Climate Policy Playbook

EUROPEAN UNION Climate Policy Playbook

April 2021 Contents

Overview 04

Electricity 07 Variable Renewable Energy 09 Transmission and Markets 15 Clean Dispatchable Power 19 Energy Storage 26 Electricity Policy Overview 32 Electricity Deep Dives 41

Market Design Reform 42

Modernisation of Distribution Grids 47

Integrated Resource Planning 50

Strengthening Electricity Transmission Networks and their Interconnection 54

Transportation 58 Electrification 61 Low Carbon Fuels 65 Efficient Mobility 70 Transportation Policy Overview 74 Transportation Deep Dives 79

Efficiency and Emissions Standards 80

Clean Fuel Standard 86

Manufacturing 92 Electrification 95 Low-Carbon Fuels 99 Energy and Materials Efficiency 102 Carbon Capture 105 Manufacturing Policy Overview 108 Manufacturing Deep Dives 116

Clean Product Standard 117

Carbon Border Adjustment Mechanism 122

Buildings 127 Electrification 129 Efficiency 132 Low-Carbon Building Materials 138 Buildings Policy Overview 143 Buildings Deep Dives 151

New Building Codes 152

Agriculture 157 Soil Management 159 Agricultural Methane Abatement 163 Alternative Proteins 166 Food Waste 170 Agriculture Policy Overview 174 Agriculture Deep Dives 178

Agriculture R&D 179

Cross-Cutting Policies 183 EU Research and Development Programmes 185 Validation, Demonstration and Testbeds 190 Stimulation of Clean Energy Entrepreneurship and Scale-up 194 Green Procurement 199 Supporting Low-Carbon Hydrogen Production 203 Negative Emissions Technologies (NETs) 207 EU Carbon Price 214 EUROPEAN UNION POLICY PLAYBOOK Overview

Breakthrough Energy is a network of philanthropic programmes, investment vehicles, and policy efforts that offer a comprehensive, end-to-end approach to accelerating the clean energy transition and helping the world reach net-zero emissions by 2050. At Breakthrough Energy, we work with policy makers alongside researchers and scientists, investors, entrepreneurs, business leaders, and activists to scale solutions and transform the global economy.

The European Union has pledged an ambitious net-zero emissions target by 2050. The policy makers who articulated this goal know they have a decisive role to play in building the market-shaping regulatory environment to ensure that clean energy solutions can prevail. Now, they need to think creatively about how policy and regulation can drive change and lay the foundations for global leadership in the next generation of clean tech. Only the widespread use of clean technologies will drive economic recovery, job creation and deep decarbonisation. It is therefore imperative that Europe not only invent the clean technologies but also deploy and scale them.

Innovation is not just about technology, it is about policy and markets too.

To assist these efforts and gain a comprehensive overview of what it will take for Europe to reach its climate targets, we have enlisted top experts to help us map decarbonisation policy pathways for all key sectors of the economy. These are compiled in the European and Member State Playbooks and aligned across the three key stages of innovation—from early-stage discovery and R&D, to validation and demonstration, and finally, scale-up and widespread diffusion.

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These Playbooks are designed to showcase tools that reduce the Green Premium for clean technologies, increase and expand R&D efforts, and support demonstration and early adoption of game- changing innovations. They also map out how to best encourage market signals that can accelerate economy-wide decarbonisation and level the playing field so that clean alternatives can compete against fossil fuel products.

The Playbooks provide a portfolio of technologies and policy options rather than a single pathway to net-zero. Organised across the Five Grand Challenges—electricity, transportation, manufacturing, buildings and agriculture—the Playbooks offer an actionable, ‘how-to’ blueprint for achieving climate neutrality by mid-century.

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Our Equity Principles

Improve public health through equitable climate action Sources of GHG emissions are often sources of other pollutants as well, such as sulphur dioxide and particulate matter. Low-income communities disproportionately bear the brunt of health impacts caused by climate change and environmental hazards. Where possible, policies aimed at reducing GHG emissions should also be designed to reduce co-pollutants and mitigate health inequali- ties in disproportionately impacted communities.

Ensure clean energy and technologies are affordable for all Climate policy should be designed to ensure that everyone has access to clean, reliable, and affordable energy. Successful climate policy will reduce the green premium of clean energy and technologies for low-income households. Policy design should include safeguards to ensure that energy and fuel prices are not regressive and will not disproportionately impact those that cannot directly access clean technology.

Invest in high-quality jobs in disproportionately impacted regions and communities Direct investments in communities revitalise and stimulate local economies. Investments should prioritise a just transition for fossil-based economies and provide resilient infrastructure and economic mobility options for rural and urban communities.

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April 2021 | 7 GRAND CHALLENGE | ELECTRICITY

ELECTRICITY Overview

Electricity is essential to modern life: it powers our homes, schools, stores, offices, and factories. Electricity generation is also one of the largest sources of greenhouse gas emissions in the EU. In 2017, it accounted for about 24 percent of emissions in the EU-27 and in the UK.

For decades, coal generated roughly one-third of the electricity we used. Nuclear generated another third, and gas, hydro, and oil made up the rest. In recent years, however, this power mix has begun to shift. Natural gas’s share increased in the 1990s and early 2000s, while the share of renewables, driven by growth in wind and solar generation, has increased to about one-third of total consumption.1 At the same time, energy efficiency is helping to flatten the demand for electricity.

These changes have reduced GHG emissions, but continued progress is not guaranteed. To get to net-zero emissions, we must both decarbonise electricity generation and help other sectors of the economy get to net-zero through electrification.

