Judge Chamberlain Haller: Mr. Gambini, didn’t I tell you the next time you appear in my court to dress appropriately?
Vinny Gambini: You were serious about that?
The above back-and-forth is from the classic Joe Pesci comedy titled “My Cousin Vinny”, when the judge takes offense to Vinny’s choice of attire. Right off you’re probably thinking we know too much about ridiculous movies, which we won’t deny. But for us it’s the perfect analogue for when somebody backs up talk with a plan for action. So, it was for us when the European Union’s “Fit for 55” legislation package was released on July 14th, because it meticulously outlines how the bloc will meet its emissions reduction targets for 2030 (55% decrease) and achieve carbon neutrality by 2050. It’s one thing to say your goal is to be carbon neutral by 2050, and another thing to outline a plan to achieve it.
So, what exactly is the plan? There are many legislative initiatives, including both revisions to existing legislation and new proposals:
- An expansion of carbon sinks to increase the amount of carbon removed from the atmosphere
- Strengthens emissions reduction targets for each Member for buildings, roads, agriculture, etc.
- Raises target to produce 40% of energy from renewable sources by 2030
- Raises target for reducing energy use at the EU level
- ReFuelEU Aviation and FuelEU Maritime: blend increasing levels of sustainable aviation fuels and stimulates uptake of sustainable maritime fuels
- Requires Members to expand charging capacity to promote transition to electric vehicles
- Stronger CO2 emissions standards for cars and vans, including a mandate that all new cars as of 2035 will be zero-emission
- Adds carbon price on imports of selected products. Adds customs duties to better enforce mechanism.
- Better aligns the taxation of energy production with EU energy and climate policies.
Source: Bank of America (BAML)
So yes Vinny, the Judge was serious about that. “Fit for 55” is a wide-ranging and well thought out plan, with each spoke designed to interconnect and complement the hub. It also provides an action plan (and optimism) that yes, the EU can achieve its goal of reducing emissions by 55%. It’s also worth noting the plan will impact countries outside its jurisdiction as it subjects imports to many of its climate initiatives. Since Europe (EU-28) accounts for only 17% of current global emissions, some will view import restrictions as a way to disincentivize the outsourcing of Europe’s existing industries, or otherwise encourage non-European countries to “green” their industries. In our view these restrictions are specifically designed to encourage China (27% of global emissions) and the United States (15% of global emissions) to play ball.
Source: Bank of America (BAML)
This is where it will get interesting. Does “Fit for 55” kickstart a global footrace for climate change, with each country/region trying to outdo others? Or do non-EU countries file World Trade Organization (WTO) objections to the reach of “Fit for 55”? Before we even get there though, do European Union legislators reject or water down the proposal? Or is this all just virtue signaling before the United Nations Climate Change Conference that will be held in Glasgow in early November? It all comes down to our oft-repeated “virtuous cycle” where one key accelerator is public policy. In other words, Main Street (society) motivates K Street (politicians) which incentivizes Wall Street (investors), which in turn excites Main Street and motivates K Street and incentivizes Wall Street … and so on.
RENEW Performance Tracker
Source: Bloomberg *Please review disclosure information at the end of this post.
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