Category: Energy and Climate

The EU gets fit for 55

By Giacomo Valentini, 31 July, 2021

On 14 July, the European commission presented its “fit for 55” initiative, a package of measures to ensure that the EU will cut its greenhouse emissions by 55% by 2030. 

The plan radically expands and replaces the bloc’s previous reduction plan, which set a more modest 40% reduction target. The new more ambitious goals will allow the EU to boost its international credentials ahead of the COP26 conference to be held in Glasgow on November 1-12. The EU will be able to tell the conference that it is putting itself on a path to complete decarbonisation of its economy by 2050, thus exceeding the goals of the Paris Agreement. It will also be able to claim to be a key player in talks with other major emitters, most notably the US and China, about how to collectively meet the Paris objectives. 

The plan addresses emissions from all major sectors of the EU economy:

  • Industry and electricity generation
  • Transport (road, air and maritime)
  • Buildings
  • Agriculture and forestry

It presents the vision of a European economy in 2030 where all new cars will be propelled by electric batteries or hydrogen, where renewable energy sources provide at least 40% of total energy use, and where coal, oil and gas will be progressively phased out.

The package of measures will have to go through the normal EU legislative process before becoming law. It is likely many of the individual measures will undergo changes as legislators work to produce agreements they can sell to their voters. Already many member states and industry associations have reacted negatively to several provisions of the package, especially the phase out of ICE cars by 2035 and the introduction of emissions trading for automotive and heating fuels. The Carbon Border Adjustment Mechanism is also likely to raise concerns about its trade impacts.

Assuming these negative reactions can be overcome, the individual measures are to start taking effect in a staggered manner, starting in 2023.

Main actions in the EU’s “Fit for 55” plan

Industrial emissions – EU ETS

  • lower the current cap on EU industrial greenhouse gas emissions, nearly doubling the annual rate of reduction to 4.2%, compared to 2.2% today. This would mean that EU industrial and energy installations would emit 61% less CO2 by 2030 compared to 2005.

Non-industrial emissions

  • Under the EU’s “effort sharing” initiative, each state will be assigned new, more ambitious reduction targets for buildings, road and domestic maritime transport, agriculture, waste and small industries.

Renewable energy and energy efficiency

  • The Commission proposes a new target to produce 40% of energy from renewable sources by 2030, while introducing new sustainability criteria for biofuels
  • EU states will be given new, more ambitious and binding annual targets for reducing energy use at EU level. 

Buildings

  • The public sector will be required to renovate 3% of its buildings each year to drive the renovation wave while creating jobs and saving money for the taxpayer.
  • Fuel for heating buildings will be included in a new fuel emissions trading scheme that will be launched in 2026.

Cars

  • Average CO2 emissions of new cars are to be reduced by 55% by 2030, and 100% by 2035 compared to 2021 levels. All new cars registered as of 2035 will be zero-emission (battery or hydrogen). By that year, EU governments will have to install charging and fueling points at regular intervals on major highways: every 60 kilometres for electric charging and every 150 kilometres for hydrogen refueling.
  • For existing cars and trucks, petrol and diesel are to be  included in the new fuel emissions trading scheme that will start in 2026.

Aviation

  • Jet fuel suppliers at EU airports will be required to blend increasing levels of sustainable aviation fuels in their fuel. This would include biofuels but also synthetic low carbon fuels, known as e-fuels. 
  • The EU will remove most exemptions from its requirement that aircraft flying to or from an EU country are subject to quotas and can trade emissions in the EU ETS.

Shipping

  • Shipping emissions will be included for the first time in the EU ETS.
  • To stimulate the uptake of sustainable maritime fuels and zero-emission technologies, there will be progressively rising purity standards for maritime fuels in EU ports, so that by 2050 these fuels emit 75% less greenhouse gas than today.

