Faster green transition would benefit firms, households and banks, ECB economy-wide climate stress test finds

06 September 2023

“We need more decisive policies to ensure a speedier transition towards a net-zero economy in line with the goals of the Paris Agreement...."

• Frontloading green investment significantly reduces medium-term costs and risks facing households and firms
• Not expediting green transition drags down firms’ profitability and households’ purchasing power while pushing up credit risk for banks
• Further delaying transition means missing Paris Agreement goals and exacerbating impact of costly physical risks

The European Central Bank (ECB) today published the results of its second economy-wide climate stress test. The results show that the best way to achieve a net-zero economy for firms, households and banks in the euro area is to accelerate the green transition to a rate that is faster than under current policies.

“We need more decisive policies to ensure a speedier transition towards a net-zero economy in line with the goals of the Paris Agreement. Moving at the current pace will push up risks and costs for the economy and financial system. There is a clear need for speed on the road to Paris,” says ECB Vice-President Luis de Guindos.

The stress test analyses the resilience of firms, households and banks to three transition scenarios, which differ in terms of timing and ambition:

1. an “accelerated transition”, which frontloads green policies and investment, leading to a reduction in emissions by 2030 in line with the goals of the Paris Agreement;
2. a “late-push transition”, which continues on the current path, but does not speed up until 2026 (and is still intense enough to achieve Paris-aligned emission reductions by 2030);
3. a “delayed transition”, which also starts only in 2026, but is not sufficiently ambitious to reach the Paris Agreement goals by 2030.

The results show that firms and households clearly benefit from a faster transition. While a speedier transition initially involves greater investment and higher energy costs, financial risks decrease significantly in the medium term. Both profits and purchasing power are less negatively affected as the frontloaded investment in renewable energy pays off earlier and ultimately reduces energy expenses. In the accelerated transition, green investment by euro area firms rises to €2 trillion by 2025, while amounting to only €0.5 trillion in the other two scenarios. In the late-push transition, green investment catches up with the accelerated transition by 2030, as they both reach a total of €3 trillion, while it remains lower in the delayed transition. For it to catch up, green investment needs to be increased swiftly, putting firms at higher risk, particularly in energy-intensive sectors such as manufacturing, mining and electricity, with debt levels rising and profits falling around twice as much as for the average euro area firm.

ECB

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