The Netherlands needs to do much more to achieve its climate targets. The energy transition is getting off the ground too slowly. We are calling for a gradual transition to a sustainable economy and present recommendations to foster that transition.
We need to step up our efforts or else we cannot limit global warming to two degrees Celsius, as agreed in the Paris Climate Agreement. The Netherlands is increasingly lagging behind in achieving the climate targets set as the energy transition is only slowly gathering pace. First of all, we need to make our energy supply, industry, transport, agriculture and built environment more sustainable. Our slow start is worrying because the longer the transition is delayed, the more costly it will be for society. Also, delays will increase the likelihood of an abrupt transition, causing unnecessary additional damage to the economy and the financial sector.
The Netherlands signed the Paris Climate Agreement in 2015. The Dutch climate act sets targets for the years ahead. For example, the government seeks to reduce emissions by 49% by 2030. In July 2021, the European Commission (EC) published detailed plans aimed at reducing carbon emissions by 55% by 2030. This means we need to pull out all the stops in the Netherlands to achieve this. The ultimate goal is for our country to be climate-neutral by 2050.
We are committed to promoting financial stability and sustainable prosperity. Climate change brings risks to our economy and our financial system, which is why it is high on our agenda. We consider the energy transition as one of the greatest challenges for our society and economy. We expect financial institutions to incorporate climate risks into their operations. We also seek to promote responsible investment to limit global warming. To do so, we perform studies and make recommendations to the government.
Read more about climate risks for the financial sector and our supervision.
The Netherlands must accelerate and scale up sustainable investment to meet its climate targets. The necessary investment by businesses and households is getting off the ground too slowly. For example, investors and financiers have difficulty matching their needs. In addition, our study into the financing of the energy transition shows that parties are waiting for each other to make the first move. To break the stalemate, the government must take on a more coordinating role. We are also calling for other measures that should boost the energy transition, such as higher prices for carbon emissions and measures to address the bottlenecks in financing the transition.
The main reason for stagnating green investment is the absence of financial incentives. The bulk of this investment must be made by private parties, which want to see returns. But these are undermined by low taxes on carbon emissions. Approximately 80% of all carbon emissions go untaxed. And existing taxes are often below €40 per tonne. These rates should be much higher to make investment profitable and achieve the climate targets. We therefore call for appropriate pricing of carbon emissions. This will preferably be coordinated at international and European level to protect competitive positions and limit emission leakages. Read more about carbon pricing as a measure to boost the energy transition.
Besides the fact that carbon pricing is too low, there are other bottlenecks in the financing of green investment. Firstly, costs for green investment often take a long time to recoup, meaning that banks and investors are exposed to relatively high liquidity risks. Secondly, the different sustainability and climate impact standards in force are not comparable, preventing financial institutions from properly assessing how sustainable investment is. Thirdly, it is difficult to estimate the expected returns of innovations, which hampers bank financing. This is why entrepreneurs depend on venture capital for innovations, which is not easily found in Europe. Lastly, scale can be an issue. Performing a thorough risk analysis for small-scale projects is often not worth investors' while.
We are calling for closer coordination by the government, allowing supply and demand to be matched more closely in terms of planning, financing and installation of the required infrastructure. This is because investment in energy supply infrastructures and industry suffer from a wait-and-see attitude among investors who are sitting on the fence. In their early stages, innovative sustainable investment is often less competitive than fossil alternatives. That is why we recommend that governments promote innovative investment and its financing, through subsidies, co-financing and guarantees. An important precondition for this is consistent and reliable government policy, so that there is sufficient certainty for investors to provide the necessary financing over the longer term.
Although some of the financing bottlenecks can be partly removed by enlarging the role of institutional investors, lack of scale is often an issue. This implies a potential role for the government to facilitate and fund the costs of pooling and standardisation. In addition, private equity and venture capital investment funds must play a greater role. It is precisely from these parties that entrepreneurs may raise financing for their innovative, sustainable technologies that involve high risks.
Read more about our research and recommendations on financing the transition.
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