• How the agrifood sector is becoming more sustainable

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    Climate change and the struggle to prevent it pose enormous challenges for agrifood production in Spain. In turn, improving the sustainability and resilience of the sector will be key to achieving the environmental targets set out in the European Green Deal. Agri-environmental indicators show that, despite some progress in recent years, the sector needs to tackle significant aspects, such as reducing the use of chemical pesticides, fertilisers and antimicrobials in agriculture, as well as improving animal health and welfare, increasing efficiency in the use of energy and water resources, promoting food consumption that is more sustainable and healthier and reducing food loss and waste, fostering a circular economy. The new CAP, with eco-schemes as its key measure, and the Next Generation EU funds will support the sector’s green and digital transition.

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    The threat of climate change and transition to a sustainable food system

    Spain’s agriculture has traditionally benefited from a privileged geographical location and climate but it is particularly vulnerable to climate change. Increased soil erosion, floods, droughts and wildfires, along with an increase in pests and diseases, are just some of the direct effects. In turn, primary sector activity also contributes to climate change: crop specialisation and intensification, the use of chemical inputs and the industrialisation of livestock production all have negative impacts on water, soil, air, biodiversity and habitat conservation.

    Agriculture contributes to climate change and, in turn, suffers directly from its consequences

    It must therefore move towards a new model that protects the natural resources on which it depends.

    EU countries are increasingly aware that they need not only to mitigate climate change but also adapt to it. Consequently, given growing concerns for the environment, the agrifood sector must move forward in its transition from a system that emits greenhouse gases (GHG), demands a large amount of natural resources and also pollutes them, to a new model, increasingly widespread, that provides healthy, nutritious food sustainably, protecting the natural resources on which agricultural activity itself depends.

    In addition to improving the sustainability of agrifood production and downstream distribution, another important lever for change is to promote healthier and more environmentally sustainable consumption patterns. For example, a diet with a larger proportion of vegetables, organic foods, seasonal and local produce. Similarly, the reduction of food loss and waste and promotion of the circular economy are also key factors in moving towards a sustainable food system, as stated in the European Commission’s «Farm to Fork» strategy.

    The Farm to Fork strategy

    The Farm to Fork strategy
    Source: European Commission.
    From the European Green Deal to the CAP Strategic Plans

    The EU is deploying a wide range of tools to provide stakeholders with mechanisms and incentives to support this transition to a sustainable food system and, in turn, to help achieve the targets set out in the European Green Deal. One important addition in the reformed Common Agricultural Policy (CAP), which will enter into force in January 2023, is the drafting of National Strategic Plans to establish priorities in terms of aid and incentives for the various production subsectors.6The star measure is eco-schemes, which are voluntary and reward sustainable practices. Spain’s Ministry of Agriculture has proposed two eco-schemes, with a budget of 1,107.49 million euros, which group sustainable practices into two areas: agroecology and low carbon agriculture. The first group includes activities such as pasture management using sustainable mowing, crop rotation and the maintenance of non-productive areas and other biodiversity aspects. The second group includes extensive grazing, conservation agriculture and the maintenance of living or dead vegetation cover.

    • 6. Spain’s Ministry of Agriculture, Fisheries and Food must submit its Strategic Plan to the European Commission by 30 December 2021.
    The new CAP, with eco-schemes as its key measure,

    together with Next Generation EU funds, will support the sector’s green and digital transition.

    In addition to the CAP, the European NGEU funds will also help to finance the green and digital transition of the primary sector. In particular, item 3 of Spain’s Recovery, Transformation and Resilience Plan, aimed at the environmental and digital transformation of the agrifood and fisheries system, provides for an investment of 1,502.8 million euros. The plan is based on four fundamental pillars: (i) improving efficiency in irrigation, (ii) promoting sustainability and competitiveness in agriculture and livestock farming, (iii) a digitalisation strategy for the agrifood sector and the rural environment, and (iv) modernising the fisheries sector, by promoting sustainability, research, innovation and digitalisation.

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    Environmental indicators in the primary sector

    The European Commission has analysed the situation of individual Member States in relation to their contribution to each of the Green Deal ambitions. The table below lists these targets and the reference values of these indicators for the main countries.7

    To make Europe the first climate-neutral continent by 2050, the first milestone has been set for 2030: reduce greenhouse gas (GHG) emissions by at least 55% compared with the 1990 level. While GHG emissions from EU agriculture have fallen by a significant 20% since 1990, no progress has been made since 2005. And in Spain the situation has been reversed: emissions have increased since 1990 (6.5%) with just a modest reduction since 2005 (–3.7%).

