While there are multiple headwinds weighing on growth, further policy tightening is expected amid the need to bring down elevated inflation
Global economic growth prospects are confronting a unique mix of headwinds, including from Russia’s invasion of Ukraine, interest rate increases to contain inflation, and lingering pandemic effects such as China’s lockdowns and disruptions in supply chains.
In turn, our latest World Economic Outlook, released last month, lowered our global growth forecast for next year to 2.7 percent, and we expect countries accounting for more than one third of global output to contract during part of this year or next. Moreover, as we discuss in our latest report prepared for the Group of Twenty, recent high-frequency indicators confirm that the outlook is gloomier.
As the Chart of the Week shows, there has been a steady worsening in recent months for purchasing manager indices that are tracking a range of G20 economies. These survey-based measures gauge the momentum of manufacturing and services activity.
As the chart illustrates, readings for a growing share of G20 countries have fallen from expansionary territory earlier this year to levels that signal contraction. That is true for both advanced and emerging market economies, underscoring the slowdown’s global nature.
While gross domestic product releases for the third quarter surprised on the upside in some major economies, October PMI releases point to weakness in the fourth quarter, particularly in Europe. In China, intermittent pandemic lockdowns and the struggling real estate sector are contributing to a slowdown that can be seen not only in PMI data but also in investment, industrial production, and retail sales. This will inevitably have a significant impact on other economies due to China’s large role in trade.
Despite growing evidence of a global slowdown, policymakers should continue to prioritize containing inflation, which is contributing to a cost-of-living crisis, hurting low-income and vulnerable groups the most. As our G20 report emphasizes, the macroeconomic policy environment is unusually uncertain.
However, continued fiscal and monetary tightening is likely needed in many countries to bring down inflation and address debt vulnerabilities—and we do expect further tightening in many G20 economies in the months ahead. Nonetheless, these actions will continue to weigh on economic activity, especially in interest-sensitive sectors such as housing.
The challenges that the global economy is facing are immense and weakening economic indicators point to further challenges ahead. However, with careful policy action and joint multilateral efforts, the world can move toward stronger and more inclusive growth.
Author:

Tryggvi Gudmundsson, an economist in the IMF’s Research Department

Compliments of the IMF.
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Fertilisers play a significant role for food security. Their production and their cost largely depend on natural gas. Following Russia’s invasion of Ukraine, a global mineral fertiliser and energy crisis is now weighing on global food security and food prices. In this context, the European Commission presented today a Communication on ensuring availability and affordability of fertilisers. Today’s Communication presents a wide range of actions and guidance on how to tackle the challenges that EU farmers and industry, as well as developing countries, are currently facing. The need to reinforce the overall resilience and sustainability of our food systems in the medium and the long-term is also addressed, in line with the Communication on safeguarding food security adopted in March 2022, the Farm to Fork strategy and REPowerEU.
Actions to maintain a sustainable EU fertilisers’ production and reduce dependencies
The Communication outlines several best practices and ways ahead to help farmers optimise their fertiliser use and reduce their dependencies while securing yields:

Critical sector: Member States may prioritise the continued and undisrupted access to natural gas for fertiliser producers in their national emergency plans in the event of gas rationing, in line with the Commission Communication “Save gas for a safe winter”.

Targeted financial support: The amended Temporary Crisis Framework for State aid enables Member States to provide specific support to farmers and fertiliser producers. Funds generated by measures such as the cap on the market revenues of certain electricity generators and the solidarity contribution can also be used, subject to the applicable conditions, for purposes of national support schemes. Furthermore, the Commission will together with Member States examine the expediency of making use of the agricultural reserve worth €450 million for the financial year 2023 for farmers affected by high input costs.

Improved market transparency: The Commission will launch a market observatory for fertilisers in 2023 to share data on production, use, prices and trade.

Sustainable farming practices and training: The Commission will work with Member States to ensure that relevant interventions such as nutrient management plans, soil health improvement, precision farming, organic farming, use of leguminous crops in crop rotation schemes are widely adopted by farmers. The Commission will also invite Member States to look into further prioritisation and increasing the ambition of such interventions in future revisions of their CAP Strategic Plans.

More organic fertilisers: The substitution, whenever possible, of mineral fertilisers by organic fertilisers will reduce EU’s dependence on gas as well as the carbon footprint of the sector. The Fertilising Products Regulation already ensures a better access in the market to fertilisers made from recovered waste and green and circular alternatives to natural gas. Horizon Europe has also invested €180 million in projects on optimisation of nutrient budget, alternative fertilising products and nature-based solutions for nutrient management. The Commission will also adopt in 2023 an Integrated Nutrient Management Action Plan to foster a more efficient use of nutrients, taking into account Member States’ starting points and the Zero Pollution Action Plan.

Transition to greener fertilisers: The Commission will encourage Member States to support investments in renewable hydrogen and biomethane for ammonia production.

Trade diversification: The Commission has reached out to alternative suppliers of fertilisers to compensate for previous supplies from Belarus and Russia. The Commission also proposed in July 2022 to suspend trade tariffs for ammonia and urea, used to produce nitrogen fertilisers.

Actions to support vulnerable countries and improve global food security
Farmers worldwide and notably those in vulnerable countries acutely feel the impact of the tight fertiliser market. In the international field, the European Commission will continue its efforts to improve global food security by:

Continuing to work with its Member States and European Financial Institutions, in a Team Europe approach towards the contribution to the four strands of the Team Europe Response to Global Food Insecurity (Solidarity, Production, Trade and Multilateralism).

Cooperating with selected EU partner countries, including through the Global Fertilisers Challenge, to reduce their dependence and consumption on imported mineral fertilisers in improving nutrient management, increased fertiliser efficiency, and alternative agricultural practices, with a particular focus on extension and advisory services for farmers.

Improving global market transparency in fertilisers, by contributing to relevant international initiatives concerning fertilisers, in particular the G20’s Agricultural Market Information System (AMIS).

