Failure to act on climate change will take a heavy toll on the eurozone. According to a European Central Bank (ECB) study carried out on September – the first to look at the impact of climate stress on the euro economy – inaction to combat the climate emergency will, in the most extreme case, cut wealth by up to 4% by 2030 and by more than 10% by the end of this century. The analysis covers 1,600 eurozone institutions and 2.3 million non-financial firms. In particular, medium-sized European firms could see their profitability plummet by up to 40% by 2050 under the maximum climate risk scenario.
Calculations start from one premise: the energy transition also has a cost, especially in the short term. But doing nothing means a much higher bill that will be charged in the future. In this sense, the ECB’s study sends out a message that is of close interest to the current situation in Spain. “Green energy, which will be produced more efficiently, would allow prices to move gently downwards”. Specifically, from 2025 onwards, the decrease should be significant, reaching a drop of 20% by 2050. Delaying the energy transition, on the other hand, would have the effect of prolonging the cost overruns for businesses and consumers.
Making long-term estimates is often difficult, but to give you an idea, a couple of weeks ago an extensive study carried out this time by the University College of London and published in the journal Environmental Research Letters pointed out that the damage of climate inaction could be much greater than those predicted by the institution presided over by Christine Lagarde. The study claims that by 2100, global GDP could be 37% lower due to the impacts of global warming, i.e., four times more than what the ECB predicts for the eurozone.
This difference lies in the fact that researchers in their analysis also take into account the long-lasting effects of climate variations. Indeed, extreme events such as droughts, fires, heat waves and storms are likely to cause long-term economic damage through their impact on health, savings and labour productivity.
“If we stop assuming that economies recover in months of heat waves or floods, then the costs of warming seem much higher than is often claimed,” said Chris Brierley, one of the authors. For their estimates, the scientists have tripled the value of the social cost of carbon, a measure that estimates the economic impact of greenhouse gas emissions, which are now valued at up to $3,000 per tonne.
However, it is not just a question of quantity. The climate emergency will have an uneven impact, because not all sectors and not all countries will suffer in the same way. In this respect, the ECB report shows that Greece, Portugal, Spain and Malta have the highest proportion of companies exposed to physical risks from climate change (this concept refers to an increase in the frequency and magnitude of natural disasters, such as floods that force the suspension of production).
In particular, this may affect the solvency of companies, which would ultimately hit creditor banks. As far as banks are concerned, the probability of defaulting on loans would increase by 7% over the next 30 years as a result of extreme weather events.
This vulnerability of institutions is also due to the fact that 40% of bank loans in the eurozone are granted to manufacturing industry, commerce, electricity and gas, sectors that will have to face major transformations to reduce emissions in the coming decades.
And in this area, the situation in Spain is not the best, as more than 60% of bank loans are subject to high risks due to the climate emergency. Not only because it operates in an area, like many southern European countries, that is more sensitive to climate risks, but also because the financial exposure of Spanish banks, in 80% of cases, is concentrated in sectors with high or medium emissions.
So, for the Spanish banking sector, the environmental challenge adds to a delicate situation. The latest Funcas report on the sector, this summer, warned that “although the Covid-19 crisis has not so far translated into an increase in the default rate, there are already signs of deterioration in asset quality (…). Spanish banks account for the highest volume of refinanced exposures in the euro area (20%) (…) and the percentage of refinanced non-performing loans is higher than the European average (50.2%, i.e. 11.5 percentage points higher)”.