Agriculture and forestry (LULUCF)

  • The overall EU target for 2030 will be to remove 310 million tonnes of CO2/equivalent  emissions through carbon sinks. This target would be broken down into individual national targets. By 2035, the EU should aim to reach climate neutrality in agriculture and forestry including both CO2 and methane emissions from fertilisers and livestock.
  • A new EU Forest Strategy will seek to plant three billion trees across Europe by 2030.

Taxation

  • New legislation will be presented to require the 27 EU states to remove all exemptions and reduced rates that currently encourage the use of fossil fuels.
  • To make sure foreign countries with lax environmental standards do not benefit from the increased EU carbon rules, a new Carbon Border Adjustment Mechanism would impose a CO2 tax on imports of certain products.

Funding the transition to a zero-impact economy

  • The entirety of the revenues from the EU ETS scheme will be devoted to funding climate and energy-related projects. This will include a new €72 billion “Social Climate Fund” which in the six years from 2025 to 2030 will help European citizens cope with the costs of installing energy efficient equipment, new heating and cooling systems, and purchasing zero-emission cars. 
  • The EU will increase the funds available under the existing “Innovation” and “Modernisation” funds (intended to help companies meet their EU ETS obligations), and provide new funding to address the possible social impact on vulnerable households, micro-enterprises and transport users. 
  • The EU has established that the €500 billion InvestEU fund (recovery from the COVID-19 crisis) be used in a manner consistent with the EU’s climate and energy goal.s
  • The EU is also requiring that 35% of its €100 billion “Horizon Europe” (2021-2027) research and innovation fund be spent on climate and energy-related innovation. 

Impact of Populism on European Policy Making

Relaunching the blog

This article relaunches IPM’s blog after over a year of silence. We hope to provide more frequent, timely updates on issues that are of interest to our clients and friends.

Giacomo Valentini

 

THE IMPACT OF POPULISM ON EUROPEAN POLICY MAKING

In recent years, a majority of European countries have experienced a rise in populist movements, a trend which is affecting national politics and even brought populist leaders to occupy important government positions.

In Hungary, on 8 April the nationalist and populist Fidesz party won a two-thirds parliamentary majority, reconfirming Viktor Orban as prime minister. Orban based his election campaign on fighting alleged foreign meddling in Hungarian politics, in particular by financier George Soros, and on preventing refugees and migrants from entering the country.

Since 2015, Poland has been ruled by the populist PiS Party, adopting policies that tend to reject international cooperation, set limits on freedom of expression, and focus on domestic issues.

In Greece, the current government is a coalition between anti-establishment parties. It adopts positions that are often at odds with those of the country’s EU partners.

In Austria, following a general election in 2017, the country is ruled by a coalition between the mainstream conservative ÖVP Party and the right-wing populist FPÖ party, with an anti-immigrant agenda. In the Netherlands, the mainstream conservative VVD Party of Prime Minister Mark Rutte heads a coalition designed to keep the right-wing party of Geert Wilders out of power. To win the election, Rutte adopted some of the anti-immigrant rhetoric of his right-wing opponents. Populist parties have appeared elsewhere in Europe, from Spain, to Finland, Norway and Sweden.

Not to be undone in this competition, Italy has spawned not one but two populist parties. The election of 4 March saw big gains for both the Five Star Movement and of the League, while the two main traditional parties lost badly. The two parties are discussing a possible coalition government, which might focus on adopting measures against immigrants, promoting greater government spending, and challenging EU authority in economic matters. While the United Kingdom does not currently feature a prominent populist party, the recently deceased UK Independence Party (UKIP) fitted that definition during the years leading up to the 2016 referendum which resulted in the UK announcing its withdrawal from the EU.

The last bastions of European stability and continuity appear to be Germany and France. However, in both countries populist movements have emerged. In France, the elections of 2017 saw the defeat of the country’s two main traditional parties, Republicans and Socialists, and the rise to prominence of two outsiders, the centrist Emmanuel Macron – who eventually won the presidency – and right-wing populist leader Marine Le Pen. In Germany, the right-wing anti-establishment AfD party made significant gains at the 2017 general election, with 12.6% of the vote and 94 members in the 600-seat parliament.

