The Most Common Risk To Decarbonization Targets? Governments Weakening Their Climate Policies

The Most Common Risk To Decarbonization Targets? Governments Weakening Their Climate Policies

In the 2024 Verdantix global corporate survey, almost 75% of respondents cited governments weakening their climate policies as one of the top three external risks to meeting their short- and long-term decarbonization targets.

Government policies play a critical role in driving decarbonization momentum: mandatory disclosure regulations hold firms accountable on their carbon emissions and climate risks and promote more rigorous carbon accounting practices. These policies provide greater access to granular third-party emissions data, supporting firms in calculating Scope 3 emissions and assessing external transition risks. Government policies also facilitate collaborative decarbonization. For example, the UK Net Zero Council supports cross-sector collaboration, providing a structured exchange of knowledge and allowing members with substantial Scope 3 emissions – such as Barclays, HSBC and Nestle – to exercise greater influence over wider ecosystem initiatives and SME policies.

Decarbonization entails substantial capital expenditure, and investment in emerging technologies that are often less cost-effective. Therefore, 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. For example, 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.

However, recent economic and geopolitical instability has seen governmental momentum on climate change stall and climate action become increasingly politicized. 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”.

There are 64 national elections in 2024, as well as elections in the European Parliament, altogether covering 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.

For further insight into how corporate peers are evaluating the risks, opportunities and challenges associated with decarbonization, see our recent report, Verdantix Global Corporate Survey 2024: Net Zero Budgets, Priorities & Tech Preferences.