## spccmeuea ## Source details **Canonical URL:** [spccmeuea](https://www.imf.org/-/media/files/publications/dp/2020/english/spccmeuea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2020/english/spccmeuea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2020/english/spccmeuea.pdf.json) --- ### Executive Summary — Scope and Key Findings - Analysis covers five sectors accounting for 95 percent of greenhouse gas emissions: power, transport, residential housing, manufacturing, and agriculture. - Overall EU progress: - Total emissions currently nearly a quarter below their 1990 level. - Sectoral changes: - Power and industry emissions have fallen by about a third. - Buildings emissions have fallen by a quarter. - Agriculture emissions have fallen by a fifth. - Transport emissions have increased. - Divergence across sectors driven by: - Cost differences among abatement channels. - Variation in effective carbon prices, market imperfections, and policy gaps. ### Cross-cutting Policy Guidance - Carbon pricing: - Comprehensive and predictable carbon pricing is key to shifting activities and investments toward the lowest cost abatement options. - Carbon pricing should remain the main tool for power and manufacturing emissions reductions. - Introducing a carbon price floor to the Emissions Trading System (ETS) recommended to steer investments. - Complementary policies needed alongside carbon pricing to address: - Financing constraints. - Incomplete markets. - Political sensitivities. - Examples of complementary measures: - Facilitate investment in power grids and vehicle charging infrastructure. - Support nascent green technologies and technology diffusion. - Remove subsidies and tax breaks for emissions-intensive activities. - Use regulations and “feebates” to induce behavioral changes. - Address owner–renter incentive mismatches. - Provide financing options for liquidity-constrained individuals, farmers, and firms. - Strengthen emissions measurement and disclosure requirements. - Shift farm subsidies away from livestock and toward land stewardship. ### COVID-19 Recovery and Sequencing - Recovery stimulus is an opportunity to intensify climate-friendly policies. - Near-term priority: prioritize green investments—especially public network infrastructure—which: - Tend to react less to carbon prices. - Support job-rich growth. - Reduce emissions. - As recovery takes hold: - Gradually increase carbon prices to provide revenues and incentivize cost-efficient investments and behavioral adjustments. - Use part of revenue for targeted compensation of vulnerable groups. ### Power and Manufacturing — Findings and Policy Prescriptions - Power sector: - Emissions from power generation still account for a third of total emissions. - Renewables must be decisively expanded; renewables are no longer costlier than fossil fuels (as of 2018 new renewable plants cost similar or lower than new fossil plants except offshore wind and concentrating solar power). - Grid infrastructure must be strengthened for intermittency and greater electrification demand. - EU Green Deal targets by 2030 include increasing renewable share of final energy consumption from 20 percent in 2020 to 32 percent and deepening energy interconnection from 10 to 15 percent of domestic production. - Manufacturing sector: - Direct manufacturing emissions reached 870 MtCO2e in 2018 and account for nearly one-fifth of total EU GHG emissions. - Six high-emitting industries (mineral, metal, petroleum refining, chemical, food, paper) account for more than 90 percent of total manufacturing emissions and about 45 percent of manufacturing value-added and employment. - Manufacturing emissions declined by 38 percent since 1990. - ETS covers about 65 percent of manufacturing emissions; free allowances have weakened price signals. - Carbon pricing and instruments: - Strengthen the ETS by reducing outstanding permits and introducing a robust price floor. - Gradually increasing the uniform carbon price to €60–100 per ton by 2030 would permit the EU to meet emission reduction and renewable share goals (recommended path). - Free allowances should be gradually phased out; consider a carbon border adjustment mechanism to prevent leakage. - Revenue-neutral instruments such as feebates can be used where required carbon prices would be unfeasibly high. - Public support where market failures persist: - Prioritize infrastructure, renewables R&D, and displaced workers. - Specific supports: network infrastructure (including cross-border grids and district heating), R&D for new renewables/power storage/CCS, financing for renewables with large fixed costs or small operators, remove regulatory hurdles, regional development and active labor market policies for displaced workers. - Investment needs: - The carbon price consistent with a 50 percent emissions reduction by 2030 is estimated to incentivize €1.4 trillion of investment in renewables over the next decade. - EU capital expenditures in electricity transmission projected at €152 billion over the next decade; gas transmission and electricity storage at €41 and €14 billion, respectively. - A linear reduction toward –95 percent in 2050 implies industrial emissions need to fall 53 percent by 2030 vs. 2005. - Additional investments to reduce industrial emissions by 80 to 100 percent between 2030 and 2050 range from €2–25 billion per year; the EU decarbonation trajectory based on current policies would require investments of €11 billion per year. ### Transport — Findings and Policy Prescriptions - Emissions and drivers: - Transport accounts for nearly 30 percent of total EU emissions; surface transport is the largest subsector with about 70 percent of transport emissions (70 percent of which is cars). - Transport emissions are nearly one-third larger than in 1990; increases driven by road transport (60 percent of the increase) and aviation (30 percent of the increase). - Abatement channels: - Short to medium term: demand management, modal shifts, and efficiency improvements. - Decarbonization relies on accelerated uptake of cleaner technologies such as electric cars for ambitious objectives. - Heavy-duty vehicles and aviation present larger technological challenges; aviation and shipping lack full-decarbonization technologies and will require R&D and offsets. - Policy instruments: - Fuel taxes and pricing: - Fuel duties typically account for 45 to 65 percent of the final fuel price. - At least 90 percent of road sector emissions were effectively priced at or above €60 per ton of CO2 in many countries (OECD 2018b). - Retail petrol and diesel prices would need to increase by a median of about 20 percent to reach efficient levels under a baseline assuming a carbon price of 45USDtCO2. - Good practice: routinely uprate fuel duties at least in line with inflation. - Diesel is often taxed at lower rates than gasoline despite diesel’s about 10 percent higher energy content and about 16 percent higher CO2 emissions per liter. - ETS inclusion and road pricing: - Including transport in an ETS would apply more comprehensive carbon pricing; governments should complement fuel duties with road pricing schemes. - Standards and feebates: - EU mandatory efficiency targets exist: 95 g CO2/km for cars and 147 g CO2/km for vans (2021 targets). - Recent EU targets: reduction in emissions of 15 percent by 2025 and 37.5 percent (31 percent for vans) by 2030, relative to a 2021 baseline. - Feebates are revenue neutral and can aggressively shift purchases toward cleaner vehicles using a sliding scale based on CO2 relative to fleet average. - Incentives for cleaner cars and infrastructure: - Many countries use fiscal instruments but low- and zero-emission vehicles remain a small fraction of sales. - Public support for charging infrastructure is justified; subsidies for charging stations can be more effective than vehicle purchase subsidies (Springel 2018). - Credible deadlines for discontinuing conventional cars (examples: 2025 Norway; 2030 Netherlands; 2035 Scotland; 2040 France and United Kingdom) help signal commitments. - Measurement and effectiveness: - EU average new-car emissions decreased from 170 g/km in 2001 to 120 g/km in 2018, but real-world emissions gap with lab-based figures increased. - WLTP and RDE methodologies expected to improve alignment with real-world measurements. - Diesel cars, on like-for-like basis, emit about 15 to 20 percent less than petrol cars. - Notable quantitative facts (transport): - Andersson (2019): CO2 emissions from transport declined by 11 percent after introduction of a carbon tax and VAT on transport fuel in Sweden. - United Kingdom fuel duty freeze since 2010/11 implies a real terms cut of about 15 percent; traffic estimated to have increased by about 4 percent as a result. - Sales of new vehicles increased by 3.5 percent in France following the bonus-malus introduction. - Netherlands tax reductions estimated to cause annual extra sale of some 25,000 to 30,000 cars. - Electric vehicles average range: about 150 miles. - Norway electric vehicles share: about 15 percent of the total fleet. - HDV emission-reduction targets: 15 percent by 2025 and 30 percent by 2030 relative to a 2019–20 baseline. - HDV highest-emitting segments account for about 65 percent of HDV emissions. - EC 2011 modal-shift target: move 30 percent of road freight over 300 km to other modes by 2030 and more than half by 2050; three-quarters of total freight transport in the EU is associated with distances of more than 300 km. - EC hypothetical jet fuel tax at €330 per thousand liters would increase average ticket price by 10 percent and reduce passenger demand and CO2 emissions by about 11 percent. ### Residential Buildings — Findings and Policy Prescriptions - Emissions and energy use: - Residential housing accounts for about a quarter of energy usage and a fifth of GHG emissions in the EU. - Energy use by end use (EU+UK, 2017): - Space heating: 64.1 percent. - Water heating: 14.8 percent. - Lighting and appliances: 14.4 percent. - Cooking: 5.6 percent. - Space cooling: 0.3 percent. - Other end uses: 0.9 percent. - Buildings’ emissions reduction from 1990 to 2017 is close to overall EU reduction (21 percent vs. 23.5 percent). - Stock and renovation challenge: - About 35 percent of EU buildings are more than 50 years old and more than 90 percent of building stock is energy inefficient. - Renovation rates: only 0.4–1.2 percent (depending on the country) of the building stock is renovated each year. - To meet 2050 net zero target, EU-wide renovation rate should be about 7–8 percent per year. - Final energy consumption in EU+UK in 2016: 1,108 Mtoe; buildings share about 40 percent (households 26 percent; services 14 percent). - Abatement potential and costs: - Deep renovation to EPC=A can reduce energy consumption by about 85 percent on average; EPC=A plus electrification could reduce current GHG emissions by about 55 percent on average. - Upgrading only to EPC=B implies an emission reduction of about 46 percent. - Investment cost for deep retrofitting and electrification estimated to entail about 40–50 percent of GDP (aggregate statement). - Renovation cost estimates per dwelling for EPC=A range: €8,457 to €44,427. - Average cost example for semi-detached dwelling: €24,448 (used in green mortgage example). - Implementation of deep renovation would save €80 to €153 billion of investment costs into the power system by 2050. - Market failures and barriers: - Housing sector coverage by environmental taxes: only about 50 percent of related emissions are covered by taxes; implied average effective price on covered emissions: €18 per tCO2. - Investor/user barrier (landlord–tenant split), liquidity constraints, awareness/uncertainty about savings, and implementation complexity hinder renovation rates. - Policy recommendations: - Fiscal and price-based: expand carbon tax coverage and increase CO2 price in residential sector; phase out support for emission-intensive energy sources; recycle revenues to compensate vulnerable households. - Structural and regulatory: set binding targets for energy efficiency, harmonize EPCs, enforce EPC disclosure when selling/renting, design energy-dependent property taxes. - Financial instruments: expand on-bill financing, green mortgages, means-tested low-interest loans or grants, long-term financing via public development banks. - Supply-side: certification and training programs for contractors; vocational training to build renovation skills. - Information: one-stop shops, campaigns, integrated loan–advice–service offers. - Green mortgage illustrative example (Box 3): - Base purchase cost: 300,000; Energy Efficient Measures: 24,448; Loan Amount rises from 240,000 to 264,448. - Monthly mortgage payment: standard 1,146; green mortgage 1,225 at a 3.75% rate (vs 4.00% standard); utility cost savings estimated at –155 per month yield monthly cost of home ownership: standard 1,146; green 1,069. - Example assumption: interest rate discount of 25 basis points; energy efficient measures cost €24,448; utility cost savings assumption: EUR3.1 per m2. - EEM criteria: improvement in energy performance of at least 30 percent evidenced by recent EPC rating. ### Agriculture — Findings and Policy Prescriptions - Emissions profile: - Agriculture accounts for about 10 percent of total EU emissions (nearly 10 percent in EU+UK), with largest country share at 33 percent (Ireland). - Primary sources: enteric fermentation methane 44 percent; mineral fertilizers on croplands 37 percent; manure-related nitrous oxide and methane 15 percent; fossil fuels in agriculture less than five percent. - Agricultural emissions declined by 20 percent since 1990, mostly in the 1990s; since 2005 emissions have been nearly unchanged. - Abatement channels: - Improved soil management and sequestration (no-till, permanent pasture, protecting grassland) have significant potential. - Reducing livestock emissions (diversify away from beef; barn modernization; breeding; methane digesters) required but not self-financing in many cases. - Carbon sequestration on croplands and permanent grassland; sustainable land use could reduce total EU emissions