Finance and CO₂ removal are the biggest obstacles to EU’s path to climate neutrality, study finds

Expanding fossil fuel subsidies and slowing afforestation impact EU’s net-zero emissions

The rise in fossil fuel subsidies during the energy crisis triggered by the invasion of Ukraine, as well as the decline in the rate of carbon storage in trees, are undermining the EU’s progress towards achieving climate neutrality by 2050, according to a report by the European Climate Neutrality Observatory.

The independent monitoring initiative, launched last year, tracks and assesses the EU’s decarbonisation process across 13 “building blocks” deemed essential to achieving a climate-neutral society and economy. These building blocks are electricity, mobility, industry, buildings, agriculture and food, carbon removal, lifestyles, clean technologies, finance, a just and inclusive transition, governance, adaptation and external action.

This year’s progress check covers indicators of change from 2016 to 2022, whereas last year’s inaugural report was based mainly on data from 2015 to 2021.

As in last year’s report, ECNO said that finances and CO₂ removal are the EU’s Achilles heel and that both areas are heading in the wrong direction.

The report says that spending public money on emergency relief rather than long-term resilience during the energy crisis has led to a sharp increase in fossil fuel subsidies, further widening the investment gap in climate finance.

It also questions the quality of information banks disclose on climate finance, saying the timeline for publishing financial institutions’ transition plans remains uncertain. The report’s authors hope that the adoption of the Corporate Sustainability Due Diligence Directive and the revision of the Capital Requirement Directive will mean that implementing such plans will become mandatory for banks.

Meanwhile, to address the decline in natural CO₂ sinks, the report proposes moving away from monoculture forests towards ensuring a greater diversity of tree species, as well as promoting biodiversity, forest resilience and soil data monitoring.

Improvements and recommendations

Energy, industry and clean technologies are the components that have improved the most compared to last year’s analysis, but the overall pace of change is still too slow, with only climate governance on track to meet its 2050 goals, the report says.

Agribusiness, buildings and mobility are areas where progress is still too slow, with insufficient political support, the report says. One proposal put forward by the report’s authors includes shifting public funds within the Common Agricultural Policy to better support farmers, by encouraging the adoption of low-carbon and climate-resilient farming.

However, there are promising signs of a just transition. The report highlights that employment in the regions most affected by the transition is at an all-time high, with the renewable energy sector employing almost 1.7 million people across the EU.

You can read the full report here.