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Essential Energy Insights - October 2021


EU unveils major climate plan, says fossil fuel economy 'has reached its limits'

SNL Image

The EU's proposals to reach its climate targets depend heavily on expanding the use of renewable energy.
Source: Yaorusheng/Moment via Getty Images

EU officials outlined a vast slate of policy proposals to reach the bloc's climate targets, becoming the first major economy in the world to set out a detailed roadmap for how to reach net-zero emissions.

The package of legislative initiatives from the European Commission, the first of which were published July 14, includes wide-ranging measures to cut emissions in industries like energy, transport and housing. It also involves a controversial plan to introduce a carbon border tax to shield European industries from emissions-intensive imports, which has already been met with concern from some other countries, including the U.S.

The measures, a mix of updates to existing laws and brand new legislation, are meant to set the bloc on a viable path to cut its greenhouse gas emissions by at least 55% by 2030. That target was strengthened earlier this year and has already been enshrined in law.

"We have made good on our commitments. Europe is now the very first continent that presents a comprehensive architecture to meet our climate objectives," Ursula von der Leyen, the president of the commission, said at a press conference in Brussels. "This was an enormous effort, but the result speaks for itself."

The release of the proposals will kick off months of negotiations with the European Parliament and member state governments, with some countries already critical of the intended pace of climate action and industries likely to lobby hard against some of the measures.

With the package, the EU also intends to send a strong signal to other countries ahead of the United Nations' climate conference in Scotland later this year. Von der Leyen, who has made climate action a centerpiece of her tenure, said the policy overhaul signified that the fossil-fuel economy "has reached its limits."

Renewables targets, carbon prices

While targeting specific industries and applications, the package would have wide-ranging effects on the energy sector, in particular.

The commission is proposing to increase the EU's 2030 target for renewables from 32% of gross final energy consumption to 40% and introduce indicative targets for individual sectors. WindEurope, a trade group, said this would require the EU to install 30 GW of new wind farms every year until the end of the decade. Only half as much is expected to come online over the coming years, so the new target would mean "major new investments," said Giles Dickson, the group's CEO.

Also chief among the plans is a strengthening of the EU's Emissions Trading System, or ETS, a cap-and-trade carbon market that targets the power sector, heavy industry and aviation. The commission wants to lower the amount of allowances in the market more aggressively, after prices have already risen to record highs and helped drive coal plants off the grid. It also wants to phase out free allowances for aviation, expand the ETS to include shipping and set up a separate market for road transport and housing.

Power producers with carbon-intensive portfolios will be squeezed by a tighter ETS, but the reforms will eventually translate into higher profits for utilities with a high share of low-carbon generation, such as Enel SpA, Iberdrola SA, EDP - Energias de Portugal SA and Electricité de France SA, according to analysts at Bernstein.

But the analysts also warned that rising carbon prices could be seen as creating excess profits at the expense of consumers; Spain is already planning to claw back hundreds of millions from nuclear, wind and hydropower producers. To avoid a public backlash against its climate policies and ease the burden for low-income households, the commission wants to set up a Social Climate Fund, endowed with up to €70 billion raised through the ETS.

'Reshaping' the energy system

The commission also wants to remove tax exemptions for fossil fuels, set targets for the use of hydrogen in industry and transport, increase its energy efficiency target, and introduce stronger emissions standards for cars and vans, among other proposals.

"Our current tools don't deliver enough," said Frans Timmermans, the commission's executive vice-president for the Green Deal.

As part of its review of energy taxes, the commission plans to adjust the minimum levels of taxation to the carbon content of energy carriers, which it said will make cleaner fuels more financially attractive and further incentivize the switch to renewables.

Measures targeting the transport sector, like an end date for registrations of combustion engine cars by 2035, could also accelerate the switch to electric vehicles and increase power demand. Another proposal would require member states to expand charging and hydrogen refueling infrastructure in line with zero-emission car sales.

Kadri Simson, the EU's energy commissioner, emphasized the heavy burden on the electricity system as an enabler for emissions reductions across the economy.

"Reaching the Green Deal goals will not be possible without reshaping our energy system," Simson said. "Planning and building energy infrastructure takes time. So to get to net-zero by 2050, we need an unprecedented transformation in this decade already."