April 29, 2020/Fitch Ratings
The coronavirus pandemic may slow the low-carbon transition, but its short-term fallout will not be a serious setback, Fitch Ratings says in a new report. We do not expect any change in the trajectory of the transition.
Some green initiatives could face delays. EMEA auto producers, for example, have been lobbying for the postponement of new European vehicle-emissions standards. A delay would support short-term cash flow in the sector, which faced challenging trading conditions in 2019. However, any temporary delay will not affect long-term investment plans for low-carbon vehicle fleets and infrastructure.
The European Commission’s (EC’s) Green Deal also faces some delays, with the 2020 work programme revised to push lower-priority initiatives on aviation fuels and smart mobility into 2021. We still expect the centrepiece revision of the 2030 emissions target to proceed, with the EC pointing to a potential increase in reduction requirements, to around 50% from 1990 levels, from 40%.
Aviation restrictions will significantly affect the market for carbon. While total emissions fell by a record 8.4% under the EU Emissions Trading System (ETS) in 2019, aviation was the only sector with increased emissions. However, the coronavirus outbreak will lead to a substantial fall in aviation emissions in 2020. The effect of the international Carbon Offsetting and Reduction Scheme for International Aviation scheme on demand for carbon offsets will be heavily influenced by the depth of the fall in revenues for the aviation industry and the subsequent pace of its recovery.
Renewables generators may be more resilient to declining energy demand resulting from the lockdown than their fossil-fuel counterparts. The crisis has led to an average 15% fall in electricity demand in countries with lockdowns, according to the International Energy Agency (IEA), but this has led to a sharp increase in renewable sources as a share of total supply in places with a high share of wind and solar capacity in the grid. This is due to stable weather patterns and declining overall demand. The impact of a sustained low oil price on renewable power may be less pronounced than the effect of an accelerated move away from feed-in tariffs in key markets.
The fall in energy demand as a result of the outbreak may further exacerbate vulnerabilities in the coal sector. Many projects had weak or negative cash flows before the crisis, and financing has been constrained as financial institutions increasingly take ESG factors into account. Coal-fired power generators may benefit from regional stimulus measures (as in China) but will face growing risks of financial stress and project cancellations as liquidity pressures increase.
Most emergency relief packages announced to date do not include specific conditions related to climate change, although such conditions were part of discussions in a number of countries. However, we expect environmental objectives to form a bigger part of post-coronavirus recovery plans, particularly in Europe. Central banks are increasingly taking climate considerations into account when setting prudential requirements and managing their own assets.
The spread of coronavirus and its economic impact has led to a wave of downgrades and Negative Outlooks across asset classes. However, these rating actions were not driven by climate-related factors, and in the coming months we do not expect any far-reaching material changes to these factors that would have a credit impact.
