Introduction

We are rapidly approaching the tipping point and perhaps the last opportunity to mitigate climate change to the level agreed in the Paris agreement. Climate change is already severely impacting people’s lives, particularly in the world’s most vulnerable countries. We are also seeing a rapidly increasing and alarming loss in biodiversity, which is partly due to climate change.

As a society we need to make a choice: either we prepare to face the consequences of irreversible climate change, or we make a step change and significantly increase investments in climate solutions from the current level. Climate Leadership Coalition (CLC) believes that the profound transition of society towards sustainable consumption habits and economy is not only possible but also economically viable and financeable. It also provides a positive future vision. Now, more than ever, we expect our governments to govern, to set the necessary rules, targets, policies and measures.

This paper presents the proposal by Climate Leadership Coalition for a systemic and market driven solution for the EU climate policy. The proposal is based on three key elements:

  • to set a target for achieving net-zero emissions by 2050 at the latest, taking the IPCC findings into account; and
  • based on the target, to agree on a binding carbon budget for the remaining GHG emissions, including the share of emission reductions and carbon sinks; and
  • to revise and align the 2030 and 2040 targets with the net-zero target.

The European Union as a driver for climate mitigation

Europe has been a global leader in climate change for decades. In November 2018, the European Commission published A Clean Planet for all – a strategy proposal with pathways to a climate neutral economy by 2050 through a socially-fair transition in a cost-efficient manner. The Clean Planet for All strategy opened a debate for European decision-makers and the general public in Europe on how Europe should prepare itself towards a 2050 horizon and the subsequent submission of the European long-term Strategy to the UN Framework Convention on Climate Change by 2020.

The In-depth Analysis describes  the role of pivotal strategy options and technologies – electrification – in all sectors, the use of hydrogen in industry, transport and buildings, fuels made by Power-to-X-processes in industry, transport and buildings, deep energy efficiency improvements and circular economy for increased resource and material efficiency, as well the need to increase carbon sinks, storages and material substitutions via land use and bioeconomy, whilst also recognizing the need for technical carbon capture and the storage and reuse of carbon. The strategy allows residual emissions to be offset in sectors where decarbonization is the most challenging.    

The strategy illustrates that modernizing and decarbonizing the EU’s economy will stimulate significant additional investment. Around 2% of GDP today is invested in our energy system and related infrastructure. This would have to increase to 2.8% in order to achieve a net-zero greenhouse gas economy. This means considerable additional investments compared to baseline, in the range of EUR 175 to 290 billion a year. At the same time, significant health costs can be saved. Achieving a net-zero greenhouse gas emissions economy on top of existing air pollution measures will reduce premature deaths caused by fine particulate matter by more than 40% and health damage by around EUR 200 billion per annum.

According the strategy, the overall economic impacts of the deep transformation have been estimated to be positive despite significant additional investments. The EU economy is expected to more than double by 2050 compared to 1990 and it is transformation to climate neutrality is expected to have a moderate to positive impact on GDP with estimated benefits of up to 2% of GDP by 2050 compared to baseline. Moreover, very importantly, these estimates do not include the benefits of avoiding the damage that would be caused by climate change and related adaptation costs.

In July 2019, Ursula von der Leyen, the new President of the European Commission, announced her agenda for Europe. A European Green Deal – driving Europe to be the first climate-neutral continent – was top of her agenda. The agenda included enshrining the 2050 climate neutrality target into law, tightening 2030 targets, extending the Emissions Trading System, financial support for industrial transformation, green financing and fair transition and improvements to ensure our companies can compete on a level playing field.

European Union can continue as a driver, but some challenges must be resolved

Long-term objectives. The EU’s emissions reduction target currently only goes up to 2030. For 2050, there is a long-term reduction goal of 80-95%. Unclear long-term targets create uncertainty for long-term investors and this slows down the transition towards a more sustainable economy. Industrial and energy-related investments typically have an economic lifecycle of 40-60 years. Investors would welcome clear long-term targets that would decrease uncertainty and accelerate large-scale investments.

