2021), the fires in Greece or the drought in the Pyrenees in 2023 and 2024 bear witness to this. Only investment in adaptation will make it possible to mitigate these risks. Procrastination in this area is costly.
Speeding up the phase-out of fossil fuels is also a matter of competitiveness and sovereignty.
Procrastinating on mitigating greenhouse gas emissions is not an option either, regardless of the international commitments made by the European Union. The European Union is 70% dependent on fossil fuels (France 50%). Reducing this dependence is not only a contribution to curbing global warming, but also to greater energy independence associated with an accelerated fall in energy costs thanks to renewables, greater visibility of these costs, an improvement in the balance of trade and greater resilience of the European economy. The transition is not without social, economic and financial risks, as it may involve restructuring jobs and devaluing productive assets. The current plant closures in the automotive industry and the difficulties faced by energy-intensive industries bear witness to this. The Draghi report[7] points the way to a dynamic that will mitigate these risks by means of a substantial budgetary commitment in addition to good coordination of public policies, regulation, trade policy, support for household and business investment, and investment in vocational training and infrastructure.
Mark Carney raised awareness of the tragedy of horizons in which financial market participants and regulators were involved. The new rules for coordinating budgetary policies are short-sighted at best. These rules are accommodating when they do not encourage political procrastination. Their revision will rapidly become essential in order to free up investment in adaptation and transition. The sooner the better.
[2] https://carbontracker.org/reports/loading-the-dice-against-pensions/
[3] https://www.bankingsupervision.europa.eu/press/pr/date/2022/html/ssm.pr220708~565c38d18a.en.html
[4] https://www.ipcc.ch/report/ar6/wg1/downloads/factsheets/IPCC_AR6_WGI_Regional_Fact_Sheet_Europe.pdf
[5] https://www.eea.europa.eu/fr/publications/evaluation-europeenne-des-risques-climatiques-synthese
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