Europe still a Leader in Energy Transition

Europe still a Leader in Energy Transition

Lapo Pistelli
There is a "green leitmotif" running across the political platforms of traditional and new European parties alike, reflecting a growing concern among the general public, both on the left and the right

What might be the impact of the next European elections, scheduled for May 26, 2019, and of the new political balances emerging from the ballot box, on Europe’s role in addressing climate change and decarbonization?

We can begin by looking at the way Europe has managed these issues in the recent past. New political forces entered the electoral arena for the first time as early as 2014. Their aim was not to drive the integration process in a different direction but to reverse the trend, with the explicit intention of derailing that process. The logic of compromise among the major traditional political families and the difficulties encountered by the new players in finding a joint platform effectively contained this risk during the 2014-2019 mandate that is now drawing to a close.

But the tide has not turned, on the contrary. The upcoming elections are even more crucial due to several factors, notably Brexit, a modern zeitgeist that is raising the specter of policies based on national sovereignty and the fight against elites and establishments (real or imagined), and, finally, the improved networking capacity of very different political forces who share the repatriation of policies and practices as their key goal. The alliance between traditional political families, some of which are visibly in crisis, may not be enough this time around, so the new Commission may have very different features and balances.

While all this is true, as confirmed daily by media reports, it is equally true that Brussels life has always run along two tracks: one involving the great political and media narratives, and one concerned with the day-to-day running of the “political-bureaucratic machinery,” The latter has continued to deliver regulations, initiatives and decisions, some of them of great importance, often neither the focus of nor hindered by attention-grabbing media headlines on the implosion of the European project.

Increasingly Ambitious Targets

The European Union has always played a leading role on the issue of climate change and energy transition, undertaking some very ambitious commitments and targets - more ambitious, at any rate, than other continental blocs and major national players have been prepared to commit to. In this respect, the E.U. has also had to deal with opposition from the European business community due to the latter’s legitimate concerns about being at a competitive disadvantage vis-à-vis its American and Asian competitors who are less restricted by regulations to comply with and targets to meet.

In 2007, the European Commission adopted a Green Paper on adaptation to climate change, endorsed by the European Council, setting out the well-known Europe 20-20-20 Strategy that aims to cut greenhouse gas emissions by 20 percent, improve energy efficiency by 20 percent, and increase the share of Europe’s energy from renewable sources to 20 percent. In keeping with this strategy, and to ensure continuity between the outgoing and incoming Commissions, a package of four fundamental directives was adopted in 2009. The key goals involve carbon pricing, a set of binding targets for every member state on energy from renewables and energy efficiency, and cuts in greenhouse gases in the transport, residential and agricultural sectors. Within a few years, the package achieved remarkable success, meeting the 20-20-20 targets or suggesting that they would be achieved well before the set deadline.  While these results are partly due to the reduction in energy consumption driven by the economic downturn experienced in the last decade, this does not diminish the historical significance of the political choices made by the European Union, which has contributed tangibly and proactively to overhauling energy policies in the European continent and also globally.

Thus, in 2014, once again on the eve of a new term, the Commission presented the more ambitious 2030 Energy Strategy to the European Council. This time around, the E.U. dropped the catchy repetition of the number 20 coinciding with the year 2020, doubling to 40 percent the target for cutting greenhouse gas emissions by 2030, and raising the target for increasing energy from renewables and energy efficiency to 27 percent.  With its customary effectiveness, the political-bureaucratic machinery put in place a series of initiatives - the “market stability reserve” with stronger carbon pricing, the fourth phase of the emission trading system, and the “clean energy package” – due to be completed by the middle of next year.

What is happening now?

First, it should be pointed out that the world has not been as virtuous as the European Union. Despite the historic Paris Accord reached at COP21, the rate of global warming has been accelerating even more due to the absence of binding targets for many of the signatory nations, the fact that in some cases the targets are conditional on international funding assistance, and America’s withdrawal from the Accord. We are a long way from attaining the Paris goals, which in any case would no longer be sufficient to save our planet. And sadly, the experience of recent years has shown that cutting greenhouse gas emissions by 40 percent by 2030, which would take the target to 80 percent by 2050, would not be enough.

