Subsidy reform is an investment opportunity for Europe’s agricultural transition

Europe’s food system is under pressure. Climate shocks are already costing the EU agricultural sector EUR28.3bn per year, around 6% of production, through droughts, floods, heatwaves, and other extreme weather events. For investors, that is a material risk to supply chains, productivity, and long-term returns. 

That’s why the EU’s Common Agricultural Policy (CAP) is essential to building and preserving a sustainable agriculture sector. In 2023, investors with over USD7tn in assets called on finance ministers to repurpose agricultural subsidies to align with climate and nature goals and to support a just transition for farmers.

As the commission carries out its mid-term evaluation, our message is clear: the CAP must accelerate emissions reductions and build climate resilience in one of the EU’s most essential sectors. 

The CAP is the EU’s main framework for supporting farmers and rural development. It is one of the largest spending programmes and plays a major role in shaping how land is used, what gets produced, and how resilient Europe’s agricultural sector will be in the decades ahead. In practice, the CAP can enable cross-border coordination and targeting of support where it’s most needed, and help unlock a competitive, climate-aligned food system. But in order to do so, it needs to tackle the sector’s carbon emissions, 75% of which are methane

Methane abatement must be part of CAP reform

Agriculture is the EU’s largest source of methane emissions, accounting for 56% of emissions of the potent greenhouse gas. Unfortunately, following rapid decline 1990-2005 agricultural methane emissions have plateaued in recent years, falling by just 4% between 2005 and 2022, far slower than reductions in the energy and industrial sectors. 

Methane is a potent greenhouse gas, but unlike carbon dioxide, it has a relatively short atmospheric lifetime. That means cutting methane can deliver near-term climate benefits, slowing warming as we tackle longer-term carbon dioxide emissions. 

Without stronger action, current GHG projections reported by Member States indicate that total methane emissions in the agriculture sector are not expected to decrease until 2030, with only a 3% reduction by 2050 under existing policies. That trajectory is incompatible with the EU’s climate neutrality goals.

EU Agricultural policy fragmentation hinders simplification

Today, there is no EU-level definition of sustainable farming, clear net-zero pathways for the agricultural sector, or methane-specific reduction targets. This creates ambiguity for both farmers and managing authorities.

The policy gaps also worsen the financing gap: banks and private investors cannot identify agricultural activities aligned with the EU net-zero objectives to finance them.  This reduces the capacity of agriculture players to access labelled bond and loan markets to finance their transition.

The result is a financing gap. Farmers and agribusinesses struggle to access sustainability-linked loans, labelled bonds and other transition finance products at scale, while private capital waits for clearer signals.

Public-private collaboration can grow a stronger agri-food sector

The CAP cannot finance the agriculture transition on its own and it should be deployed to maximise crowding in of private finance. This requires science-based sectoral criteria and transition pathways that align EU agricultural policies credibly with climate objectives and support farmers throughout the transition. 

Climate Bonds has developed Crop and Livestock criteria that can support farmers as they transition their operations, cut methane emissions, and build more resilient businesses and food systems.

Some investors are already aligning portfolios with climate goals, but many have highlighted the need for public support to be better aligned with these objectives. Partnersip between public policy and private finance is essential to mobilising a rapid, credible, and just transition for the sector. 

CAP reform can establish a modern investment framework for one of Europe’s most exposed and most essential sectors. If designed well, it can strengthen food security, reduce climate risk, and accelerate methane abatement and a rapid transition for the sector.