1. eea.europa.eu

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ELECTRICITY SOLUTION Variable Renewable Energy

Overview Variable Renewable Energy (VRE) sources are just what they sound like: they produce energy intermittently instead of on demand. VREs include wind, solar, tidal, and hydro- electric power.

Thanks to technological advances, policy incentives, and economies of scale, the cost of onshore wind and solar photovoltaic (PV) energy has declined considerably since 2009: by 60 percent and 86 percent, to €37/MWh and €42/MWh respectively, in 2020.1 Over that same time period, the costs of offshore wind generation have been reduced by 59 percent.1 In 2019, onshore and offshore wind installations had grown in capacity by almost 170 percent since 2009 and made up 15 percent of EU electricity generation.2 Solar is also growing rapidly in the EU: cumulative installed capacity grew by almost 600 percent between 2009 and 2019. In 2019 alone, 16.7GW of new assets were installed.3

Continuing this trend will require innovation in the design, production, siting, and operation of VREs. Market Challenges

Market Rules Today, wind and solar are among the cheapest sources of new generation in many parts of Europe, but fundamental changes to power markets are necessary to accommodate expanding shares of these VREs. Currently, operators meet demand for electricity on the grid largely by turning fossil- fuelled generating plants on and off—a process called dispatching. As more electricity comes from VREs, there will be fewer dispatchable plants available to adjust to meet demand. 1. https://about.bnef.com/blog/scale- up-of-solar-and-wind-puts-existing- To accommodate increasing shares of VRE, markets will need to incentivise coal-gas-at-risk/ flexibility from various sources. In addition, current grid operations, market 2. https://windeurope.org/data-and- rules, and environmental policies do not fully value the services that VRE, new analysis/product/?id=59 technologies, and system management practices can provide to reduce GHG 3. https://www.solarpowereurope. emissions.4 Until these two evolutions occur, VRE growth across Europe will org/wp-content/uploads/2019/12/ be constrained. SolarPower-Europe_EU-Market- Outlook-for-Solar-Power-2019-2023_. pdf?cf_id=7181

4. Such as grid ancillary services, avoidance of investment in peaking plants and grid reinforcement.

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High Capital Costs and Access to Capital The capital costs of large-scale, land-based wind and solar technologies have declined impressively over the past decade, but we will need a broader suite of renewable technologies to decarbonise the power sector in a cost-effective way. Other renewable technologies, such as offshore wind and concentrating solar power, still face high capital costs relative to incumbent fossil generators. Because these technologies are earlier in their deployment, financial institutions also tend to perceive them as riskier investments, leading to higher financing costs.

Siting Renewable Generation Wind and solar are land-intensive generation sources compared with fossil generation, and they need to be built in areas with plenty of sun or wind. If VREs are going to play a large role in the European energy system, they will need better access to these high-quality locations. Several Member State territories and waters are home to some of the best renewable resources in the EU, but current permitting rules prevent developers from accessing them in an environmentally responsible way. The permitting process process can also be very time intensive and puts high administrative burdens on developers. Local resistance to renewable energy projects has also slowed down renewable expansion significantly in recent years. Technologies

Onshore Wind

R&D VALIDATION SCALE

Advances in taller wind turbines with larger blades can help onshore wind power provide an increasing share of electricity.

Over time, the fundamentals of generating power from wind have not changed much: large blades rotate in the wind, spinning a rotor that drives a turbine and generates electricity. What has changed are the cost and performance of wind-generation technologies. Technological innovation and growing markets have enabled the successful large-scale use of wind power around the world. 5. https://about.bnef.com/blog/scale- Since 2009, the price of onshore wind energy has dropped by 60 percent up-of-solar-and-wind-puts-existing- globally from €94/MWh to €37/MWh,5 while installed onshore wind capacity in coal-gas-at-risk/ the EU has more than doubled from 75GW in 2009 to 183GW in 2019.6 In 2019, 6. https://windeurope.org/about-wind/ wind power provided more than 15 percent of the EU’s electricity.7 statistics/european/wind-energy-in- europe-in-2019/

7. https://windeurope.org/data-and- analysis/product/?id=59

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Taller wind turbines and larger blades can improve performance and open more areas of the EU to wind development. The average rated capacity of onshore wind turbines installed in 2009 was 1.6MW.8 By 2019, this had improved to average rated capacities of 2.5-4 MW in new wind turbines across EU countries. These trends, along with further performance and cost improvements, can drive additional deployment of onshore wind technologies.

Offshore Wind

R&D VALIDATION SCALE

While fixed foundations are a proven technology, demonstrations of floating foundations are needed to enable offshore wind deployment in deeper waters.

LAND BASED

SHALLOW WATERS < METERS TRANS T ONAL WATERS METERS

DEEP WATERS > METERS

Offshore wind technology works much like onshore wind, except the turbines themselves are in bodies of water—generally oceans or lakes. This brings both advantages and challenges. High-quality offshore wind resources have generally higher capacity than their onshore counterparts. They also tend to be located farther away from towns and cities and thus their deployment is less likely to trigger local resistance due to visual and noise impacts. Maintaining offshore turbines is also more difficult, though lessons can be drawn from decades of experience maintaining offshore oil rigs.

Since turbines can be placed in water with varying depths and sea-floor composition, different types of turbine foundations are needed. Though most commercial offshore turbines today use fixed foundations, floating foundations allow turbines to be deployed in deeper water.