Stepping up the support to address balance of payments needs including through the IMF Poverty reduction and Growth Trust, and reinforce cooperation with international financial institutions (IFIs) under the Global Gateway to develop innovative and sustainable investments.
Initiating discussions on transparency improvements, including the avoidance of export restrictions on fertiliser trade in the WTO, with the view to delivering on the commitments taken under the declaration on food insecurity agreed at the last Ministerial Conference.
Continuing to work with Member States to ensure that global trade in agri-food products, including fertilisers, is able to proceed smoothly.

Further strengthening EU humanitarian food assistance, which is already over EUR 900 million so far in 2022. This is around 55 percent more than last year, and almost 80 percent more than in 2020.

Beyond fertilisers’ availability, affordability and use, the EU will continue to address the root causes of hunger, including conflict and insecurity, climate change, and economic shocks. The EU will work with its international partners and Member States to support the enhancement of local production capacities and the creation of sustainable and resilient food systems in the most fragile contexts. While promoting this objective, the EU will pave the way for innovative approaches in support of integrated soil fertility management, applying a diverse set of site-specific soil fertility solutions conducive to sustainable yield gains.
Background
Russia’s illegal invasion of Ukraine has worsened an already challenging situation for the fertiliser market, on the heels of the COVID-19 pandemic. The production of nitrogen fertilisers depends on natural gas. The peak in gas price led to a 149% price rise of fertilisers in September 2022 compared with the year before.  As a result, farmers have been delaying and reducing their purchases of these products. This could lead to lower yields for next year’s harvest, and ultimately to higher food prices, with potentially devastating effects on food security, especially in vulnerable regions of the world that are highly dependent on import of such products and with already high levels of food insecurity.
High and unstable fertiliser prices are challenging for EU farmers. Purchases of fertilisers represent around 6% on average of the share of input costs and up to 12% for arable crop farmers. The objective of the EU’s Farm to-Fork strategy is to reduce nutrient losses by 50% by 2030 while preserving soil fertility. In addition to leading to clear economic and environmental benefits, efficiencies in the EU will reduce tensions in the global market too.
Compliments of the European Commission.
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The return of inflation, higher interest rates, record-high debt levels and geopolitical tensions threaten to expose vulnerabilities within the financial system.

This letter was submitted to G20 Leader ahead of their meeting on 15-16 November.
The letter notes that developments since the Rome Summit have been a stark reminder that global financial stability should not be taken for granted. The return of inflation to levels not seen in decades has resulted in a strong interest rate response and significantly tighter financial conditions. The tightening is occurring amidst record-high levels of debt of non-financial corporates, households and governments globally, and in a global financial system where the provision of finance through non-banks has become as important as bank credit.
The letter notes that during the Indonesian G20 Presidency, the FSB has intensified its monitoring of current vulnerabilities and taken forward work to reinforce the resilience of the financial system. At the same time, the FSB has continued to work to enable the financial system to adapt to secular trends. The FSB has done so in three ways. First, by taking forward the Roadmap for Enhancing Cross-Border Payments, with the focus now being on three  priority areas, cooperating closely with the private sector. Second, by developing a comprehensive framework for the regulation, supervision of oversight of crypto-assets activities and markets. Third, by working to address financial risks from climate change through enhancements to disclosures, data, vulnerabilities assessment and regulatory and supervisory policy. Work in all these areas will continue under the Indian G20 Presidency in 2023.
The letter outlines the reports being submitted to the November Summit, which cover:

Policy proposals to address systemic risk in NBFI
Key performance indicators to achieve targets for enhancing cross-border payments
Scenario analysis of climate-related financial risks to better understand the financial risks associated with transition to net zero

The FSB Chair asks for the G20’s continued and reinforced support for the work of the FSB to strengthen the resilience of the financial system as a whole. The challenges that lie ahead make global cooperation on financial stability matters as important now as it was after the global financial crisis, when the decisions of G20 Leaders triggered reforms that, coordinated through the FSB, have made the global financial system more resilient and growth-enhancing.
Compliments of the Financial Stability Board.
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Today, the EU Commission and the High Representative put forward an Action Plan on Military Mobility 2.0 and a Joint Communication on an EU cyber defence policy to address the deteriorating security environment following Russia’s aggression against Ukraine and to boost the EU’s capacity to protect its citizens and infrastructure.
In particular, the Action Plan on Military Mobility will help European armed forces to respond better, more rapidly and at sufficient scale to crises erupting at the EU’s external borders and beyond. It will bolster the EU’s ability to support Member States and partners as regards transport of troops and their equipment. It works towards better connected and protected infrastructure, while streamlining regulatory issues. It will reinforce cooperation with NATO and promote connectivity and dialogue with key partners.
Building on the achievements of the first Action Plan launched in 2018, the new Military Mobility covers the period 2022-2026 and includes:

Identification of possible gaps in the infrastructure, informing future actions to prioritise improvements and integrate fuel supply chain requirements, to support short-notice large-scale movements of military forces;

Digitalisation of administrative processes related to customs logistics and military mobility systems;
Measures to protect transport infrastructure from cyber-attacks and other hybrid threats;
Promoting access to strategic lift capabilities and maximising synergies with the civilian sector to enhance the mobility of the armed forces, especially by air and sea;
Enhancing the energy efficiency and climate resilience of transport systems;
Reinforcing cooperation with NATO and key strategic partners, such as the US, Canada and Norway, while promoting connectivity and dialogue with regional partners and enlargement countries, such as Ukraine, Moldova and the Western Balkans.