EU-level and national policies and means. The current EU Climate Policy is based on three pillars:

  1. Emissions Trading System (ETS), including energy production, industry and partly aviation;
  2. Effort Sharing Decision (ESD), including residential and commercial, transport, agriculture, waste and smaller industrial installation sectors; and
  3. Land Use, Land Use Change and Forestry (LULUCF).

The ETS is an EU-wide system covering about 45% of CO2 emissions. In the sectors to which the ESD and LULUCF apply, each EU Member State defines and implements national policies and measures based on the national targets agreed at EU level. The current set-up of the pillars, in particular the national parts, creates uncertainty. It will be difficult to anticipate and plan for changes in the regulatory environment, since country-based climate policies tend to vary after national elections depending on the parties in power. By 2050, around 200 parliament elections will have been held. Furthermore, separate country-based policies increase the risk of suboptimal outcomes and overlap in and between Member States.

Overlaps between the three pillars. The Commission’s new strategy demonstrates that the technical boundaries between the current three sectors are on their way out. As transport electrifies and starts using Power-to-X-fuels, it moves gradually under the ETS. Biomaterials will bring the LULUCF sector close to the other two pillars and Carbon Capture and Utilization (CCU) will lead to a “horizontal flow” of carbon through all three pillars. One of the most important details in setting up long-term climate targets is defining the role of carbon sinks.

Financing the transformation. As the strategy illustrates, there is a significant need to finance both the development of new solutions as well as to make commercial investments. Because the investments should mainly come from the private sector, there must be a market and a sufficient carbon price to attract investments. Local policies are not effective at creating large enough markets for new solutions and do not necessarily lead to the most cost-efficient solutions.

Proposal by Climate Leadership Coalition

CLC proposes that the EU develops a more systemic, market-based solution that:

  • secures emission reductions and enables carbon sinks;
  • is predictable in the long term and withstands shifts in political power structures;
  • creates a sufficient carbon price;
  • ensures economically efficient progress, i.e. the cheapest solutions will be implemented first;
  • is market-driven and technology-neutral;
  • can be integrated internationally;
  • can be adjusted rapidly, when the need arises;
  • covers a large share of emissions and factors in carbon sinks, storages and substitutions;
  • uses carbon price revenues to speed up low-carbon solutions and green business;
  • enables a fair transition towards climate neutrality;
  • provides a mechanism for preventing carbon leakage and enhances a level-playing field for competition.

Alongside the agenda laid down by President Ursula von der Leyen, we have five recommendations:

  • Set clear, ambitious and actionable climate targets
  • Plan and agree on a more systemic market-based solution
  • Strengthen financing mechanisms to support the transformation of society
  • Secure a level-playing field for the competition
  • Make an emergency plan for the rapid scale down of emissions

Set clear, ambitious and actionable climate targets

Unclear long-term targets create uncertainty for long-term investors and thereby slow down the transition towards a more sustainable economy. Industrial and energy-related investments typically have an economic lifecycle of 40-60 years. Investors require clear long-term targets that decrease uncertainty and accelerate large-scale investments.

Nordic businesses, the financial sector and NGOs are calling on the EU and its Member States to make the European Union Paris Agreement-proof by setting and agreeing on new, sufficiently ambitious climate targets. The signatories are urging EU leaders:

  • to set a target for achieving net-zero emissions by 2050 at the latest, taking the IPCC findings into account; and
  • based on the target, to agree on a binding carbon budget for the remaining GHG emissions, including the share of emission reductions and carbon sinks; and
  • to revise and align the 2030 and 2040 targets with the net-zero target.

Over 90 organizations has signed the call, including companies, cities, universities, business networks and The Confederations of Finnish Industries and Danish Industries representing more than 25,000 companies, as well as The Central Union of Agricultural Producers and Forest Owners in Finland having more than 300,000 members.

A binding carbon budget is key and, upon being defined, an ambition level for emission reductions and carbon sinks should be made; however, if it turns out that there will be more robust verifiable sinks and product carbon storages than estimated to start with, those should compete with emission reduction alternatives as mentioned in the Commission’s strategy.

CLC would appreciate the clarification of the long-term climate goals as soon as possible.

