On February 6th, the European Commission released its Communication on a 2040 climate target. European member states are now called to agree on the ambition level and the required enabling conditions to deliver this target. Swift endorsement is crucial, as it will solidify Europe's commitment to climate action in its next political mandate and confirm its climate leadership globally.

The European Commission recommended a 90% reduction in the EU’s net greenhouse gas emissions by 2040, in comparison to 1990 levels. This recommendation is based on the Commission’s own impact assessment and the advice from the European Scientific Advisory Board on Climate Change. The Communication comes at a challenging political time, that includes the upcoming 2024 European elections, uprising social unrest across Europe, and geopolitical tensions spreading in Ukraine and the Middle East. These debates will contribute to shape the outcome of a renewed political leadership and political agenda by the end of 2024.

Despite the disruptive political climate, the Commission sent a clear message: fighting climate change will benefit the future of all Europeans, give predictability for investments, and boost the competitiveness of industries and economic resilience. The irreversibility of the transition to a climate-neutral society is well underway and will continue to guide future policy choices. Several national leaders have signalled their continued support to ambitious climate objectives ahead of the release of the Commission’s Communication. What will test their commitment in the coming months is the ability to forge consensus on the strategy for delivering this new intermediate target. Presently, the common ground lies in the commitment to pursue this endeavour in a fair and cost-efficient manner.

As climate, economic and social challenges become more intertwined, they need to be tackled as one to unlock the systemic change that will deliver progress in a just and resilient way. The Commission's assessment shows how each economic sector is called to play its part in this process. Having to address these conversations during an electoral campaign marked by socio-economic concerns adds a layer of complexity to the task.

Yet, agreeing on a shared direction for the next 10-15 years is the strongest signal policymakers can send to their voters in the coming four months. The Commission has rightly stressed the direct and positive impacts that the transition will have on citizens' lives and businesses. Outlining a clear vision for the longer term would provide consistency between one legislature to the other, confirm the commitment to measures agreed in the past years and show clarity on the road ahead. As it might get bumpier, innovative ways to tackle emerging challenges will be required to safeguard the credibility to follow through on existing commitments to bring along international partners while also giving predictability to investors to mobilise their capital.

We will have to wait for the next European Commission to be in place to formulate legislative proposals. However, the more European leaders can agree on the needed enabling conditions, the easier it will be for the newly appointed executive to outline a clear delivery pathway. The first opportunity to debate the target level, structure, and broader package will arise during the upcoming environmental council and a dedicated ministerial meeting on March 25-26. The informal European Council on April 17 will provide the space to bring this debate alongside the European Strategic Agenda for the next five years, set to be finalised by June 2024.

The debate over the Communication’s implications for the continent's energy and industry sectors is already heating up. When looking at the supporting impact assessment, E3G identified six insights and areas of concern from the perspective of energy and industry:

Insight 1: The drivers of decarbonisation are changing

-          Although power generation decarbonisation will continue to be a crucial objective throughout this decade, industry and transport will become the main drivers of decarbonisation in the 2030s.

-          Technological innovation and growing business interest are rapidly expanding the realm of what is considered possible in these sectors.

-          The coming years will be critical for refining the policy framework to facilitate the delivery of 2040 goals in these sectors and reap the benefits of decarbonisation.

Insight 2: Decarbonisation brings clear benefits

-          The “energy efficiency first” principle remains central. The communication expects a significant contribution of energy efficiency to achieve decarbonisation, resulting in a 30% decrease in available energy between 2021 and 2040.

 

-          Beyond this, the communication underscores the link between decarbonisation, competitiveness, and the overall resilience of the economy. It also highlights that decarbonising the economy will enhance the EU's security and strategic autonomy. This indicates the emergence of a new understanding of energy security, focusing on demand reduction and reducing overdependencies.

Insight 3: Course correction on hydrogen, but uncertainties remain

-          In the power sector, the communication indicates a clear direction: a significant reduction in fossil-fired generation, to 12% of total electricity generation by 2030 and 3% by 2040. This will predominantly be replaced by gas-fired power plants with CCS post-2040.

-          The analysis clarifies that hydrogen will only play a marginal role in building decarbonisation, but uncertainty remains on what type of hydrogen (renewable or low carbon) will be used, and what  the main centres of demand will be by 2040.

-          Biomethane is expected to play a significant role, but projections do not distinguish between fossil gas and biogas. Clarity regarding the phase-out rates of fossil gas and the scaling strategies for biomethane is crucial to guide future energy investments and infrastructure development.

-          Considering the building sector's projected decarbonisation by 2040, it is equally imperative to understand the implications for gas transmission and distribution networks which could become obsolete due to the absence of residential gas demand.

Insight 4: Increased reliance on carbon capture comes with risks

-          Carbon capture technologies are treated as a ‘stopgap solution’ to tackle emissions not addressed through other means. As a result, the course correction on hydrogen has led to a larger role for carbon capture compared to previous pathways, including in the power sector.

 

-          This puts pressure on carbon capture to (finally) deliver and highlights the importance of establishing EU and Member State-level carbon management policy frameworks.

-          However, policymakers should be cautious to not fall in the “hydrogen trap”, i.e. excessively counting on a solution that comes with uncertain costs and has not yet proven its (technical, political and societal) viability at scale.

-          To avoid overreliance, carbon capture efforts should focus where few alternatives exist, while prioritising proven solutions including renewables, efficiency improvements, direct electrification and circular economy options where possible.

Insight 5: Circularity and demand-side action remain underexploited

-          The impact assessment indicates that fully leveraging circularity and demand-side action could significantly reduce needed investments, material inputs, primary goods and commodities, and energy system costs.

-          Due to deindustrialisation fears and competitiveness concerns, the Commission seems to hesitate to explore these scenarios in its communication,

-          This somewhat presents a false dilemma, as these scenarios do not have negative implications on GDP growth or employment levels. In contrast, embracing these solutions could present an exciting economic opportunity and spur new business models ideal for a resource- and energy-poor continent like Europe.

Insight 6: Distributional questions will make or break the 2040 climate target

-          The lack of transparency regarding the interplay of energy with other sectors raises critical questions about cost distribution across society. The distributional question lies at the heart of 2040 politics.

One case in point is getting the business case right to cover the so-called “green (cost) premium” for industry. Decisions on whether responsibility lies at the Member State level or adopts more common EU approaches; and how burden-sharing occurs between producers and consumers carry significant implications.