On the road to Net Zero – the world is still moving too slowly, but transformation is imminent in Europe

A stocktake of the progress on global environmental protection and climate action in 2023 fails to spread much optimism. Countries’ emission reduction commitments fall short of limiting global warming to 1.5 degree Celsius as reiterated by the Intergovernmental Panel on Climate Change in March. There is also an ‘implementation gap’ as national policies fail to deliver on commitments, resulting in record levels of greenhouse gas emissions in 2022.  

The good news is  the global community has reached universal consensus on climate protection. The urgency to act and the magnitude of the problem resulted in the ratification of the Paris Agreement. Similarly, a landmark Agreement on conserving and restoring biodiversity was reached in December 2022 at the United Nations Biodiversity Conference.

Now is the time to move from commitment to the implementation of a sustainable, post-carbon world. This requires a complete rehaul of national production and consumption systems and their underlying market rules. Additionally, the phase-out of fossil fuels, together with the rise of the green hydrogen economy will upend geopolitical and trade patterns, which require careful design of new global energy partnerships. 

Europe has already made good progress in rewriting market rules in alignment with a post-carbon economy. These are mainly crafted by the European Union (EU) and directly apply to Member States. The effort was kicked-off with the Action Plan for Sustainable Finance in 2018, which lays the ground to re-orientate capital flows towards sustainable investments. The EU Taxonomy, together with the gradual increasing of non-financial reporting requirements (e.g., under the Corporate Sustainability Reporting Directive) are key to providing more transparency of companies’ social and environmental management. This is timely from a market stance, as investors increasingly consider a company’s environmental footprint and ability to transform when assessing the long-term viability of their business model. Good ESG performance has also become a selling point on the job market.  

Australia follows Europe’s (and other jurisdictions, such as the UK and New Zealand) movement towards mandatory, harmonised sustainability-related disclosures. This is one of the key trends to watch in the sustainable finance space in Australia in 2023. Indeed, the second half of last year saw several significant developments on non-financial reporting, importantly, the launch of a consultation process in December 2022 by the Federal Government on climate-related financial disclosure. 

The transition of the real economy saw a change in gears following the European Green Deal, adopted in 2019. In a nutshell, it sets the goal of a just and fast transition to a net-zero emission, circular economy by 2050. To achieve this, the EU uses a wide range of instruments, including a carbon price, subsidies and incentives or binding targets. In recent times, we’ve borne witness to the internationalisation of EU climate policies. 

The planned Carbon Border Adjustment Mechanism will set a price on the carbon footprint of energy-intensive goods imported to the EU (e.g., cement, fertilisers, hydrogen). The tax envisages the avoidance of carbon leakage (where production in Europe is replaced by increased activities in countries with no or lower carbon taxes) and is expected to provide an effective incentive to realise reduction of emissions in other countries. There is an urgent need to cut emissions drastically across world regions; it is therefore appropriate to incorporate climate aspects in global trade relationships and policies. 

Apart from CO₂ pricing, policies and politics, in Europe (and elsewhere), the transformation has already unfolded. This has substantial socio-economic impacts, with winners and losers, and promises that a carbon-neutral economy will leave no actor unscathed. For example, a recent Deloitte study estimated that 25 per cent of the global workforce will be affected by economic transition impacts or are vulnerable to climate extremes. Unquestionably, this demands an active, participative transition. 

Germany’s transformation expertise lies in the (coal) power sector and is rapidly expanding to the automotive sector. Indeed, the former is an old hand, having initiated the transition from coal, gas and nuclear to renewables in 1990. The decision to set end dates for nuclear and coal power followed in 2011 and 2020, respectively. Coal mining in Germany has a long history, and its phase-out has had a marked impact on mining districts. Germany has adopted a holistic approach to regional development policy, making substantial investments in a wide range of social and economic infrastructure to create high-value jobs and attract businesses. 

Yet there is also the flip side to the coin, i.e., the transition to renewable energy sources. Like Australia, Germany aims to seize this historical opportunity, seeking to build up clean tech industry and renewable energy production capacities, including green hydrogen. In doing so, there is a focus on transforming the coal mining districts into Germany’s future energy regions, with the government kick-starting the process with investments of €40 billion over the transition period up until the end of the 'coal age'. 

The complexity of the transformation journey is inescapable and there is still a long way to go. In the near future, we must obtain much needed transparency of businesses’ social and environmental impacts, a key ingredient for creating a sustainable economy. The upcoming European carbon border tax will change global trade relationships, certainly not without frictions – but will be worthwhile given the stakes.