Current issues around economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof, on the impact of a stricter climate policy and higher carbon prices on the equity markets.
Fit for 55. That’s the name of the plan launched by the European Commission on July 14 to reduce European emissions by 55% by 2030. An important part of that plan is the revision of the Emissions Trading System (ETS). Companies that cause emissions must compensate for them through the purchase of carbon emission rights. They can do this within the ETS.
The general expectation is that Fit for 55 will lead to higher and more widely applied prices for carbon emissions in Europe. To meet the Paris targets, it will have to, despite the large increase we have already seen this year. But higher prices for emissions lead to higher costs for companies. There is speculation here and there that this will lead to falling stock markets. Justified?
Winners and losers
According to Olthof, this reasoning is much too short-sighted. “It's clear that the price of carbon emissions has to go up considerably for it to really make a difference. And in most Paris scenarios that will happen. But you really can’t predict that a rise in the price of carbon will lead to a certain fall in stock markets. It depends on so many more factors. What you will see is that there will be winners and losers among companies.”
Whether a company becomes a “winner” or “loser” depends on a number of factors. “Companies that do not make the switch to zero emissions in time and provide a product for which a more sustainable alternative exists are going to suffer from a high carbon price. Their product will simply be too expensive compared to the alternative. Coal-fired power plants, for example. The customer can also turn to companies that supply green energy, with zero emissions. These energy companies incur fewer costs and can therefore supply their products more cheaply. But if you are a cement company, for example - which causes considerable emissions - there are currently few alternatives for your product. Those kinds of companies can largely pass the cost of a higher carbon price on to the customer. As a result, they suffer less quickly and less directly when emission allowances become more expensive.”