Setting 2040 climate targets: technical adjustment or transformational agenda?
By Maximo Miccinilli, Senior Vice-President, Head of Energy, Mobility and Climate, FleishmanHillard EU
The EU is preparing to define its new 2040 climate goals, in an attempt to bridge the existing Commission’s Green Deal plan under the von der Leyen Presidency with the new leadership to be elected mid-2024. A public consultation for all stakeholders is open here.
This 2040 exercise could lead to a couple of contrasting scenarios.
Scenario 1 entails a purely technical re-modelling exercise on how to reach a lineal 2040 GHG reduction target – accounting for the impacts of the COVID19 pandemic and war in Ukraine on the energy system. Such a scenario may well lead to adjustment and enforcement of existing policy frameworks.
Scenario 2 comprises a more drastic political/regulatory rupture from the multiple EU climate and energy packages over the past decade. While the former implies a tightening exercise, the latter would transport the debate into uncharted waters for most policymakers and practitioners.
All in all, these scenarios are radically different in terms of goals, policy options, market impacts and the EU’s climate and energy diplomacy efforts, which are needed more than ever in a deteriorated multipolar and liberal world order.
Let’s now dig into them.
Scenario 1: technical check-up and policy continuity
This scenario is not business as usual but relatively close to that. It will primarily assume that the 2030 decade will not trigger a wave of new policies and hence the economy should land smoothly into a -65/-70% GHG emissions reduction track by 2040. While one can expect massive criticism from progressive organizations, socialist and green political formations – and the United Nations itself – the existing climate policy structure (renewables, ETS, energy efficiency and phasing out fossil fuels as much as possible) will not be massively revamped but rather reinforced and complemented by another layer of policies. In this scenario, the entire electrification process of the economy may lose pace significantly compared to current expectations, and hard-to-abate sectors will gain more time to both decarbonize and innovate by the end of the 2030s. Nuclear power renaissance, bioenergy with carbon capture and storage (BECCS), long-term LNG contracts with new EU and bilateral deals, some regional CCS emergence and only a gradual decline in natural gas supplies would reframe the dynamics of a continent free of Russian gas. Equally, while hydrogen will need to play an important role, it won’t be a game changer as predicted today. One of the challenges with this scenario is that the European Commission will need to prepare a very aggressive 2040-2050 policy/regulatory decade, should the intention to reach net-zero by 2050 remain. Certainly, such a scenario may generate doubts about Europe’s global weight and overall regulatory capabilities in leading climate change policies. What is more, the global clean tech race will also imply a massive redefinition of which sectors will require further support to survive or, by default, disappear.
Scenario 2: policy rupture, new paradigm and the challenge of a transformative agenda
Today, the idea of a truly transformative agenda for climate seems to be the preferred choice for senior officials in the European Commission. Conceived as a fundamental policy paradigm shift, the EU would first endorse the call of the United Nations Secretary General in bringing the net-zero target forward to 2040, by promising regulatory levers between early 2030s and 2040. That would represent a significant game changer in the trajectory of GHG emissions reduction in the EU.
How radical this agenda will be, however, will depend first on how Member States do their homework in enforcing the main goals set out in the Fit-for-55 package. Reaching the -55% GHG target reduction by 2030 would require speeding up the whole decarbonization process of mobility, industrial manufacturing, and heating systems. These three need to decarbonize faster but also retain competitiveness in the global market to maintain European GDP growth.
On top of that, this scenario implies five specific success stories:
- Infrastructure: Massive infrastructure roll-out for EVs, electromobility (light, and heavy-duty) and decarbonisation of shipping and aviation through domestic production of sustainable fuels.
- Grids: A brand-new model to incentivize extensive investments in both high- and mid-voltage grids across the continent (to avoid the almost unavoidable infrastructure crisis) with the aim of integrating the best technology and connect Europe with other neighbouring regions
- Hydrogen: A truly Pan-European H2 infrastructure that will facilitate i) the distribution of green hydrogen and ii) simplification of regulatory rules in the single market with clear policies to prevent ‘colorful H2 imports’ from third countries
- Storage: Deployment of electricity storage at large scale using best available technologies with access to funding in vulnerable regions
- Raw Materials: Sufficient and stable access to critical and strategic raw materials from Third countries in the next 20 years
In light of the above, what would a general shift in Europe’s policy making to a more transformative agenda broadly entail? Below I suggest a list of relevant elements that may gain traction in Brussels and other capitals before EU elections. The goal here is to shed light on how this policy rupture can emerge and redefine climate and energy policy areas.
First, subsidies and climate taxation regimes will matter more than ever. State aid rules will continue to play a substantial role (scope to be enlarged or extended?) as public money will be instrumental to compete in the global arena. Subsidisation of innovative and transformational technologies would therefore need to continue. The global tech race will pick up speed between the U.S., China and the EU for the entire 2030 decade. The EU’s taxation regime will give rise to challenges against unanimity or revising the EU Treaty to find solutions beyond the state aid arm.
Secondly, the EU decarbonisation paradigm may shift from ‘supply more decarbonized inputs’ to ‘destroy unsustainable demand for the economy’. This may lead to mandatory plans and targets for demand (‘destruction’) optimisation of all kinds of goods and products including electricity and fuels. The debate will change dynamics as production capabilities, recyclability rates, circularity and real electricity demand needs will come under scrutiny.
Thirdly, water policy and regulation will emerge as a fundamental mainstream policy affecting all parts of the economy. Water systems, water management, water scarcity, water infrastructure, water re-use will become common language in Brussels and local communities across Europe. As the crisis is hitting Spain today before its own Presidency, the water crisis is just about starting with multiple implications for the economy without exception for the energy system. Evolving energy systems (producers, developers, distributors, and all types of consumers) will need to contribute to water management and, ultimately, investments to adapt to scarcity and related critical issues.
Fourthly, a number of different policies will gain traction such as electricity tariffs reforms, with more appetite for regulatory sandboxes, locational or nodal pricing, the enforcement of a mandatory carbon removals regime that goes beyond the existing proposals on certification and EU ETS ‘last dance’ reform.
For instance, the EU ETS post-2030 reform will look very different from the current system with some sectors being phased out completely. Other sectors may be handled more cautiously from a social/distributional perspective as decarbonising may be more costly than expected. Such a reform will encompass a simultaneous CBAM review which may be instrumental to push the EU’s greener market agenda or, on the contrary, remain a conflictual trade policy instrument in a fast-changing landscape for global value chains.
Overall, this transformational agenda implies enlarging the policy and regulatory boundaries of climate policymaking in Europe. Going large does not necessarily mean being effective or a climate leader but rather exploring the possibility of changing the economy on the way to our 2040 and 2050 targets. This is a very complex exercise requiring ownership at EU, national, but more than ever, local levels.
The European electoral cycle is about to start. Will the strong EU candidates take 2040 targets with them and launch a real political debate? It is hard to say but the second half of the year will tell.