The EU has big and growing ambitions for emissions reductions by 2030: down 40% below 1990 levels, increasing the share of renewables to 32% of final energy consumption and improving energy efficiency by 32.5% above business-as-usual. These targets will be further revised as the more ambitious goal of cutting emissions by 55% by 2030 becomes legally binding. This means the EU as well as individual nations must estimate the cost of meeting these goals. Carlo Stagnaro and Carlos Di Bonifacio at Istituto Bruno Leoni have reviewed the individual National Energy and Climate Plans (NECPs) and warn there is a wide variation of methodologies and cost/benefit results. In other words, they give the EU no useful guide to how much it actually needs to spend. As an example of the range, the EU-average expected total investment cost to cut one ton of CO2 is €522/annum. The highest-cost countries are Portugal (€1,645), Italy (€1,312), and Bulgaria (€1,174). The least-cost are Estonia (€47), Lithuania (€67), and Denmark (€82). The authors strongly urge the EU Commission to help the member states revise their NECPs and make them consistent and transparent. The climate challenge is too important, and the amount of money to be mobilised too large, to get away with loose numbers.
With the Clean Energy for All Europeans package, the European Union has committed to become carbon-neutral by 2050. This will entail a major transformation in the EU’s productive sector as well as in the consumption behavior of individuals and businesses. In order to meet its environmental goals, the block has set three binding targets of reducing carbon emissions by 40 percent below 1990 levels by 2030, increasing the share of renewable energies to 32 percent of final consumption, and improving energy efficiency by 32.5 percent above the business-as-usual.
These targets will be revised upwards to reflect the more ambitious goal of cutting emissions by 55 percent that is being agreed upon. This will require large investments along the entire production chain, with particular regard to electricity generation, heating, and transport. How much will this cost? How will it impact GDP growth?
These are most fundamental issues, when one considers how steep is the planned trajectory for emissions productions. In fact, carbon emissions are a function of population growth, GDP growth, and technology. Given that nobody would want an environmental policy which is predicated upon forcibly reducing population or economic development, the entire stress is placed upon technological development – in fact this is why the expression “energy transition” is employed.
The Figure below shows how the projected path diverges from the existing trends. Again, it should be emphasised that the challenge will be even more complex after the 55 percent target will become binding.
We have reviewed the National Energy and Climate Plans (NECPs), i.e. the documents that illustrate how individual member states intend to reach their own targets and contribute to achieve Europe’s environmental goals. The plans, that were present by late 2019 or early 2020, were written in a pre-Covid time. They do not take into account the subsequent increase in the emissions reduction target. Therefore, they are to be revised. Still they can be taken as a lower bound of the efforts that Europeans are about to make.
All NECPs follow the same structure: they address EU-wide and national objectives under five dimensions:
- Energy efficiency;
- Energy security;
- Internal energy market;
- Research, innovation and competitiveness.
They also follow the same structure:
- Overview and process for establishing the Plan;
- National objectives and targets;
- Policies and measures;
- Current situation and projections with existing policies and measures;
- Impact assessment of planned policies and measures.
We are particularly concerned with the dimensions of decarbonisation and energy efficiency, as they are transposed into quantitative objectives and policy tools in Sections 2 and 4 of the plans. Our survey is mostly focused on Section 5 of the plans: we check whether estimates about the need for investments and the economic impact of the proposed measures are consistent with each other.
Are the national estimates consistent with outcomes, and with each other?
Short answer: no. Each member state seems to have adopted its own criteria that make the resulting estimates hardly comparable.
Moreover, not all member states provide explicit, disaggregated data on the need for investments. Some provide an estimate for the total amount of investments that is needed to meet the targets; others focus on the additional investments that are needed, on top of what would happen anyway.
