A recent study by the European Central Bank (ECB) has revealed that accelerating the transition to a greener economy would be more cost-effective for euro zone companies, households, and the banks serving them compared to delaying the process.
This "climate stress test" conducted by the ECB is one of the most comprehensive studies on the economic implications of achieving emission-reduction goals in line with the Paris Agreement. It analyzed data from 2.9 million companies and 600 banks in the euro area with a combined exposure of nearly €3 trillion ($3.22 trillion).
The study indicates that implementing green policies and investments to phase out fossil fuels and promote energy efficiency sooner rather than later would lead to fewer defaults by households and companies, resulting in reduced losses for banks through 2030. Under an "accelerated transition" scenario, euro zone firms would invest around €2 trillion by 2025 to reduce their emissions, as opposed to €500 billion under scenarios with delayed transitions.
While this approach would lead to an initial 10% rise in energy costs for households by 2025, these expenses would stabilize. The ECB suggests that despite these higher initial costs, the long-term benefits include lower energy expenses and reduced financial risks, which would result in banks' annual losses on loans peaking at €13 billion in 2026, gradually decreasing to €6.6 billion by 2030.
In contrast, a scenario where most transition costs are postponed until 2026 and beyond would see annual losses for banks steadily increase to €21 billion in 2029. Over the cumulative period, banks would experience losses equal to 0.7% of their loans by 2030 under the accelerated transition, compared to 0.9% under the delayed approach.
It's worth noting that these losses would be concentrated among a small number of large banks, with 2% of lenders accounting for 75% of the total expected losses by 2030 in the delayed transition scenario. This discrepancy arises because larger banks tend to issue more unsecured loans, which, without collateral, result in more significant losses when unpaid.
The study also highlights that sectors with high emissions, such as mining, manufacturing, and electricity companies, would experience the greatest increase in defaults if the transition is delayed. This research underscores the potential benefits of a swift transition to a greener economy, not only in terms of environmental impact but also in terms of economic stability and resilience.
By fLEXI tEAM