The populist parties that have emerged in Europe in recent years can be divided into two broad categories:

  • Parties that defend the “ordinary citizen” against the power of the “elites” – an umbrella name which covers supposedly corrupt politicians, multinationals, and unspecified occult powers.
  • Nationalist parties which claim their country is under attack from foreign threats – including immigrants, supranational organisations such as the EU, the UN, or the IMF.

These two categories often overlap, and most populist parties include both elements. Both these groups of parties tend to be inward-looking, in the sense of being relatively uninterested in international issues. Many of the populist parties in power in Europe adopt inward-looking policies, and try to divert government expenditure towards measures to help vulnerable groups – in particular the unemployed and retirees.

Implications for European politics and policy making

Election results in recent years suggest that in most of Europe, traditional parties are struggling to maintain their popular support. Many factors might be cited to explain this decline – including the financial and economic downturns of the past decade, increased automation on the factory floor and outsourcing of production to countries with cheaper labour costs, the long-term political and ideological consequences of the end of the cold war in the 1990s, the rise of social media, the refugee crisis that followed the civil war in Syria, and hypothetical Russian disinformation campaigns.

The changes in government are already having an impact on EU politics. However, the impact on policy making has so far been much more muted. This is because EU institutions are somewhat shielded from political swings. The civil service plays a central role, and top civil servants are career officials, thereby relatively immune from changes in the political mood.

This means that sudden swings in policy are unlikely as a result of political shifts in government. Nonetheless, over time the political changes will make their way into EU policy making.

Policy outlook

It is quite possible that over time, the rise of populist parties could result in subtle changes in the EU’s policy focus. Populist parties tend to be suspicious or outright sceptical of policies that would require them to spend money on international issues, or on issues which appear to be removed from the concerns of the ordinary citizen. On climate change, some populist parties are openly climate-sceptic. This is, for instance, the case of Poland.

For instance, in energy policy currently the EU concentrates its efforts on market deregulation and coordination of national energy policies. A rise in populist parties might result in more attention being paid to electricity prices. On climate change, populist parties are likely to assign a low priority to climate-related policies, if these involve major costs or budgetary expenditures.

Similarly, on policies such as innovation, transport, or industrial policy, populism is likely to promote diversion of expenditure towards meeting the concerns of the ordinary citizen, away from more lofty or long-term goals.

Giacomo Valentini

Europe and the Energy Transition Challenge

September 14, 2016

Energy transition has become a buzzword to indicate the many transformations under way in the energy sector. The term is generally used to denote the transition from traditional forms of electricity generation – mainly fossil fuels and nuclear power – towards renewable energy sources (RES), especially wind and solar. But as a recent Financial Times article (paywall) points out, further transitions are under way in the energy world. I am here highlighting the following:

  • transitions in the oil and gas markets, which make the west less vulnerable to traditional suppliers in the Middle East and elsewhere;
  • a transition in energy use, with the prospect of electric vehicles (EVs) taking increasing shares of the market from gasoline- and diesel-powered vehicles
  • a transition in the patterns and dynamics of power production – with a shift away from large centralised utilities in favour of a variety of alternative production centres, from industrial self-producers, all the way down to individual consumers with their own PV panels – the “prosumers”.

All three these transformations are producing profound changes in the European energy landscape. The interaction between them makes it particularly hard to forecast the exact direction of the energy transition.

In the oil and gas markets, the US has undergone its shale revolution, essentially securing it against the uncertainties of world markets. In Europe, the ripples caused by the US shale revolution, along with gas deals with various countries and enforcement of EU gas transmission and distribution rules, are gradually reducing dependency on Russian gas supplies, though for oil, Europe remains largely dependent on imports from major world producers.

