FRANKFURT — Net-zero targets risk doing more harm than good and should be dropped in favor of more realistic strategies to help the environment, one of Italy’s top central bankers warned.
Paolo Angelini, deputy governor at the Bank of Italy, said in an interview with POLITICO that concentrating on long-term targets, rather than focusing on the intermediate steps needed to reach them, may end up destabilizing the economy, not least by forcing banks to change their lending policies faster than the society they serve can change its behavior.
The comments add to a growing sense of concern among policymakers that Europe’s attempts to lead the world in the energy transition risk fatally weakening what is left of its industrial strength, undermining any aspiration to global leadership.
“If one bank drops a heavy emitter — say, a major oil company — in favour of lower emission-producing companies — say, a firm in the services sector, such as Big Tech — that is fine,” Angelini said. “But if every financial intermediary adopts this strategy there will be problems, at least as long as people keep using cars and want to keep warm in winter and cool in the summer. If everybody divests from high-emitting sectors there will be a problem because if the economy does not adjust at the same time, things could blow up unless a miracle happens in terms of new technology.”
Angelini’s concerns echo those of the fossil fuel and chemicals industry, which has consistently stressed the need to keep up investment in legacy energy sources to maintain supply security in the short term. The lack of spare capacity in the global energy system was one of the reasons why Russia’s invasion of Ukraine had such a huge impact on the European economy last year.
“Every European government subsidized the consumption of electricity because firms faced with huge increases in price could not stay open, and because citizens do not like to stop driving, do not like to be in cold houses, and so forth,” he said.
While he vociferously supports the green transition, Angelini warned that prioritizing net-zero targets could have adverse consequences.
“As soon as you announce targets, you want to deliver on them and, if you fall short of meeting them, you may start looking for shortcuts,” he said.
For banks — soon to be stress-tested by the European Central Bank on their exposure to climate risks — such shortcuts could mean dropping carbon-intensive customers to deliver quick results. That’s despite the broad recognition in policy circles that such sectors should be part of the solution in the transition. “This may imply in the short term, and also in the medium term, an increase in the carbon intensity of financial intermediaries’ own portfolios,” Angelini observed.
Such considerations affect the allocation of the Bank of Italy’s own funds too, he noted, adding that strategies offer more assurance than targets.
“I would personally drop the targets and go for a strategy of investing in firms with credible and ambitious transition plans,” he said.
ECB’s green credentials
The ECB has enthusiastically embraced an environmental agenda under the presidency of Christine Lagarde, even going so far as to include green performance credentials in its decisions on which companies’ bonds to buy and hold as part of its quantitative easing programs. Angelini’s comments don’t contradict that policy, but they do chime with French President Emmanuel Macron’s call earlier this week for Europe not to impose any additional environmental burdens on an economy struggling to stay competitive with China and the U.S.
Angelini is one of four deputy governors at the BoI. Traditionally, that would give him a chance of taking current governor Ignazio Visco’s seat on the ECB’s governing council when Visco retires in November. The government is yet to take a decision on the succession, although there are rumors that Fabio Panetta — currently halfway through his term on the ECB’s Frankfurt-based board — may switch back to Rome.
Even the Bank of Italy itself isn’t immune to the challenges of the green transition, Angelini noted. “For the time being I am refraining from raising my hand and saying at the Bank of Italy we’re going to net zero, because I don’t have the technology, the ability to be certain about the pledge,” he said. He recalled asking his team if the Bank could commit to net zero.
“They told me: ‘If you allow us to tear down all our historical buildings and build energy efficient ones, then we can do it’.”
While the thought of razing the Bank’s famous Palazzo Koch headquarters may not horrify some environmental activists as much as it would aficionados of 19th century architecture, it’s a potent symbol of the trade-offs that the green transition demands: how much of Europe’s present — and past — is it willing to risk to secure its future?