    • 7. «Commission recommendations to Member States as regards their strategic plans for the CAP», European Commission, December 2020.
    In relative terms, GHG emissions by Spain’s agricultural sector

    are lower than the EU average, which has set itself the target of at least 55% below 1990 levels by 2030.

    Despite this trend, it is important to note that, in relative terms, the sector is responsible for 12.0% of the economy’s total GHG emissions compared with an EU average of 12.7%. Furthermore, if we take into account the fact that the primary sector contributes 2.9% of GDP compared with 1.6% in the EU, the result is that GHG emissions by Spain’s agrifood sector per unit of GVA are significantly lower than the European average (1.2 kg/euro compared with 1.7 kg/euro in the EU).8 Similarly, emissions from agriculture per unit of agricultural land (tonnes of CO2 equivalent per hectare) are lower in Spain (1.6 compared with 2.5 in the EU).

    The second EU milestone is contained in the Farm to Fork strategy, which sets a target of 50% reduction in the use and risk of chemical pesticides by 2030. In recent years, Spain has significantly reduced the use of this type of chemical and the challenge is to continue moving in this direction. The target for antimicrobial resistance is a 50% reduction of the overall antimicrobial sales for farm and aquaculture animals by 2030, compared with the EU baseline in 2018. In this respect, Spain lags behind the EU average.

    On the other hand, Spain performs positively both in its share of agricultural land used for organic farming, an aspect we discuss in more detail in the next section, and the proportion of agricultural land occupied by highly diverse landscape features. In this case Spain, with 13.2% of its land, already exceeds the target of 10%.9

    • 8. Data from the European Commission’s Common Monitoring and Evaluation Framework (CMEF) for the CAP 2014-2020, https://agridata.ec.europa.eu/extensions/DataPortal/cmef_indicators.html
    • 9. EU Biodiversity Strategy 2030.

    European Green Deal targets and reference values

    European Green Deal targets and reference values
    Notes: GHG stands for greenhouse gases. UAA stands for utilised agricultural area. Source: CaixaBank Research, based on the European Commission’s COM (2020) 846.
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    Nitrate pollution from agriculture remains one of the greatest pressures on the aquatic environment. In this respect, the EU has set a target of reducing nutrient losses by at least 50% by 2030 while ensuring there is no deterioration in soil fertility, an aspect in which Spain needs to improve considerably. An increasing number of EU countries are also affected by water scarcity, often caused by excessive abstraction of water for agriculture and livestock. Climate change will further aggravate the problem of water availability in many regions, including Spain.

    Finally, the new CAP establishes digitalisation as a priority across the board, believing that the transition towards a sustainable food system must be supported by knowledge, innovation and digitalisation. In this respect, one key factor in developing rural areas and reversing their depopulation is the availability of a fast, reliable internet connection. While there has been a notable increase in the proportion of households in rural areas with next-generation broadband access, there is still a significant gap with respect to urban areas. The goal is to cover 100% of the population by 2025.10

    • 10. This target is included in the Agenda España Digital 2025.
    58.7% of Spanish households in rural areas

    had access to fast broadband internet in 2019. The goal is to cover 100% of the population by 2025.

    The green and digital transition of European agriculture is also creating new business opportunities which the sector must take advantage of, for example by better aligning its production with evolving consumer tastes. Sustainability will become a competitive advantage for those companies and farms that achieve a balance between economic growth, environmental care and social well-being, while those that fail to comply with environmental standards will be penalised by increasingly demanding and environmentally aware consumers who identify with the most sustainable brands and products.

    A firm commitment to boosting organic production

    The commitment to more sustainable production schemes, such as organic farming,11 is relentless. Spain, with more than 2.44 million hectares of these crops in 2020, is the first country in the EU and the third in the world after Australia and Argentina. However, in terms of its share of utilised agricultural area (UAA), it is above the EU average, as noted in the previous section, but well below leading countries such as Austria, Estonia and Sweden, which exceed 20%. Four million additional hectares would be needed to achieve the 25% target set in the Organic Action Plan.

    • 11. Organic farming is a system of agrifood production and management that combines the best environmental practices, a high level of biodiversity and preservation of natural resources and the application of high animal welfare standards, so that products are obtained from natural substances and processes (MAPA).

    Share of utilised agricultural area under organic farming

    Last actualization: 13 October 2021 - 16:38

    Regarding organic operators,12 almost 90% out of a total of 50,047 in 2020 were primary producers while the rest were industrial operators and traders. However, the number of operators is growing much faster (more than double) further down the food chain.