Solar Photovoltaics

SOLAR PANEL SUNLGHT R&D VALIDATION SCALE

A solar cell is composed of p-type and n-type semiconductors, which form an electric field at the p-n junction. When sunlight hits the solar cell, energy from photons is transferred ELECTRON to electrons, creating electron-hole pairs FLOW that flow in opposite directions to create an NTYPE MATERAL electric current. PN JUNCTON PTYPE MATERAL PHOTONS

HOLE FLOW

8. https://www.irena.org/wind

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The amount of solar energy that hits Earth every day is large enough to power the world many times over with carbon-free electricity. Solar panels convert the sun’s energy into usable power by using the photovoltaic effect to generate direct-current electricity. Continued innovation and increasing scale have made solar power directly competitive with incumbent fossil generation in many regions.

Continued cost reductions can further drive the use of solar power on the grid and make it possible for solar to decarbonise other sectors through, for example, the production of low-carbon transportation fuels and industrial materials. While most solar cells today are made of silicon, a new generation of technologies made with materials such as perovskites could bring down costs even further. Tandem solar cells incorporating multiple materials could also improve efficiency and further reduce overall system cost.

Ocean Energy

BLADES NNOVATON

R&D VALIDATION SCALE

ROTOR NNOVATON Research in a variety of technologies is needed NOVEL APPROACH TO DALECTRC FRST GENERATON ELASTOMERS to reduce costs and increase reliability of WAVE ENERGY ocean energy. FLOATNG TDAL CONCEPTS

BREAKTHROUGH MATERALS FOR THRD GENERATON FRST GENERATON TDAL ENERGY DEVCES TDAL DEVCES

The world’s oceans are a vast potential source of renewable energy that is typically more predictable than wind and solar power. Promising ocean energy resources that could provide significant amounts of carbon-free power include wave energy, ocean-current energy, and in some regions, tidal energy.

Of these technologies, wave and tidal power have made the most progress to date. However, due in large part to ocean conditions, today’s technologies are not yet cost-competitive with other sources of electricity. A new generation of transformational ocean energy technologies can unlock the carbon-free energy resources that exist in oceans all around the world.

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Concentrated Solar Power

RECEVER Parabolic ENGNE Disk/ R&D VALIDATION SCALE Trough Engine REFLECTOR Concentrated solar power plants use mirrors to concentrate sunlight onto a receiver. ABSORBER TUBE REFLECTOR The receiver collects and transfers the solar energy to a heat-transfer fluid, which in turn can be used to generate heat for end-use applications or electricity through conventional steam turbines. TOWER Heliostats Source: Modified from Science Direct Linear CURVED and Central MRRORS Fresnel Receiver

ABSORBER TUBE AND RECONCENTRATOR HELOSTATS

Concentrated Solar Power (CSP) plants use mirrors to concentrate sunlight onto a receiver, which collects and transfers the solar energy to a heat-transfer fluid. This in turn can be used to generate heat for end-use applications or electricity through conventional steam turbines. Large CSP plants can be equipped with a system that can store energy for use at night or when the sky is cloudy. CSP plants require high direct solar irradiance to work and are therefore an intriguing option for places with a lot of sun, such as Southern Europe. The significant advantage of CSP over PV is that it can integrate low-cost thermal energy storage to provide intermediate- and base-load electricity.

Synthetic Inertia High Inertia Low Inertia

R&D VALIDATION SCALE

Inertia is the capability of a system to store CONVENTONAL kinetic energy in rotating mass. While wind COAL HYDRO GENERATORS STORAGE and solar plants do not possess rotating masses, they can be equipped with control technologies that make them react to drops or increases of the system frequency, which provide “synthetic inertia.” Source: Modified from Skeleton Technologies

NUCLEAR WND & PV PV WND

GENERATORDOMNATED SYSTEM NVERTERDOMNATED SYSTEM

In traditional power systems, large coal and gas fired generators provide a crucial service to the system: inertia. This is because their rotating masses keep on spinning for some time in the case of a disturbance, e.g. loss of generation on the system due to a damage to a power line or a fault at a power station. This in turn dampens the impact that the disturbance has on the power system frequency. Without this dampening effect, disturbances can quickly lead to cascading failures in the system, up to a widespread blackout.

As the power system transitions towards high penetrations of renewable energy, the amount of inertia provided by conventional generation such as coal and gas plants will decrease and need to be replaced by new sources. Wind and

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solar plants do not possess rotating masses and thus cannot provide inertia in the same way as coal and gas plants. However, research has shown that wind and solar plants can provide inertia type services—synthetic inertia—to the power system if equipped with control technologies that instruct them to react to drops or increases of the system frequency. Furthermore, technology called rotating stabilisers can provide inertia to the power grid via rotating masses in the same way as conventional generators, but without having to generate electricity and burn carbon. Increasing development and deployment of technologies providing synthetic inertia will enable higher penetrations of renewables in electricity grids while ensuring power system reliability.9

Improved Forecasting of Supply VARABLE and Demand ENERGY SOURCES PRCNG AND RSK

R&D VALIDATION SCALE

Artificial intelligence and big data allow system operators to analyse (sic) live and + H historical weather patterns and energy demand to make predictions. This helps ensure +X H the reliability of power grids at lowest cost for PROBABLSTC increasing levels of renewable penetration. POWER FORECAST Source: Modified from Jungle MANTENANCE PLANNNG AND PRODUCTON