Plan and agree on a more systemic market-based solution

To reduce the uncertainty of country-based policies, to enable a market-based selection of the most cost-efficient solutions and to cope with changes in technology, CLC proposes:

  • to widen the use of the ETS system as a cornerstone policy instrument so as to reduce emissions via expanding EU emission trading (ETS) to also cover heating and cooling of buildings and transport;
  • to absorb carbon from the atmosphere by factoring in measurable, verifiable carbon sinks, and to store carbon via carbon capture and utilization solutions and as well as to substitute high carbon footprint materials via low carbon footprint materials;
  • to develop better mechanisms for addressing carbon leakage;
  • to enable international integration between compatible emission trading systems and verifiable development projects.

In addition, the ETS system can offer a unique benefit when we need to accelerate climate actions. By reducing ETS allowances we can influence the pace of emissions and regulate the price levels of trading allowances. In contrast, within ESD and LULUCF sectors the operationalization of policies depends on national legislation and the implementation of such legislation could take years.

The planning for this more systemic solution should begin as soon as possible and the solution for the time period after 2030 should be agreed in synchronization with ETS revisions and the COP Global Stocktake in 2023. The California Cap-and-Trade Program is a good benchmark, covering more than 85% of emissions.

Strengthen financing mechanisms to support the transformation of society

CLC proposes that, in addition to climate- and energy-related investments, a larger part of the EU ETS incomes should be earmarked and used to support science, research and the development of new climate solutions and to support the low-income stakeholders involved.  

California has successfully demonstrated how green transition can be supported financially and in a socially justifiable way. The revenues from the Cap-and-Trade Program are dedicated to reducing GHG emissions by making legislatively directed investments in California with an emphasis on programs or projects that benefit disadvantaged and low-income communities.

A larger part of the EU ETS incomes as well as other funds should be allocated to the commercialization of pivotal technologies, for example Power-to-X, carbon-free steel, carbon absorbing concrete and biomaterials. If effective, the ETS can help to widen the use of these technologies at a later stage; however, to create the required impact, they would need to be commercialized well before 2030.

Secure a level-playing field for the competition

As a large market, the EU should do its best to secure a level-playing field for companies and the effectiveness of market-based solutions by minimizing risks of unilateral compliance burden and carbon leakage. If there is evidence of unfair competition, the first action to level the playing field should be to find ways to help the EU´s trade partners to improve their policies, for example by implementing carbon pricing and promoting the trade of climate-friendly goods and services. Other possible actions could include using new and existing regional trade agreements (RTAs), holding talks with like-minded WTO Members, including climate-related issues in the WTO Trade Policy Review Mechanism (TPRM) and border carbon adjustments (BCA) for those sectors that cannot be levelized otherwise. It should be evaluated how trade policies and agreements could be utilized in this, starting from those sectors that cannot be levelized otherwise.

Make an emergency plan for the rapid scale-down of emissions

When climate change accelerates, it may create circumstances in which global climate emergency measures will be needed. The EU should consider an emergency plan and a rapid emissions reduction program. The systemic model proposed by CLC would make rapid adjustments easier than the current set-up, which is largely based on national policies.

There is solid evidence of increasing weather-related disasters in the world. Some countries and several non-state actors like the UK, Scotland, Wales and Ireland have already declared a climate emergency. By the publication of this paper, there were climate emergency declarations in 18 countries, 990 councils covering 212 million citizens.

Supporting means

In addition, CLC views that “demand-based policies”, such as using carbon footprint in public and private procurement and in enabling sustainable choices by citizens, need to be utilized much wider than they are currently.

Climate Leadership Coalition (CLC) is a non-profit organization committed to the pursuit of carbon-neutrality through the sustainable use of natural resources. The purpose of CLC is to promote the sustainability of businesses, city planning strategies and activities of research organizations towards more sustainable and resource efficient models. CLC enhances its members’ ability to respond to the threats posed by climate change by sharing information, ideas and best practice solutions. We make proposals to governments and other stakeholders to harness the market economy in a more sustainable direction and to attract sufficient investments for such a transition. CLC believes that green transition can be economically beneficial, and therefore financeable, and that early adapters can benefit and become more profitable.

CLC currently has 56 organizational and 22 personal members (as at September 2019).

More information: Jouni Keronen, jouni.keronen(at)clc.fi, tel. +358 50 453 4881.