GECF Expert Commentary - European Energy-Related Emissions In The Context Of Increased Climate Policy Commitments
Sid Ahmed Hamdani, Energy, Environment & Policy Analyst, Energy Economics and Forecasting Department
The European Commission has initiated a landmark proposal, the ‘European Green Deal’, that aims to accelerate the transformation of the European Union into a prosperous, modern, competitive and climate-neutral economy. The proposal promoted by the new president, Ursula von der Leyen, is articulated around various priority axes including strengthening the climate ambition, supplying clean and affordable energy, supporting efficiency in the building sector, accelerating the shift towards sustainable mobility, promoting environmentally-friendly agriculture and food system.
Achieving carbon neutrality has a special focus in the new green deal, which proposes to achieve net-zero emissions by 2050 and to further reinforce the 2030 intermediate target, from the current 40% to more than 50% emissions reduction compared to 1990 level. This proposal adds to other initiatives such as building effective and coherent carbon pricing system, revising energy taxation directive, setting up a carbon border adjustment mechanism.
It is worth noting that the European Green Deal builds on various measures, already undertaken by the EU, to strengthen its climate commitments. Among these measures are the adoption of the ‘Clean for all energy” package with reinforced renewables and energy efficiency targets, the strengthening of carbon standards in the framework of the low carbon mobility initiative, the implementation of EU ETS reforms as well as Effort Sharing Regulation which covers non-ETS sectors (e.g. transport and buildings).
The formal adoption of the EU ETS phase IV reforms in February 2018 and the entry into force of the Market Stability Reserves in January 2019, contributed to increasing carbon prices, by mitigating the observed imbalances between supply and demand in the EU emission allowances (EUAs). These imbalances were responsible for the low prices dominating the carbon markets before 2018. The Effort Sharing Regulation is another greenhouse gas (GHG) mitigation policy, which sets a collective target to reduce non-ETS sectors emissions by 30% in 2030 relative to 2005. To support this target, Member States use several tools including carbon taxes.
The effort deployed by countries to decarbonize their energy system adds another layer to the EU collective policy and climate commitments. For instance, several Member States have decided to phase out coal in power generation and have committed to achieve net-zero emissions by 2050, including the UK, Germany, Portugal and Denmark. Germany, which represents around 22% of the EU total emissions, has taken an important step with the adoption of the 2030 climate protection program in October 2019.
The European Green Deal is not the first-time commitment of the EU to achieve a climate-neutral objective. The EU has particularly stated this ambition in its strategic vision for climate-neutral economy released last November. The vision highlighted different potential scenarios to achieve GHG emissions pathways, which are compatible with the Paris Agreement objectives. These scenarios consider several decarbonization options that are able to achieve more than 80% emissions reduction in 2050 compared to 1990 level, They reflect a clear policy orientation to boost the uptake of renewables, electrification of final energy sectors, accelerating the phasing out of coal and deployment of energy-efficient and circular economy options.
Moreover, the EU carbon-neutral economy vision states that natural gas could be negatively affected, over the long-term, with a possible significant reduction of its share in the European primary energy mix. This vision remains, however, confronted with the necessity to adopt affordable options in order to replace the expected structural decline of coal and the old fleet of nuclear power plants. Natural gas is very suitable to support competitively this replacement while enabling and complementing the development of intermittent renewables.
What are the main challenges of European climate policy?
Despite all the above-mentioned measures and developments, the EU is facing numerous challenges that can hinder its progress towards its ambitious climate commitments. These include economic competitiveness and the risk of migration of its industry, social opposition to the potential loss of welfare due to taxation, technical and economic challenges for the deployment of low carbon options (e.g. intermittent renewables and electric vehicles), as well as disparities between the Member States in commitment and policy implementation.
To illustrate this disparity, it is worth noting that countries like Poland, Greece, Romania and Bulgaria are still backing coal, despite European engagement to accelerate coal decommissioning. Poland, particularly, highlighted in its last released energy policy that coal will remain a major source of energy and represent around 60% of the power mix by 2030 (80% presently). Poland is also challenging the adoption of the carbon-neutral vision and has not agreed, so far, on the green deal commitment.
Regarding EU renewables deployment, which is the cornerstone of the European decarbonization policy, it is still facing several barriers constraining the progress with the ambitious and recently revised European target (i.e. 32% of renewables penetration by 2030). These constraints include the technical and economic challenges to integrating a large share of intermittent renewables that require costly back-up capacities and strong reinforcement of electricity transmission and distribution networks. The increased share of renewables makes their integration a very complicated issue and is likely to drive an increase in electricity prices charged to customers.