WEATHER FORECASTS

As the share of wind and solar in power generation grows, the importance of forecasting the output of these VREs to ensure reliable system operation increases. Furthermore, due to the rollout of distributed energy resources and the electrification of transport and heat. the number of generation, storage, and demand assets connecting to the power grid is growing, thus increasing the complexity of power system operation. These developments will require accurate forecasting of renewable supply and demand at high resolution using data science and machine learning technologies. Advances in digital technologies such as artificial intelligence and big data allow operators to analyse live and historical weather patterns and energy demand to make predictions. This will help ensure the reliability of power grids at the lowest cost for increasing levels of renewable penetration.10

Additional Resources

→ Wind capacity across EU countries → European wind power statistics and trends → Solar capacity across EU countries → BNEF, 2020, Global LCOE benchmarks → Concentrated Solar Power Projects: Crescent Dunes project in Nevada and 9. Nat Grid 2020; NREL 2018; The Arenales plant in Spain Energyst 2020. → EIB, Energy Sector Programme 10. IRENA 2019 Advanced Forecasting → Solar power EU market outlook 2019–2023 of VRE, IRENA 2019 AI and BIG DATA, → EU GHG inventory E3G 2020 ELECTRICITY DISTRIBUTION NETWORK REGULATION – TIME FOR → Annual PV installations compared to IEA projections A NEW APPROACH

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Transmission & ELECTRICITY SOLUTION Markets Transmission and Markets

Overview In the legacy electricity system, power plants were usually built near large concentrations of power users. These are known as electricity demand centres. By contrast, wind and solar generation must take place where those resources are, and the electricity they generate must be transported to users through transmission lines. Consequently, high- voltage transmission infrastructure is needed to ensure that grid operators can provide reliable service when using variable renewable energy sources (VREs) such as wind and solar power.

Market Challenges

Inadequate Planning The transition from a mainly fossil-based to a mainly renewable-based electricity supply changes the fundamental topology of the interconnected electricity grids of European Member States. National and European electricity transmission infrastructure need to be upgraded and expanded to enable integration of the increasing amounts of renewable generation connecting to the grid up to 2050. To enable economies of scale and avoid expensive readjustments down the line, coordinated, long-term approach planning is necessary. This is especially true for the development of a European offshore electricity grid,1 since the current regulatory framework lacks incentives for coordination between offshore wind projects.2

Permitting Obstacles Because transmission lines often cross local and national borders, developers often must deal with multiple regulatory frameworks and government agencies. Even within a single regulatory framework, planning procedures are often too complex and time intensive. This constitutes a significant administrative burden and increases the risk of transmission projects significantly. Public opposition to power lines late in the planning process can also generate high-cost delays. 1. https://windeurope.org/wp-content/ uploads/files/policy/position- papers/20200610-WindEurope- offshore-renewable-energy-strategy. pdf; p. 4;

2. https://windeurope.org/wp-content/ uploads/files/policy/position- papers/20200609-Windeurope-TEN-E- feedback.pdf; p.3

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Disagreement on Fair Cost Allocation Transmission lines require significant capital and will not be developed unless project costs can be recovered in a reasonable timeframe. Most lines have been developed under the regulated cost-recovery model, whereby Transmission System Operators (TSOs) and developers get approval by National Regulatory Authorities (NRAs) for investments which they can recover through customer bills. The European Commission also helps fund interconnections between electricity transmission grids of Member States via the Connecting Europe Facility. However, it can be difficult for stakeholders to agree on these costs. This is especially challenging in the case of multi-state lines that are needed to meet policy goals. Not everyone may agree on the net benefit of reducing emissions and share costs accordingly. Technologies

Low-Cost, Long-Distance Transmission

R&D VALIDATION SCALE

Today, most high-voltage lines are alternating current (AC), but innovations in direct current (DC) lines and superconducting materials can achieve lower-cost transmission over longer distances.

Advances in high-voltage DC (HVDC) technology and/or superconducting materials provide opportunities to build low-cost, long-distance transmission lines, including underground lines. While ambient air cools above-ground transmission lines, underground power lines can overheat if they are not designed to dissipate or withstand the heat generated by resistive losses. This limits the current they can carry.

HVDC and superconducting lines have lower losses and lower heat production than AC lines. Consequently, they can achieve higher current and lower cost over long distance. Other technologies under development also increase the current in overhead lines.

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Underground Transmission Lines

R&D VALIDATION SCALE

Advances in HVDC technology and superconducting materials provide opportunities to build low-cost, long-distance underground transmission lines that can dissipate or withstand the heat generated by resistive losses.

UNDERGROUND UNDERGROUND SUBSTATON DSTRBUTON LNES

Some companies are working on next-generation technologies using high- voltage DC (HVDC) technology to dissipate heat and significantly reduce the cost of underground lines. The conductor and insulation for underground cables can be optimised for the thermal characteristics of the soil they are passing through. (525-kV cross-linked polyethylene insulated cables enable much higher line ratings, for instance, which means a single cable can deliver many more GW.)

Enhanced Converter Technology Present Future R&D VALIDATION SCALE

Existing power systems are dominated by conventional AC power plants and contain a small amount of inverter-based DC generation. Next-generation controllers will enable architectures with much more inverter-based generation and enhanced grid control.

= GENERATOR = CONVERTER

Solar, batteries, and some types of wind generators produce DC power that is converted to AC. The growth of these resources increases the need for new mechanisms that maintain grid stability. Enhanced power converters will play an important role. Today’s converters follow frequency and voltage signals on the grid set by conventional AC power plants. Parts of the grid using large amounts of VREs and few conventional power plants are reaching reliability constraints that limit the addition of new wind and solar generators. Advanced converters will overcome these limits by contributing to grid control.

