Despite questions over financing the European Union’s (EU’s) new Green Deal, the green transition is now under way. The implications for bond investors are clear and urgent.

Global efforts to combat climate change are about to get a welcome boost from US reengagement. One of President Biden’s first acts was taking the US back into the Paris climate accord. But while the US was shunning the climate agreement, the EU was taking the lead.

Understanding the Green Picture

The European Green Deal is the centrepiece of the EU’s climate strategy. Launched in December 2019, it is a comprehensive plan to cut greenhouse gas emissions, invest in new technologies and protect the natural environment. It aims to make Europe the world’s first climate-neutral continent by 2050.

Europe can justifiably claim to be leading the world in reducing emissions. Since 1990, the EU’s net CO2 emissions have fallen by over 20% while globally net emissions increased by over 60%. Of course, the EU has advantages. Most of its economies passed peak industrialisation many years ago and have relatively high carbon starting points. That’s why euro-area net CO2 emissions per capita are still well above the global average―7.7 tonnes per person per annum against 4.4 globally (Display, above).

Although the EU compares favorably with other developed economies―including the US and Japan―in curbing emissions, the Green Deal recognizes that this is still not good enough. So, to achieve climate neutrality by 2050, EU leaders have pledged to reduce net greenhouse gas emissions by at least 55% of 1990 levels by 2030.

Such a big step up from the old target of 40% will require a huge effort in new legislation, oversight mechanisms and increased public and private sector investment. The transition will be tricky, as many measures will disproportionately hit poorer countries and social groups.