Carbon pricing is also not free of challenges for Europe. Although the EU ETS reforms are expected to increase the level of carbon prices compared to our previous anticipations, there are still some uncertainties that can affect the role of carbon markets in providing relevant signals for decarbonization. Among these uncertainties are Brexit and its potential effect on carbon market trading, the overlaps between various policies that might affect the demand for emission allowances (e.g. potential phase-out of coal) and the treatment of free allocation auctions for the industries exposed to migration (i.e. the carbon leakage issue). Moreover, the modalities and interactions between carbon prices and the proposed mechanism for carbon border adjustment also remain unclear.
Adding new taxes and burdens to the European economies and populations has proved to be not an easy task. The UK has already frozen its Carbon Price Support mechanisms amid negative effect on business competitiveness. France reviewed the stringency of its taxes after the social protests (“Gilet Jaune” crisis) by the end of 2018, and Finland revised downward its taxes for fuels used in heating and for a work machine.
Energy-related CO2 emissions projections
Based on our assessment of different policy measures and challenges affecting the deployment of carbon mitigation options, we forecast a substantial long-term decline of the EU energy-related CO2 emissions. The latter are anticipated to decrease at 1.7% average annual rate, from 3.6 GtCO2 in 2018 to 2.8 GtCO2 by 2030 and 2 GtCO2 by 2050.
This projected emissions trajectory reflects a significant downward revision compared to our anticipations in the previous GECF Outlook edition (GGO 2018), where emissions were expected to achieve almost 3.2 GtCO2 by 2030, or 15% more than the current reference case projections. These projections factor in strengthened climate-related measures including those supporting energy efficiency and renewables in the context of the “Clean for all energy” regulations; accelerated phasing out of coal for power generation, and higher carbon prices following the EU ETS phase IV reforms.
With regards to emissions targets, the EU is well on track to achieve its 2020 target (i.e. 20% emissions reduction compared to 1990 level), driven by its implemented measures. The ongoing economic crisis triggered by the spread of Coronavirus will support further emissions reduction in 2020, but this effect is anticipated to be short-lived with emissions recovering soon with the pre-corona virus trajectory by 2021. Over the longer term, the EU is expected to miss by some margin its 2030 mitigation target (i.e. 40% GHG reduction over 1990), which is estimated to be compatible with around 2.6 GtCO2 of energy-related emissions.
For the 2050 horizon, a large mismatch is also anticipated between the targeted emissions savings (more than 80% compared to 1990 level) and the anticipated emissions trajectory. This gap is underpinned by the observed differences in Member States climate commitments and their capacity to deploy carbon mitigation options while simultaneously supporting population welfare and economic competitiveness.
Source: GECF Secretariat based on data from the GECF GGM
The extent to which renewables can be competitively deployed and integrated into countries’ power systems is one key factor that weighs in driving the gap between the forecasted and targeted emissions. We anticipate that the EU will achieve two-third of its electricity production from renewable sources (including hydropower) by 2050, which remains much lower than the 80% minimum share stated in the scenarios developed by the European Commission in the framework its climate-neutral vision. Moreover, the development of renewables in heating and transport sectors will still face considerable technical and economic barriers, preventing this source of energy from being a large contributor in these sectors’ energy consumption.
Coal utilisation is also another factor supporting the emissions gap. Despite the significant anticipated decline, this source of energy is expected to stay as an affordable and available energy source, representing around 4% of the 2050 primary energy mix, and to be utilised specifically in Poland and some east European countries.
Natural gas is set to play a role in supporting the forecasted decline of European emissions, particularly through its penetration against coal in power generation, industry and heating sectors. In our reference case, supportive measures such carbon prices and emissions standards, as well as affordable gas prices will support natural gas in keeping a stable market share between 2030 and 2050, at around 26% of the primary energy mix. EU gas demand is anticipated to reach nearly 420 Bcm by 2050.
The role of gas in driving EU emissions decline can be significantly reinforced with the potential development of carbon removal options, including CCUS and Blue Hydrogen. Although our reference case forecasts do not factor in a large-scale deployment of these technologies, these forecasts can be revised in the future, in a context where the European climate policy is paying increasing attention to these options as a way to achieve deep decarbonization, particularly for the hard to decarbonize sectors such as heating and industry.