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Grid Control Technologies

R&D VALIDATION SCALE

A schematic of how grid control technologies can optimise energy transmission from generator to load is shown here. 61%

39%

Grid control technologies, like dynamic line ratings and power flow control, can deliver more energy over existing lines with speedy, low-cost installations. Dynamic line ratings use real-time temperature measurements to keep lines from overheating and causing long-term damage. Power-flow control technologies can also optimise transmission by increasing flow over less used lines. Deploying these technologies can result in significant cost savings and energy efficiency.

Additional Resources

→ EU Parliament Fact Sheet on the Internal Energy Market → EU Commission, 2019, New Electricity Market Design: A Fair Deal for Consumers → Five years Connecting Europe Facility, 2019 → EU Com, Electricity network codes and guidelines → ACER / CEER, 2019, Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2018, Electricity Wholesale Markets Volume → Imperial College 2016; An analysis of electricity system flexibility for Great Britain → Imperial College, 2017, Roadmap for flexibility services to 2030 → Trinomics, 2018; TEN-E regulation evaluation

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Clean ELECTRICITY SOLUTION Dispatchable Power Clean Dispatchable Power

Overview Advanced nuclear power, geothermal energy, and thermal generation with carbon capture can all help the EU reach net-zero emissions. These technologies are also dispatchable, which means they can be used when wind and solar resources—also known as variable renewable energy sources (VREs)—are not available. This, in turn, maintains the stability and reliability of the power grid.

While these technologies are at various stages of commercial development, new policies are required to deploy them at scale. Market Challenges

Market Price Volatility and Investment Risk With increasing shares of variable renewable energy and an absence of significant demand side response and storage capacities, high output from VREs can oversupply the market, potentially depressing wholesale electricity prices at times. This increases risk for investors who seek to cover their investment through wholesale market revenues. As a result, the cost of capital for electricity plants may increase. To address this, either long-term government support or long-term power purchase agreements at predefined prices are necessary to reduce risk and encourage investment in electricity plants. Such measures can enable early-stage deployment of low-carbon dispatchable generation technologies. In the UK, such contracts have been awarded to a new nuclear plant and plants using new biomass technologies.

High Capital Costs and Access to Capital Dispatchable low-carbon power sources face higher capital costs relative to conventional fossil fuels, onshore wind, and solar. The first few commercial- scale advanced nuclear and carbon capture-equipped power plants require large capital expenditures and come with higher technology and implementation risk. Geothermal power generation is also limited by the time- and cost-intensive exploration phase needed to find power-generating resources. Because of these challenges, the private sector is often unwilling to take on the risk required for investment in these projects. Developers therefore face limited access to private-sector financing and often struggle to compete with incumbent technologies as a result.

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Regulatory Uncertainty Developers face licensing, permitting, and other regulatory hurdles during the design, construction, and operation of power plants and associated infrastructure like CO2 pipelines. Though these processes are important to protecting safety, health, and the environment, each new plant may face multiple rounds of review, leading to longer project timelines and increasing project risk.

Public Perception Some clean dispatchable technologies face high levels of public uncertainty. People tend to place greater weight on risks that are uncertain and perceived to be potentially catastrophic, such as a nuclear meltdown or a geological leakage. New nuclear technologies have been designed with passive safety features that significantly reduce the risk of nuclear accidents, and the risk of CO2 accidents is extremely low, too. Well-designed policies can further safeguard against these risks. Nevertheless, these perceptions persist and remain a market barrier to full deployment. Technologies

Advanced Nuclear

R&D VALIDATION SCALE CONTANMENT STRUCTURE Researchers are exploring a wide range of next-generation fission technologies—like the helium-based reactor shown here—that improve on today’s Generation III+ reactors. STEAM FUEL ELEMENTS GENERATOR

HELUM REACTOR VESSEL

SPENT FUEL

Nuclear power is a significant global source of zero-carbon energy: already, it provides about 10 percent of the world’s electricity. In the EU, this fraction is greater: nuclear energy provides one-quarter of electricity and a higher proportion of base-load power, equivalent to more than half of the EU’s low-carbon electricity. Researchers are currently investigating a wide range of next-generation fission technologies that address some of the challenges today’s Generation III+ reactors face. Advanced reactors can be characterised by the coolant they use, which include gases (like helium), liquid metals, and molten salt and offer varying trade-offs between size, safety, cost, and complexity.

To expand the use of nuclear power in the decades ahead, researchers must develop a new generation of advanced nuclear-fission technologies that are safer and more resistant to weapons proliferation than their predecessors— and that cost less, take less time to build, and produce less nuclear waste.

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Fusion

VALIDATION SCALE TRTUM R&D DEUTERUM H H In a nuclear fusion reaction, hydrogen isotopes deuterium and tritium fuse and recombine into a helium atom and a neutron, releasing energy in the process.

.MeV . MeV NEUTRON ALPHA PARTCLE He

Net energy production from controlled nuclear fusion has long been a key priority of clean energy R&D. Controlled fusion for energy production could generate substantial amounts of zero-carbon energy while alleviating some of the challenges around safety, waste, and weapons proliferation associated with nuclear fission. But despite more than 60 years of research in this field, no one has yet found a way to achieve it.

If net energy production from fusion is achieved, making it cost-effective will remain a significant challenge as well. That said, innovative new approaches in recent years may bring the world closer to cheap, reliable, and emissions-free fusion energy for the first time.