To ensure a well-connected, capable and secure military mobility network, the European Commission is supporting the Action Plan with funding instruments such as the Connecting Europe Facility (funding dual-use transport infrastructure projects), and the European Defence Fund (supporting the development of interoperable logistical and digital systems).
Background
The first Action Plan on Military Mobility was launched in 2018 to strengthen the EU Common Security and Defence Policy. It aimed to ensure swift and seamless movement of military personnel, materiel and assets – including at short notice and at large scale – within and beyond the EU. It helped to create a well-connected network, with shorter reaction times and capable, secure and resilient transport infrastructure and capabilities.
The new Action Plan on Military Mobility responds to the call in the Strategic Compass to enhance the military mobility of our armed forces within and beyond the Union following Russia’s military aggression against Ukraine. This urgent need was also reflected in the Joint Communication on defence investment gaps adopted in June 2022.
Military Mobility is supported through other defence initiatives, notably through the Permanent Structured Cooperation (PESCO) Military Mobility project and Logistical Hubs project. The European Defence Agency’s programme on “Optimising Cross-Border Movement Permission procedures in Europe” and the Coordinated Annual Review on Defence (CARD) also contribute to the effort.
Together with the Security and Defence package, the Commission is also publishing today the first progress report on the Action Plan on synergies between civil, defence, and space industries, available here.
Compliments of the European Commission.
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Today, the Commission presented a proposal to reduce air pollution from new motor vehicles sold in the EU to meet the European Green Deal’s zero-pollution ambition, while keeping vehicles affordable for consumers and promoting Europe’s competitiveness.  
Road transport is the largest source of air pollution in cities. The new Euro 7 standards will ensure cleaner vehicles on our roads and improved air quality, protecting the health of our citizens and the environment. Euro 7 standards and CO2 emission standards for vehicles work hand-in-hand to deliver air quality for citizens, as notably the increased uptake of electric vehicles also creates certain air quality benefits. The two sets of rules give the automotive supply chain a clear direction for reducing pollutant emissions, including using digital technologies.
The new Euro 7 emission standards will ensure that cars, vans, lorries and buses are much cleaner, in real driving conditions that better reflect the situation in cities where air pollution problems are largest, and for a much longer period than under current rules. The proposal tackles emissions from tailpipes as well as from brakes and tyres. It also contributes to achieving the new stricter air quality standards proposed by the Commission on 26 October 2022.
While CO2 emission rules will drive the deployment of zero-emission vehicles, it is important to ensure that all vehicles on our roads are much cleaner.  In 2035, all cars and vans sold in the EU will have zero CO2-emissions. However, in 2050, more than 20% of cars and vans and more than half of the heavier vehicles in our streets are expected to continue to emit pollutants from the tailpipe. Battery electric vehicles also still cause pollution from brakes and microplastics from tyres.
Euro 7 rules will reduce all these emissions and keep vehicles affordable to consumers.
The new requirements based on the Euro 7 standards:
The proposal replaces and simplifies previously separate emission rules for cars and vans (Euro 6) and lorries and buses (Euro VI). The Euro 7 standards rules bring emission limits for all motor vehicles, i.e., cars, vans, buses and lorries under a single set of rules. The new rules are fuel- and technology-neutral, placing the same limits regardless of whether the vehicle uses petrol, diesel, electric drive-trains or alternative fuels. They will help to:

Better control emissions of air pollutants from all new vehicles: by broadening the range of driving conditions that are covered by the on-road emissions tests. These will now better reflect the range of conditions that vehicles can experience across Europe, including temperatures of up to 45°C or short trips typical of daily commutes.

Update and tighten the limits for pollutant emissions: limits will be tightened for lorries and buses while the lowest existing limits for cars and vans will now apply regardless of the fuel used by the vehicle. The new rules also set emission limits for previously unregulated pollutants, such as nitrous oxide emissions from heavy-duty vehicles.

Regulate emissions from brakes and tyres: the Euro 7 standards rules will be the first worldwide emission standards to move beyond regulating exhaust pipe emissions and set additional limits for particulate emissions from brakes and rules on microplastic emissions from tyres. These rules will apply to all vehicles, including electric ones.

Ensure that new cars stay clean for longer: all vehicles will need to comply with the rules for a longer period than until now. Compliance for cars and vans will be checked until these vehicles reach 200,000 kilometres and 10 years of age. This doubles the durability requirements existing under Euro 6/VI rules (100,000 kilometres and 5 years of age). Similar increases will take place for buses and lorries.

Support the deployment of electric vehicles: the new rules will regulate the durability of batteries installed in cars and vans in order to increase consumer confidence in electric vehicles. This will also reduce the need for replacing batteries early in the life of a vehicle, thus reducing the need for new critical raw materials required to produce batteries.

Make full use of digital possibilities: Euro 7 rules will ensure that vehicles are not tampered with and emissions can be controlled by the authorities in an easy way by using sensors inside the vehicle to measure emissions throughout the lifetime of a vehicle.

Next Steps
The Commission’s proposal will be submitted to the European Parliament and the Council in view of its adoption by the co-legislators.
Background
Road transport is the largest source of air pollution in cities. In 2018, more than 39% of NOx and 10% of primary PM2.5 and PM10 emissions in the EU came from road transport. These percentages are much higher in cities, where transport is regularly the main contributor to air pollution. It is estimated that road transport caused about 70 000 premature deaths in the EU-28 in 2018.
In 2035, Euro 7 will lower total NOx emissions from cars and vans by 35% compared to Euro 6, and by 56% compared to Euro VI from buses and lorries. At the same time, particles from the tailpipe will be lowered by 13% from cars and vans, and 39% from buses and lorries, while particles from the brakes of a car will be lowered by 27%.
Following the Dieselgate scandal, the Commission has introduced new tests to measure emissions on the road (the RDE method) and increased the market surveillance powers of Member States and the Commission, in order to ensure that vehicles are as clean as expected by the Euro 6 norms.
The rules on pollutant emissions are complementary to the rules on CO2 emissions. The agreed target for 100% CO2 reduction by 2035 for cars and vans has been taken into account in this proposal. The Commission will review in the coming months the CO2 standards for lorries and buses.
Compliments of the European Commission.
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We need to intensify the greening of our economies despite the energy crisis. Hastening the process will reduce the costs of transition and help to ensure price stability in the long run. This is the third post in a series of climate-related entries on the occasion of COP27.

