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Early Mover - The EU 2030 Package and what it means for Markets

December 2014 - On October 23 and 24 2014, the European heads of state convened for their quarterly meeting in their capacity as the European Council and came up with a triad of targets for reducing greenhouse gases (GHG), fostering renewable energy use and increasing energy efficiency – along with a detailed outline of the envisaged legislation.
The targets were set at:

  • At least minus 40 percent domestic (i.e. within the EU) versus 1990 for GHG reduction
  • At least 27 percent for renewables in 2030
  • And at least a 27 percent efficiency increase versus the same trend line as in the previous package. With regards to efficiency, a review is planned with a view to a 30 percent target.

The GHG target is binding, the renewables target is binding at EU level, but not for individual member states, and the efficiency target indicative.

A fourth target was added: electricity grid interconnection, which should be increased to 15 percent of installed capacity by 2030. This recognises the role of a well-connected grid for security of supply and for the integration of fluctuating renewables.

The targets send two strong messages

Firstly: the EU still has a strong climate agenda. While a 40 percent reduction might not be the full share of what the EU needs to contribute to a below 2° warming world, the addition of “at least” is more than the Commission had suggested (40 percent) and opens the door to increasing ambition in the forthcoming UNFCCC negotiations. Knowing the way decision-making processes go in the EU, the fact that the Council tightened rather than watered down a proposed target is impressive and perhaps unprecedented.

Secondly: the EU continues to recognise the necessity for integrated climate and energy policy, which specifically addresses renewables and energy efficiency as important pillars for achieving climate targets, and for addressing security of energy supply.

The specific message to markets beyond the clear commitment to climate policy is more complex, as outlined below.

Beyond 2020:  The 2030 package and its impact on markets

The European 2030 GHG target is set at at least a 40 percent reduction in EU internal GHG emissions based on 1990 levels. The breakdown of the 40 percent target between the member states is, however, based on reductions compared with 2005 emissions, as in the previous package.

Essentially, the European Council conclusions set the budgets for emissions up to 2030, both under the ETS and the Effort Sharing Decision (ESD).

The ETS emission budget for the period up to 2030 was set according to a linear reduction from the 2020 target of -21 percent compared with 2005 figures to a 2030 target of -43 percent compared with the base year 2005. This corresponds with an annual reduction of the emission budget of 2.2 percentage points from 2020 onwards. Thus, the annual reduction is increased from 1.74 percent between 2013 and 2020, to 2.2 percent beyond 2020. The total ETS emission budget for the period 2021 to 2030 is 15.5 billion tons.

Reductions under ESD are set to -30 percent based on 2005 figures. The  target for 2020 is -10 percent compared with the base year 2005. The total emission budget for the period 2021 to 2030 is 22.5 billion tons.

International certificates are not part of achieving the 40 percent reduction target. However, while the European Commission’s impact assessment sees the 40 percent domestic target as part of an economic pathway towards the EU’s 2050 ambition of an 80 to 95 percent reduction based on 1990 figures , most studies agree that this is less than what the EU would need to contribute as its fair share towards a 2°-compatible 2030 reduction scenario. According to some calculations, a “fair share” would be closer to 55 percent. The debate preceding the Council meeting made it quite clear that domestic ambition beyond 40 percent would be exceedingly difficult to agree on, so the assumption is that action beyond 40 percent would involve international action, presumably markets – naturally depending on markets as a possibility under the new regime.

The 2030 Package Outlook

The EU heads of state have agreed on an ambitious set of targets that should help speed up development and encourage ambition in other regions’ future targets. The challenges now facing the EU involve ambitious and efficient implementation of the measures outlined. Given the fact that the new European Commission has only just been appointed, the exact schedule for this remains unclear. At the time of writing, only the legislative process for a market stability reserve in the ETS has begun.

On a very general level, the outcome of the European Council meeting shows a strong commitment to climate action. Other parties are now challenged to deliver their domestic targets. Some, notably the US and China, have already done so. Use of international market mechanisms has not been considered in the EU’s 2030 target to date. This topic will be debated in the lead up to Paris. The German position in the negotiations on the Council text was to at least include a sentence stating that “The EU will consider raising the ambition of its GHG reduction target, including through the use of mechanisms of the international carbon market, as part of/within the framework of an international climate agreement”.

by Silke Karcher

A full version of this article was published in Carbon Mechanisms Review 4-2014