In order to attempt a benchmarking exercise, we compare the estimated total / additional amount of investments with the projected reduction of carbon emissions. Total investments are assessed against the total expected emissions reductions, i.e. the difference between the projected 2030 value and the (expected) amount of emissions in 2020 (remember: the 2020 estimate was released before the corona crisis). Additional investments are assessed against the difference between 2030 emissions in the business-as-usual scenario (called “with existing measures” or WEM) and the projected scenario (called “with additional measures” or WAM). We divide each by ten, in order to take into account the length of the 2021-2030 period. The result is an estimate of the annualised total and marginal capital cost of abatement, respectively. This figure has little physical meaning – in the sense that investments are not planned to happen regularly at a rate of one tenth per year – but provide a simple and intuitive ground for comparisons.
The Table below summarizes the results.
What does the Table tell us? Let’s start from total costs, that are supplied by 17 member states. On average, the expected total investment cost to cut one ton of CO2 in 2030 is 522 euro per annum. The highest-cost countries are Portugal (1,645 euro / ton CO2), Italy (1,312 euro / ton CO2), and Bulgaria (1,174 euro / ton CO2). The countries which feature the least-cost are Estonia (47 euro / ton CO2), Lithuania (67 euro / ton CO2), and Denmark (82 euro / ton CO2). The above-cited average does not consider Malta, whose estimate is an outlier (almost 12,000 euro / ton CO2).
Nine countries provide detailed information on what they believe will be the additional cost to achieve the goals (Germany, Italy, Latvia, Luxembourg, Malta, Poland, Portugal, Slovakia, and Spain). Unfortunately, an estimate of emissions in 2020, 2030 WEM and 2030 WAM is not available for Latvia, so we have to drop it. The remaining eight countries display an average annualised marginal abatement capex of 318 euro / ton CO2. Malta has a very high cost of 1,020 euro / ton CO2 per annum, whereas the other countries range between Germany’s 165 euro / ton CO2 per annum and Spain’s 339 euro / ton CO2 per annum.
Four countries – namely Italy, Poland, Portugal and Slovakia – provide both an estimate for total costs and for additional investments, which allows us to compare average and marginal abatement capex: marginal capex is much lower than average capex (332 vs 1,312 euro / ton CO2 for Italy, 65.4 vs 317.8 euro / ton CO2 for Poland, and 282 vs 1,645 euro / ton CO2 for Portugal, 23 vs 377 euro / ton CO2 for Slovakia). This raises a serious concern about the reliability of these estimates.
Little correlation between expected capital costs and any other meaningful variable
There seems to be little, if any, correlation between the expected total or marginal annualised capital costs of abatement and any other meaningful variable, such as emissions per capita or emissions intensity of the GDP at the beginning of the period, or the reduction of CO2 emissions. The Figures below show some of these correlations.
Inconsistent national estimates make EU budgeting “virtually impossible”
The failure to find a pattern provides, by itself, an important indication that should be taken into serious account as member states as well as the EU Commission revise their plans to reflect the more ambitious target of 55 percent emissions reduction. Unfortunately, the heterogeneity among the member states’ estimates of the investment needs is as large as it can be.
Just to mention a figure, the EU Commission estimates that, in order to meet the -55 percent target by 2030, EU-wide annual investments should grow by approximately 350 billion euro, as it can be seen in Figure 5: that amount is lower than what Italy and Latvia alone believe will be needed to meet the -40 per cent target. These figures are clearly inconsistent with each other.
This makes it virtually impossible to perform any reasonable comparison and to draw any reasonable implication from the NECPs. That also means that no best practice can be inferred by the member states’ own documents. The EU Commission should provide assistance to the member states in the revision process and strive to make the national estimates consistent and transparent.
Mobilising enough resources, coordinating investments in so many different areas, and making sure that time-to-market does not exceed the 2030 deadline is an unprecedented challenge for the European Union.
This article summarises the results of a survey conducted on behalf of Istituto Bruno Leoni, a Milan-based think tank, on the contents of the National Energy and Climate Plans of EU member states. The paper can be freely downloaded at the following URL: http://brunoleonimedia.it/public/Papers/IBL_SR-Climate_2021.pdf
Carlos Di Bonifacio is an intern at Istituto Bruno Leoni
Carlo Stagnaro is director of the Observatory on the Digital economy at Istituto Bruno Leoni