The current energy crisis has sent gas and electricity prices skyrocketing and brought the potential challenges and opportunities of the green transition into sharper relief. Does that mean that the green transition must now wait until the current crisis is resolved? The answer is firmly no. Humanity must act today to mitigate the devastating effects of climate change[1] and the earlier the green transition takes place, the lower the ultimate costs will be. For central banks globally, fighting climate change and fighting inflation can go hand in hand. The ECB Blog explains why.
The unexpectedly sharp increase in fossil fuel prices, in particular after the Russian invasion of Ukraine, has generated substantial uncertainty. The high energy prices have eaten into households’ real income and business profitability, which makes investing in low-carbon technologies and activities difficult for now. European governments have provided substantial subsidies to businesses and households to cushion the impact of energy price rises. At the same time, they have scrambled to secure energy supplies, undertaking substantial investment in fossil-fuel infrastructure. That includes re-opening mothballed coal-fired plants and constructing liquefied natural gas terminals.
These actions risk hindering the green transition. New fossil fuel infrastructure can reinforce reliance on, and lock in usage of, carbon-intensive fuels. Broad-based energy price subsidies mask the price signals given by the relatively more expensive fossil fuel prices compared with other products including clean energy. Yet, these relative price changes are needed to incentivise lower consumption of fossil fuels, behavioural changes and greater investment in green technology. Broad-based energy subsidies also risk burdening public finances. Government support instead needs to be made temporary and better targeted towards vulnerable households and small businesses, while preserving relative price signals.
Hastening the shift towards a green economy
The current situation also offers opportunities to hasten the green transition. The shortage of energy has brought home the urgent need to reduce reliance on fossil fuels and to foster energy efficiency. Recently made policy proposals such as RePowerEU, even if not sufficient, point in the right direction.[2] Challenges remain related to their implementation, though.
In the medium term, and once pressure on fossil fuel prices eases, governments should price in the negative effects of carbon more effectively. Already committing today to a gradual and predictable future increase in carbon taxes would allow households and businesses to timely prepare. Besides, pricing carbon would provide an incentive to steer financial flows towards green energy sources and low-carbon production and offers governments revenues to support these investments. The green transition is ultimately a question of structural transformation. It cannot happen without green investment.

Price stability and the green transition
Advancing the green transition is not necessarily at odds with price stability. Gradual relative price changes caused by carbon taxes do not inevitably result in higher headline inflation. This is especially true when accompanied by green technological advances and higher energy efficiency.[3] That said, the overall impact of the green transition on inflation is highly uncertain and depends on many factors, including the climate actions taken and the policy responses made.
Increasing the share of renewables can reduce total energy prices in the long run, while also supporting energy security. The price of wind and solar power has plummeted in the past decade due to technological improvements and economies of scale and is now substantially cheaper than fossil fuels. The EU aims to increase the share of renewables. For example, renewables are supposed to account for 45% of gross final energy consumption by 2030 according to REPowerEU.[4] This will help to unwind the recent spike in energy prices and reduce the malign influence of fossil fuels on inflation volatility in the long run.[5]

Chart 1
Fossil fuel prices drive inflation

Annual percentage changes and percentage point contributions

Sources: Eurostat and ECB calculations.
Latest observation: September 2022. The series “other” includes heat energy and solid fuel. and notes

Likewise, an environment of price stability is important for the green transition. Anchoring longer-term inflation expectations at the central bank’s target helps contain long-run financing costs and is conducive to investment in green technologies in the long run.
By contrast, failure to advance the green transition poses risks for price stability. Climate extremes such as droughts or floods can damage infrastructure, ravage harvests, and disrupt supply chains. This can affect the prices of key products and drive inflation volatility.[6] These impacts will only be magnified if we fail to achieve the objectives of the Paris Climate Agreement of limiting global warming to 2°C and making efforts to keep it below 1.5°C.
Government must drive the green transition
The principal responsibility for driving the green transition lies with governments, particularly through properly pricing the negative effects of carbon. But they also have the tools to dismantle the regulatory barriers that currently impede the uptake of renewable energy and to catalyse innovation and investment in green technology.

Now is the time to redouble our collective efforts and hasten along the path of decarbonisation.

The ECB is committed within its mandate to account for climate change. In doing so, it supports the green transition, which will reduce risks to price stability in the long run. We have already made significant progress in implementing our climate change action plan and we will continue to do so.[7]
A well-planned green transition goes hand in hand with energy security and can also contribute to price stability in Europe. Now is the time to redouble our collective efforts and hasten along the path of decarbonisation.
Authors:

Irene Heemskerk
Carolin Nerlich
Miles Parker

Compliments of the European Central Bank.
1. Intergovernmental Panel on Climate Change (2022), Climate Change 2022: Impacts, Adaptation and Vulnerability, contribution to IPCC Sixth Assessment Report.
2. See the European Commission proposal on the REPowerEU Plan.
3. Ferrari, A. and V. Nispi Landi (2022), “Will the green transition be inflationary? Expectations matter”, ECB Working Papers, No. 2726, European Central Bank. Ferdinandusse, M., Kuik, F., Müller G. and C. Nerlich (2022), “Model-based analysis of the short-term impact of increasing the effective carbon tax on euro area output and inflation”, ECB Economic Bulletin, Box 2, Issue 6; Konradt, M. & B. Weder di Mauro (2021), “Carbon Taxation and Greenflation: Evidence from Europe and Canada”, CEPR Discussion Papers, No. 16396, Centre for Economic Policy Research.
4. Discussions are still on-going between the Commission, the Council and the European Parliament.
5. Oil and energy prices have historically played an outsized role in driving global inflation volatility, see, for example, Choi, S. et al. (2018), “Oil prices and inflation dynamics: Evidence from advanced and developing economies”, Journal of International Money and Finance, Vol. 82, Issue C, pp: 71-96; Parker, M. (2016), “How global is ‘global inflation’?”, Journal of Macroeconomics, Vol. 58, pp: 174-197.
6. Parker, M. (2018), “The impact of disasters on inflation”, Economics of Disasters and Climate Change, Vol. 2, Issue 1, pp. 21-48; Faccia, D., Parker, M. & L. Stracca (2021), “Feeling the heat: extreme temperatures and price stability”, Working Paper Series, No. 2626, European Central Bank; Feng, A. & H. Li (2021), “We are all in the same boat: cross-border spillovers of climate risk through international trade and supply chain”, IMF Working Papers, No. 2021/013, International Monetary Fund.
7. See press release on the action plan on 8 July 2021 and the press release on further steps to incorporate climate change into its monetary policy operations on 4 July 2022.

