With mandatory disclosure regulations holding firms accountable on carbon emissions and climate risks, government policies play a critical role in driving decarbonization momentum. However, recent economic and geopolitical instability has seen governmental momentum on climate change stall and climate action become increasingly politicized. This uncertainty may jeopardize corporate climate strategies, with 75% of net zero decision-makers citing governments weakening their climate policies as one of the top three external risks to meeting their short- and long-term decarbonization targets.
Governments are crucial to improving the business case for decarbonization through financial incentives, access to public funding and through the protection of low carbon products from cheaper alternatives. Without these interventions, corporate climate action can become prohibitively expensive: decarbonization entails substantial capital expenditure and investment in emerging technologies that are often less cost-effective. In the US, the 2022 Inflation Reduction Act (IRA) provided $391 billion in funding and tax credits for clean energy and climate initiatives. Section 45Z financially incentivizes the production of low-emission transportation fuels through a tax credit system from 2025 to 2028. The EU’s Carbon Border Adjustment Mechanism (CBAM) also aims to create a level playing field for decarbonization and protects EU manufacturers with green investments by preventing higher emission imports from undercutting green premiums.
While these policies are encouraging, their introduction does not ensure long-term support, as political and economic concerns are leading governments to backtrack on their climate plans. In September 2023, the UK Government delayed its ban on the sale of new fossil-fuel-powered vehicles by five years and scrapped its planned policy to enforce energy efficiency upgrades in the rented residential property market from 2025. In April 2024, the Scottish Government abandoned its ambitious target to reduce emissions by 75% by 2030, citing it as “no longer credible”.
2024 has - and will - see 64 national elections and elections in the European Parliament, which altogether account for 44% of global emissions (as of 2022). The results of these elections threaten to pull the rug out from under the feet of corporate sustainability practitioners, making decarbonization targets unfeasible. Of particular concern is the US election – where Republican candidate Donald Trump has promised to re-withdraw from the Paris Agreement and repeal the IRA, calling renewable energy a “scam business”. Sustainability teams need to remain vigilant to changes in market decarbonization momentum and be conscious of policy risk and the potential for unfavourable changes to certain decarbonization business cases during target-setting and transition plan creation.
To read more on how corporate peers are evaluating the risks, opportunities and challenges associated with decarbonization, read Verdantix Global Corporate Survey 2024: Net Zero Budgets, Priorities & Tech Preferences.
