Four policies to shift the needle to net-zero emissions

Falling short

To a great extent, the policy debate has become a kind of displacement activity, revolving around individual behaviours and morality. This is a dead end. We need instead bold policies that mobilize and scale solutions to rapidly decarbonize economic sectors. The EU’s strategic agenda must enable member states to shift the needle to net-zero.

The carbon price under the EU-ETS has recently climbed from a dismal 4–5 euros per tonne to a more reasonable 25–30. But at this rate, it is still not able to drive change at the scale needed.

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

This is hardly surprising. Some 90% of industrial emissions are emitted without any cost to the companies. Even with the revised EU-ETS, there is simply too little market incentive for them to change.

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

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

Turning the tide of EU climate policy

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

But decarbonization of industry requires large capital investments, which introduces new costs and risks to individual companies. For many companies, the investments will effectively amount to “betting the company”. This warrants policy intervention beyond a generic price signal at €30. Therefore to achieve net-zero, the future of climate policy action in Europe will need to be focused on the national level.

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

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

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

Four policy areas to drive the net-zero transition

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

Permitting: States need to establish permit and license frameworks for permits and licenses to operate that ensure that all new major investments in, for example, industrial installations, commercial buildings, housing and transport infrastructure are compatible with honouring the Paris Agreement. Permitting processes for climate-smart investments need to be simplified so that they do not delay installation. Today, thanks to administrative processes it can take a decade or more to plan and install a transmission line to integrate renewable energy into the electricity distribution network, or to connect new industrial-scale demand. This is not compatible with the urgency of reducing emissions.

Financing: States can play a key role in the net-zero transition by taking on part of the financial risk companies face in low-carbon investments. States need to make significant public funding available, in the form of loans and equity. Other options are private-public partnerships with long-term contracts or concessions, mitigating the market and policy risks for private investors.

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

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

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