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The global energy crisis highlights the need for a massive surge in clean energy investment

The global energy crisis is fueling fierce debate around the world over which new energy projects should or shouldn’t go ahead.
Conversations about energy and investment often fail to take into account the considerable lag between investment decisions and when projects actually go live. At the International Energy Agency (IEA), we warned years ago that global investment in clean energy and energy efficiency was not sufficient to put us on a path to reach our climate goals. Without a surge in clean energy spending, the amounts invested in conventional energy projects also risked falling short of what would be needed to meet potential increases in demand.
Even though the current energy crisis was triggered by Russia’s invasion of Ukraine, we must still pay close attention to these underlying investment imbalances as we emerge from the crisis, or we risk more volatility ahead. Are today’s sky-high fossil fuel prices a signal to invest in additional supply or further reason to invest in alternatives?
Energy investment decisions are being clouded by the fog of war. Russia’s invasion has thrown investment plans across all energy sectors into turmoil and exacerbated strains in global commodity markets that were already visible. Energy importing countries are now scrambling to replace disrupted supplies of fuels, and soaring costs have wreaked havoc in many economies and forced millions of people back into poverty and energy insecurity.
Of course, countries need to find immediate substitutes for the fuel imports that were suddenly cut off. If not, factories will close, jobs will be lost, and people will struggle to heat or cool their homes. But today’s energy crisis—the first truly global energy crisis—has given rise to a false narrative that now is not the moment to invest in clean energy.
This could not be further from the truth. We do not have to choose between responding to today’s energy crisis and tackling the climate crisis. Not only can we do both, we must do both because they are intimately linked. Massive investment in clean energy—including energy efficiency, renewables, electrification, and a range of clean fuels—is the best guarantee of energy security in the future and will also drive down harmful greenhouse gas emissions.
A worrying divide
Global energy-related CO2 emissions rose by a record amount in 2021, and investment in clean energy technologies is still well below what it will take to bring emissions down to net zero by mid-century or soon thereafter. The $1.4 trillion we expect the world to spend on energy transitions in 2022 would have to rise to well over $4 trillion by 2030 to get us on track to limit global warming to 1.5 degrees while also ensuring sufficient energy supply.
At the same time, lower investment in recent years has left some oil and gas producers unable to quickly ramp up production to meet today’s demand, even with the incentive of record high prices. We risk seeing the worst of both worlds: the inability to provide for current energy needs and falling woefully short of what is needed to meet international climate goals.
Published earlier this year, the World Energy Investment 2022 report shows some encouraging trends—but also plenty of cause for concern.
The good news is that investment in clean energy transitions is finally picking up. In the five years following the 2015 Paris Agreement, clean energy investment grew only 2 percent a year. However, since 2020, this rate has risen to 12 percent a year, led by increased spending on solar and wind power, including a record year for offshore wind power in 2021.
There is strong momentum in other new areas like low-emissions hydrogen; new battery technologies; and carbon capture, utilization, and storage (CCUS), even if this impressive growth is coming from a small base. For example, in 2021 plans for about 130 commercial-scale carbon capture projects in 20 countries were announced, and six CCUS projects were approved for final investment. Meanwhile, Russia’s war against Ukraine has bolstered policy support for low-emission hydrogen, especially in Europe. And investment in battery energy storage is hitting new highs and is expected to double in 2022.
But this investment is concentrated in advanced economies and China, leaving many emerging market and developing economies, particularly in Africa, unable to attract the clean energy investments and financing they need, widening an already troubling divide. Except in China, clean energy spending in emerging market and developing economies is stuck at 2015 levels, which means it hasn’t increased since the Paris Agreement was reached. Falling clean technology costs mean that this money goes further, but the overall amount—about $150 billion a year—is far short of what is needed to meet rising energy demand in developing economies in a sustainable way.
In these economies, public funds for sustainable energy projects were already scarce and have become scarcer still since the COVID-19 pandemic. Policy frameworks are often weak, the economic outlook is uncertain, and borrowing costs are rising. After the pandemic hit, the number of Africans without access to electricity rose, wiping out years of progress on that crucial front.
No shortage of capital
This is where international financial organizations and development institutions have a major role to play. They can work with local governments to develop policies to improve the investment environment, and their financing can help de-risk private sector involvement.
There is no shortage of capital globally. The amount of sustainable financing available worldwide has surged in recent years and is a strong tailwind for solar and wind projects in particular. But far more needs to go to emerging market and developing economies. For example, sustainable debt issuance in 2021 hit a record $1.6 trillion, but more than 80 percent was in advanced economies.
Sustainable finance, and the wider world of Environmental Social and Governance (ESG) investing, would greatly benefit from clearer standards, definitions, and reporting obligations, and there has been progress. For example, the EU has introduced risk management and reporting requirements for financial market participants regarding climate risks and sustainability practices. Clearer guidelines and opportunities to finance credible transition plans in carbon-intensive sectors would ensure that ESG requirements do not prevent financing for essential-but-emitting energy sectors. Finally, the entire ESG ecosystem must engage more with emerging market and developing economies and take account of their needs and circumstances. Institutions such as the IMF have a major role to play.
In the IEA’s landmark Roadmap to Net Zero Emissions by 2050, we said a massive surge in investment in clean energy technologies and energy efficiency could cut global demand for fossil fuels so much that there would be no need for investment in new oil and gas fields. At the same time, continued spending on existing assets—including investments to reduce upstream emissions—remains essential in this pathway. Moreover, Russia’s war against Ukraine has brought major disruptions to the global energy system. Immediate shortfalls in fossil fuel production from Russia obviously must be replaced by production elsewhere—even in a world working toward net-zero emissions by 2050.
Balancing these demands requires judicious investment, and the IEA is helping decision-makers around the world with data, analysis, and policy advice. The key is to avoid spending on infrastructure that would either lock in heavy emissions for years to come or quickly turn into stranded assets. Suitable options include extending production from existing fields and making better use of natural gas that is currently flared or vented. Some new infrastructure may be needed, especially liquefied natural gas import terminals in Europe, to diversify supply away from Russia. But with careful investment and planning, these terminals could facilitate future imports of low-emission hydrogen or ammonia. In countries open to it, nuclear power has a role to play, especially the promising new small modular reactors that are in development.
A historic turning point
The current situation offers a crucial opportunity for the oil and gas sector to show it is serious about the transition to clean energy. The run-up in prices is set to generate an unprecedented $2 trillion windfall for oil and gas producers this year, bringing their total income to a record $4 trillion in 2022. Yet the oil and gas industry is still spending only modestly on energy transitions: on average, clean energy spending accounts for about 5 percent of total oil and gas company capital expenditure. That is up from 1 percent in 2019, but still far too little. Today’s windfall gains are a once-in-a-generation opportunity for oil- and gas-producing countries to diversify their economies and prepare for a world of lower fossil fuel demand – and for major oil and gas companies to seize leadership roles in some of the clean energy sources that the world will rely on for decades to come.
Let’s not forget that energy security is not just about increasing the supply of power and fuels. It is also about efficient use of energy—especially given today’s array of technologies that can help. The IEA’s 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas, published in March—one week after Russia’s invasion—includes steps to replace Russian gas but also calls for major push on renovating building stock to reduce demand. Better materials and insulation, newer technologies, and more efficient appliances greatly reduce the energy needed to heat, cool, and light our homes and workplaces. Smart electrical grids will better manage and reduce power demand. Consumers can take immediate and simple steps such as adjusting the thermostat to avoid overheating or overcooling, which can collectively add up to massive savings.
The current global energy crisis presents huge challenges, especially for the coming winters. But after the winter comes spring—and the right investment decisions can transform this crisis into a historic turning point toward a cleaner and more secure energy future. We are already seeing encouraging steps in this direction—such as the Inflation Reduction Act in the United States; the REPowerEU package in the European Union; Japan’s Green Transformation plan; and the growth of renewables in China, India, and beyond. A new global energy economy is emerging, and the governments and businesses that invest early and wisely stand to reap the benefits.
Author:

