Maybe the European Commission foresaw that the COP25 in Madrid was not going to achieve the ambition they had hoped for, or maybe they just wanted to be first to announce a new ambition plan. In any case last Wednesday, when the COP25 had not even gone into extra time, the European Commission announced The European Green Deal with new ambitious plans for a sustainable future. The new president of the European Commission, Ursula von der Leyen, even called it ´Europe´s man on the moon moment´. Now that seems a little strong, especially since nothing (new) has been achieved yet. For now, it is nothing more than a plan. However, it does become clear from the plans that Europe will give even more importance to tackling climate change and this will be the number one priority before anything else. And if Europe does achieve the ambition of becoming the first climate-neutral continent by 2050, perhaps then we can really talk of a ´man on the moon moment´.
In this blog we will discuss the new ambitions set by the European Commission, with which measures it is planning to achieve the ambitions and which implications these measures will have.
Ever more ambitious
To start with the ambition, the European Green Deal sets new targets for the reduction of greenhouse gas emissions. The old targets for reduction of emissions were a 40% reduction in 2030 compared to 1990 levels and a 80-95% reduction in 2050. The new targets will be a more ambitious 50-55% in 2030 and zero net emissions of greenhouse gases in 2050. Quite some countries previously discussed in our blogs such as Portugal (reduction of 45-55%), Netherlands (49%) and Germany (55%) had already set more ambitious targets for 2030 than the agreed 40%, so to them it will not come as a big shock. However, now this more ambitious target will be set for all countries, so it is definitely an increase in ambition.
How is Europe going to achieve this? Before all, by making sustainability an integral part of all the policy areas of the European Union. This will be laid down in a new European Climate Law. This law should ´provide predictability for investors and (…) ensure that the transition is irreversible´, and will ´ensure that all EU policies contribute to the climate neutrality objective and that all sectors play their part´. Furthermore, the European Commission will include sustainability in the European Semester process of macroeconomic coordination (in which the European Commission reviews the policies of all member states).
Source: European Commission, 2019.
It all sounds good and no doubt these steps are important, but which concrete measures and actions will be taken? Well for now it is mostly plans. The roadmap that is part of the European Green Deal consists of 47 initiatives, proposals and new legislation to be worked out in the months and years to come. However, the European Green Deal does give some directions which we will discuss below.
The Emission Trading System (ETS)
To deliver the additional greenhouse gas emissions reductions, the Commission will review the Emissions Trading System (ETS), including a possible extension to new sectors. This is elaborating on the German proposals discussed in one of our previous blogs to create a system of CO2-pricing for the mobility and building sectors. As we explained there, including more sectors in ETS does not necessarily increase the CO2-price, since corresponding rights will be allocated. However, the more ambitious target will mean that the yearly reduction of the number of emission allowances in the market will have to go at a higher pace. This will most likely mean a faster increasing price trend than previously foreseen.
As we know from CO2-pricing mechanisms and is highlighted by the European Commission, these policy reforms will help to ensure effective carbon pricing throughout the economy, will encourage changes in consumer and business behaviour, and facilitate an increase in sustainable public and private investment.
To reduce the risk of carbon leakage and to prevent unfair competition, the European Commission will propose a carbon border adjustment mechanism if differences in climate ambitions with countries in other parts of the world persist. This would ensure that the price of imports reflect more accurately their carbon content.
With respect to electricity generation the Commission does not come with much news. A power sector must be developed that is based largely on renewable sources and coal needs to be phased out rapidly. Europe will continue with the integration and interconnection of its energy market. Peculiar is that the Commission mentions one particular technology for renewable energy as it states that increasing offshore wind production will be essential.
Building and renovating
To increase energy efficiency the EU should engage in a ‘renovation wave’ of public and private buildings. To stimulate this the Commission will rigorously enforce the legislation related to the energy performance of buildings. Like Germany, the Commission is considering including this sector in ETS. This would also ensure that the relative prices of different energy sources across sectors provide the same incentives for energy efficiency.