by 5 percent. - Barriers: - Large subsidies, measurement challenges (farm-level methane/nitrous oxide), capital intensity of measures, and risk of carbon leakage. - Sector not covered by ETS; more than 85 percent of agricultural emissions are methane and nitrous oxide, leaving coverage low. - Non-uniform national targets can increase imports and shift emissions outside EU (more than 90 percent of any emissions reduction may be reflected in higher emissions outside the EU). - Policy opportunities in CAP (2021–27 planning period): - Widen First Pillar “green payment” scope to incentivize livestock emissions reduction and carbon storage payments for farmland. - Align crop insurance support with climate action to remove disincentives to sustainable farming. - Expand Second Pillar regional support for circular economy, renewable energy on farms, and technologies that reduce imports (e.g., insect-based protein). - Use direct payments to support capital-intensive livestock mitigation for smaller firms. - Make annual consolidated nitrogen balance at farm level mandatory. - Demand-side measures: - Shifting consumption away from beef and dairy has large emission-reduction potential and health co-benefits. - Removing CAP subsidies increases producer prices by 5 percent and reduces production by 6 percent on average; dairy prices increase by 11 percent. - Administrative improvements (Box 5): - Climate actions under CAP must meet at least four out of six specified priorities. - At least 30 percent of the EAFRD budget in each member state needs to be allocated to climate and environmental actions. ### Cross-cutting Sectoral Insights - Abatement heterogeneity: - Some sectors have untapped cost-effective measures (e.g., residential insulation). - “Hard to treat” sectors (aviation, shipping) lack technologies for full decarbonization; carbon pricing alone unlikely to trigger required innovation (CCS, low-carbon heat, EV charging infrastructure). - Carbon leakage risk: - Greater for industry, agriculture, and international transport than for domestic transport and residential buildings. - Technological lock-in: - Asset lifetimes differ: cars < planes < housing; policies must address both flows (new purchases) and stocks (existing capital). - Co-benefits and distributional concerns: - Many measures deliver co-benefits (health, reduced congestion). Distributional impacts vary: - Domestic energy spending often more regressive than road transport spending. - Coal-mining employment could fall sharply: model simulations indicate carbon prices needed to meet goals would lower employment in coal mining by 70 percent. - Carbon prices needed to meet goals would raise electricity prices by 20 percent on average by 2030 compared to 2020. - Use existing social safety nets and local active labor market policies to mitigate adverse distributional effects. ### Implementation and Policy Design Principles - Policy mix: - Carbon pricing should be primary but complemented by targeted regulations, subsidies for R&D, infrastructure support, feebates where appropriate, and well-designed compensation. - Market-based instruments: - Auctions, feebates, and carbon pricing generally more cost-effective and transparent, but predictable and accessible subsidy/regulatory schemes may be needed to attract private participation. - Public finance and guarantees: - High fixed costs and financing constraints justify public guarantees, public–private partnerships, or grants for early-stage projects. - Measurement and transparency: - Strengthen emissions measurement and disclosure requirements; EU taxonomy and Green Deal investment pledges to mobilize private capital. _Italic: Source: "Sectoral Policies for Climate Change Mitigation in the EU" (spccmeuea)._ ### Executive Summary ������������������������������������������������������������������������������������������������������ ### Executive Summary ### Scope and key findings - This paper analyses climate mitigation policy in the European Union (EU) for five sectors which account for 95 percent of greenhouse gas emissions: power, transport, residential housing, manufacturing, and agriculture. - The EU has made important progress in reducing emissions, with total emissions currently nearly a quarter below their 1990 level. - Sectoral progress has varied: - Emissions from power and industry have fallen by about a third. - Buildings emissions have fallen by a quarter. - Agriculture emissions have fallen by a fifth. - Transport emissions have increased. - The divergence across sectors reflects: - Cost differences among available abatement channels. - Variation in effective carbon prices, market imperfections, and policy gaps. ### Cross-cutting policy guidance - Comprehensive and predictable carbon pricing is key to shifting activities and investments toward the lowest cost abatement options. - Even with appropriate carbon prices, complementary sector-specific policies are essential to address: - Financing constraints. - Incomplete markets. - Political sensitivities. - Examples of complementary policies: - Facilitate investment in power grids and vehicle charging infrastructure. - Support nascent green technologies and technology diffusion. - Remove subsidies and tax breaks for emissions-intensive activities. - Use regulations and “feebates” to induce behavioral changes. - Address incentive mismatches between home owners and renters. - Provide financing options for liquidity-constrained individuals, farmers, and firms. - Strengthen emissions measurement and disclosure requirements. - Shift farm subsidies away from livestock and toward land stewardship. ### COVID-19 recovery and sequencing - The large stimulus packages to facilitate recovery from the COVID-19 crisis provide an opportunity to intensify the adoption of climate-friendly policies. - Near-term priority: prioritize green investments—especially in public network infrastructure—which tend to react less to carbon prices, support job-rich growth, and reduce emissions. - As recovery takes hold: gradually increase carbon prices to provide revenues and create a virtuous circle of cost-efficient investments and behavioral adjustments. - Part of revenue can be used for targeted compensation of vulnerable groups adversely affected by the transition. ### Power and manufacturing — findings and policy prescriptions - Power sector: - Emissions from power generation still account for a third of total emissions. - Meeting future goals requires a decisive expansion of renewable power; renewables are no longer costlier than fossil fuels. - Grid infrastructure must be strengthened to cope with intermittency and greater electrification demand. - Manufacturing sector: - Past decline reflects substantial efficiency gains in energy use and process-related emissions. - Remaining industrial emissions have untapped reduction potential; many available technologies have high costs and are not yet produced at scale at current low carbon prices. - Carbon pricing and instruments: - Carbon pricing should remain the main tool for power and manufacturing emissions reductions. - Introducing a carbon price floor to the Emissions Trading System (ETS) would steer investors and consumers toward green power sources and discourage carbon-intensive processes. - More ambitious member states can adopt additional carbon pricing of industrial emissions at the national level. - Free allowances in the ETS should be gradually phased out. - A carefully designed carbon border adjustment mechanism can be considered to prevent emissions leakage. - Higher carbon prices would make support schemes, including subsidies for renewable power, unnecessary. - Where carbon prices required would be unfeasibly high, revenue-neutral instruments such as feebates can be considered. - Public support where market failures persist: - Prioritize infrastructure, renewables R&D, and displaced workers. - Specific public support examples: - Network infrastructure such as power grids (especially across borders) and district heating. - R&D or early-stage technologies with large knowledge spillovers (for example, new renewable sources, power storage technologies, and carbon capture and storage). - Financing for renewable plants with large fixed costs, or operated by small firms or households. - Removing existing regulatory hurdles to unlock green investment. - Regional development and active labor market policies for displaced workers. ### Transport — findings and policy prescriptions - Transport has grown to become one of the EU’s largest emitting sectors because efficiency gains were more than offset by increases in travel demand. - Near-term scope for reducing reliance on oil products is limited; emissions reductions need to rely on: - Demand management. - Modal shifts to cleaner transport modes. - Improving fuel efficiency. - Accelerated uptake of cleaner technologies such as electric cars for ambitious decarbonization. - Policy instruments: - Fuel taxes: despite high taxes on road transport fuel, prices may still be below efficient levels when considering congestion, air pollution, and climate externalities. Including transport in the ETS would apply more comprehensive carbon pricing. Governments should complement fuel duties with road pricing schemes. - Standards: new car efficiency standards have been broadly effective despite testing problems. Recent adoption of standards for certain heavy-duty vehicles aligns the EU with other major countries. - Incentives for cleaner cars: most countries use fiscal instruments to steer vehicle purchases, but low- and zero-emission vehicles remain a small fraction of sales. Feebates can be used to more aggressively shift purchases toward cleaner vehicles. Complementary policies such as development of charging infrastructure are also needed. *Executive Summary — Sectoral Policies for Climate Change Mitigation in the EU.* ### Executive Summary ### Executive Summary ### Motivation and EU targets - Rising temperatures pose major global risks from gradual warming, extreme weather events, and transition-related risks. - The longer action is delayed, the greater the GHG accumulation and the more abrupt and costly stabilization will be. - EU commitments and targets: - EU countries pledged to reduce overall GHG emissions by 40 percent relative to 1990 levels by 2030. - The EU Green Deal proposes more ambitious targets of at least 50 percent reduction by 2030, and net zero emissions by 2050. - Overall emissions are currently nearly a quarter below their 1990 level. - As of 2019, EU countries project a 30 percent reduction by 2030 under current policies and measures, while additional policies planned for the coming years would bring it to a 36 percent reduction. - Delivering on EU climate ambitions requires progress across all sectors; five sectors (power, industry, transport, buildings, agriculture) accounted for 95 percent of total emissions in 2017 (the remaining 5 percent primarily from waste-related emissions). ### Sectoral policy framing and carbon pricing - Sectoral approach: - Analysis proceeds sector by sector: overview of emissions/drivers; abatement channels; policy frameworks including carbon pricing and supplementary policies. - The ETS provides a unified cross-country carbon pricing framework but is mainly limited to emissions from energy generation and large industries. - The majority (55 percent) of emissions arise from sectors outside the scope of the ETS and are dominated by road transport and buildings, with agriculture significant in some countries. - Policy design considerations: - Carbon pricing is a key cost-effective tool, but political constraints, market barriers, and frictions may require supplementary policies. - Non-price barriers (innovation dynamics, slow adoption, financial constraints, asymmetric information) can justify targeted policies: technology funds, low-carbon mandates, R&D support, investment subsidies, standards, and feebates. - Interactions across sectors matter: electrification in transport, buildings, and industry depends on a clean power mix and increased electricity network capacity; anticipatory grid investments and system flexibility (for example, “smart” vehicle charging) are critical. ### Transport and aviation - Modal shifts: - Policies to promote walking, cycling, and mass transportation would deliver co-benefits for health and reduced congestion. - Aviation: - Technologies to fully decarbonize aviation do not yet exist; investment in R&D is needed to accelerate innovation. - Air transport has benefited from a generous tax framework, with most emissions untaxed. - If EU authorities assess the international offsetting scheme CORSIA as ineffective, they could consider extending ETS coverage (currently intra-European Economic Area flights only) to all flights to and from the EU. ### Residential buildings - Recent trends and potential: - Residential building emissions have declined broadly in line with total emissions, driven by higher energy efficiency of new buildings and a cleaner energy mix, partly offset by population growth, larger dwellings, and smaller household sizes. - Increasing renovation rates and promoting electrification could more than halve current emissions using existing technologies. - Achieving net zero emissions in residential buildings will require full electrification and a clean power mix. - Barriers: - Many abatement measures are self-financing, but public interventions are needed to overcome market failures and incentivize investment. - Renovation rates are held back by inadequate price incentives due to limited environmental taxation, liquidity constraints, cost-benefit mismatches between owners and renters, and unawareness or uncertainty about energy savings from renovation. - Recommended comprehensive policy response (which could vary by country): - Carbon pricing — Residential housing has one of the highest “carbon pricing gaps.” Increasing coverage and price of CO2 emissions, including by reducing tax expenditures on emission-intensive fuels, would improve incentives for investment in emission reduction. - Regulations — Binding targets for energy efficiency improvements could