Four policies to shift the needle to net-zero emissions

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The EU's ambitious goals are not even close to being met, and the main European climate policy tool, the carbon pricing mechanism known as the EU-ETS, is not driving sufficient change. [Michael/Flickr]

In order to achieve the EU’s goal of net-zero carbon emissions by 2050, bolder strategies are needed to drive sufficient change, writes Måns Nilsson.

Måns Nilsson is the executive director of the Stockholm Environment Institute. This opinion article is based on a panel intervention delivered at the annual McKinsey Global Sustainability Summit.

Grassroots demonstrations, extreme weather conditions and the IPCC special report on 1.5°C have contributed to growing political momentum across Europe for net-zero greenhouse gas emissions.

But such ambitious goals are not even close to being met, and the main European climate policy tool, the carbon pricing mechanism known as the EU-ETS, is not driving sufficient change.

Much of the policy debate has become a form of displacement activity revolving around individual behavior and morality. This is a dead end. We need instead bold policies that mobilise and scale solutions to rapidly decarbonise economic sectors. The EU’s Strategic Agenda must enable Member States to shift the needle to net zero.

What policy tools are available for the transition to a net zero emissions economy? The carbon price under the EU-ETS has recently climbed from a dismal 4-5 Euros per tonne to a more reasonable 25-30 Euros per tonne. But at this rate, it is still not able to drive change at the scale needed.

The decline in coal-fired power production in Europe represents almost the entirety of greenhouse gas emission reductions (falling by 9% in 2018, compared to 2017). In contrast, industrial emissions have remained flat since 2012.

The free allocation to industrial sectors has not incentivised reductions in emissions, and 90% of industrial emissions are emitted without any cost to the companies.  Even with the revised EU-ETS, there is too little market incentive.

Stretching across Europe, a “carbon neutrality coalition” of EU member states has emerged, including Portugal, Spain, France, Netherlands, Belgium, Luxembourg, Denmark, Sweden, and Latvia. These countries are pushing for a legal framework at the EU level for net zero emissions but they have yet to convince Germany, let alone the coal-fired central and eastern European countries.

The leadership of Germany on scaling solar power through their national policy is now being counteracted by their continuing dependence on coal power and a conservative automotive industry. And without Germany, not much happens in the EU.

Turning the tide on climate policy

Studies have shown that decarbonising industries is possible with new solutions available across industrial sectors. For example, a recent study by Material Economics shows that it is possible to reduce emissions from industry to net zero by 2050 at less than 1% added cost to consumers.

But decarbonisation of industry requires large capital investments, which introduces new costs and risks to individual companies. Moving to a zero emissions strategy will mean investments that for many companies amounts to a “bet the company” moment. This fact warrants policy intervention beyond a generic price signal at €30. To achieve net zero, the future of climate policy action in Europe will be geared at the national level.

What countries need is a new industrial policy framework which recognises the importance of systems solutions across sectors, and leverages the links between the public and the private. For example, fossil-free steel production, using hydrogen instead of coal in the production process, depends on a power system with cheap and abundant renewable electricity supply and would benefit from progress on other sectors’ uses of hydrogen, such in fuel cells for transport sectors. Such industrial transitions cannot be developed by the steel industry, or the private sector, alone.

In this new industrial policy, the state becomes an active member of the innovation system, exploring and taking risks as opposed to merely fixing market failures. As Mariana Mazzucato points out, the state can be, and indeed has been over the decades, a key actor in innovation systems.

This represents a paradigm shift. In the market paradigm of the last three decades, there is ingrained fear of states being unproductive and captured by political interest. In mainstream economic theory, the value that the state provides is mainly to solve market failures and provide infrastructure or security. The perception that it is inefficient and undesirable to interfere with or create new markets is a barrier, and many times, attempts at public action have been stopped due to presumed conflicts with EU internal market rules. But the climate challenge calls for a new paradigm where public actors are drivers of innovation together with the private sector.

Four policy areas to drive the net-zero transition

To drive innovations and solutions for a net-zero economy, four policy areas merit extra attention over the coming years:

Permitting: states need to establish frameworks for permits and licenses to operate to ensure that all new major investments in, for example, industrial installations, commercial buildings, housing, and transport infrastructure are compatible with honoring the Paris Agreement. Permitting processes for climate-smart investments need to be simplified so that installations can be sped up. Today, the administrative time required to plan and install a transmission line to integrate renewable energy into the electricity distribution network, or connect new industrial-scale demand, takes up to a decade or more. Such time frames are not compatible with the urgency in reducing emissions.

Financing: states can play a key role in taking on a part of the risk of the net-zero transition, which is currently hindering companies from making the leap. States need to make significant public funding available for investment, in the form of loans and equity. Other options are private-public partnerships with long term contracts or concessions providing lower market and policy risks for private investors.

Niche markets: states need to create markets for zero-emissions solutions and innovations, in particular through the instrument of public procurement. This both provides protected space for new solutions to develop and sends a strong signal – decarbonised products and services is the future.

Public infrastructure: states need to accelerate capital investment in the critical low-carbon infrastructure that is needed for moving to net zero emissions, and borrow money if necessary. This includes power grid and renewable power supply and integration, as well as more novel solutions for hydrogen supply chains, electrification of roads, charging infrastructure, and electrified railways.

Lofty words and emergency declarations will not take us forward – only ambitious public policy and courageous governmental action will be able to shift the needle to a net zero pathway.

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