To achieve climate neutrality, a 90% reduction in transport emissions is needed by 2050. The Commission wants fossil-fuel subsidies to end and will look closely at the current tax exemptions for aviation and maritime fuels and at how best to close any loopholes. Flight ticket prices and freight transport costs might well go up if the Commission achieves this.
The Commission will propose to also include the maritime sector in ETS, and to reduce the number of ETS allowances allocated for free to airlines. Furthermore, the EU will provide funding to reach 1 million public recharging and refuelling stations by 2025 for the 13 million zero- and low-emission vehicles expected on European roads by then.
Source: European Commission, 2019
Environmentally friendly food system
Maybe the best expression of the fact that sustainability is to become an integral part of all policy areas, is the Commission´s proposal for agricultural policy for 2021 to 2027. At least 40% of the common agricultural policy’s overall budget and at least 30% of the Maritime Fisheries Fund should contribute to climate action according to the Commission. Here for the first time the European Green Deal is talking about substantial (public) money.
Similarly, the Commission has proposed a 25% target for climate across all EU programmes. At least 30% of the InvestEU Fund will contribute to fighting climate change. Moreover, projects will be subject to sustainability proofing to screen the contribution that they make to climate, environmental and social objectives. Much highlighted in the press but in the plan only one sentence is the role of the European Investment Bank. The EIB will double its target for climate investments from 25% to 50% by 2025, thus becoming ´Europe’s climate bank´.
The European Green Deal includes a number of other measures, such as differentiating value added tax (VAT) rates for products according to their environmental impact, for example low VAT rates for organic fruit and vegetables. The Commission also wants to keep investing in research and innovation on transport, batteries, clean hydrogen, low-carbon steel making, and circular bio-based sectors. While it is clear that the goal of the plan is to constrain climate change, it should also bring new growth opportunities to the European economy.
Notwithstanding all its internal efforts, Europe wants to act as a global leader in international efforts to come to agreement on how to reach the goals laid down in the Paris Agreement.
Even though reaching agreement in Europe is slightly easier than in a worldwide context, we know that even within Europe it can be very challenging to align all member states. For sure many preparations had been made and consultation rounds had been done before government leaders joined last Thursday the 12th of December to discuss the European Green Deal proposed by the European Commission.
Source: ANP, 2019
Surprisingly enough it took government leaders only nine hours to come to agreement on the deal proposed. They confirmed the European Green Deal, with only two adaptations. One is that member states remain in charge of their energy mix and the suitable technologies for reducing emissions. This was important for countries such as France, Hungary and the Czech Republic, which have a large share of nuclear energy. Nuclear energy thus remains one of the options for power generation. On the other hand, Poland will get time until June 2020 to confirm the deal. Poland is still heavily relying on coal for power generation. The share of coal in power generation is currently 78% and the current target for 2030 is reducing to 60% (where many other countries want to have phased out coal by then). For that reason, Poland states that in this moment it cannot promise to not emit CO2 by 2050. Even though this might prove to be a hurdle for the climate ambitions of the EU, there is optimism that with the right compensation for the changes needed to be made, Poland will agree to the deal.
The European Green Deal is not a radical change in policy, it is not a change of direction, it is before all a shift to the next gear of policies to combat climate change. A much-needed shift of gear if we are to take the goals under the Paris Agreement seriously. Even more so taking into consideration the difficulties of reaching wider international agreement on measures to be taken. With Europe taking the next step, it might prove easier to convince other countries to do so as well. Meanwhile for Europe a faster transition will mean that more investment is needed, and the costs of emissions will go up quicker. Part of the transition costs will be covered by the funds dedicated by the EU as well as those of member state governments, another part will come from private funds. No transition is easy, but as the European Commission sets out in its European Green Deal taking the initiative and being a front runner can also have advantages and bring along new opportunities for the European economy.
Rens van de Ven | Energy Consultant