speed up renovation rates. Accompanying measures should harmonize and regulate energy efficiency ratings and increase availability of building efficiency information. - Financing — Enhanced financial support through “green mortgages” and means-tested, low-interest loans or grants for renovation would boost demand, especially for lower-income households. Designing energy-dependent property taxes and expanding options for “on-bill financing” could help overcome the owner-user barrier. ### Agriculture - Importance and emissions profile: - Agriculture accounts for about 10 percent of total EU emissions. - After falling in the 1990s, agricultural emissions have remained nearly unchanged since 2005. - Main abatement channels: improved soil management, reduced livestock emissions, and significant potential for carbon sequestration on croplands and permanent grassland (which occupy more than half the territory of the EU). - Barriers to abatement: - Large subsidies, measurement challenges, and investment costs hold back emissions reduction. - Some abatement measures can be self-financing (savings from lower fertilizer use, greater crop efficiency, less transportation of animal feed), but most farmers operate on low margins and depend on EU financial support, which does not currently reward reducing livestock emissions. - Lack of precise emissions measurement, potential high carbon leakage, and inelastic demand for food can undermine price-based supply-side policies. - Policy opportunities: - Demand-side measures that shift consumption away from beef and dairy have large emission-reduction potential and co-benefits for health. - The 2021–27 planning period for the EU’s Common Agricultural Policy (CAP) offers opportunities: - Broaden the scope of the current “green payment” mechanism to incentivize livestock emissions reduction. - Improve carbon storage payments for farmland where no general payment mechanism exists. - Align crop insurance support with climate action to remove disincentives to sustainable farming. - National fiscal policies and regulations can complement CAP changes: remove tax expenditures favoring emission-intensive products (for example, some countries have lower VAT rates for dairy/meat products) and introduce standards and awareness measures such as CO2 footprint labels on food. ### Cross-cutting sectoral insights - Abatement heterogeneity: - Some sectors contain untapped cost-effective measures (e.g., residential insulation), indicating significant non-price barriers. - “Hard to treat” sectors (aviation, shipping) lack technologies for full decarbonization; carbon pricing alone is unlikely to bring forward necessary low-carbon innovation and investment (e.g., CCS, low-carbon heat, EV charging infrastructure). - Carbon leakage risk: - Greater for industry, agriculture, and international transport than for domestic transport and residential buildings. - Technological lock-in: - Asset lifetimes differ: cars < planes < housing; policies must address both flows (new purchases) and stocks (existing capital). - Co-benefits and distributional concerns: - Many measures deliver co-benefits (health, reduced congestion). Distributional impacts vary: domestic energy spending is often more regressive than road transport spending; coal-mine closures have localized employment effects. ### COVID-19 implications and policy sequencing - The COVID-19 crisis does not diminish the importance of climate action; it increases the need to prioritize and sequence green policies that support growth and emissions reduction. - Observations: - GHG emissions temporarily fell during the “great lockdown,” but atmospheric CO2 concentrations continued to increase, albeit temporarily at a slower pace. - Economic conditions are more challenging: high unemployment, higher poverty incidence, large fiscal deficits, and increased public debt ratios. - Behavioral changes from the pandemic may affect mitigation efforts in unpredictable ways (for example, shifts in business travel, residential location, and public transport use). - Policy implications: - Carbon pricing can provide revenue but fuel price increases must be paced to avoid hindering recovery. - Low oil prices present an opportunity to cut fossil fuel subsidies without increasing fuel bills. - Governments are likely to scale up public investment; prioritizing “green” investments—building renovation, solar and wind installation, and sustainable farming methods—can be job-intensive and support recovery. *Executive Summary (spccmeuea).* ### Introduction ### Introduction ### Overview of Emissions and Drivers - Domestic energy production accounts for about 30 percent of EU GHG emissions. - Nearly half of the EU’s energy consumption is produced domestically, mostly in the form of electrical power. - Imports are dominated by fossil fuels (mainly oil and gas for transport and heating), which are more carbon intensive than domestic production. - Within power generation: - GHG emission intensity is relatively higher in most Eastern European countries, which are more reliant on coal. - The least-emitting large producer is France, due to the importance of its (emission-free) nuclear sector. - Emission reductions in the power sector have been mainly driven by improvements in emission intensity: - The ratio of emissions per electricity produced has declined in virtually all countries over the past two decades. - Reductions in electricity produced per unit of GDP have been uneven and have not fully offset GDP-driven demand for electricity. - Scandinavian countries have been among the most successful in reducing emissions through improvements in emission intensity. - Renewable energy penetration remains low: - Renewable energy accounts for less than 30 percent of EU primary energy production, and 20 percent of final energy consumption. - Within renewables, 60 percent of production comes from bioenergy and waste; the share of purely emission-free sources is still small. - The largest energy producers (France, United Kingdom) display some of the lowest renewable shares in the EU; Germany is the only large producer with an above-average share. - The EU’s joint ETS-covered targets for energy production and industry: - Cut emissions from these two sectors by 21 percent in 2020 (relative to 2005). - Cut emissions by at least 43 percent in 2030 (the target is likely to be increased in the context of the Green Deal). - Cut emissions by virtually 100 percent in 2050. - The energy sector is on track to “overperform” the 2020 goal, but future goals will not be attained unless the current pace of emission reductions is accelerated. ### Abatement Channels - Transitioning from fossil fuels to renewables is required for further emissions reductions in power generation; absent expanded nuclear capacity, increasing the share of renewables is the main route to reduce emissions per energy consumed. - Substituting coal with gas may help short term but will not achieve zero net emissions by 2050. - As of 2018, the cost per unit of power of new renewable plants was already similar or lower than for new fossil fuel plants across different technologies (except offshore wind and concentrating solar power), so price competitiveness is largely no longer an issue. - Because existing plants have extended lifetimes (20–40 years), effective abatement calls for a frontloaded effort to phase out high-emitting plants quickly. - Spurring innovation is a key channel: - Innovation required in renewable energy generation and in CCS to absorb remaining emissions from power plants (for example, from biofuels). - CCS is still far from being price competitive. - Electrification and renewables increase infrastructure needs: - Decentralized and intermittent renewables (solar, offshore wind) increase needs for electrical grid coverage, interconnection, and energy storage technologies. - Expected increase in electricity demand from transport, industry, and buildings moving to electrification raises infrastructure investment needs. - Remaining dispersion in pretax electricity prices suggests further margin to integrate national electricity markets. - Potential innovations in electrical infrastructure include: - Storage systems such as “power-to-gas” converting electricity into emission-free gases (e.g., hydrogen). - Decentralized market platforms and more efficient digitalized grids. - CCS will require development of carbon transport networks to link emission sources to storage sites. - EU Green Deal sectoral targets by 2030: - Increase aggregate renewable energy share of final energy consumption from 20 percent in 2020 to 32 percent. - Deepen energy interconnection from 10 to 15 percent of domestic production in each country (each country’s grid should be able to transport at least 15 percent of the electricity produced by its power plants to neighboring countries). ### Policy Frameworks - The main EU policy tool for containing energy sector emissions is the Emissions Trading System (ETS), which auctions emission permits for the energy and industry sectors, setting a common EU price for carbon emissions. - Current ETS prices are at €25 per ton of CO2 and have been lower and volatile in the past decade. - The Green Deal pledged €1 trillion of public funds by 2030 to support green investment; the fraction allocated to energy production and distribution is still to be announced. - The EU is designing a renewables financing mechanism and developing an Action Plan to encourage private capital toward green technologies. - National measures coexist with EU policies; countries use multiple instruments to support renewable investment, including: - Auctions/tenders (technology-specific or open to any renewable technology). - Feed-in tariffs (above-market prices paid to renewable producers for a certain period). - Quotas (tradeable obligations to supply a fraction of energy from renewables). - Net metering (household self-generated electricity accounted at a fixed price). - Tax incentives (feebates taxing higher-emission generators and rebating lower-emission ones). - Investment grants, subsidies, and loans. - Auctions/tenders have become the most widespread national tool; countries moved from fixed feed-in tariffs to feed-in premiums determined by competitive bidding to maximize cost-efficiency and control volumes or fiscal cost. - Corporate renewable power purchase agreements (PPAs) are expected to play a larger role going forward. - EU capital expenditures in electricity transmission are projected at €152 billion over the next decade; gas transmission and electricity storage projected at €41 and €14 billion, respectively. - Financing channels for infrastructure include: - Revenue from regulated grid tariffs. - Public funds from the EU Connecting Europe Facility and national budgets. - Debt (including loans from the European Investment Bank and the European Bank for Reconstruction and Development). - Equity. - A common challenge for investors is the need for long-term investment planning amid uncertain regulation and utilization rates. - Interconnection capacity concerns: - As of 2017, the EC estimates electricity interconnection capacity in Cyprus, United Kingdom, Greece, Ireland, Spain, Italy, and Germany is below 30 percent of the projected renewable power capacity in 2030, indicating critical investment needs. - Renewable R&D support is limited: - EU registers 30 percent of the world’s patents in renewable energy but public R&D in renewables is low in most countries, averaging less than 0.7 basis points of GDP. - For comparison, EU total public R&D is 0.23 percent of GDP. - EU countries promised to double public R&D in renewables by 2021 as part of Mission Innovation within the Paris agreement. ### Policy Recommendations - Carbon pricing at the EU level should be the main tool to incentivize transition to clean energy sources: - The EU ETS is appropriate but should be strengthened by reducing the amount of outstanding permits so prices reach levels sufficient to meet emission goals, and by introducing a robust price floor to provide stability to investors. - Gradually increasing the uniform carbon price to €60–100 per ton by 2030 would permit the EU to meet its emission reduction and renewable share goals. - Differentiated carbon prices across countries would be inefficient and could produce a “waterbed effect.” - Absent sufficient EU-level progress, national efforts are welcome. - Phasing out low regulated electricity prices and tax exemptions for fossil fuels are necessary to align energy prices with social costs. - Support for renewable R&D and infrastructure investment is needed to address additional market failures: - Public R&D should be targeted to basic or early-stage research and managed at the EU level due to borderless knowledge flows. - Electrical, gas, district heating, and carbon networks are natural monopolies; public support is needed to achieve efficient provision. - Grid planning should prioritize international connectivity and digitalization. - High fixed costs, financing constraints, and investor short-termism justify publicly guaranteed loans, public-private partnerships, or grants to young innovative firms, and developing the green financing market. - Subsidies to renewable investment would lower the carbon prices needed to achieve targets, easing political concerns: - With sufficient carbon price, many renewable support policies become redundant. - The carbon price consistent with a 50 percent emissions reduction by 2030 is estimated to incentivize €1.4 trillion of investment in renewables over the next decade, more than the amount needed to reach the EU renewables goal. - Generalized deployment subsidies are less justified than R&D subsidies; income taxes or cash transfers are better targeted to compensate vulnerable groups than energy subsidies. - A feebate scheme for power generators could cut emissions without adding a net tax burden on the industry. - Policy design principles: - Subsidies, auctions, and regulations must be predictable, impartial, and easily accessible, balancing anti-corruption safeguards with streamlined processes for private participants. - Market-based