The European Commission has thus decided to raise the bar, putting forward a proposal to the European Council - once again on the eve of a renewal of its mandate - to adopt new decarbonization targets for 2050, linked to mid-century scenarios. The debate is in full swing right now. The Commission’s proposal, submitted to the European Council on November 28, presents eight possible mid-century scenarios involving the adoption of new decarbonization goals. Until a few months ago, the Commission was only focusing on two scenarios, one of which was defined as “moderate” and the other as “ambitious,” envisaging an intermediate target of 45 and 50 percent, and a final target of 90 and 95 percent respectively. But the discussion has broadened out in recent days, fueled by a new development. Ten European Union member states (Denmark, France, Italy, The Netherlands, Luxembourg, Finland, Slovenia, Portugal, Spain, and Sweden), through a letter signed by their environment ministers, have called on the Commission to present a proposal to the European Council that also includes a radical “net-zero option” scenario whereby Europe would achieve full decarbonization by 2050, followed by negative emissions thereafter. This reflects the alarm raised by the Special Report published by the United Nations Intergovernmental Panel on Climate Change (IPCC), and its suggestion that global warming should be kept to below 1.5C. The debate has kicked off and will end with the choices that will be made at the European summit to be held in May 2019, laying the foundations for European legislations applicable from 2020.

What direction should Europe move towards in order to meet these targets, given that it seeks to maintain and protect a strong industrial base on the continent? Multiple working tracks are being considered, all of which will have a major impact on the energy industry and on their positioning in the public debate and public perception. The European Commission - whatever scenario and targets are eventually adopted - implicitly assumes, on the one hand, that energy efficiency actions relating to consumption and individual behavior will steam ahead, and, on the other, that some sectors of the economy (e.g, agriculture and some processes in the chemical industry) will find it structurally impossible to decarbonize. Critically, the latter prospect places the burden of higher targets on other industrial sectors (manufacturing, energy and transport), which will be required to compensate for the reduced contribution of primary production and the chemical industry.

Areas of Regulatory Intervention

We can assume that four areas will be affected by regulatory intervention in the coming years: the gas market, new technologies, the transport sector and the financial sector.

Today, the major oil and gas companies are already working and investing in new directions, with some differences in their respective priorities. These include carbon capture and sequestration technologies, the production of biogas and synthetic gases used in conjunction with natural gas, and the use of hydrogen. But what companies are currently doing in terms of their in-house research and development or through the acquisition of external companies and startups driven by medium-to-long-term strategic plans, could become an even more pressing need to comply with European legislation in the future.

A similar situation applies to the transport sector. In recent years, the public narrative on the necessary and imminent electrification of light transport, namely our cars, has come to play a dominant role. On the one hand, this has encouraged automakers to launch new hybrid and electric models and to announce the end of diesel cars, and, on the other, the number of towns and cities that have imposed future limitations on vehicle circulation consistent with this model has multiplied. Here, too, it is worth recalling the other side of the equation, that is to say, the electricity required for recharging electrically powered cars is generated in a variety of different ways. There is thus a real risk that the final consumer will feel “carbon free” even when the electricity delivered at the recharging station may be generated by coal-fired power stations. The new legislative packages will also try to tackle heavy goods transport - involving commercial vehicles, air cargo and container shipping - which accounts for a huge and growing share of transport as a whole and where electrification poses a far bigger challenge.

Whether trade tariff wars will increase, and whether the anti-globalist tide will keep rising, all future scenarios point to a massive rise in “heavy” transport carriers. Europe will thus have to cope with new fuel specifications or using new energy sources like hydrogen, decided at the European level or through multilateral negotiations. And industry, too, will have to cope with the same issues.

Finally, we turn to finance. Through direct or indirect action, and by incentivizing sustainable investment or discouraging traditional investment, a new chapter on sustainable finance is about to commence. This will become an additional carrot and stick with which to drive industrial transformation and energy transition.

Let us then return to where we started from, next year’s European elections. The last ten years tell the story of decisions taken at the end of the various mandates and always strictly implemented by those who inherited the legacy of their predecessors.

Will Things be the Same After 2019?

We might suppose that the parties in favor of the repatriation of policies and competencies will resist the “intrusive” attitudes of the European Commission and the European Parliament on climate change, too, making it harder, slower or even impossible to implement European policies in this respect. Poland and Hungary, for example, have already shown signs of moving in this direction. This, however, would be a short-sighted calculation. Looking across the political platforms of traditional and new parties alike, it is easy to glimpse a “green leitmotif” linking them, reflecting a feeling of growing concern among the general public, whether on the left or the right of the political spectrum. We will probably quarrel over foreign policy or migration issues, over financial austerity and agricultural quotas, but when it comes to climate and energy transition, there will probably be less political resistance.

Industry has been warned.