FATIH BIROL is executive director of the International Energy Agency

Compliments of the IMF.
The post IMF/IEA | A Call to Clean Energy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

On November 3rd, the European Commission is launching the third call for large-scale projects under the EU Innovation Fund. With a budget doubled to €3 billion thanks to increased revenue from the auctioning of EU Emissions Trading System (ETS) allowances, this 2022 call for large-scale projects will boost the deployment of industrial solutions to decarbonise Europe. With a special focus on the priorities of the REPowerEU Plan, the call will provide additional support towards ending the EU’s dependence on Russian fossil fuels.
The call will fund projects covering the following topics:

General decarbonisation (budget: €1 billion) seeking innovative projects in renewable energy, energy-intensive industries, energy storage or carbon capture, use, and storage, as well as products substituting carbon-intensive ones (notably low-carbon transport fuels, including for maritime and aviation);

Innovative electrification in industry and hydrogen (budget: €1 billion) seeking innovative projects in electrification methods to replace fossil fuel use in industry as well as renewable hydrogen production or hydrogen uptake in industry;

Clean tech manufacturing (budget: €0.7 billion) seeking innovative projects in manufacturing of components as well as final equipment for electrolysers and fuel cells, renewable energy, energy storage and heat pumps;

Mid-sized pilots (budget: €0.3 billion) seeking highly innovative projects in disruptive or breakthrough technologies in deep decarbonisation in all eligible sectors of the Fund. Projects should prove the innovation in an operational environment but would not be expected to reach large-scale demonstration or commercial production.

Projects will be assessed by independent evaluators according to their level of innovation, potential to avoid greenhouse gas emissions, operational, financial and technical maturity, scaling up potential and cost efficiency. The call is open for projects located in EU Member States, Iceland and Norway until 16 March 2023.
Promising projects that are not sufficiently mature for a grant may benefit from project development assistance by the European Investment Bank.
Next steps
Projects can apply via the EU Funding and Tenders portal where information on the overall procedure is available. Applicants will be informed about the results of the evaluation in the second quarter of 2023. The grant awards and signature of projects will take place in the fourth quarter of 2023.
A webinar on lessons learned from the previous call and an Info Day will be organised on 29 and 30 November 2022 respectively to give prospective applicants the opportunity to get information and ask questions on the new call.
Background
The Innovation Fund is one of the world’s largest funding programmes for the demonstration and commercialisation of innovative low-carbon technologies. Financed by revenues from the auctioning of allowances from the EU’s EU ETS, it has already held two large-scale calls awarding €1.1 billion and €1.8 billion in grants to 7 and 17 projects respectively (see the Innovation Fund Project Portfolio Dashboard).
With a currently estimated revenue of approximately €38 billion until 2030, the Innovation Fund aims to create the right financial incentives for companies and public bodies to invest now in the next generation of low-carbon technologies and give EU companies a first-mover advantage to become global technology leaders. As proposed under the Fit for 55 package currently being negotiated by the co-legislators, the Fund would be substantially increased to channel even more investments in breakthrough green technologies.
The Innovation Fund is implemented by the European Climate, Infrastructure and Environment Executive Agency (CINEA), while the European Investment Bank provides the project development assistance to promising projects that are not sufficiently mature.

