The forgotten innovation agenda of the ETS

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Climate innovation is a crucial step in de-risking the effort to decarbonize the economy and European policymakers need to make this part of ETS reform, argue Andris Piebalgs and Alessia Virone. [LINDSEY PARNABY / EPA]

Climate innovation is crucial in de-risking the effort to decarbonise the economy, and European policymakers need to make this part of ETS reform, argue Andris Piebalgs and Alessia Virone.

Andris Piebalgs is the former European Commissioner for Energy; Alessia Virone is the Clean Air Task Force’s Director of EU Advocacy.

The forthcoming revision of Europe’s Emissions Trading Scheme (ETS) has generated many column inches. From breathless coverage of the highs and lows of the ETS price over the past 18 months to the spectre of the Gilets Jaunes conjured up by the proposed expansion to housing and road transport, few EU policies in the Fit for 55 have received more attention.

But one part of the reform has been largely ignored – the backing of climate-forward innovation projects in Europe. The ETS should ensure the decarbonisation of EU industries, but, at the same time, it should support the development of the innovative technologies required to reach this decarbonisation.

Climate innovation is crucial for meeting Europe’s decarbonisation targets. The International Energy Agency (IEA) estimates that nearly 50% of the reductions in emissions that Europe needs to reach its 2050 climate goals will come from technologies that are yet to be deployed at scale. For sectors that have been slow to reduce emissions – like heavy transport and industry – developing pathways to new technology options is crucial for decarbonisation.

Building new industrial infrastructure at an appropriate scale will take decades, and postponing them would jeopardise reaching climate neutrality by 2050. Thus we need to start immediately. In the meantime, those stubborn industrial emissions will offset gains made elsewhere in the energy system.

From the Intergovernmental Panel on Climate change to the European Commission to the IEA, climate models show that carbon management technologies, such as carbon capture and storage (CCS) or direct air capture (DAC), are a major part of decarbonising heavy transport and industry.

Carbon capture and storage technologies are the only solutions that can fully decarbonise the cement industry. It is also one of two main pathways to decarbonise steel production. The other relies on the assumption of the availability of cheap, clean hydrogen quantities, which would likely involve trade-offs with decarbonising the electrical grid.

They also have substantial applications in the waste and chemical sectors. These industries are core components of modern economies and will be at the heart of the energy infrastructure boom we need to reach our climate targets. But right now, the commercialisation of carbon capture and storage technologies remains out of reach, as the current policy landscape is insufficient to push investors and industries beyond the demonstration phase into full-scale deployment mode. And that’s where the ETS could make a massive difference if it were designed correctly.

There are two significant problems with the ETS design regarding climate innovation.

First, the carbon price isn’t enough to provide confidence to investors and the industry. The Commission has acknowledged this fact already, so it’s clear that we need additional support for innovative technologies. The Innovation Fund has been expanded in the ETS proposal but is still far from enough – which explains why the first call for the Innovation Fund was twenty times oversubscribed.

Revenues from Europe’s Carbon Border Adjustment Mechanism could be used to strengthen the Innovation Fund. Moreover, mechanisms like Carbon Contracts for Difference would give investors more certainty to support new technology areas.

Second, ETS has carved out ‘free allowances’ for high-emitting industries that render any rise or fall in carbon price irrelevant to the stubborn emissions. Maintaining free allowances for 94% of industrial emissions significantly delays the impact of any ETS provisions’ impact, so it’s no wonder this mechanism has been ineffective.

There is little sense in designing incentive structures if the industries that most need help to decarbonise are unaffected.

These factors have been lost in the noise around ETS is a grave oversight. Focusing on EU-wide climate innovation will enable the decarbonisation of the entire economy and lead to the creation of jobs in new high-skill industries, not to mention maintaining the positions in Europe’s existing industrial base.

As the most recent round of Innovation Fund funding illustrates, some industrial players are desperate to get on a pathway to decarbonisation. Four of 7 projects that got funding are built around carbon management technologies. It’s not hard to tell which way the wind is blowing for European businesses: decarbonise or perish.

Under current market conditions, the problem is that if they choose to decarbonise, they are likely to perish due to increased costs. Policymakers must step in and ensure the availability of the required innovative technologies to decarbonise.

The recent volatility of Europe’s energy market shows that over-reliance on a single energy source is far too risky for Europe’s energy future. The Commission’s REPowerEU plan recognises the problems of market inertia and how it has blocked progress on multiple fronts. It is a shame that this very sound logic has not been extended beyond the power sector, as multiple technologies should also be integrated when thinking about the decarbonisation of industries.

And we cannot forget that the climate transition is a global problem. Beyond the 27 member states, European climate innovation has been one of the drivers for the global clean energy revolution celebrated in the IPCC’s WG3 report, with early investments in wind and solar now paying dividends worldwide.

The ETS revision is an opportunity to apply these lessons to new arenas, setting up European industry to succeed in a net-zero world while driving the development of crucial decarbonisation technologies that will be needed around the world.

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