instruments such as auctions can be more cost-effective, flexible, and transparent than regulations, though they can diminish certainty for investors. - Empirical evidence is mixed on whether market-based or regulatory approaches encourage more renewable innovation. - Compensation and regional adjustment: - Model simulations indicate the carbon prices needed to meet emission goals would raise electricity prices by 20 percent on average by 2030 compared to 2020, and lower employment in coal mining by 70 percent. - Low-income households are most affected by electricity price increases as a share of income. - Coal-mining communities face large structural unemployment; effects of abandoning coal would be concentrated in a few European regions. - Governments could use existing social safety nets (unemployment benefits, income tax system, cash transfers) to mitigate effects on low-income households. - Local policy tools (active labor market policies, well-targeted public investment) are suited to foster growth in coal-mining areas. ### Case Study: Germany’s Energiewende (Box 1 summary) - Energiewende aims to transition Germany to a low-carbon, nuclear-free economy, focusing on expanding renewables in power generation. - Wind and solar growth pushed renewables to overtake coal as the most important power source in Germany in 2018. - Authorities target 65 percent of power consumption covered by renewables by 2030; slow progress on grid expansion and storage poses challenges. - Historical policy timeline: - 1990: feed-in tariffs above wholesale market prices introduced. - 2000: Renewable Energy Sources Act (EEG) instituted significantly higher fixed feed-in tariffs and priority grid access for renewables. - 2014: feed-in tariffs reduced for new investors. - 2017: conversion of feed-in tariffs into auctions. - Rapid growth since 2000 was driven by household participation in renewable investment: - By 2016 total installed renewable energy capacity amounted to 100.3 gigawatts, of which 31.5 percent was owned by private individuals and another 10.5 percent by farmers. - Despite the boom in wind and solar, the current share of power consumption covered by renewables remains far from the 65 percent goal. *Source: Introduction, "Sectoral Policies for Climate Change Mitigation in the EU" (spccmeuea - Introduction).* ### 2030. More importantly, recent trends in renewable investment indicate new chal- ### spccmeuea - 2030. More importantly, recent trends in renewable investment indicate new chal- ### Renewable Electricity Capacity Increases (Germany) - Figure 1.1 shows annual change in renewable electricity capacity (Gigawatts, annual change) with axis values: 12, 10, 8, 6, 4, 2, 0, –2 and years indicated including 1991, 1994, 1997, 2000, 2003, 2006, 2009, 2012, 2015, 2018. - Capacity categories listed: Onshore wind energy; Solar photovoltaic; Offshore wind energy; Biogas; Hydropower; Others; Total. - Source: AGEE-Stat. ### Ownership of Renewable Power Capacity, Germany, 2016 - Percent of total capacity by owner type: - Power providers, 10.3 - The “big four” power providers, 5.4 - Investment fund/banks, 13.4 - Industry, 13.4 - Farmers, 10.5 - Others, 1.0 - Private individuals, 31.5 - Project firms, 14.4 - Source: Renewable Energies Agency. ### Challenges to Renewable Expansion in Germany - Auction scheme opened the sector to market competition but may have put smaller competitors at a disadvantage. - Lagging expansion of high-voltage transmission lines inhibits transmission of power from productive wind farms in the north and northeast to industrial centers in the south. - Appropriate storage solutions are needed to cope with the volatility of renewable power supply. ### Transport Sector: Overview of Emissions and Drivers (EU level) - Transport sector (including international travel) has grown to become the highest-emitting sector at the European level. - Total transport emissions account for nearly 30 percent of total EU emissions, ranging between 15 and 40 percent of the total at the individual country level. - Surface transport is the largest-emitting subsector, with about 70 percent of emissions (70 percent of which is accounted for by cars). - Transport emissions are now nearly one-third larger than in 1990, driven by higher emissions in road transport and aviation (60 percent and 30 percent, respectively, of the increase). - Passenger and freight traffic and emissions dropped after the global financial crisis but have since recovered; the COVID-19 related fall in traffic is expected to be temporary. ### Trends and Drivers - Gains in efficiency have been more than offset by material increases in demand for transport. - Road transport emissions per distance travelled have decreased across most European countries. - Distance travelled in relation to real GDP has typically decreased, but growing population and real income have more than offset this trend. - Air transport has seen particularly large increases in travel demand and emissions, growing in importance relative to other transport modes. ### Targets and Projections - 2011 EC indicative target: 20 percent reduction in transport GHG emissions (excluding international maritime) from 2008 levels by 2030, and a 60 percent reduction by 2050 compared to 1990. - Official projections based on policy measures currently in place show emissions broadly constant over the next decade. - Implementation of planned policy measures, such as tighter standards, would reduce emissions by about 10 percent, but emissions would remain off-track relative to established goals absent additional policy action (according to member states’ 2019 projections). - The EU overall goal: reducing GHG emissions by 80 to 95 percent by 2050; net zero emissions would require even greater efforts. - EC noted transport emissions would need to be reduced by 90 percent by 2050 to be in line with a climate neutral economy by 2050. ### Abatement Channels in Transport - Broad approaches: manage travel demand; shift toward cleaner transportation modes; improve efficiency of traditional vehicles; deploy cleaner fuels and vehicles. - Time horizon: - Short to medium term: scope for significantly reducing reliance on oil appears limited. - Emission-reduction measures will rely heavily on demand management, mode shift, and efficiency improvements in existing technologies. - Subsectors: - Full decarbonization of cars and vans is technologically feasible; electric vehicles are falling in cost due to declining battery prices. - Electric vehicles are broadly expected to reach cost parity with conventional vehicles over the coming decade. - Heavy-duty vehicles are more challenging; potential solutions include electrification and sustainably produced hydrogen fuel. - Aviation and shipping currently lack technologies for full decarbonization; some emissions would need to be offset elsewhere to attain net zero (Burke, Byrnes, and Fankhauser 2019). - Country characteristics affect abatement strategies: economic growth, fleet age, energy production mix. - Countries with relatively old car fleets (Estonia, Latvia, Lithuania, and Poland) could reduce emissions by more than a quarter if they upgraded their car fleet to the average emission intensity of new cars in Portugal (best-performing country over the last three years) (Figure 18). - Decarbonization via electrification requires a clean energy mix as a precondition. - Using wind power, lifecycle emissions of an electric vehicle could result in emissions almost 90 percent lower than an equivalent combustion engine vehicle (EEA 2018; IEA 2017). ### Road Transport Policy Framework - European countries use a multipronged approach: price-based and regulatory measures, including fuel economy standards, fuel taxation, fiscal incentives, and complementary policies. - Fuel economy standards: - May be less cost-efficient than price-based measures but typically encounter lower opposition. - Mandate a specific amount of fuel economy/CO2 reduction; prompt switching to greener technologies but do not discourage vehicle use. - Provide little incentive to outperform standards and raise no revenue. - Feebate schemes can provide continuous incentives to outperform standards and automatically adjust to technology changes; revenue-neutral feebates can be set aggressively to influence purchase decisions. - EU standards context: - Mandatory efficiency targets at EU level in place since 2009 for passenger cars and since 2011 for light duty vehicles. - Targets for 2021: 95 g CO2/km for cars, 147 g CO2/km for vans. - Recent EU targets: reduction in emissions of 15 percent by 2025 and 37.5 percent (31 percent for vans) by 2030, both relative to a 2021 baseline. - EU is the only market worldwide to have set mandatory targets up to the year 2030. ### Effectiveness and Measurement Issues - EU average new-car emissions decreased from 170 g/km in 2001 to 120 g/km in 2018, largely attributable to mandatory limits. - Real-world emissions have not declined as much as lab-based statistics indicate; the gap between official (lab-based) and real-world emissions has increased. - Introduction of WLTP and RDE measurement methodologies is expected to improve alignment with real-world measurements, though potential loopholes remain. - Meeting the 2021 EU efficiency target for new passenger cars will require significant effort; recent two-year reversal in efficiency trend observed (Figure 19). - A key factor: shift away from diesel toward larger petrol vehicles, specifically SUVs. - Diesel cars, on a like-for-like basis, emit about 15 to 20 percent less than petrol cars, but diesel engines are often fitted to larger and heavier vehicles. - If targets are not met, options include higher regulatory penalties or additional policy measures such as stronger fiscal incentives for cleaner and smaller cars. ### Heavy-Duty Vehicles - The EU has adopted emission standards for certain new heavy-duty vehicles (HDVs). - Lorries, buses, and coaches are responsible for about a quarter of total road transport emissions. *Source: IMF staff compilation from the provided chapter content.* ### 1. Average Fuel Efficiency from New Passenger Cars ### 1. Average Fuel Efficiency from New Passenger Cars ### Trends in new-car emissions and fuel-efficiency shifts - Figures illustrate: - Average fuel efficiency measured as g CO2 per km for new passenger cars. - Growth in CO2 emissions per km (Percent). - EU+UK new passenger car sales: diesel (Percentage points). - EU+UK new passenger car sales: petrol (Percentage points). - Country list uses International Organization for Standardization (ISO) country codes. - Annotation in charts: Shift away from diesel; Shift into larger petrol. ### Heavy-duty vehicles (HDVs) and regulatory context - HDV fuel efficiency has been mostly stagnant over the last decade (ICCT 2018; BloombergNEF 2019b). - Until recently, the EU had neither mandatory procedures for monitoring fuel efficiency in the sector, nor mandatory targets. - Emissions standards for HDVs adopted in 2019 set targets for reducing the average emissions from the highest-emitting HDV segments (accounting for about 65 percent of HDV emissions) for 2025 and 2030 by 15 and 30 percent, respectively, relative to a 2019–20 baseline. - The EU became the last major market to introduce emission standards for trucks, following the United States, Canada, China, Japan, and India. - Targets and coverage will be reviewed in 2022. ### Fuel taxes: incidence, effectiveness, and gaps Findings: - Tax instruments proportional to fuel consumption (carbon taxes, ETS permits, VAT, excise taxes) are efficient instruments to target emission reductions. - Andersson (2019) shows that CO2 emissions from transport declined by 11 percent after the introduction of a carbon tax and VAT on transport fuel in Sweden. - Road transport fuel is in general already heavily taxed in Europe relative to other goods; taxes and duties typically account for 45 to 65 percent of the final price. - Countries commonly apply VAT at standard rates, and most countries do not charge explicit carbon prices (OECD 2019). - Effective carbon rates in the road transport sector are significantly higher than in other sectors (OECD 2018b). - In most European countries, at least 90 percent of the road sector emissions were effectively priced at or above a benchmark carbon cost of €60 per ton of CO2 (a midpoint estimate of the carbon costs in 2020 and a low end estimate for 2030, OECD 2018b). - Examples of country-specific effective carbon rates (European exceptions noted): Finland (€62 per CO2 ton), France (44.6), Sweden (120), Ireland (20), Slovenia (17), Portugal (7), Iceland (33), Norway (54). - Road transport is not currently covered by an ETS anywhere in Europe, but plans are underway in Germany. Efficiency gap and externalities: - Estimates from Coady and others (2019) suggest that retail petrol and diesel prices do not typically reflect the full range of associated external costs. - Across European countries, retail prices would have to increase by a median of about 20 percent to come to their efficient levels. - The baseline estimation assumes a carbon price of 45USDtCO2. - Multiple negative side effects of road use (congestion, noise, accidents, local air pollution) imply that higher carbon pricing alone is not sufficient; all external costs should be appropriately reflected in prices. Policy design issues: - It is good practice to routinely uprate fuel duties at least in line with inflation. Fuel duties are typically set in nominal terms and uprated only occasionally. - Examples of countries with significant reduction in real fuel duty over recent years: Belgium, Germany, Hungary, Lithuania, Poland, United Kingdom. - The United Kingdom government has maintained a freeze on fuel duty since 2010/11, implying a cut in real terms of about 15 percent. Begg and Haigh (2018) estimate that traffic has increased by about 4 percent as a result of the freeze. - The current low price of oil could provide an opportune window for restoring the real value of duties, particularly in countries with significant fiscal needs. Diesel versus gasoline taxation: - Taxing diesel at higher