For example, ITER in the south of France brings together 35 nations to prove the feasibility of fusion as a large-scale and carbon-free source of energy. The project’s aim is to produce its first plasma in 2025, but current expectations are that the first successful demonstration of a fusion power plant will occur after 2050.

Enhanced Geothermal Systems

Heated ﬂuids are recovered at the surface for energy production

R&D VALIDATION SCALE

A conceptualization of an enhanced POWER PLANT geothermal system, with a man-made geothermal reservoir, is shown here.

HOT WATER COOL WATER PRODUCTON WELL NJECTON WELL

Heated ﬂuid is Fluids are injected into produced back to the earth for continuous the surface energy recovery

GEOTHERMALLY HEATED RESERVOR

Earth’s vast reserves of deep geothermal heat present a huge opportunity to provide large amounts of zero-carbon power if we can find a way to tap into it

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cost-effectively. Recent modelling indicates that the EU’s geothermal capacity could reach 540TWh in 2050. At a basic level, geothermal electricity is generated by using the subsurface geothermal resource to heat water or another working fluid, which then turns the turbine of a generator. Enhanced geothermal systems (EGS) open more parts of the EU to geothermal development, as they allow developers to access a wider range of temperatures and rock formations than conventional hydrothermal resources via new drilling and fracturing techniques.

Further research, development, and deployment will bring down costs and improve technological performance, allowing developers to tap into this vast energy resource. New technologies for extracting heat more efficiently from lower temperature resources can also expand the deployment of geothermal energy.

Hydrogen Fuel Cells

R&D VALIDATION SCALE HEAT HEAT

A fuel cell utilises a fuel—most commonly hydrogen—and oxygen to generate electricity through a chemical conversion process, with heat and water as the only byproducts of hydrogen fuel cells. HYDROGEN N Fuel Cell OXYGEN N

WATER OUT MEMBRANE

ANODE CATHODE

Fuel-cell technologies can provide an important source of grid flexibility to balance the variability of wind and solar sources. In a fuel cell, electrons are split from the input fuel and pass through an external circuit, creating a flow of electricity. A variety of fuels can be used: hydrogen is the most common, and its only by-product is water.

For these technologies to provide cost-effective grid flexibility, they will have to become significantly more affordable. The production of hydrogen used by these fuel cells will also need to be decarbonised if the technology is going to reduce emissions.

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Power Generation with CCUS

R&D VALIDATION SCALE

Operational since 1996, the Sleipner CCS facility in Norway is one of the world’s longest-running large-scale CCS projects, having captured and stored approximately 1 million tons of CO2 during 1997-2018 deep under the North Sea. Source: Equinor.

One of the most promising solutions for dramatically reducing CO2 emissions from large-scale fossil-fuel power plants lies in carbon-capture technologies. CO2 can be captured from the fuel before its combustion through gasification or reforming. It can also be captured from the gas the plant exhausts, typically using a thermally regenerated amine-based process. Alternatively, the fuel can be combusted in pure oxygen, resulting in a purer post-combustion CO2 stream that is more easily captured and purified. The captured CO2 can then be put to a productive use or stored securely underground.

Further development of transformational new low-cost, high efficiency carbon-capture technologies can bring this potentially powerful emissions- reduction solution into widespread commercial use.

Next-Generation Hydropower

R&D VALIDATION SCALE GENERATON STANDARDZED MODULE MODULE OPTONS A modular hydropower approach, conceptualised here, could help new hydropower facilities meet site-specific parameters, as well as power generation and environmental goals.

FOUNDATON PASSAGE MODULE MODULE

Hydropower provided 10 percent of total electricity and 30 percent of renewable electricity in 2018 in the EU.1 However, plans to construct new dams 1. https://eepublicdownloads.blob.core. often face resistance. Large hydropower projects have also faced cost and windows.net/public-cdn-container/ schedule over-runs, and many old dams are nearing the end of their permits clean-documents/Publications/ and face challenges in re-permitting. Statistics/Factsheet/entsoe_sfs2018_ web.pdf

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Distributed, low-head hydropower could be a solution to these challenges, but costs remain prohibitive and most existing technologies do not mitigate many of the environmental concerns associated with large dams, such as fish passage and ecological disruption. Novel turbines can solve these problems and enable the continued development of hydropower. Streamlined permitting can also accelerate existing timelines.

Bioenergy for Power

Combustion of R&D VALIDATION SCALE CO₂ Gas for Power

Biomass can be gasified by reacting the feedstock at high temperatures (typically >700°C), without combustion, via controlling the amount of oxygen and/or steam present Carbon-Neutral in the reaction. Power can be derived from the subsequent combustion of the resultant Trees and Biomass Energy High Heat (without synthesis gas. Plants Combustion) to Derive Synthesis Gas Source: Modified from BioExplorer

Woods and Biomass Wooden Products (Organic Decay)

Power generation from bioenergy can come from a wide range of feedstocks and use a variety of different combustion technologies. Some are commercially available and have a long track record and a wide range of suppliers. Others are less mature, more recent innovations. Among the latter— technologies that are still largely at the development stage but are now being tried out on a commercial scale—are atmospheric biomass gasification and pyrolysis. More mature technologies include direct combustion in stoker boilers, low-percentage co-firing, anaerobic digestion, municipal solid-waste incineration, landfill gas, and combined heat and power. While today’s bioenergy power plants are typically run as baseload generation, in the future they could be designed and operated more flexibly to complement non- dispatchable generation from wind and solar. The challenges that come with using bioenergy for power include the high capital costs of plants and ensuring that sufficient minimum sustainability requirements are met by dedicated biomass plantations. Net GHG reductions of electricity plants burning dedicated biomass depend on harvesting rates as well as land-use change from new plantations. Plantations can also have a negative impact on biodiversity.2

