The Fuse

EU Ratchets Up Clean Energy Goals

by Nick Cunningham | December 14, 2020

On December 11, a global (virtual) gathering of world leaders celebrated the fifth anniversary of the Paris Agreement on climate change, and the event was intended to build momentum towards a more significant global summit in Glasgow in November 2021. At the latest meeting, dozens of countries put forth more ambitious climate plans, building on pledges they made five years ago.

The latest movement will still have far-reaching consequences for energy markets.

From the start, the 2015 Paris Agreement fell far short of what would be needed to bridge the emissions gap necessary to hit climate targets, and even then, many countries have failed to keep up with their pledges. The latest proposals still leave the globe significantly behind. However, while inadequate, the latest movement will still have far-reaching consequences for energy markets.

Stricter 2030 targets
Some of the top global emitters were no-shows for the latest meeting. The U.S. withdrew from the accord (something that could change under the Biden administration), while Australia, Saudi Arabia, Russia and Brazil decided not to attend. China, the world’s top polluter, offered a lot of hope when it announced a 2060 net-zero emissions target a few months ago. As a result, there was some speculation that China would steal the show on December 11 by possibly issuing an interim goal of hitting peak emissions as soon as 2025. Instead, President Xi Jinping offered less ambitious tweaks to China’s 2030 goals.

With all of that said, more than 75 countries and the European Union issued plans that ratchet up the climate ambitions, including around two dozen that pledged long-term net-zero targets.

Perhaps the most significant development is the European Union’s latest decision to tighten its 2030 target. The EU will now cut emissions by 55 percent by 2030 (from a 1990 baseline), a much deeper cut than the existing 40 percent reduction. Beneath that headline number, individual countries may go further. For example, the UK says it is aiming for a 68 percent reduction.

The EU’s new 2030 target will likely require an almost complete phase out of coal from the grid.

How countries achieve these targets is still in flux. The devil will be in the details. But the implications could be profound. For instance, the EU’s new 2030 target will likely require an almost complete phase out of coal from the grid. In Germany, a new law would require 65% of its electricity to come from renewable sources by 2030. The UK also said it would end overseas financing for fossil fuel projects.

In the wake of the new EU agreement, carbon prices on Europe’s emissions trading system hit a record high. Prices topped 30 euros per ton, and could continue to rise. “We are bullish for 2021,” Trevor Sikorski, head of natural gas and carbon research at Energy Aspects, told Bloomberg Green. “We expect price rises to head up to 40 euros by the end of the year.” Changes are likely for the cap-and-trade system, but the surge in carbon prices will likely result in a bigger blow to coal in the short run.

But the trading system doesn’t cover transportation, which is a tougher nut to crack. Still, progress is accelerating at a rapid clip. The UK recently moved up its proposed ban on gasoline and diesel vehicles. Roughly a dozen countries have now announced plans to phase out fossil fuel vehicles, many with 2030 deadlines, and California has signaled it will follow suit by 2035.

Meanwhile, seven heavy-duty truck makers, including Daimler, Scania, MAN, Volvo, DAF, Iveco and Ford, have pledged to phase out the internal combustion engine by 2040, according to the FT. The EU has also announced plans to cut tolls by 50 percent for trucks that are emissions-free, either electric or using green hydrogen.

Tighter EU fuel efficiency rules that took effect in 2020 have already contributed to faster growth for electric vehicles. In Norway, EVs captured more than 70 percent of new cars sold this year, and EV sales have accounted for 11 percent of the auto market across Europe in 2020.

Then there is fiscal spending. The EU had previously agreed to funnel around 550 billion euros into green stimulus. That funding could accelerate adoption of renewables, EVs and other clean technologies, which would also help cut costs and contribute to a virtuous cycle of lower costs and faster uptake.

Global problem
Cutting emissions is a global problem requiring multinational cooperation. There is a lot of anticipation surrounding potential new policies from Washington. President-elect Joe Biden has already pledged to rejoin the Paris Agreement, but more ambitious fiscal stimulus into clean energy will be harder lift. The world awaits more details. There is some speculation that Xi Jinping was cagey during his recent appearance at the climate summit, perhaps withholding details on Beijing’s next moves as China waits to see what the U.S. will do.

But there is no doubt that Europe is trying to push the ambition forward. The difficulty is when there are countries from around the world going at different speeds. To counter that, the European Commission is also looking at a “carbon border adjustment mechanism,” or a tariff on goods imported into the EU based on their carbon content, which would serve to keep European industry competitive compared to countries doing less on climate, while also avoiding “leakage” – shifting carbon-intensive production outside the EU, resulting in little or no climate benefit.

If it occurs, the carbon border adjustment would “put foreign partners – including the U.S. – on notice that the bloc plans to lead by example and to hold counterparties accountable,” ClearView Energy Partners wrote in a note to clients. A carbon tariff of some kind could gain traction in the coming years with some countries keen for action and others digging in their heels.

Ultimately, climate watchers remain frustrated. In terms of hitting emissions targets to keep warming below 1.5 or 2-degrees Celsius, the world is still woefully and tragically off track. “As encouraging as all this ambition is, it is not enough,” said Alok Sharma, U.K. Business Secretary, in response to the latest round of pledges. A recent report from the UN found that the world will need to decrease fossil fuel production by about 6 percent per year through 2030 to remain on a 1.5-degree pathway. Instead, countries are planning on increasing production by 2 percent annually.

However, change is underway. A year ago, peak oil demand forecasts tended to point to the 2030 or even 2040 timeframe. Today, some say oil demand may have already peaked. And as the latest round of climate pledges suggest, policy is working in the direction of the clean energy transition, ratcheting tighter even if it remains short of what is needed.