rates than gasoline is sound environmental policy because diesel has a higher carbon content per liter and is associated with larger non-climate external costs (worse local air pollution). - Diesel taxes per liter are materially lower in many European countries (for example, Greece, Sweden, Finland, Netherlands, Slovakia, and Germany). - Only in the United Kingdom are diesel and gasoline being taxed at the same rate (at time of writing); Belgium and France have begun closing the gap. - The disparity is larger when tax rates are considered relative to energy content or CO2 emissions per liter, which are about 10 and 16 percent higher, respectively, for diesel than for petrol (Transport and Environment 2017). ### Acquisition taxes, feebates, and vehicle purchase incentives Findings on taxation design: - Acquisition taxes and recurring ownership taxes are less well targeted at emissions than fuel duties because they are not based on actual use, but they may influence purchasing decisions due to stronger reactions to upfront costs. - Evidence suggests that countries with CO2-differentiated vehicle taxes have typically achieved a greater reduction in emission intensity, with acquisition taxation playing a more significant role than recurring ownership taxes. - Company cars account for a significant share of new car sales in many European countries; only some countries (Netherlands, United Kingdom) have introduced CO2-related elements in taxation of this in-kind benefit. Variation across countries: - Some countries (France, Netherlands, Norway, Portugal) provide registration tax schedules that are highly graduated according to CO2, increasing steeply in each additional gram beyond certain limits. - The United Kingdom provides less differentiation in acquisition taxes. Spain’s stepwise system raises taxes at thresholds, providing fewer incentives to reduce emissions below thresholds. - Some countries have no CO2-related registration tax at all: Bulgaria, Czech Republic, Estonia, Germany, Lithuania, Luxembourg, and Switzerland (as of 2018). Feebates: - Feebates are a special case of CO2-based acquisition taxes: sliding scale fees on vehicles with above-average emission rates and sliding scale rebates for below-average emission rates. - Feebates are revenue neutral (no first-order tax burden on the average motorist) and can dramatically alter relative prices of low/high emission vehicles. - Subsidy for cleaner vehicles would decline over time as the average emission rate of the fleet declines, appropriate as zero-emission vehicle costs decline. - Feebate formula (as described): CO2 price × (CO2/mile – fleet average CO2/mile) × lifetime mileage. Complementary measures and trade-offs: - A high tax on acquisition of new cars could discourage replacement of old cars with newer/cleaner ones; solutions include combining emissions-based registration tax with a scrappage subsidy dependent on emissions, or using revenue-neutral feebates. - Vehicle purchase subsidies could increase ownership and additional vehicle mileage (and emissions): - Sales of new vehicles increased by 3.5 percent in France following the introduction of the bonus-malus system. - In Netherlands, tax reductions for small, low-emissions cars are estimated to have caused an annual extra sale of some 25,000 to 30,000 cars. - To offset undesirable impacts on emissions, fuel taxes could be raised at the same time; current low fuel prices make this an opportune moment. ### Incentives for low- and zero-emission vehicles and charging infrastructure Adoption and scale-up: - Over the last decade, the number of countries offering incentives for the adoption of low- and zero-emissions vehicles has increased significantly; most EU countries provide at least one such measure (registration/ownership tax exemptions, one-time purchase subsidies, subsidies for charging infrastructure, free parking, reduced tolls, restricted-lane access). - Justifications for incentives: induced innovation, learning by doing, economies of scale, and network effects (additional EVs make charging stations more profitable). - Incentive effectiveness depends on size, transparency, accessibility, and frontloading. - As electric vehicles approach cost parity with conventional vehicles, several countries have been scaling back incentives (for example, United Kingdom). Country example: - Norway has the highest proportion of electric vehicles in Europe (about 15 percent of the total fleet), favored by fiscal incentives that make the cost of these cars comparable to similar conventional cars. Charging infrastructure: - Strong case for public support to expand charging infrastructure; lack of charging stations ("range anxiety") is a barrier to adoption. - Electric cars currently offer an average range of about 150 miles, which is sufficient for most car journeys (for example, average trip distances in the United Kingdom are 8 to 12 miles) but could limit longer trips. - The extent of charging infrastructure differs considerably among countries; normal charge and fast charge stations vary by country. ### Key statistics and figures preserved from source - HDV highest-emitting segments account for about 65 percent of HDV emissions. - HDV emission-reduction targets: 15 percent by 2025 and 30 percent by 2030 relative to a 2019–20 baseline. - Andersson (2019): transport CO2 emissions declined by 11 percent after carbon tax and VAT on transport fuel in Sweden. - Taxes and duties typically account for 45 to 65 percent of the final fuel price. - At least 90 percent of road sector emissions effectively priced at or above €60 per ton of CO2 (OECD 2018b). - Example effective carbon rates: Finland (€62 per CO2 ton), France (44.6), Sweden (120), Ireland (20), Slovenia (17), Portugal (7), Iceland (33), Norway (54). - Baseline efficient price estimation assumes a carbon price of 45USDtCO2. - Median retail fuel price gap to efficient level: about 20 percent increase needed. - United Kingdom fuel duty freeze since 2010/11 implies real terms cut of about 15 percent; traffic increased by about 4 percent as a result. - Sales of new vehicles increased by 3.5 percent in France after bonus-malus introduction. - Netherlands tax reductions estimated to cause annual extra sale of some 25,000 to 30,000 cars. - Electric vehicles average range: about 150 miles. - Norway electric vehicles share: about 15 percent of total fleet. _Italic: Sources: European Environment Agency microdata; Eurostat; and IMF staff calculations._ ### 1. EU+UK: Zero- and Low-Emission Car Adoption ### 1. EU+UK: Zero- and Low-Emission Car Adoption ### Electric vehicle adoption and charging infrastructure - Charging infrastructure is a public good that the market may underprovide in the absence of public support. - Springel (2018) finds that subsidies for charging stations are more effective for increasing electric vehicles uptake than are purchase subsidies for electric vehicles, though their effectiveness tapers off with increased subsidy. - Credible deadlines for discontinuing conventional cars can signal commitment and encourage long-term investment. Examples of national targets for all new zero-emission vehicles: - 2025 in Norway - 2030 in Netherlands - 2035 in Scotland - 2040 in France and the United Kingdom - Fleet turnover constraints: - The average age of a car in the EU is about eight years. - In many countries more than 60 percent of the fleet is older than one decade. ### Transport modal shift: rationale and policy levers - Rationale: - Bus rapid transit, rail, and waterborne modes tend to be relatively carbon-efficient per passenger or ton kilometer compared with conventional heavy or light duty road vehicles, or aviation (although this varies with vehicle occupancy rates). - Shifting to more sustainable modes can be a cost-effective alternative to private car ownership. - Policy levers: - Pricing measures (adequate pricing of externalities; elimination of unjustified tax/subsidy distortions). - Investment in infrastructure and policies targeted at changing consumer behavior. - Integration of modal networks (airports, ports, railway, metro, and bus stations) to reduce travel time and increase attractiveness of alternatives. ### Active mobility (walking, cycling) and public transport - Walking and cycling: - Should become integral to urban mobility and infrastructure design. - Electric bikes provide many benefits of light duty vehicles with much lower emissions. - Promotion through investments in safe and attractive infrastructure: pedestrian pathways, cycle highways, shared bicycle systems, and bike parking. - Public transport: - Countries differ significantly in share of public transport; prevalence tends to be inversely correlated with car ownership. - Fiscal incentives and physical restrictions (no-parking zones, dedicated bus lanes) are effective. - Integration and good passenger mobility statistics are important for setting and monitoring modal-shift targets. - Freight: - Modal shifts (rail and coastal shipping) are key for decarbonizing freight over medium and long distances. - EC nonbinding target (established 2011): move 30 percent of road freight over 300 km to other modes by 2030, and more than half by 2050. - Three-quarters of total freight transport in the EU is associated with distances of more than 300 km. ### Infrastructure appraisal and lock-in risks - Infrastructure investment appraisals should adopt an all-encompassing view, accounting for climate, health, air pollution, congestion, safety, and accessibility benefits. - Beware lock-in effects from slow turnover of vehicle stocks (aircraft, trains, large ships) and long-lived infrastructure. ### Setting targets and monitoring - National and EU strategies could set additional modal-shift goals (including for short- and medium-distance passenger trips and cycling). - Example: France’s 2018 national Plan Vèlo committing to triple cycle use by 2024 to 9 percent of the transport modal split. ### Challenges: distributional and fiscal - Distributional considerations: - Transport fuel expenditure as a share of total expenditures is typically not higher for poorer households than for other income segments. - Direct effect of higher fuel prices is not necessarily regressive, but horizontal equity concerns arise (e.g., commuters living farther from work). - Example policy: Germany proposed an increased commuters’ allowance to compensate higher fuel costs from CO2 pricing (applicable for long-distance commuters). - Subsidies to certain public transport modes could have better distributional implications than broad fuel subsidies. - Fiscal revenues and future of transport taxation: - Fuel duties are a significant revenue source but will decline with vehicle efficiency improvements and electrification. - Electricity is typically taxed at much lower rates than conventional fuels partly because it is not intended to contribute to road financing. - Intelligent road pricing schemes can address vehicle attributes and actual use as well as congestion, air pollution, and other externalities. ### Quantitative notes and figures from the chapter - Average car age in the EU: about eight years. - Fleet older than one decade: more than 60 percent in many countries. - EC hypothetical jet fuel tax scenario: introduction at the EU minimum rate for aviation kerosene (€330 per thousand liters) would: - increase the average ticket price by 10 percent, - reduce passenger demand and CO2 emissions by about 11 percent, - have negligible impact on aggregate employment and GDP. - EC 2011 modal-shift target: 30 percent of road freight over 300 km by 2030; more than half by 2050. - Three-quarters of total freight transport in the EU is associated with distances of more than 300 km. ### Policy recommendations (transport modal shift and road transport) - Invest in public charging infrastructure and consider subsidies targeted to charging stations given evidence of higher effectiveness relative to vehicle purchase subsidies. - Announce credible deadlines for phasing out combustion-engine vehicle sales to accelerate fleet turnover and reduce transition costs. - Set national and EU modal-shift targets, including specific ambitions for walking, cycling, and short- and medium-distance passenger trips. - Incorporate co-benefits (health, air quality, congestion reduction) into infrastructure appraisal to avoid underinvestment in sustainable transport. - Consider subsidies to public transport modes to improve distributional outcomes compared with compensatory measures that blunt carbon pricing signals. - Explore intelligent road pricing schemes to better internalize congestion, pollution, and other externalities. --- *Source: spccmeuea - 1. EU+UK: Zero- and Low-Emission Car Adoption (excerpt).