The European Commission’s 2030 Climate Target Plan represents the beginning of a new era; an era of radical regulation in the long journey towards the energy transition and climate-neutrality. This opinion piece explains why that is so, points to where regulatory and policy shifts will be seen, and examines some exceptions to this new approach.
The measures needed to achieve the new 2030 emission reduction targets will affect the fundamental nature of the current EU energy and climate acquis communautaire. They will impact the climate trajectories that have been shaping the European Union’s economy since the adoption of the 2020 energy and climate package.
The Climate Target Plan calls for a constitutional re-framing of the regulatory package. That’s a radical approach. Its ultimate purpose is not about tightening a few existing policies or regulations here and there, it is not just an adjustment exercise.
To secure net-zero emissions by 2050, the Commission proposes nothing less than a regulatory quantum leap (i.e. a further reduction of at least 10% in greenhouse gas emissions by 2030 on top of the current potential of the recently submitted National Energy and Climate plans of around 45%). Beyond the political appetite to discuss intermediate targets, there are clear indicators that the Commission has plans to propose more aggressive regulatory and policy frameworks that will break the continuity of the 2020 and original 2030 package. There are also indicators that the Commission has understood that there will be more unintended consequences of its policies and, therefore, a need to either prevent or mitigate the undesired effects of this new regulatory era.
As a starting point, the primary test of this new phase of regulation will build upon the future shape of the EU Emissions Trading System (ETS). For the European Commission, it remains the core instrument to drive decarbonisation and the implications of its reform, from scope to cap mechanics, will define a new pathway in terms of the EU Allowance (EUA) CO2 price for the next decade. After four phases, policymakers are considering – for the first time – an unprecedented potential extension of the scope of the EU ETS (i.e. maritime shipping, mobility, heating, etc.). In terms of the size and volume of allowances needed, the impacts on existing regulatory frameworks (i.e. CO2 standards for cars, Energy Taxation Directive and Effort Sharing Decision), and the overall functioning of the system this reform is far from a minor development. The results of such a process may recalibrate efforts to decarbonise different sectors and will also generate new pressures to redevelop a new equilibrium of policy mixes. The effects of the extension remain a regulatory terra incognita. We need much research to shed light on this.
The European Commission is also determined to revise the Energy Taxation Directive, which had been forgotten for almost two decades. This is another important element of this radical shift, linked to the EU ETS reform. By challenging the test of unanimity vote in the Council for taxation decision-making, the Commission understands that a fundamental revamp of taxation on the energy sector is no longer a red line.
The Commission understands that this radical approach will require some mitigation policies.
The controversial Carbon Border Adjustment Mechanism (CBAM) is one of the mitigation tools to manage the impacts of carbon leakage in ETS sectors that will shortly face a much higher EUA price scenario. For instance, there would be no political appetite to introduce such a complex mechanism for a low CO2 price scenario in this decade (i.e. 25-30 euro per tonne of CO2). The Commission is clearly preparing the ground for a much higher price differential between Europe and third countries trading with the bloc.
Some fear that different designs of the CBAM may well fall short of ensuring against effective carbon and investment leakage for all the sectors. As a result, we can expect the debate over design to remain as fundamental as the debate concerning the future price signal that a brand new ETS is expected to deliver. For instance, reinventing a carbon leakage regime that will support the sustainability, competitiveness and promotion of technology innovation/breakthrough in energy-intensive industries with a high EUA price level forecast (i.e. 50 euro per tonne of CO2) will require a vast number of regulatory and policy support for those industrial value chains beyond any CBAM shield. That said, a CBAM may work better for the electricity sector facing unfair coal-based imports from third countries.
All in all, Europe will have to exercise great creativity to enable radical regulation and to avoid imposing targets for different sectors while offering only the same policies or regulations. Falling into this trap – attempting a one-size-fits-all-sectors policy – will fail to deliver the Union’s goals and will ultimately undermine its credibility as a climate front-runner.
The Just Transition Mechanism and other money recycling approaches to compensate the most vulnerable regions and segments of the society also constitute an implicit recognition of this radical approach. More than ever, the European Commission recognises the distributional effects of radical regulation. However, the nature (i.e. subsidies, lump sums, tax rebates) and effectiveness of the relevant measures are still far from clear at this stage and require further research.
As radical as the Commission’s plans are, they stop short of addressing a key issue: pure sector integration regulation. If cost-effective and acceptable, defining an entirely new regulatory framework which entails sectoral integration for electricity, gas and heat would be innovative and radical. So far, it is unclear whether the regulatory proposals in the pipeline will deliver a different legislative framework which one day could replace the electricity and gas packages with a systemic package.
Also missing from these new proposals is a much-needed upgrade of the EU’s energy governance. Without effective governance, it will be impossible to ensure the convergence of regulation/policies that will support common infrastructure for low carbon technologies. The scale-up of hydrogen and the investment of large-scale technologies and infrastructure require a top-down direction with fundamental levels of flexibility in every Member State. The recent national plans to promote hydrogen (i.e. France, Germany, Spain, Portugal, etc.) have shown a willingness to invest in new technologies. However, the approach will require a very structured EU master plan in infrastructure to ensure that the functioning of the single market and international cooperation will continue to be the backbone of the EU’s role in this transition.
The 2030 Climate Target Plan marks the beginning of an era of radical regulation. What comes next is far from certain. Many pieces of the regulatory, policy and governance puzzle are yet to be developed; their consequences cannot be taken for granted. If it is to succeed, this radical approach will need to be supported by sectoral and cross-sectoral research and impact assessments, which are currently missing. This is a necessary condition to allow Europe not only to give itself the means to achieve its decarbonisation ambitions, but also to manage the consequences of these ambitions in a socially just and economically efficient manner.