Today more than ever, we need to boost innovation and scale up technological solutions that tackle the climate crisis and bring Europe energy sovereignty. The faster we do so, the quicker we will become immune to Russian energy blackmail. With this new call of € 3 billion, the EU Innovation Fund will support even more clean tech projects than before, speeding up the replacement of fossil fuels in hard-to-decarbonise industries and accelerating the uptake of renewable hydrogen in the EU market.

Executive Vice-President Frans Timmermans

Compliments of the European Commission.
The post EU Commission invests €3 billion in innovative clean tech projects to deliver on REPowerEU and accelerate Europe’s energy independence from Russian fossil fuels first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

If we do not account for the impact of climate change on our economy, we risk missing a crucial part in our work to keep prices stable, argues Christine Lagarde in the ECB Blog. This is the second entry in a series of climate related entries on the occasion of COP27.

A year ago, in his speech at COP26 in Glasgow, Sir David Attenborough asked us: “Is this how our story is due to end? A tale of the smartest species doomed by that all too human characteristic of failing to see the bigger picture in pursuit of short-term goals?” That question remains ever more pressing, and, worryingly, unanswered.
The world, and especially Europe, face a host of pressing challenges that require urgent attention, including from us at the European Central Bank: the economic fall-out from the coronavirus (COVID-19) pandemic, Russia’s invasion of Ukraine, and the cost-of-living crisis due to surging energy prices, to name just a few.
These challenges are complicated and painful, particularly for those struggling every day to make ends meet. As the guardian of the euro, we are fully committed to playing our part in common efforts to address them here and now. In particular, we are determined to do everything to ensure that inflation returns to our medium-term target of 2%. However, we must not lose sight of the challenges we will face tomorrow, and in the years to come.
Last summer, we were already confronted with record-breaking droughts across the globe, and with heatwaves and floods that caused suffering and damage across every continent. Science tells us that this is only a preview of the impact climate change will have on our planet. We also know that the only way to avoid the worst is to green our economy. We must reduce our greenhouse gas emissions all the way to net zero. If we do this early on, the long-term benefits will far outweigh the short-term costs of doing so.
Making our monetary policy fit for climate change
At the European Central Bank, our primary objective is to keep prices stable. That is the compass guiding every one of our actions, now more than ever. To deliver on this core responsibility, we need the full picture on all factors affecting inflation so that our policies remain effective.
Climate change is one of these factors, given its widespread effect on our economy. Extreme weather events can damage infrastructure, ravage harvests and disrupt supply chains. This can push up prices for key products and thereby fuel inflation, making it tougher for us to keep prices stable. By contrast, reinforced efforts to shift our energy supply towards more economical renewables should ultimately help to slow inflation.
If we do not account for the impact of climate change on our economy, we risk missing a crucial part of the overall picture. This means that our job of preserving price stability must include further work on better understanding how climate change affects our role. We must incorporate climate change into everything we do: our models, data, projections and analyses. Ultimately, we need to ensure that our monetary policy accounts for the impact of climate change.
Over the past year, we have moved beyond words and on to real action. We have adjusted our corporate bond holdings, collateral framework and risk management practices to better account for climate-related risks. As supervisors, we work to ensure that banks account for climate-related risks in their business and lending decisions. We also analyse the impact of climate change on the economy and financial stability. And naturally, we work to reduce the environmental footprint of our day-to-day corporate activities in line with the goals of the Paris Agreement.
With our work on climate change, we aim to better manage climate-related risks, support the green transition in line with the European Union’s net-zero objectives and foster wider action from others, always within our mandate.
Looking ahead: paving the way towards a greener economy
Speeding up the green transition has never been more important: surging energy prices have highlighted just how reliant we are on fossil fuels and how vulnerable this makes us. Harnessing the opportunity to push ahead with a timely shift of our energy system towards more renewable energy would not only make our economy greener and more self-sufficient, but it would also reduce the risk of spikes in energy prices. The resulting lower and more stable inflation rates would make our economies work better for the benefit of all.
Of course, we cannot do this alone. All of us need to work hard to lay the groundwork for a greener and brighter world. International cooperation and transparency will be key to achieving this long-term transformation. Pricing in the negative effects of carbon, plentiful investment in innovative green technology and climate adaptation, consistent and comparable climate-related disclosures and clear and timely transition paths with intermediate milestones are just some of the tools that we can use to green our economy. If we all know about the processes at work and are transparent about the true costs of climate change and the benefits of the green transition, people and businesses will understand that changing their behaviours and practices is not just good for the planet, but also makes simple economic sense.
We must do everything in our power to prevent Sir David’s worst fears from coming true. We must make sure that we can turn the page and continue our story. In doing so, may we also find encouragement in his words: “If working apart we are forces powerful enough to destabilise our planet, surely working together we are powerful enough to save it.”
Author:

Christine Lagarde, President of the ECB

Compliments of the European Central Bank.
The post ECB | Painting the bigger picture: keeping climate change on the agenda first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

We need strong rules for strong banks. Basel III has what it takes. But planned EU laws might fall behind international standards, write ECB Vice-President Luis de Guindos, ECB Supervisory Chair Andrea Enria and EBA Chairperson José Manuel Campa in a joint Blog post