* ### Box 2. Road Transport in the EU ETS? ### Box 2. Road Transport in the EU ETS? ### Overview of Emissions and Drivers - Residential housing accounts for about a quarter of the energy usage and a fifth of GHG emissions in the EU (Pirelli and others 2020). - These emissions comprise three main sources: - indirect emissions (about 10 percentage points), - direct emissions (about 6 percentage points), - other emissions (about 4 percentage points) arising from construction and building materials, as well as household waste and water treatment. - Direct emissions refer to on-site fossil fuel use for heating and cooking. - Indirect emissions are embedded in the generation of electricity to run appliances, such as electric space heating or cooling, cooking, and lighting. - The chapter focuses mainly on heating, which dominates total energy usage and is the largest source of direct and indirect emissions (Figures 27 and 28). - Lower emissions due to higher energy efficiency and a cleaner energy mix were partly offset by: - a 8 percent increase stemming from population growth, - a 20 percent increase due to fewer persons per households. - The emissions reduction in the residential building sector from 1990 to 2017 is close to the overall emissions reduction in the EU (21 percent vs. 23.5 percent). - Decomposing historical changes shows that—except for Malta—cleaner energy generation (GHG emissions per unit of energy consumed) was the key driver of emissions reduction in the EU residential building sector (at 28 percent on average) (Figure 29). - Energy intensity (energy consumed per building) has declined in the EU by 19 percent. ### Energy Use by End Use (selected exact figures preserved) - Space heating: 64.1 percent of final energy consumption by households (EU+UK, 2017). - Water heating: 14.8 percent. - Lighting and appliances: 14.4 percent. - Cooking: 5.6 percent. - Space cooling: 0.3 percent. - Other end uses: 0.9 percent. - EU+UK households—energy consumption by end use measured in tonnes of oil equivalent (toe) per dwelling (country-level series shown in Figure 28). ### Policy Framework and Targets - The European Commission Green Deal (2019) prioritizes full de-carbonization of the energy sector, and energy-efficient construction and renovation of buildings. - The European Commission (2015b) estimated savings from adopting the highest minimum energy performance standards (MEPS) in the EU by 2030 would range from €37 to €55 billion (or 7–11 percent of estimated energy use) per year, of which one-third would be attributable to energy-efficient buildings. - Under the 2020 Climate and Energy Package, the EU aims to achieve energy savings of 32.5 percent by 2030. - Article 7 of the EED requires each member state to develop an Energy Efficiency Obligation (EEO) scheme to achieve cumulative energy saving targets from 2014 to 2020, which are at least equivalent to 1.5 percent of the annual energy sales to final customers of all energy distributors. - Nearly zero-energy buildings (NZEB) regulation will apply to all new buildings from end-2020 (new public buildings were subject to this regulation already since end-2018). ### Stock, Renovation Rates, and Projection Benchmarks - At present, about 35 percent of the EU’s buildings are more than 50 years old and more than 90 percent of the building stock is energy inefficient. - The average floor area of the housing stock has increased by 14 percent since 1990, which has slowed the potential reduction of energy use per building. - Current energy use is still far above the EU energy efficiency target of 0.7 tons of oil equivalent (toe) per unit by 2030. - At the current rate of new construction and renovation activity, it would take more than half a century for the EU housing stock to become fully energy-efficient. - To meet the 2050 net zero emission target, the EU-wide renovation rate should be about 7–8 percent per year. - Construction of new dwellings of about 1.1 percent of the existing housing stock each year has resulted in an average annual net replacement rate of older dwellings by only about 0.2 percent since 1990. - Only 0.4–1.2 percent (depending on the country) of the building stock is renovated each year. ### Emissions Trend (selected exact figures preserved) - Figure 30: Buildings—Effort Sharing GHG Emissions and Projections (Mtonnes of CO2 equivalent) shows historical and projected emissions with existing measures and with additional measures toward the 2050 Net Zero Emission Target (time series markers include years 1990, 1995, 2000, 2005, 2010, 2015, 2020, 2025, 2030 and 2050 Net Zero Emission Target with axis up to 1,000 Mtonnes of CO2 equivalent). - Countries expect emission reductions from heating and cooling in the building sector to continue as a result of further implementation of existing measures (in particular, the fuel switch away from oil heating and the promotion of clean energy) and the introduction of additional measures, including increasing the renovation rate in residential buildings. ### Abatement Channels and Economic Effects - Abatement measures aimed at lower and cleaner energy use in residential housing are self-financing at current prices and technologies. - Main abatement channels: - Increasing energy-efficiency of buildings through better insulation, and cleaner and more efficient heating/cooling equipment. - Other channels with more limited abatement potential: energy-efficient lighting, digitalization to “smart” homes (for example, optimal automatic adjustment of heating temperatures), and renewable energy-based water heating systems. - Deep building renovations are the main channel of reducing emissions due to lower energy use (under current technologies). - Renovating the EU’s building stock for improving its energy performance will save €80 to €153 billion of investment costs into the power system by 2050. The savings, estimated after deep renovation, are at grid and production level. *Source: Excerpt from the provided IMF content unit.* ### 2030. In 2016, final energy consumption reached 1,108 million tonnes of oil equivalent (Mtoe) in the EU+UK. Buildings (h ### spccmeuea - 2030. In 2016, final energy consumption reached 1,108 million tonnes of oil equivalent (Mtoe) in the EU+UK. Buildings (h ### Energy consumption baseline and 2030 target - Final energy consumption in EU+UK in 2016: 1,108 million tonnes of oil equivalent (Mtoe). - Share of final energy consumed by buildings (households and services): about 40 percent. - Households: 26 percent. - Services: 14 percent. - Heating accounts for about two-thirds of household energy consumption. - Projected EU target for total energy use for 2030: 956 Mtoe. - Target threshold of energy use per dwelling for 2030 (for a building stock of 215 million buildings as of end-2016): 0.7 toe. ### Energy-efficiency potential from renovation/retrofitting (EPC upgrades) - Current EPC distribution: - EPC=“E” or less: about 50 percent of the EU housing stock. - EPC=“A”: less than 5 percent. - Potential reductions from upgrading to EPC=A: - Energy consumption reduction: about 85 percent on average (with slightly higher savings in Southern and Eastern Europe). - Emission reduction potential (combined with country-specific household energy mix): estimated at above 50 percent for the EU; highest potential in Belgium, France, Ireland, and the United Kingdom. - Allowing upgrade only to EPC=B still implies an emission reduction of about 46 percent. - Methodology note: values obtained by weighting existing energy efficiency ratings against consumption of a three-bedroom semi-detached house (100 m2, monthly energy cost of €380), adjusted for country-specific average floor size. ### Electrification and combined mitigation potential - Reaching net-zero emissions by 2050 requires full electrification and switch to non-emitting electricity generation. - Electrification emission-savings potential depends on share of renewables and low-carbon power generation versus fuels used for heating. - In some economies (Belgium, France, Luxemburg, Slovak Republic) the switch could reduce emissions by 20–50 percent. - Combined effect of deep renovation (EPC=A) plus electrification: - Current GHG emissions could be reduced by about 55 percent on average under baseline simulations. - Individual countries with high carbon-intensity could achieve more than 60 percent emission reduction (Belgium, France, Germany, Ireland, United Kingdom). - Under full electrification, net-zero 2050 scenario: - Demand for household electricity would increase by about 30 percent (about the share of direct energy use by households). ### Investment needs, costs, and amortization - Implementation of all deep retrofitting renovations and electrification would entail high investment cost of about 40–50 percent of GDP. - Renovation cost estimates range: €8,457 to €44,427 (average cost of retrofitting/renovation for reaching EPC=A, including roof/wall/façade insulation and window frame system upgrade). - Amortization time: - Amortization time estimated for each country using cost to upgrade to EPC=A and corresponding utility-bill savings. - Time discount factor assumed uniform at 2 percent. - Energy cost savings are expected to broadly offset investment costs under current technology standards and prices, with differing horizons across countries. - Note: estimates are subject to uncertainty and do not account for a moderate saving of about 1 percent of GDP at aggregate EU level due to lower investment needs in the electricity grid. ### Coverage of residential emissions by taxes and effective prices - Housing sector coverage by environmental taxes: only about 50 percent of related emissions are covered by taxes (the housing sector has one of the highest “carbon pricing gaps”). - Implied average effective price on covered emissions: €18 per tCO2. - In many cases taxes are not specifically targeted at CO2 content; coverage and effective tax rates in housing are below other sectors (for example, transport). - OECD benchmark carbon prices referenced: €30 (low-end estimate at the time) and €60 (midpoint-estimate for 2020 and low-end for 2030). ### Market failures and challenges to faster renovation and electrification - Investor/user barrier: - Renters often reap energy savings, reducing landlord incentives to invest. - Fragmented ownership lifecycles (homeowner mobility) can disconnect investment and benefits. - Lack of (access to) financing: - Deep retrofitting requires high upfront investment that exceeds savings of low-income households. - Social housing renovations can resolve financing and investor/user barriers and are a case for public investment. - Energy savings awareness/uncertainty: - Individuals give low priority to energy cost; uncertain future energy prices reduce perceived self-financing of deep retrofits. - Implementation complexity: - Larger renovations involve many counterparties, higher administrative costs, and risks of suboptimal realization of energy savings. - Adequate skills and certification are needed to ensure high-quality renovations. - Distributional concerns: - Price-based policies will need compensating measures for vulnerable households to avoid exacerbating energy poverty. ### Policy recommendations (enumerated) - Fiscal and price-based measures: - Expand carbon tax coverage and increase the price of CO2 emissions in the residential sector, including phasing out support for emission-intensive energy sources. - Accompany price-based measures with adequate compensating measures for vulnerable households. - Structural and regulatory measures: - Set binding targets for energy efficiency improvements and support building renovation (amend EPBD and EED consistent with EU Green Deal). - Harmonize and regulate energy efficiency ratings (improve comparability of EPCs across member states). - Increase availability and commercial relevance of building-efficiency information (strictly enforce EPC requirements when selling or renting; expand disclosure to bank lending collateralized by real estate; incentivize inspection schemes for heating/AC). - Design energy-dependent property taxes (make real estate taxes progressive to EPCs to address landlord investment incentives). - Financial instruments and support: - Expand options for “on-bill” financing to shift repayment to occupants and overcome investor-user barrier. - Enhance financial support through “green mortgages” and “green building insurance”: mobilize public and private financing, strengthen long-term renovation strategies, provide means-tested low-interest loans or grants. - Example financing programs: long-term financing via public development banks. - Supply-side and capacity building: - Remove structural constraints by introducing certification and training programs for developers/contractors; amend vocational training to build required renovation skills. - Information and demand-side measures: - Raise awareness of energy efficiency benefits through campaigns, one-stop shops, and integrated offers (loan, advice, service providers). - Ensure inclusivity: - Recycle some carbon tax revenues to combat energy poverty with means-tested grants for vulnerable households and focus on social housing renovation. - Ireland example: plans to use one-third of its revenues from higher carbon taxes for “just transition” measures (housing upgrades and social protection). ### Green mortgages and EEMs (Energy Efficient Mortgages) - Definition and rationale: - Green mortgage (energy efficient mortgage, EEM) incentivizes acquisition of energy-efficient buildings or upgrades to improve EPC level. - Lower operating costs from energy savings improve debt repayment capacity, enabling lenders to offer below market interest rates and/or increase loan amounts. - Empirical evidence and pilot initiatives: - Bank of England study (Guin and Korhonen, 2020): energy efficiency is a relevant predictor of mortgage defaults; mortgages on energy-efficient properties are less frequently in payment arrears. - Institute for Market Transformation and UNC Center for Community Capital (2013): banks in US and Europe enjoy default rates up to 33 percent lower from green home buyers. - Energy Efficient Mortgages Initiative (EEMI) by the European Mortgage Federation and partners: pilot to develop pan-European standard approach for green mortgages. - Illustrative cost-benefit example: - Assumed average cost of efficiency measures: €24,448 for a semi-detached dwelling (valued at €300,000). - Average EU floor space at EPC=A: 96m2. - Monthly payment for a 30-year green mortgage would be €1,225 (and slightly higher than for a standard mortgage even if the borrower benefits from a small interest discount of 25 basis points). - EEMI criteria: - Green mortgages intended to finance purchase/construction and/or renovation where there is evidence of: (1) energy performance meeting or exceeding market best practice standards, and/or (2) an improvement in energy performance of at least 30 percent, evidenced by a recent EPC rating or score. *Sources: European Environment Agency; Eurostat; United Nations Framework Convention on Climate Change; Organisation for Economic Co-operation and Development; Building Performance Institute Europe; Central Statistics Office Ireland; EU Building Stock Observatory; and IMF staff calculations.