Mobilizing European Finance for the Energy Transition

With a goal of reducing carbon dioxide emissions by 55% by 2030 and achieving carbon neutrality by 2050, Europe must equip itself to ensure a successful energy transition and catch up on the delays of recent years. From replacing fossil fuels to thermally insulating buildings, decarbonizing industrial production sites, and phasing out internal combustion engines in automobiles—how can Europe mobilize hundreds of billions of euros annually to finance such investments?

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Firstly, there is an urgent need to redirect savings towards combating climate change. A significant challenge for the Paris financial center is to channel abundant savings in Europe towards investments in energy transition. Finance plays a central role in this. Financial institutions have essential expertise in mobilizing capital and directing it towards the needs of the energy transition. Improving the profitability of the European financial industry requires cross-border consolidations to build leaders capable of competing with American banks. Europe must establish European champions capable of serving the needs of large European companies. A major obstacle to this lies in the regulatory framework, which, despite banking union efforts, remains fragmented in Europe.

Banks need synergies in managing their equity and liquidity. However, the inability to move liquidity or capital from one EU country to another impedes consolidation. European banks must generate enough profits to build internal capital or raise capital from markets when needed, requiring paying sufficient dividends to investors. The reality is that investment funds and venture capital in Europe are too weak compared to the United States. Europe needs to create a single financing market and bring about the Capital Markets Union (CMU). Unfortunately, since the Junker agenda of July 15, 2014, which promoted the CMU, political leaders have shown little enthusiasm for this topic.

Things must change because it is by integrating its capital markets that Europe can facilitate investment in green and digital sectors. Europe needs to invest more in green technologies and decarbonized energy to compete with American and Asian counterparts. To maintain its attractiveness and avoid decline, Europe must unite its forces and invest as massively as the United States in reindustrialization. The Inflation Reduction Act (IRA) adopted by the U.S. Congress on August 7, 2023, is not only aimed at combating climate change but also at positioning the country at the forefront of future industries. We need more innovation to lower prices and more wealth to invest in decarbonized energy.

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The United States has committed €460 billion to climate transition investments, and China will invest €800 billion by 2025. Meanwhile, various European green energy aid plans total only €360 billion by 2030. Europe must bridge this gap as quickly as possible. Fueled by the IRA, the United States is rapidly decarbonizing its economy and reindustrializing. The World Bank's Managing Director, Axel van Trotsenburg, estimates that climate money is scattered among subsidies contradictory to the energy transition. Explicit subsidies to agriculture, fishing, and fossil fuels from states reach $1.25 trillion per year. Implicit subsidies contributing to pollution, greenhouse gas emissions, and nature destruction exceed $6 trillion per year. The urgency is clear: we must gradually redirect environmentally harmful subsidies towards decarbonization.

To address these collective challenges, Europe has powerful levers, including major banks and energy companies. Only a united Europe will allow us to exist in the face of the geopolitical demands of large countries and the economic power of major American and Asian companies.