2. https://www.irena.org/ publications/2020/Jun/Renewable- Power-Costs-in-2019 ; https://assets. publishing.service.gov.uk/government/ uploads/system/uploads/attachment_ data/file/795029/Global_Biomass_ Markets_Final_report.pdf ; https:// www.ieabioenergy.com/wp-content/ uploads/2017/02/IEA-Bioenergy-bio-in- balancing-grid_master-FINAL.pdf

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Hydrogen Gas Turbines VENTLATON MODFCATONS ENCLOSURE MODFCATONS: R&D VALIDATION SCALE - Piping for Syngas, Diluent HGH - Explosion Proofing HYDROGEN SKD - Hazardous Gas Detection Commercially available gas turbines using - Fire Protection hydrogen blends exist. For example, GE claims that some of their turbines can already today run on 100% hydrogen. But their HA Class turbines, which are very efficient and used in CCGTs, can only take blends of up to 50% hydrogen. Source: Modified from Turbomachinery Magazine

GAS TURBNE CONTROLS

ACCESSORY MODULE

DLUENT NJECTON SKD

A gas turbine can operate using a range of fuels. Right now, natural gas is the most common—but if they could be fuelled by clean hydrogen only, gas turbines could provide a road to clean dispatchable power. Gas turbines already exist that burn a fuel mix with a volumetric share of hydrogen of 30–90 percent. These turbines can be found in industrial settings such as refineries, steelworks, and coking works, where they burn fuels that are waste products of production processes. They are also used in Integrated Gasification Combined Cycle (IGCC) power plants, where they are fuelled using syngas, a mixture of carbon monoxide and hydrogen.

Turbine manufacturers have started research into developing gas turbines that are fuelled entirely by hydrogen and expect to bring them to market by the late 2020s. The challenge of adjusting the design of natural gas-fuelled turbines to hydrogen combustion is to not compromising efficiency or start-up times or emitting more NOx than current models do. Another challenge that comes with generating electricity using hydrogen produced from renewable electricity are the high losses (via the conversion of electricity to gas in the electrolyser and then back to electricity via the turbine) compared to the direct use of renewable electricity. Hydrogen-fuelled gas turbines might be needed for longer periods of low renewable output where other flexibility options, such as demand-side response or batteries, might not be suitable.3

Additional Resources

→ European Marine Energy Centre → EURACTIV, Can advanced biofuels really work? (2018) → MIT, Future of Nuclear in a Carbon-Constrained World → Third Way, Advanced Nuclear 101 → C2ES, Carbon Capture → Directive on common rules for the internal market for electricity (EU) 2019/944 setting a carbon intensity limit of 550gCO2/kWh for plants eligible for capacity remuneration mechanisms

→ EU Commission, Just Transition Platform (2020) 3. https://www.powermag.com/ high-volume-hydrogen-gas- → EU Emission Trading System turbines-take-shape/; https://www. thechemicalengineer.com/features/ hydrogen-as-a-fuel-for-gas-turbines/

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Energy ELECTRICITY SOLUTION Storage Energy Storage

Overview Another critical tool that allows for the use of more variable renewable energy sources (VREs) like wind and solar power is technology that can store electricity for a long period and dispatch power at times, such as during the night or on windless days, when these VREs are less available.

A range of long-duration storage options already exist, including flow batteries, underground pumped hydro, and molten-salt storage. But deploying these technologies at scale will require policy innovations and market-rule reform. Market Challenges

Cost Barriers There are already several cost-effective grid-scale energy storage options available on the market today, but each has its own challenges. Pumped- storage hydroelectricity provided more than 90 percent of grid connected operational storage capacity in the EU in 2019,1 but it faces land-use and other environmental constraints. Lithium-ion battery prices are dropping rapidly, but the ones commercially available today can only store several hours’ worth of energy.

Other storage technologies like flow batteries, molten salt storage, and subsurface pumped hydro address these issues. But they also cost more, as they are still progressing through stages of research, design, and development. The higher costs for VREs combined with longer-duration storage are especially stark when compared to combustion turbines fuelled by natural gas—the dominant technology providing peaking capacity to the grid. These are extremely cheap because they do not have their damaging environmental impacts priced in. Like earlier-stage innovations discussed elsewhere in the power sector, newer technologies also tend to face higher costs of capital.

1. https://op.europa.eu/en/publication- detail/-/publication/a6eba083-932e- 11ea-aac4-01aa75ed71a1/language- en?WT.mc_id=Searchresult&WT. ria_c=37085&WT.ria_f=3608&WT. ria_ev=search

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Market Rules The ability of energy storage to participate in wholesale markets is determined by transmission and distribution system operators overseen by national and European regulators. The European Commission has adopted guidelines that aim to allow demand side response (DSR) and storage to participate in all-wholesale electricity markets on a level playing field with incumbent technologies. However, the extent to which storage and DSR can participate in markets without facing barriers differs between Member States. In many cases, regulators still need to make major changes to market rules before energy storage can be fully integrated into these markets alongside generation resources.

