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FEATURE: Tough road ahead for EC's decarbonization plans: Platts Analytics

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FEATURE: Tough road ahead for EC's decarbonization plans: Platts Analytics

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'Significant barriers' seen ahead for new 2030 climate goals

Challenges include raised costs, consumer backlash

Industry groups warn over loss of free carbon allowances

Europe faces a tough challenge in meeting its revised 2030 target to cut greenhouse gas emissions by at least 55% below 1990 levels, S&P Global Platts Analytics warned in a report July 14.

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Significant challenges stand in the way of achieving the goal, including the potential for raised costs of living for consumers and tackling CO2 emissions from sectors that until now have proven hard to abate.

"The 'Fit for 55' package of 12 legislative proposals cements the EU's position as the world's leader in climate policy, as it is the most comprehensive suite of policies announced by any government to date to achieve broad decarbonization of an economy," Platts Analytics said in a Future Energy Outlooks special report.

"However, even with this aggressive suite of policies, significant barriers sit between the EU and the target 55% reduction in emissions," Platts Analytics said.

The report comes after the European Commission unveiled its long-awaited package of legislative measures July 14, intended to overhaul the European economy to make every sector contribute to delivering on the new 55% target.

Platts Analytics' Most Likely Case projects that CO2 emissions from energy combustion will decline by 32.8% by 2030 and its 2 Degree Case projects that emissions will decline by 45.8%.

"This shows that the EU's climate ambition is far surpassing the Paris Agreement, focusing more on the 2050 net-zero target than a 2 degree or 1.5 degree warming pathway," it said.

Warning over rising bills

While the EC's suite of policies included stronger measures under the existing EU Emissions Trading System, it is the additional proposed policies in particular that could run into trouble, Platts Analytics warned.

"A new emissions trading system will be established for fuel distribution for road transportation and buildings [starting in 2025]," Platts Analytics said.

"The addition of carbon costs to home heating and road transportation fuels via this new emissions trading scheme will have a direct and visible impact on consumers' energy bills, prompting concerns of a backlash similar to the 'yellow vest protests' of 2018 in France when new taxes applied to gasoline increased prices at the pump," it said.

The EU is clearly concerned with this potential backlash and has put measures in place to avert it, such as a new Social Climate Fund to help pay for building renovations to improve energy efficiency and boost renewable energy uptake, Platts Analytics said.

A proposed Carbon Border Adjustment Mechanism, which would place a charge on the carbon content of imports of certain metals, chemicals, cement and power, could also hit resistance from Europe's trade partners, it said.

But the expected problems in meeting the new 2030 targets don't stop at the political and social aspects of the proposed policies.

"On top of the potential backlash from populist parties and citizens, a 55% reduction in emissions by 2030 will still be difficult to achieve, as it will require the retirement of assets and fleets that still have years, if not decades, of useful life," Platts Analytics said.

"For example, the EU is targeting a 55% reduction in emissions from cars by 2030, which will require the scrappage of a vast number of internal combustion engine vehicles that are already currently on the road," it said.

"The same can be said of light commercial vehicles, residential/commercial heating systems, and a whole host of other asset classes."

"However, Platts Analytics believe that even if the EU were to miss the 55% reduction in emissions by 2030, this suite of policies sets the stage for even greater emissions reductions over the 2030s and beyond and is a strong step in the necessary direction," it said.

Metals industry group sounds alarm

The dust had barely settled on the EC's proposed legislative package before some industry groups were voicing concerns over the impacts on jobs and competitiveness.

European metals industry group Eurofer said the 2020s will be a decisive decade for the transition to climate neutrality and warned that policies that create additional costs for companies will hamper low-carbon investment.

In particular, a proposed long-term move away from freely allocated carbon allowances under the EU Emissions Trading System is a risk, according to the group.

"Removing financial resources through the post-2026 phase-out of free allocation for an untested and incomplete CBM [Carbon Border Mechanism] risks hindering, rather than incentivizing, low-carbon investment," Eurofer said in a statement July 15.

"The priority today should be to upscale and deploy low-carbon technologies in industry as fast as possible while remaining internationally competitive," the group said.

"This requires effective carbon leakage measures, markets for green steel, funding support, and affordable low-carbon energy."

Major business association BusinessEurope said it supports the EU's overall policy direction on 2030 but issued its own warning over the loss of free carbon allowances.

"We remain concerned about the plans by the Commission to reduce the amount of free allocation to be received by the sectors covered by the Carbon Border Adjustment Mechanism," the group said in a statement July 14.

"The reduction path, together with some of the open questions around the effectiveness of CBAM, risks destabilizing the investment outlook for these sectors enormously," BusinessEurope warned.

"We call on co-legislators to step up their efforts in favor of a predictable business environment that allows all of European industry to make the investments needed to decarbonize."

The EC's legislative package sets the stage for complex and difficult negotiations between the EU Parliament and Council. Agreement is needed between the two institutions before the measures can pass into law, in a process that can take up to two years to complete.