* ### Box 3. Green Mortgages ### Box 3. Green Mortgages ### Cost-benefit comparison (table summary) - Standard Mortgage vs Green Mortgage (Monetary units unless specified otherwise) - Base Purchase Cost: 300,000 | 300,000 - Energy Efficient Measures: — | 24,448 - Down Payment (20%): 60,000 | 60,000 - Loan Amount: 240,000 | 264,448 - Monthly Mortgage Payment: 1,146 | 1,225 - Rate: 4.00% | 3.75% - Term: 30 | 30 - Utility Cost Savings (Energy): —155 - Monthly Cost of Home Ownership: 1,146 | 1,069 - Bank Income (one year): 13,750 | 14,696 ### Key findings - Retrofitting/energy-efficient measures increase the base financing need (Loan Amount rises from 240,000 to 264,448) but reduce monthly cost of home ownership from 1,146 to 1,069 after accounting for estimated utility cost savings of €155 per month. - The green mortgage in the example assumes an interest rate discount (from 4.00% to 3.75%), producing higher bank income (one year) of 14,696 compared with 13,750 under the standard mortgage. - The arrangement is characterized as a win-win: borrower benefits from lower monthly net housing costs and the bank benefits due to higher mortgage payments and increased income. ### Underlying assumptions and parameter notes - For the financing of a retrofitted/energy-efficient dwelling. - Energy Efficient Measures figure (24,448) uses EU average for semi-detached dwelling with an average floor space of 96m^2 with EPC=A, estimated based on the implied (additional) cost for the construction of a net-zero energy building (NZEB) or a deep renovation, including roof insulation, wall/façade insulation, window frame system upgrade, and upgrading lighting and electronic appliances; for existing dwellings, the average energy efficiency for dwellings occupied by households at the median income level is assumed (EPC=D). - Banks typically offer cashbacks, partial principal forgiveness, and a significant interest rate discount for green mortgages—in this example, a discount of 25 basis points is assumed (which is conservative, given that rate discounts can be as high as 75 basis points). - Utility cost savings assumption: the weighted-average, purchasing power-adjusted annual energy cost for space and water heating are EUR3.1 per m2. - Bank Income (one year) figures do not include additional benefits from potentially lower loan loss provisioning and lower capital requirements due to lower expected and unexpected losses. *Source: IMF staff estimates.* ### Box 3. Green Mortgages (continued) ### Box 3. Green Mortgages (continued) ### Overview of emissions and drivers - EU direct manufacturing emissions reached 870 MtCO2e in 2018. - Manufacturing emissions account for nearly one-fifth of total EU GHG emissions. - Six high-emitting industries (mineral, metal, petroleum refining, chemical, food, paper) account for: - more than 90 percent of total manufacturing emissions - about 45 percent of manufacturing value-added and employment. - Two-thirds of manufacturing emissions come from the sector’s use of energy via fuel combustion; one-third originates from production processes. (Indirect emissions due to the use of electricity are not included in this accounting.) - Manufacturing emissions declined by 38 percent since 1990, while total economy emissions dropped only by 23 percent. - By comparison, manufacturing emissions declined only by about 20 percent in Japan, Russia, and the United States during the same period. - EU ETS covers about 65 percent of manufacturing emissions. - Non-covered emissions stem from non-covered products, small plants, and gases (CH4, HFC, NF3, SF6). - Member-state transfers of ETS auction revenues to industry range from less than 5 percent in Lithuania to 30 percent in France and 50 percent in Luxembourg. ### Abatement channels and technology options - Cost-effectiveness of options varies; some are relatively cost-effective at current carbon prices, others are not, and some require further technological progress or scaling. - Promising technical solutions include: - Electrifying processes (already feasible for many low-temperature heat processes; high-temperature processes are more difficult to electrify). - Switching to low-emission feedstock such as hydrogen (e.g., hydrogen-based steelmaking to remove oxygen from iron ore). - Capturing and storing carbon (CCS). - Increased energy efficiency and fuel switching (biofuels, biogas, biomass where electrification is challenging). - Process changes and improved material efficiency (reducing scrap, recycling). - Carbon Capture and Storage (CCS): - CCS technology is at an advanced stage but not yet ready for large scale industrial application. - Dutch 2019 industrial plan projects that half of the country’s industrial emissions reduction by 2030 would be achieved by CCS. - Scaling CCS requires production reconfiguration and significant infrastructure investments, including transport. - Recycling and chemical recycling: recycling can bypass process emissions of new production but some recycling processes are costly and not yet commercially viable; chemical recycling requires large amounts of energy. - Example cost-abatement evidence: cost abatement curves and cost-effectiveness estimates are highly uncertain and depend on future energy and CO2 prices and interest rates. ### Effectiveness of EU climate policies for manufacturing - EU ETS has been effective in reducing emissions between 2005 and 2012 (empirical evidence cited). - Manufacturing sector has received most of its emission allowances for free since 2005; free allocation can weaken the carbon price signal in practice. - Installations receiving more free allowances reduced emissions by less on average (empirical finding). - Member states often provide partial compensation to industries for carbon and energy costs; large industrial electricity consumers frequently benefit from lower electricity prices due to tax reductions and price rebates. - Electricity price discounts and tax rebates are not necessarily limited to countries with low-carbon electricity generation mixes. - High-emitting industries invest less in R&D and pollution-control equipment: - R&D investment in high-emitting industries: 1 to 6 percent of value added (where data available). - R&D investment in the rest of manufacturing: about 10 percent of value added in top-performing countries. - Investment in equipment for pollution control and cleaner technologies in some high-emitting sectors: about 0.4 percent of value added. - Investment needs to reach deep decarbonization: - Additional investments needed to reduce emissions by 80 to 100 percent (compared to 1990) will range from €2–25 billion per year between 2030 and 2050. - The EU decarbonation trajectory based on current policies would lead to 64 percent reduction of GHG emissions by 2050 and require investments of €11 billion per year. - Industry electricity demand could rise considerably (it could double), implying additional investments needs in the energy sector. ### Projections and policy targets - Emissions are projected to fall short of the current 2030 ETS target (43 percent reduction vs. 2005) under existing policies. - A linear reduction of emissions toward –95 percent in 2050 (close to net neutrality) would imply a needed reduction of industrial emissions of 53 percent by 2030 vs. 2005. - Past episodes of sustained declines of direct manufacturing GHG emissions in the EU since 1990 showed: - Significant improvements in emission intensity of processes and a large decline in energy-related emissions. - No significant adverse effects on employment during those episodes. ### Toward a more consistent green policy package for industry (policy recommendations) - Strengthen the EU ETS to improve the signaling effect of carbon pricing: - A clear and predictable price signal will incentivize investment in cleaner technologies. - Find an alternative to free allocations to prevent leakage because free allocations limit the price signal and revenues available to governments. - Consider a Carbon Border Adjustment Mechanism as a second-best option in the absence of global carbon pricing. - Introduce complementary carbon pricing policies provided ETS allowances are reduced in parallel to avoid a waterbed effect (e.g., revenue-neutral feebates at sectoral level). - Complementary policies to address market failures and investment barriers: - Increase public R&D and support private R&D in green technologies to compensate for knowledge spillovers and experimental risk. - Remove existing regulatory hurdles (for example, standards that limit lower-cement-content concrete). - Improve market transparency (EU’s Green taxonomy for sustainable investments is an important step). - Address coordination failures across value chains (for example, policies and fora such as the EU Circular Economy Strategy). - Address investment constraints by mobilizing green investment (European Green Deal Investment Plan aims to mobilize at least €1 trillion to support sustainable investments over the next decade). - Use guarantees for large capital-intensive projects from experienced lenders to help projects reach commercial scale. - Improve the investment framework for private investors via the EU taxonomy for sustainable activities. - Consider an EU-backed insurance mechanism to compensate investors for abrupt climate-policy reversals (noted as potentially complicated and limited in practice). - Use fiscal stimulus and state aid in pandemic recovery to promote decarbonization: - Apply low-carbon conditionality for support to emissions-intensive manufacturing (similar to conditionality in parts of the transport sector). - Encourage banks to commit to more detailed disclosure of climate risks in lending and investment portfolios. ### Historical sectoral outcomes and illustrative sector evidence - Chemical sector: - A 57 percent decrease in emissions between 1991 and 2017 while production expanded by 84 percent; mitigation driven mainly through reductions in process emissions (especially non-CO2 gases such as N2O) and reduced fuel and power consumption via new production processes and increased use of biomass waste. - Cement sector: - Reduction in emission intensity compared to 1990 levels mainly from energy consumption improvements and increased use of biomass and alternative fuels; efficiency improvements and modernized plants reported in Germany. - Regulatory and non-price measures supporting transitions: - EU-wide measures include Ecodesign Directive, Energy Efficiency Directive, Industrial Emissions Directive, energy-efficiency audits, energy labelling, Best Available Techniques reference documents, and EU support for R&D (for example, EU Sustainable Industry Low Carbon (SILC) Initiative and the Innovation Fund). - Non-price policies have contributed to emissions reductions but their cost-effectiveness relative to carbon pricing is not always clear; non-price measures do not raise public revenues and can in some cases undermine ETS impact. *Source: spccmeuea - Box 3. Green Mortgages (continued) (spccmeuea - Box 3. Green Mortgages (continued))* ### Box 4. EU Green Industrial Transitions: Sectoral Case Studies ### Box 4. EU Green Industrial Transitions: Sectoral Case Studies ### Overview - Title: SECTORAL POLICIES FOR CLIMATE CHANGE MITIGATION IN THE EU - Note: GHG = greenhouse gas; VA = value added. - Sources: Eurostat; Organisation for Economic Co-operation and Development, Structural Analysis database; United Nations Framework Convention on Climate Change; and IMF staff calculations. ### Figure 4.1 — EU+UK: Chemical Industry—GHG Emissions per Unit of Value Added - Caption: (KgCO 2 e per unit of VA) - Countries shown: DEU, FRA, GBR, ITA, NLD, POL - Axis/scale markers (as presented): 6, 5, 4, 3, 1, 2, 0 - Time labels (as presented): 199095200005101520 ### Figure 4.2 — EU+UK: Mineral Industry—GHG Emissions per Unit of Value Added - Caption: (KgCO 2 e per unit of VA) - Countries shown: DEU, FRA, ITA, ESP, BEL - Axis/scale markers (as presented): 4.0, 3.5, 3.0, 2.5, 1.5, 2.0, 1.0 - Time labels (as presented): 199095200005101520 *Sources: Eurostat; Organisation for Economic Co-operation and Development, Structural Analysis database; United Nations Framework Convention on Climate Change; and IMF staff calculations.* ### Box 4. EU Green Industrial Transitions: Sectoral Case Studies (continued) ### Box 4. EU Green Industrial Transitions: Sectoral Case Studies (continued) — Agriculture Sector ### Overview of Emissions and Drivers - Agriculture accounts for nearly 10 percent of total greenhouse gas emissions in the EU and the United Kingdom, with large cross-country variation; the highest share is 33 percent (Ireland). - The four largest euro area economies—France, Germany, Italy, and Spain—account for nearly half of all emissions from agriculture. - Most emissions from agriculture are biogenic and difficult to reduce. Primary sources: - Enteric fermentation (methane): 44 percent of agricultural emissions. - Manure-related nitrous oxide and methane: decomposition of manure under anaerobic conditions and manure management (nitrous oxide accounts for 15 percent; manure methane included above). - Use of mineral fertilizers on croplands: 37 percent. - Emissions from fossil fuels used in agriculture: less than five percent of the total. - Methane and nitrous oxide relative global warming potential and persistence: - Methane: 50–60 times the heat-trapping power of carbon dioxide; disintegrates within 10–15 years. - Nitrous oxide: 300 times the heat-trapping power of carbon dioxide; disintegrates within 10–15 years. - Land-use factors: - Conversion of wetland and peatbogs into arable land increases emissions; cropland soil respiration (especially after tillage) releases carbon dioxide. - Emissions per arable land are particularly high in several smaller countries with higher livestock density. - Climate impacts on agriculture: - Southern Europe most seriously adversely affected by climate change: rising temperatures, greater risk of drought, more heat stress and declining arable land. - Other regions may benefit from longer growing seasons, but drier summers and more storms/floods could reduce yields and make cycles less predictable; pests and diseases may spread. - Historical trends: - Agricultural emissions have declined by 20 percent since 1990, with most reductions in the 1990s due to lower methane emissions from livestock and reorganization in Central and