    • 12. An organic operator can be an individual or company and must meet certain requirements to be able to produce, process, prepare or package food of agricultural origin in order for it to be marketed using the terms ecological, biological or organic. In Spain there is a General Register of Organic Operators (REGOE) that collates the information provided by each autonomous region.
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    By region, Andalusia leads the field both in terms of land under organic farming, with more than 45% of the total, and in terms of organic livestock farms, with almost 60%. By type of crop, cereals for grain production come top (43% of the total) and, by type of livestock, cattle (48%). Compared with other countries, the Spanish agrifood sector is the world’s leading organic producer of olive oil and wine and the second for citrus fruits and vegetables.

    However, one of the challenges facing organic production in Spain is the low domestic consumption: per capita consumption of these products in 2019 stood at 50.2 euros, a far cry from countries such as Denmark or Switzerland, which exceed 300 euros. As a result, most of Spain’s organic produce, around 60%, is exported.13 The change in habits brought about by the pandemic has boosted healthier, more sustainable and local consumption, so the trend in domestic consumption of organic produce is clearly upward.

    • 13. Sociedad Española de Agricultura Ecológica (SEAE), MAPA (2021), «Análisis de la caracterización y proyección de la producción ecológica española en 2019» and Ecovalia (2021), «Informe anual de la producción ecológica en España».
    Organic farming in Spain, on the rise

    Area under organic farming

    Last actualization: 13 October 2021 - 16:38

    Organic operators in the primary sector (producers)

    Last actualization: 13 October 2021 - 16:39

    Organic operators in the secondary sector (manufacturers and processors)

    Last actualization: 13 October 2021 - 16:40
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The necessary move towards a green financial sector

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Thanks to the growing, and necessary, interest in the climate emergency, more and more studies are being published on the impact that this challenge will have on the economy. In fact, there is already a consensus that characterises the climate emergency as big, non-linear and uncertain. It is «big» because of the disruptive effects it will have on the productive model, either due to the physical risks it entails or those related to the transition.1 It is «non-linear» because, as the average temperature of the planet increases, certain natural phenomena accelerate, such as the melting of the polar ice caps, which will further accentuate global warming, thereby exponentially increasing the frequency and violence of extreme natural events. Finally, it is «uncertain» because there are no historical precedents for such a high concentration of greenhouse gases as we have today that can help us to make precise forecasts of the consequences it will have.

The magnitude and uncertainty of the economic impact of the climate emergency is perfectly illustrated when we look at potentially stranded assets, which are primarily exposed to transition risks. The best example of such assets is the reserves of fossil fuels that have not yet been extracted, a significant portion of which should be left underground if we are to achieve the targets of the Paris agreement. There are various methods for estimating the impact of these assets on global wealth. While some studies focus on the total volume of reserves that should remain underground, others focus on the value of the investments already made to extract the fuel in question or the net present value of the revenues from these reserves. Thus, some estimates suggest that the impact of such a decision on global wealth would amount to between 1 and 4 trillion dollars, while others place it at 18 trillion dollars (approximately 15 times the annual GDP of Spain).2 Like we said, a big and uncertain impact.

The financial sector will be affected by the climate emergency, although it can also help to mitigate it

In view of the potential impact of the climate emergency on the economy, the financial sector will need to incorporate climate risks into the comprehensive risk management associated with its activities (operational, credit, reputation or market risks). Take, for example, the case of a company with potentially stranded assets. In the event that a regulation limiting the extraction of these assets were to enter into force, the valuation of that company would fall, as would its ability to service its debt payments. As such, any banks that had offered this company financing would be exposed to a credit risk due to the borrower’s reduced solvency. Also, since these companies often use their assets as collateral when obtaining funding, upon executing the guarantees the bank would receive an asset that has no value, so it would also be exposed to market risk. The Bank of Spain estimates that up to 25% of the corporate debt held by Spanish banks is in sectors that are potentially vulnerable to these transition risks.3

On the other hand, the climate emergency also represents a major opportunity for the financial sector. The capital requirements of activities that help to mitigate and adapt to climate change are substantial and are unlikely to be met with public funds. The role that the private sector can play is therefore key. In this regard, the banks, as intermediaries between savings and investment, are in a prime position to channel capital flows into «green» projects. Nevertheless, distinguishing between sustainable and harmful projects requires international standards. To address this, as part of the Green Deal the European Commission has approved the long-awaited taxonomy which can be used to determine which projects are green and thus facilitate the flow of capital towards an economy that is neutral in greenhouse gas emissions.

The EU taxonomy and the next steps

In this proposal, the EU proposes considering an activity as sustainable if, at a minimum, (i) it contributes substantially to one of the six environmental objectives specified in the second chart, (ii) it does not significantly harm any of these objectives, (iii) it fulfils certain social guarantees and (iv) its contribution is technically verifiable. Thus, a set of metrics have been determined for each economic sector, so that companies and investors can estimate what percentage of their activity or assets are green.

