articles Ratings /ratings/en/research/articles/240919-creditweek-how-are-changing-political-priorities-affecting-climate-transition-risk-13254250.xml content esgSubNav
In This List
COMMENTS

CreditWeek: How Are Changing Political Priorities Affecting Climate Transition Risk?

COMMENTS

Instant Insights: Key Takeaways From Our Research

COMMENTS

CEE Brief: Growth Will Decelerate, But The Outlook Isn't Bleak

COMMENTS

Credit FAQ: How Would China Fare Under 60% U.S. Tariffs?

COMMENTS

LGFV Brief: China's RMB10 Trillion Debt-Swap Scheme Is A Good Start


CreditWeek: How Are Changing Political Priorities Affecting Climate Transition Risk?

(Editor's Note: CreditWeek is a weekly research offering from S&P Global Ratings, providing actionable and forward-looking insights on emerging credit risks and exploring the questions that matter to markets today. Subscribe to receive a new edition every Thursday at: https://www.linkedin.com/newsletters/creditweek-7115686044951273472/)

As leaders across the public and private sector convene in New York next week for Climate Week to discuss their plans and progress in accelerating action on climate goals, the focus will be on how shifting priorities and political pressures are pushing policymakers to rethink the economics of the energy transition.

What We're Watching

The climate policy paradigm appeared to have shifted from a doom-and-gloom view (where economic growth wasn't seen as possible) to a more constructive model (in which growth and a sustainable environment can coexist). However, intensifying geopolitical uncertainty and changing spending priorities are now prompting many countries to gradually shift away from (and, in many cases, slow) their energy transition policies.

Following the surge in public spending to bolster economies during the pandemic and support households during the energy crisis, governments around the world have been tightening their belts as interest rates started to rise in 2022—and are now focusing instead on cost-of-living initiatives, economic competitiveness, defense spending, and energy security.

Public sentiment appears to be changing, too. For example, European voters are seemingly more concerned about geopolitical risks and inflation than they are about climate change—as reflected in voter surveys, the European parliamentary elections this year, and the European Commission's strategic agenda that placed the green transition in the back seat.

Even if countries align on a climate policy paradigm as the time to meet climate commitments closes in, other developments may impede their ability to reach net-zero as quickly and efficiently as necessary for the global economy. New political priorities are increasingly reflected in countries' industrial and trade policies, but also in how they balance the energy trilemma of energy security, affordability, and sustainability priorities.

Energy security, related to and resulting from geopolitical conflict, is a key driver of this prioritization recalibration and can either help or hinder the adoption of lower-carbon energy policies and actions. In a year packed with elections worldwide, the social impacts of the climate transition are in the spotlight—with a focus on which populations carry the costs of energy prices, which industries (and, thus, jobs) will emerge as the winners and losers of the transition, and whether governments are well positioned to manage the implications.

What We Think And Why

The potential impacts of a slowed or stopped transition are substantial, particularly when considering the potential costs and credit materiality of climate change. Changes will not be linear, with tipping points—defined by the U.N. Intergovernmental Panel on Climate Change as critical thresholds in a system which, when breached, can lead to significant and irreversible changes—that may permanently detriment our ability to grow and restore natural capital.

Physical risks linked to climate change will become an increasing source of supply-side shocks for the global economy, particularly if adaptation and resilience investments are not stepped up. Our research shows that, if global warming does not stay well below 2 degrees Celsius and we do not adapt, up to 4.4% of global GDP could be lost annually by 2050. This will test countries' adaptation plans—particularly those of lower-income nations that are disproportionately (4.4 times) more exposed to climate risks than their wealthier peers.

Political priorities will diverge around the world, as the economics of the energy transition differ across countries and regions. The decoupling of economic growth and greenhouse gas emissions has so far happened only in advanced economies. Progress in reducing global greenhouse gas emissions has been offset by rapid growth of carbon emissions in emerging markets, in particular China and India.

image

What Could Change

The agreement to transition away from fossil fuels in energy systems at COP28 and various regulatory initiatives around the globe mandating transparency, verification, and disclosure for credible transition plans signal that a turning point for transition finance may be on the horizon. But countries' approaches to covering energy-transition investments differ, and increasing investments quickly to limit the impact of climate change is challenging in a more fragmented world.

Looking at policies, the EU has mainly opted for carbon taxing, while the U.S. and China have taken more active industrial policies. Both approaches provide different incentives for companies to enhance green technology industries locally. With international competition in those technologies growing, some governments have attempted to protect their local industries by imposing tariffs on green technology products.

Nonetheless, establishing or maintaining energy security amid fossil fuel price shocks spurred by geopolitical tensions adds to the impetus to expand renewables capacity, particularly for net energy importers. Green technologies, especially renewable power, are cost-competitive and sometimes even cheaper than fossil fuel alternatives. The push for higher renewable investments was most pronounced when energy prices in Europe peaked in 2022 and policymakers tried to increase energy independence from Russia.

As the energy transition gathers pace, social aspects related to climate policy are becoming more visible. Lower-income households generally spend a larger share of their disposable income on energy than their more affluent compatriots do and have been hit harder by recent runaway inflation. To the extent that energy transition policies such as carbon pricing increase energy prices, lower-income households would be disproportionally affected. On the flipside, governments that slow the pace of their transitions will likely have to continue spending what can amount to considerable costs on fossil fuel subsidies as long as energy prices remain elevated.

To be sure, the investment required to achieve the transition remains much higher in emerging and developing economies—due to both how quickly energy demand in emerging and frontier economies is increasing and infrastructure gaps. We estimate that emerging and frontier markets will need to invest 6.3% of GDP (about $2.6 trillion, or $1.4 trillion excluding China) by 2030 to achieve the committed share of renewables in electricity production under the International Energy Agency's Stated Policies Scenario.

Writers: Molly Mintz and Joe Maguire

This report does not constitute a rating action.

Head of Climate Economics:Marion Amiot, London + 44(0)2071760128;
marion.amiot@spglobal.com
Primary Credit Analyst:Ludwig Heinz, Frankfurt + 49 693 399 9246;
ludwig.heinz@spglobal.com
Global Head of Sustainable Finance Markets Analytics:Christa Clapp, Oslo;
christa.clapp@spglobal.com
Secondary Contact:Alexandra Dimitrijevic, London + 44 20 7176 3128;
alexandra.dimitrijevic@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in