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The European Union is currently re-evaluating its 2030 target to
align it with the 2050 net zero carbon ambition. Currently the EU's
aims to reduce emissions by 40% of compared with the 1990 level,
which Europe is on track to meet.
A decision on the new 2030 target is a collective effort, a
process called Trilogue, by the Commission, Parliament and the
Council which represents the heads of state of European member
states. The European Commission has proposed a reduction of 55% of
emissions by 2030, Parliament suggests a 60% reduction.
Due to the magnitude of this decision, the Council's position is
expected to prevail. Several member states have made their position
clear: a number of Western European countries are advocating at
least 55%, while Germany supports a 55% target. Those countries
that have not expressed a preference are likely to be concerned
about the cost implications of a faster energy transition and are
possibly seeking guarantees that Europe will assist them
financially. By early 2021, Europe is likely to have agreed to a
new 2030 target. IHS Markit expects the EU will agree on a 55%
target, but a slightly lower target cannot be ruled out.
As important as the headline number is the fine print that is
also part of the discussion: will all countries need to achieve
climate neutrality in 2050 or will the obligation rest of the EU as
whole? Will Europe introduce a 2040 target? What will be the role
of offsets in meeting the 2030 ambition? Will abatement outside of
the EU be allowed to count towards national goals?
Wide-ranging impacts for Europe's power and gas
markets
Once the 2030 target is set, Europe will overhaul its Climate
and Energy Framework. A raft of European legislation will be
reviewed including the renewable energy directive, the emissions
trading directive, the energy efficiency directive, the energy
taxation directive, the effort-sharing directive and several more.
Impacts on the power and gas markets will be profound.
One of the most visible impacts of the new 2030 target is likely
to be a larger role for the European carbon
market. Today, the emissions trading system (ETS)
regulates emissions for power and industry in Europe. At the very
least, its ambition will be increased - by tightening parameters
such as the linear reduction factor, the level of the cap or the
market stability reserve. The EU is also discussing including new
sectors - shipping, transport and buildings are in the short list.
Whatever the sectors included, the tightening of the cap and the
growing pressure on the industrial sector will lead to higher
carbon prices. Prices are unlikely to spike to the three-digit
levels, however: IHS Markit expects that industrial decarbonization
will come from a layering of policies, not just the ETS.
To meet a higher climate ambition, renewable capacity
will increase. The renewable target is likely to rise from
the current ambition of 32% to over 38% of renewables in energy
demand. To deliver a higher 2030 target, renewable additions in
power will need to accelerate in the next decade beyond our current
growth outlook of 400 GW.
The role of low-carbon hydrogen stands to grow
as it offers a route to decarbonize energy demand that cannot be
electrified. The EU and six countries have issued national
strategies - all after the start of the COVID-19 crisis, a sign
that hydrogen is integral to green recovery - identifying
low-carbon gas as a preferred option to decarbonize industry and
possibly buildings and transport.
Finally, Europe is finalizing the sustainable finance
taxonomy which, from 2022, will identify what investments
are green and, crucially, which are not. The taxonomy will be used
to award the EU recovery and budget funds and the finance sector
will be required to disclose how their investments align with it.
For the power sector this raises two questions: will nuclear and
gas investments be viewed as sustainable? Nuclear's status depends
on whether nuclear waste meets the 'do not harm' principle
of the taxonomy and the current proposal requires that thermal
plants emit less than 100gCO2/kWh ruling our new natural gas fired
plants without carbon capture and storage. Sustainability
definitions will also be important for hydrogen project
development.
The next generation of Europe's climate policy will be agreed in
the next years, IHS Markit expects it will deeply reshuffle the
playing field in Europe's power and gas markets.
Posted 25 November 2020 by Coralie Laurencin, Senior Director – Gas, Power, and Energy Futures, IHS Markit
