The European Central Bank (ECB) urged for an accelerated transition towards a net-zero economy in the euro area, citing the results of its second economy-wide climate stress test. ECB Vice-President Luis de Guindos emphasized the need for more decisive policies to speed up the transition in alignment with the Paris Agreement goals.
The stress test assessed the resilience of firms, households, and banks under three transition scenarios: an accelerated transition, a late-push transition, and a delayed transition. The results underscored that frontloading green investments reduces medium-term costs and risks for all sectors, while delaying the transition exacerbates financial risks and costs.
Under the accelerated transition scenario, which aligns with Paris Agreement goals by reducing emissions by 2030, initial investments and energy costs are higher. However, financial risks decrease significantly in the medium term as upfront investment in renewable energy pays off earlier, reducing energy expenses.
In contrast, a late-push or delayed transition could increase credit risk for banks by over 100% by 2030 compared to 2022. These scenarios involve ramping up investments rapidly at a later stage, particularly impacting energy-intensive sectors such as manufacturing, mining, and electricity. Firms in these sectors face elevated risks with rising debt levels and falling profits.
The ECB noted that the increased risk to firms also affects banks that lend to them. "Banks are exposed to the highest credit risk if the transition has to be rushed at a later stage and investment is required quickly at higher costs," said de Guindos.
Furthermore, a delayed transition would exacerbate the physical risk faced by the economy generally, and the financial sector in particular. While such a scenario entails less overall investment, missing emission reduction targets would significantly amplify the impact of physical risk on both sectors.
The bank concluded that firms and households clearly benefit from a faster transition. It estimated that an upfront investment of €2 trillion by 2025 would pay off earlier and reduce energy costs, thus having the least impact on profits and purchasing power.
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