Eastern Europe. - Since 2005, overall EU agricultural emissions have changed little as falling emissions intensity has been offset by growing agricultural output. - Most countries increased farming intensity, usually resulting in higher emissions per hectare of arable land and per bovine population. - Decline in livestock emissions largely due to shrinking bovine population and fewer livestock farms rather than emissions per animal. - The Effort Sharing Decision of 2012 does not appear to have altered emission stagnation; emissions have increased since 2012 as output growth outpaced improvements in emissions intensity. - Carbon sequestration potential: - Croplands occupy more than half the territory of the EU and can store significant carbon via agronomic measures (no-till, maintaining permanent pasture, protecting grassland and agro-ecological infrastructure). - “Negative emissions” from sustainable land use, land use change, and forestry could halve overall emissions from agricultural activities by halting conversion of wetlands into arable land and protecting forests. - Sustainable land use, land use change, and forestry reduce total EU emissions by 5 percent. - Projections and targets: - Under existing policies, agriculture is expected to contribute little to meeting the effort sharing target by 2030. - Under the EU Climate and Energy Framework 2030, member states committed to nationally defined emissions reduction targets in sectors not covered by the ETS, including transport, households, and agriculture. - Half of EU countries have increased agricultural emissions since 2005; only four countries achieved significant reduction (Croatia, Greece, Malta, and Romania). - Only a few countries (Finland, Germany, Ireland, Lithuania, Spain) reported reduction effects in 2030 projections. - Emission intensity vs. value added: - In the EU, the share of agriculture in total emissions is about six times the share of its value added; similar to Brazil and the United States but double the global average. - This multiple has increased steadily since 2005 and is even larger for France and Germany. ### Abatement Channels - Enhancing soil management: - Cost-efficient and could deliver significant emission reductions over the near term. - The 2003 EU Fertilizer Directive led to significant soil emission reductions through precision farming and optimized application rates of nitrous fertilizers. - Additional agronomic measures (manure application on cropland, crop rotation, cover crops) can reduce emissions from soil respiration. - Reducing livestock emissions: - Not self-financing but essential to reach climate neutrality by 2050. - Potential measures: diversify away from beef toward non-ruminants (pigs and poultry), enhanced farm management, new technologies (food additives, breeding programs, barn modernization, animal healthcare). - Methane digesters can turn manure into biogas to substitute energy use on farms and contribute to sustainable energy generation if implemented at scale. - Conservation farming and sequestration: - Conservation farming, maintaining permanent pasture, and protecting grassland boost soil carbon sequestration. - Soil carbon sequestration is relatively safe and economical but slow, potentially reversible, and significantly dependent on soil type. - Growing new trees on harvested areas and protecting forests provide a permanent carbon sink and effective carbon dioxide removal. - Cost and measurement constraints: - Some abatement measures can be self-financing (savings from lower fertilizer use, greater crop efficiency, less transport of external feedstuffs), but initial investments may exceed farmers’ financial capacity. - Most large-scale measures (e.g., fermentation facilities for biogas) are capital-intensive and not self-financing. - Absence of comprehensive, reliable farm-level measurement systems for methane and nitrous oxide hampers price-based measures. - Environmental taxes are limited to energy use in agriculture; sector not covered by the ETS. More than 85 percent of agricultural emissions are due to livestock and soil management (methane and nitrous oxide), leaving coverage below that of other sectors. - Carbon leakage and trade: - Non-uniform national emission reduction targets for agriculture in the EU will significantly increase imports from non-EU countries; more than 90 percent of any emissions reduction may be reflected in higher emissions outside the EU (mainly Africa, Asia, and South America). - Multilateral commitments and consumption-side mitigation are important to avoid carbon leakage. - Demand-side measures: - Large potential to reduce agricultural emissions by shifting consumer preferences away from land-intensive food (e.g., beef). - Emission intensity varies significantly across agricultural products; changes in diet (meat, milk, eggs) and minimizing food supply losses can reduce production emissions significantly. - Dietary changes entail health benefits and public spending savings. - Removing CAP subsidies increases producer prices by 5 percent and reduces production by 6 percent on average across product groups; dairy prices increase by 11 percent; poultry and beef see small price changes but large drops in production (M’Barek and others 2017). - Health context: more than half of all Europeans are overweight; nearly one-quarter are obese. About 10 percent of the EU’s GDP is spent on healthcare (OECD 2018a); up to 80 percent of this spending goes toward treating noncommunicable diseases, many related to unhealthy diets. ### Policies - Strategic approach: - Mitigation measures must be multi-pronged, well-calibrated, consider social and political impacts, and recognize agriculture’s role in food security. - Greater EU-level coordination could generate economies of scale and sharing of best practices. - High marginal abatement cost in agriculture requires a balanced cross-sectoral approach. - CAP framework and opportunities (planning period 2021–27): - The CAP currently includes climate-related measures across both Pillars (First Pillar: “green payments”; Second Pillar: rural development and organic farming) but lacks specific measures for ruminant emissions and cross-country efforts on soil sequestration. - Opportunities: - Widen the scope of the First Pillar to include explicit livestock measures, possibly through an EU-wide target for reducing and taxing methane emissions to incentivize investment in emission-efficient meat production and biogas generation. - Most mitigation measures for livestock are capital-intensive and would benefit from direct payment support, especially for smaller firms. - Once adequate measurement methods exist, price-based policies could be modelled after the ETS, accompanied by compensating CAP measures. - Linking direct payments to methane emissions under an EU-wide emissions limit would reward carbon-efficient meat and milk production and mitigate carbon leakage. - Provide more “green payments” in the First Pillar for sequestering carbon in agricultural soils; currently 30 percent of First Pillar support is allocated as a “green payment,” but there is no direct payment mechanism for boosting carbon sequestration. - Expand regional farming support under the Second Pillar to strengthen the circular economy: reduce imports associated with deforestation (e.g., soy for feed), develop technologies to create nitrogen fertilizer and animal feed from agricultural waste, and shorten supply chains. - Align risk mitigation under the Second Pillar with climate action: reform crop insurance to integrate greater crop diversity and reward periodic set-aside areas to reduce incentives for low-diversity, high-emission production. - Scale up financial and structural support under the Second Pillar to shift toward renewable energy on farms and increase generation of electricity from wind and other renewable sources. - Fiscal and structural national policies: - Remove tax expenditures favoring emission-intensive products (some countries reduce VAT for dairy/meat). - Provide financial support to R&D on emission reduction and carbon capture in agriculture. - Tax emission-intensive foods and align public procurement and education programs to promote better diets. - Use standards, regulations, CO2 footprint labels, and awareness measures to shape consumption. - Facilitate green financing for smaller farmers (e.g., Young Farmer Scheme). - Operational and regulatory areas to address: - Establish greater linkage between First and Second Pillar for climate action; currently no clear linkage between First Pillar cross-compliance and Second Pillar program eligibility. - Close implementation gaps in the First Pillar: reorient available funding toward “green payments” and specify greening equivalency measures by member states to enhance mitigation potential. - Remove administrative hurdles in the Second Pillar by lowering eligibility thresholds for climate mitigation measures; the Second Pillar’s rural development menu includes climate options but uptake is member-state driven and limited in scale. - Prioritize protection and enhancement of carbon sinks on farms in the new CAP planning period. - Specific operational recommendations highlighted: - Use direct payments to support capital-intensive livestock mitigation (e.g., anaerobic manure handling for biogas) particularly for smaller firms. - Make an annual consolidated nitrogen balance (post-harvest) at farm level mandatory as a monitoring tool. - Promote innovations such as insect-based high-quality protein for animal feed to reduce soy/fish meal imports and improve nutrient balance. - Leverage the proposed “Next Generation EU” recovery package’s scale-up of rural development to fund climate action under the Second Pillar. *Source: IMF staff compilation from "Box 4. EU Green Industrial Transitions: Sectoral Case Studies (continued)" in spccmeuea PDF.* ### Box 5. Administrative Improvements to the First and Second Pillar of the EU CAP ### Box 5. Administrative Improvements to the First and Second Pillar of the EU CAP ### Objective and scope - Aim: support a low-carbon and climate-resilient economy in the agriculture, food and forestry sectors. - Climate actions under the CAP must meet at least four out of the six priorities derived from the three main objectives. ### Priority requirements and interpretation - Requirement: climate actions need to meet at least four out of the six priorities. - Observation: many specialized mitigation measures are likely to be focused on only a couple of these priorities, and, thus, are unlikely to satisfy this condition within the current scope of the Second Pillar. ### Specified budgetary rule - At least 30 percent of the EAFRD budget in each member state needs to be allocated to climate and environmental actions. ### The other four out of six priorities (listed in the source) - fostering knowledge transfer in agriculture, forestry and rural areas; - enhancing the competitiveness of all types of agriculture and enhancing farm viability; - promoting food chain organization and risk management in agriculture; - promoting social inclusion, poverty reduction, and economic development in rural areas. *Source: Box 5. Administrative Improvements to the First and Second Pillar of the EU CAP* ### References ### References ### Agriculture and Food - Sarzeaud, Patrick, Andie Dimitriadou, and Milan Zjalic. 2007. EU Beef Farming Systems and CAP Regulations. Wageningen, Netherlands: Wageningen Academic Publishers. - Schulte, Rogier, Paul Crosson, Trevor Donnellan, Niall Farrelly, John Finnan, Stan Lalor, Gary Lanigan, Donal O’Brien, Padraig O’Kiely, Laurence Shalloo, Fiona Thorne, and Frank O’Mara. 2012. A Marginal Abatement Cost Curve for Irish Agriculture: Food Harvest 2020—and Beyond. Dublin: Irish Agriculture and Food Development Authority, Teagasc. - Takle, Eugene, and Don Hofstrad. 2008. “Global Warming—Agriculture’s Impact on Greenhouse Gas Emissions.” Ag Decision Maker newsletter, April Iowa State University, Ames, IA. - Wang, Xia, Xinying Lin, Ying Y. Ouyang, Jun Liu, Gang Zhao, An Pan, and Frank B. Hu. 2016. “Red and Processed Meat Consumption and Mortality: Dose–Response Meta-Analysis of Prospective Cohort Studies.” Public Health Nutrition 19 (5): 893–905. ### Transport and Vehicles - Sims, Ralph E., Felix Creutzig, Xochitl Cruz-Núñez, Marcio D’Agosto, Delia Dimitriu, Maria Josefina Figueroa Meza, Lew Fulton, Shigeki Kobayashi, Oliver Lah, Alan McKinnon, Peter Newman, Minggao Ouyang, James Jay Schauer, Daniel Sperling, and Geetam Tiwari. 2014. Transport in Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK, and New York: Cambridge University Press. - Springel, Katalin. 2018. “Network Externality and Subsidy Structure in Two-Sided Markets: Evidence from Electric Vehicle Incentives.” Working Paper, Georgetown University. - Stewart, Alex, Alastair Hope-Morley, Peter Mock, and Uwe Tietge. 2015. “Quantifying the Impact of Real-World Driving on Total CO2 Emissions from UK Cars and Vans.” Project Report for the UK Committee on Climate Change, London. - TNO. 2014. “Energy and Environmental Aspects of Electrical Passenger Vehicles.” Report for Netherlands Enterprise Agency. The Hague. - Transport and Environment. 2017. “Diesel: The True (Dirty) Story.” Brussels. - Wappelhorst, Sandra, Peter Mock, and Zifei Yang. 2018. “Using Vehicle Taxation Policy to Lowe Transport Emissions: An Overview for Passenger Cars in Europe.” International Council on Clean Transportation Vehicle Taxation Report, Washington, DC. - Yang, Zifei, Peter Slowik, Nic Lutsey, and Stephanie Searle. 2016. “Principles for Effective Electric Vehicle Incentive Design.” White Paper, International Council on Clean Transportation, Washington, DC. - Zhou, Yan, Todd Levin, and Steven E. Plotkin. 2016. “Plug-in Electric Vehicle Policy Effectiveness: Literature Review.” Argonne National Laboratory, US Department of Energy, Lemont, IL. ### Buildings and Construction - United Nations Environment Programme/International Energy Agency. 2017. Towards a Zero-Emission, Efficient, and Resilient Buildings and Construction Sector—Global Status Report 2017. 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