The ECB warns that delaying the green transition would trigger energy prices to levels at the beginning of the Ukraine war

The European Central Bank (ECB) is very clear that the cost of starting the green transition as soon as possible far exceeds the risk of leaving things until the last minute.. This Wednesday, the banking supervisor presented a study in which it analyzes in great detail the effects that the adaptation of companies and households to an ecosystem without polluting emissions will have on the economy. Among the ideas that best summarize the situation, one fact: delaying the ecological transition for three years and concentrating efforts in the second half of this decade could confront consumers and companies with energy prices like those experienced at the beginning of the invasion of Ukraine.

In their study, ECB researchers propose three different scenarios that the eurozone economy could face on its way to reducing polluting emissions to zero.. The document focuses on analyzing the consequences that each of them would have in the short-medium term (until the year 2030).

The first of them is the most optimistic. It would be an accelerated transition, in which companies and households focus from the beginning on achieving their objectives. The second would involve delaying the transition until 2026, but with a final settlement that would compensate for the delay in the beginning and meet the emissions target for 2030.. Of course, with higher effort and cost. Finally, a third scenario proposes a transition that also takes three years, but would be smoother and less costly.. Instead, the increase in the planet's temperature would drop to 2.5ºC by the end of the century, with the potentially catastrophic consequences that this could entail.

The ECB researchers conclude that the first scenario —in which immediate and decisive action is taken— would bring significant benefits to companies, households and the financial market. The initial costs and investment would be higher than in the other two paths, but would be amortized before. This would allow families and companies to reduce their energy costs faster than in the other two scenarios.. The idea is to withstand a greater blow at the beginning, to later achieve greater savings in the medium term.

The ECB is very clear that this first scenario is, undoubtedly, the most desirable: “the faster the ecological transition, the lower the financial risk and the less public support will be necessary to mitigate the costs,” they point out.. “An accelerated transition is preferable to a last-minute push,” he summarizes.

This brings us to the second scenario, the one in which the transition is delayed by three years, but the delay is compensated by a greater effort in the middle of the decade.. The ECB believes that in this situation, citizens and companies would face energy prices “like those seen at the beginning of the Russian invasion of Ukraine.”. Something that would produce “a severe deterioration” in the profitability of the companies that most depend on energy to produce. It is worth remembering that in March 2022, the wholesale price of electricity reached €283/Mwh, triple what was registered last August.

Under this assumption, the economy would be weakened, which would lead to greater losses for the banks.. Furthermore, this overexertion would imply a higher level of debt, which would increase financial vulnerability and credit risk.

Finally, the third option—a smooth transition with a delay of three years—would imply a level of economic risk and investment similar to that of an accelerated and immediate adaptation.. However, this more progressive adaptation would come at the cost of further aggravating the physical threat posed by climate change.. A greater increase in global temperature at the end of the century is associated with more severe natural disasters in the long term, with the obvious consequences on the economy that this would have.

Of course, regardless of the scenario, there will be companies that will suffer the consequences more than the rest. The manufacturing industry, mining, or electricity, water or gas suppliers will be the sectors most affected by their greater dependence on dirty energy.

The financial system will also be affected.. The ECB estimates that in a scenario like the current one, the average bank will suffer 25% higher losses in 2030 compared to those registered last year only due to the indirect consequences of the transition. In addition, the most exposed entities are the large systemically important banks—those whose failure would put the global financial system in trouble.