Compared to other OECD countries, the EU countries share a large, liberalised and increasingly integrated energy market. It is EU gas market rules that prevent Gazprom from forging monopoly supply deals with EU countries – prompting European countries to seek new intra-EU pipelines, and Russia to threaten to abandon the EU as a customer for its gas. And it is EU market rules that can facilitate the other transformations under way: large utilities have lost their monopoly status, leaving space for new and innovative market players.

Before the launch of EU liberalisation in the late 1990s, most of Europe’s electricity systems were beholden to centralised, vertically integrated utilities. Market liberalisation helped set the conditions for the expansion of renewables. So far, the main beneficiaries of the transformation in Europe have been RES generators. They have benefited from relatively open markets and from favourable government policies such as feed-in tariffs, which are intended to promote renewable energy but also help Europe’s chronic dependence on imported energy sources.

But Europe’s liberalised energy market can do more than that. It is often said that a common European energy policy is still hampered by the fact that the EU Treaty explicitly grants EU governments the right to set their energy strategies in full autonomy. However, the impact of the limited energy legislation that does come out of Brussels – from the energy market rules to climate legislation and state aids guidelines on RES subsidies – have had a major impact on the continent’s energy landscape. Over time, a convergence of policies is happening, partly because European countries, though autonomous in energy matters, already share so much in terms of economic policy and are increasingly interlocked politically, that energy policy making is is following a more general trend towards common goals.

Thus, energy transition also means transition towards shared European goals.

The current Polish government is an outlier in the EU, being the sole supporter of continued coal development and discouraging renewable energy development. Most other European countries are embracing an approach based on pragmatic support for renewables, combined with due recognition that traditional energy sources will remain part of the energy mix for the foreseeable future.

This common trend towards low-carbon energy and energy security, combined with the EU’s energy market rules, can create fertile ground for the application of innovative ideas, some of which are already being pioneered across the continent.

Energy storage is probably the area of greatest importance right now, and the one where the greatest opportunity for business innovation lies. Storage is necessary to make best use of intermittent energy sources such as wind and sun. It is needed to store power produced by RES installations at times when the sun is shining or the wind blowing while demand is incapable of absorbing all the RES supply. Batteries might never evolve to the point of storing the vast amounts of energy needed to power Europe’s economy during times of low wind and/or sun. But they are already being used for stabilisation of the electricity system, a crucial function to maintain reliability of power supplies as more and more intermittent RES come on the grid.  Car batteries are one possible way to store renewable energy. Several Vehicle-to-Grid (V2G) projects have tested the idea of transforming Europe’s EV park into a distributed store of electricity to help manage the transition to renewables.

The European energy market also sets positive conditions for companies to establish their own power production, which they can design to meet their specific needs while selling or purchasing any excess supply or demand.

But for the above energy transitions to succeed in Europe, the European energy policy must evolve further. The Energy Union initiative of Commissioner Maros Sefcovic is reinforcing a trend that has already been under way for some time.

But because all rapid transitions tend to be messy, unfortunately there are some losers in this process. Traditional European utilities are facing a period of crisis. Several are responding, as testified most visibly by E.ON’s decision to rebrand itself as a “green company”, putting its traditional generation activities into a slightly revised version of its former self. But the process of transformation is costing the sector billions.

The current financial weakness of Europe’s utilities could undermine Europe’s economy. While RES are on the rise, they still provide just above a quarter of Europe’s total electricity generation, and 13% of total energy consumption. With EVs set to grow in number, electricity demand is set to increase significantly over the coming decade. For the years to come, Europe will still need varying amounts of coal, gas and nuclear to provide the remaining 75% of electricity. European policy makers should not forget this or they risk putting the future of the whole process in jeopardy.

 

 

Brexit and the UK’s energy and climate policy

July 15, 2016

It is early to start making detailed predictions about how UK climate and energy policy will evolve following Brexit. The latest developments suggest that the new British government, headed by Theresa May, is likely to balance the need for climate ambition against the goals of affordable and reliable energy supply for the citizen. The result is likely to be a reformulation of the country’s priorities and programmes. Continue reading Brexit and the UK’s energy and climate policy