The EU banking package matters now more than ever. We need to stick to our global commitments, faithfully implement Basel III and strengthen supervisory powers. We call on the co-legislators to focus on the resilience of the banking sector. Strong rules lead to strong banks, and strong banks are better able to serve firms, citizens and the economy at large.
The post-financial crisis overhaul of the Basel standards has been a long and demanding journey. With the finish line nearing, Europe is now at a critical juncture: implementing the internationally agreed Basel III standards will be decisive in keeping our banking system safe and sound. Europe sat at the negotiating table in Basel, and the final agreement consequently incorporates many suggestions and adjustments put forward by European actors. Claims that the agreement is not a good “fit” for the EU financial sector are therefore misleading.
We are very concerned that in the ongoing legislative discussions in the EU Council and the European Parliament on the EU banking package, numerous calls have been made to deviate from the international standards. The ECB and the European Banking Authority (EBA) have consistently argued for a full, timely and faithful implementation of Basel III. The rules have been carefully articulated to ensure a worldwide minimum safety net against the plethora of risks that we painfully experienced during the global financial crisis.
The legislative proposal of the European Commission already included several deviations from the Basel III rules. The EBA and the ECB were critical[1] of these deviations, as they would leave pockets of risk unaddressed and could increase risks to financial stability.
In a report published in September 2022[2] the EBA estimated that the Commission’s proposal would reduce by 3.2 percentage points the expected increase in Tier 1 aggregate capital requirements stemming from the Basel III reform at the end of the phase-in period.[3] Even this estimate is likely to understate the actual differential, as due to limited data availability only some of the Commission’s proposed deviations could be quantitatively assessed.
The EU Council and the Parliament are assessing the introduction of further deviations from Basel III in different areas, including the risk weighting of equity intra-group exposures, of subordinated debt, exposures to land acquisition, development and construction and off-balance sheet trade finance exposures.
At stake here are the reputation, the competitiveness and, ultimately, the funding costs of the EU banking sector. Back in December 2014, the Basel Committee already deemed the EU to be “materially non-compliant”[4]. If all deviations under discussion make it into the final legislative package, we cannot rule out the Basel Committee labelling the EU to “non-compliant” (the lowest possible grade).
The Basel III rules were endorsed by both the Financial Stability Board and the G20. We therefore risk undermining global cohesion and weakening the EU’s standing in international negotiations if we do not keep our commitments. The current geopolitical disorder shows how important it is to safeguard cohesion and cooperation at global level. Most importantly, Europe and European banks would suffer not only in terms of reputation, but also in terms of resilience. The COVID-19 pandemic again demonstrated the virtue of strong banks for the economy. European banks acted not as shock amplifiers, but as shock absorbers during the pandemic. Today, the Russian invasion of Ukraine and the energy crisis are shaping a highly uncertain outlook. We are convinced that the overriding principle for this banking package – the needle in our compass – must be prudence.
Our concerns regarding the proposed deviations are not limited to the capital relief relative to the pure Basel regime. A leading principle for both the EBA and the ECB has been to introduce a regulatory regime that limits complexity as much as possible. However modest in terms of capital relief, the inclusion of additional deviations from the Basel standards will inevitably make the system more complex. This not only adds to the cost of compliance for banks, but also complicates the work of supervisors and market participants.
We also need strong supervision. This means empowering supervisors with all the tools necessary to ensure that banks keep their risks under control. Another priority for the banking package is to therefore close gaps in our current rulebook. We clearly need increased ambition on environmental, social and governance risks. However, the work of both the ECB[5] and the EBA[6] in this area shows that banks are lagging behind on this front. Not only will ambitious proposals in the EU banking package help banks to rectify these shortcomings, they will also ensure supervisors can step in should banks fall behind. This will also help cement the EU’s global leadership role in this important area, which is developing quickly. It will therefore be important that the final agreement not only shows the way in terms of ambition, but also sets out a framework that remains risk-based and which allows scope for future developments in an area that will evolve rapidly over the coming years.
Finally, we need sound and harmonised rules for third country branches. We also need tools to avoid inappropriate bank management and poor governance. In order not to fall short in addressing these risks, it is important that the co-legislators do not to lower the ambition compared to the Commission’s proposal. Notably on the fit and proper assessment of banks’ management, we need an ambitious improvement of the rules to tackle the challenges we see. Only capable decision-makers can enable sound decisions and sound risk management, and supervisors need to be able to intervene accordingly. Looking ahead, this is clearly the most effective way of avoiding problems in banks.
Authors:

José Manuel Campa, Chairperson of the European Banking Authority

Luis de Guindos, Vice-President of the ECB

Andrea Enria, Chair of the Supervisory Board of the ECB

Compliments of the European Central Bank.
Footnotes:

Opinion of the European Central Bank of 24 March 2022 on a proposal for amendments to Regulation (EU) No 575/2013 of the European Parliament and of the Council as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CON/2022/11) (OJ C 233, 16.6.2022, p. 14-21).

EBA (2022), “Basel III monitoring exercise – results based on data as of 31 December 2021”, 30 September.

This estimate refers to the steady state implementation in 2033 and therefore does not reflect that, due to adjustments in the calculation of the output floor for specific types of exposures that the Commission proposes to apply on a temporary basis until the end of 2032, the output floor will have an even lower impact before the steady state level kicks in. Moreover, we should not underestimate the fact that, whereas the Basel agreement proposed phasing in the reforms between 2023 and 2028, the Commission proposed doing so between 2025 and 2030, giving banks more time to prepare. Finally, the estimate does not include the decision to mute the impact of historical losses on the capital charge for operational risk. This is a legitimate choice, as the Basel agreement left this decision open to the discretion of the authorities but goes against the advice of both the EBA and the ECB and implies a further alleviation of average requirements of 110 basis points.

BIS (2014), “Assessment of Basel capital regulations in the European Union concluded by the Basel Committee”, press release, 5 December.

ECB (2022) “Walking the talk – Banks gearing up to manage risks from climate change and environmental degradation. Results of the 2022 thematic review on climate-related and environmental risks”, 2 November.

EBA (2020), “Discussion Paper on management and supervision of ESG risks for credit institutions and investment firms”, 30 October.

The post ECB | Strong rules, strong banks: let’s stick to our commitments first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.