Four types of activities that can be considered green will be distinguished: (i) those that are already low-emission (such as clean energy generation), (ii) the enablers (such as the manufacture of solar panel components), (iii) transition activities (those with a level of greenhouse gas emissions below their industry average, such as electricity generation using natural gas) and (iv) those aimed at adapting to the physical risks.

This «new common language» will avoid the use of divergent criteria when determining whether or not an activity is green. At the same time, it will combat the practice of greenwashing by companies and investors seeking to improve their reputation by engaging in activities which appear sustainable a priori but which, in the end, do not represent a real improvement in the environment. It will also open up a number of channels that can provide a boost to the transition towards a climate-neutral economy, such as:

The publication of the type of activities being financed: the EU will require financial institutions to publish, for each financial product, the proportion of green activities being financed.4 Furthermore, large corporations that are already subject to non-financial disclosure requirements will have to report information regarding the new taxonomy. Thus, both investors and consumers will be able to know how polluting a company is or what verifiable actions they are taking to offset their carbon footprint.

Incentivising the financing of green projects: once green activities can be distinguished from the rest, the respective financing costs could be influenced (for instance, by offering guarantees that reduce the cost of green projects). Some of the tools that have been proposed include the green supporting factor and the brown penalising factor, which would need to be subtracted or added, respectively, from or to the minimum capital requirements applicable to financial institutions. That said, it does not seem desirable to use banks’ capital requirements for a purpose unrelated to absorbing potential losses.

Pending challenges

To further reduce greenhouse gas emissions, it is necessary to be able to classify the most polluting activities as «brown» and to differentiate them from those that are simply not green, thus creating three groups of assets and activities: green, neutral and brown. However, the current proposal does not yet offer any tools to do so. Moreover, there is still some way to go in the identification of climate risks. Moving towards better detection and quantification of the physical and transition risks that will affect the various economic sectors is key for financial institutions to be able to make better-informed decisions based on international standards. Thus, once the climate risks have been quantified, stress tests can be carried out to see how resistant the financial sector (and all other sectors) is to the various environmental scenarios.

What about the role of monetary policy?

The mandate of the central banks focuses primarily on price stability, and the climate emergency certainly has an impact on prices. However, the direction that prices will take as a result of climate factors is far from clear, as there are demand and supply forces driving them up and down.5 For this reason, and because of their implications for financial stability risks, central banks are beginning to take action in order to better understand the impact of the climate emergency and to clarify whether they need to include environmental sustainability in their mandates in order to avoid a scenario that would be disruptive to economic growth and would generate sudden price fluctuations.

In this regard, drawing on the strategic review currently being undertaken by both the ECB and the Fed,6 voices have been raised proposing that the central banks purchase green assets (green QE). However, this measure is somewhat controversial given that, strictly speaking, the transition towards a climate-neutral economy is not yet within the mandate of the monetary authorities. Moreover, one of the main features of the ECB’s purchases of corporate assets at present is precisely its neutrality with respect to the various economic sectors in order to avoid price distortions.

In short, monetary policy can at best aspire to complement and accompany whatever regulations are established by the authorities responsible for setting the course of the environmental transition.

Ricard Murillo Gili

1. Physical risks are those arising from the exposure of human activity to the natural system, while transition risks are those arising from the regulation that aims to bring the economy towards a lower level of greenhouse gas emissions and from the transformation of economic activities itself in order to meet the new environmental targets.

2. See J.F. Mercure et al. (2018). «Macroeconomic Impact of Stranded Fossil Fuel Assets». Nature Climate Change 8. E IRENA (2017). «Stranded Assets and Renewables: How the Energy Transition Affects the Value of Energy Reserves, Buildings and Capital Stock».

3. This article does not take into account companies individually; rather they are aggregated by sector. See M. Delgado (2019). «Energy transition and financial stability. Implications for the Spanish deposit-taking institutions». Financial Stability Review (Autumn edition).

4. The first two EU environmental targets will be detailed at the end of 2020 and implemented by the end of 2021, by which time the remaining four pillars that are due to be implemented at the end of 2022 will have been defined.

5. In a disruptive scenario in which extreme natural events occur more frequently and are more violent, we can assume that there will be a supply shock that will drive prices up. In other scenarios involving a reduction in economic growth, meanwhile, prices would tend to fall. See P. Bolton et al. (2020). «The Green swan – Central banking and financial stability in the age of climate change», BIS and Bank of France. Also, C. Alestra et al. (2017). «Long-term growth impact of climate change and policies: the Advanced Climate Change Long-term (ACCL) scenario building model», Bank of France.

6. See the Focus «The ECB and the Fed: two mandates, one target» in the MR02/2020.

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