Should climate investors worry about the European elections?

EU climate policy is likely to weaken but not radically change after the upcoming parliamentary elections, policy analysts have told Net Zero Investor.

This is because much of the policy machinery is already place, and cannot easily be rolled back, due to the structure of EU institutions, which enable member-states to veto new laws and decisions. 

Good and bad news

The good news for investors is that the general direction of EU's long-term climate policy is unlikely to change. Investors, especially long-term renewables investors, require a degree of continuity to make their projects economic.

A new wind farm, for example, is a major time- and capital-intensive investment the fruits of which take many years to ripen. The last thing developers want is a U-turn in policy - say the removal of subsidies or some other form of price protection - to undercut the investment. 

This is especially true in the challenging macroeconomic environment in which rising interest rates and inflation have put substantial pressure on infrastructure investments.

The bad news is that a weakening of ambition going forward could put a brakes on the momentum of the energy and broader sustainability transition.

Many climate-focused asset owners call for more "carbon pricing" to support their renewables investments and give them confidence to move away from oil and gas. Canada Pension Plan, for example, recently called carbon pricing the "holy grail" of climate policymaking. 

While the EU's flagship Emissions Trading Scheme is generally seen as a highly efficient policy tool for supporting innovation and decarbonisation, a weakening of climate ambition at the EU level may prevent or delay the scheme from being extended to cover more sectors.

The current EU Commission president Ursula von der Leyen is a vocal proponent of a global carbon price in line with IMF recommendations.

A weakened ambition could also translate as a less aggressive setting of net-zero goals. There has been a suggestion that the EU, with the right climate leadership, could push forward its aim to reach net-zero to 2040, but this would be incredibly unlikely under a right-leaning parliament and commission.

Lurch to the right

Since 2019, when Europeans last went to the polls, right-wing populists have come to power in Italy and the Netherlands. Comparable figures have also fared well in Sweden, Finland, and Greece, as well as in Germany’s local elections, which saw a surge of the neo-Nazi Alternative for Germany (AfD).

This has led some commentators to conclude that a similar dynamic could unfold at the European elections in June, even leading to a new right-wing majority supporting the next leader of the European Commission.

As right-wing populists tend to be climate sceptics, such an outcome would have negative implications for EU climate policy.

With the fiscal agenda in the EU still being set by nation states, there are also implications for each member-state's individual fiscal policy. For example, a right-wing populist government may look to reduce green bond issuance and thereby negatively impact the decarbonisation agenda in that country. 

Moreover, political instability could spark a widening of government bond yields spreads, which in turn could restrict up government's ability to fund the energy transition. 

Across the Euro area, the average debt to GDP ratio still stands at a moderate 90% as of Q2 2023, according to Eurostat. But there are outliers such as Greece, Italy, France, Spain, Portugal and Belgium where debt levels exceed 100% of GDP.

“There are serious problems that keep European citizens awake at night, but for many, climate isn’t one of them,” said Hans Stegeman, chief economist at Triodos. “If the right-wing populist outcome materialises, the next generation of EU politicians will be very different from the current one in terms of their climate ambition.”

Yet Stegeman was adamant that much of what has already been achieved, especially the European Green Deal and transparency regulations such as the SFDR, the taxonomy, and the CSRD, is irreversible.

He also noted that the European elections won’t affect the composition of the European Central Bank, which has been pushing to integrate climate and sustainability risk concerns into policymaking and financial decisions. 

“I wouldn’t be too gloomy at this stage about the implications of the European elections,” said Richard Folland, a former British diplomat and head of policy and engagement at Carbon Tracker.

“I expect degrees, not fundamental change,” he added.

Even if the Commission is a “little less progressive” and the parliament a “little more climate sceptic”, it wouldn’t stop the EU from being the most progressive overall at the international level in terms of climate policy, he argued.

While the success of right-wing populists in Italy and the Netherlands have grabbed headlines, Folland stressed that the EU, as a whole, is still a mixed picture.

For example, Poland actually shifted back to the liberal centre after years on the right, and Pedro Sanchez’s left-leaning government managed to hang onto power in Spain.

In addition, the heads of government around the European Council that will appoint the new leaders will hail from different political families.

Of the largest member states, France and Poland will be represented by liberals, Germany and Spain by socialists and only Italy the populist right.

Dr Nathalie Tocci, director of the Istituto Affari Internazionali, said this was “hardly a configuration pushing for a radical right-wing agenda” and “would suggest a degree of continuity in the European policy agenda".

European Green Deal: will it change?

Tocci suggested that the European Green Deal, which aims to make Europe the first climate-neutral continent by 2050, “may change pace and form”.

“It will probably be discussed more in terms of green technologies, industrial policy and the socioeconomic costs of the energy transition, rather than climate as such,” she wrote. “Particularly at risk are areas in which the business case in favour of the transition is weaker, such as agriculture reform.”

Yet the strategic direction of the energy transition is unlikely to change fundamentally, as “energy security and the energy transition will continue to be seen as sides of the same coin”.

Folland said a right-wing outcome could lead to protectionist measures when it comes to limiting cheap EV and solar panel imports from China. An EU investigation into "unfair competition" from China is already underway.

Gavin Haran, head of policy for asset management at Macfarlanes, argued that a populist outcome might see the “prioritisation of workers' immediate interests over green investment” and a possible disruption for the sustainable investment landscape.

In any case, all sources said the outcome is still shrouded with uncertainty.