Technology Performance Types of chemical batteries include lithium-ion, sodium metal and Redox flow. Within these types, different chemistries and system designs are available. These differ in terms of their performance and characteristics, such as their longevity, energy density, and safety. Lithium-ion battery systems in particular use highly active materials and need to be carefully designed and operated to manage safety hazards as well as degradation issues.2

Sustainable Resourcing Chemical batteries contain expensive, energy- and labour-intensive materials for which global resources are limited and which can cause environmental damage if they are not disposed of appropriately. For all these reasons, the reuse and recycling of batteries is key to scaling up the chemical storage sector. However, the ability to reuse and recycle chemical batteries is also one of this technology’s particular strengths. For instance, several public- and private-sector R&D projects and industrial projects seek to capture the economic opportunity offered by reusing and recycling batteries from electric vehicles (EVs).3

Land Use and Permitting

Some forms of energy storage, like pumped-storage hydroelectricity, are land- 2. Chen et al. 2020, Applications of use intensive and may face public opposition as a result. Subsurface pumped Lithium-Ion Batteries in Grid-Scale hydro can help mitigate some of these concerns, but it faces additional Energy Storage Systems, https://link. permitting requirements due to its underground injection process. springer.com/article/10.1007/s12209- 020-00236-w ; Energy Institute, 2019, Battery storage guidance note 1, https://publishing.energyinst.org/__ data/assets/pdf_file/0007/655054/web- version.pdf

3. BEIS, U Warwick, Nissan, Element Energy, 2020, UK Energy Storage Lab, http://www.element-energy. co.uk/wordpress/wp-content/ uploads/2020/01/UKESL-Non- technical-Public-Report_2020.pdf ; https://www.smart-energy.com/ industry-sectors/storage/uk-university- breakthrough-in-second-life-use-for- nissan-ev-batteries/ ; https://www. energy-storage.news/news/china-to- dominate-recycling-and-a-second- life-battery-market-worth-us45bn-b ; https://hondanews.eu/eu/en/cars/ media/pressreleases/203209/honda- hybrid-and-ev-batteries-get-second- life-in-new-recycling-initiative

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Technologies

Lithium-Ion Batteries

ELECTRON FLOW ELECTRON FLOW DSCHARGE CHARGE

R&D VALIDATION SCALE

A lithium-ion battery consists of an anode, cathode, separator, electrolyte, and positive and negative current collectors. The lithium

ions flow from the anode to the cathode and CATHODE ANODE vice versa, depending on whether the battery is discharging or charging, respectively.

LTHUM ON LQUD ELECTROLYTE SEPARATOR

As an increasing share of variable renewable energy is brought onto the power grid, it becomes more and more important to have resources that can mitigate that variability. Lithium-ion batteries (LIB) are increasingly being deployed as a potentially low-carbon solution to fill in the gaps of variable generation. These batteries work by passing lithium ions through an electrolyte from negative to positive electrodes, thus generating electric current. (The ions flow in the opposite direction when the battery is charging.)

LIBs are increasingly cost-competitive with other, more fossil-fuel-intensive forms of responding to variability (like natural gas-fired combustion turbines), and they are scalable from house-sized batteries to utility-scale deployments. But today’s batteries have limited discharge periods and degrade in performance over their lifetime. Continued R&D to address these challenges can enable LIBs to contribute further value to the power grid.

Flow Batteries

LOAD SOURCE

R&D VALIDATION SCALE

A redox flow battery, shown here, uses chemical reduction and oxidation reactions in the anolyte and catholyte solutions that flow through a battery stack to transfer energy during charge CATHOLYTE ANOLYTE and discharge.

MEMBRANE SEPARATOR ELECTRODE

PUMP FLOW BATTERY PUMP STACK

Flow batteries are a promising class of long-duration energy storage technology. A flow battery generates electricity by flowing stores of liquid

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electrolytes through an electrode stack. It can be recharged by reversing the direction of ion exchange, or (more rapidly) by replacing the discharged electrolytes with new liquid. Compared with LIBs, flow batteries can discharge over longer durations, scale more easily, and suffer less performance degradation over time.

The most common battery chemistry today is based on vanadium, which is relatively expensive. Though the cost of conventional flow batteries is still higher than LIBs, this gap is projected to shrink in the coming years, particularly as R&D continues on new battery chemistries, such as those based on iron.

Next-Generation Pumped

Hydro Storage UPPER RESERVOR CABLE

R&D VALIDATION SCALE PUMPNG ARVENT One type of next generation PSH is subsurface PSH, conceptualised here, which involves locating one or both reservoirs below ground and therefore, has the potential to reduce site LOWER RESERVOR footprint and environmental impact. GENERATON POWERHOUSE Source: Based on original by University of Colorado at Boulder.

Pumped storage hydropower (PSH) provides the vast majority of utility-scale energy storage on the EU grid today (more than 90 percent of grid connected storage capacity in 2019). During periods of low electricity demand and/or inexpensive power, a PSH facility pumps water into an upper reservoir. When the energy is needed, gravity draws the water back downhill through a typical water-driven turbine and generator. Despite its large market share, very little PSH is being built today, as such facilities have a large site footprint and specialised site requirements.

Researchers are pursuing several options for overcoming these challenges. Among these options is subsurface PSH, which pumps water into underground water wells, creating a large amount of pressure. To generate electricity, the pressure is released, pushing the water up the well and through a turbine. This approach can make use of existing “brownfield” sites like abandoned mines or caverns.

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Advanced Thermal Storage Advanced Thermal Storage POWERLNES R&D VALIDATION SCALE

ARCOOLED In a CSP plant, advanced thermal storage CONDENSER based on molten salt technology can be used to store thermal energy which can be converted to electricity when required. RECEVER

STEAM GENERATOR

TOWER GENERATOR

TURBNE

THERMAL ENERGY STORAGE TANKS HELOSTATS

While most people think of batteries when they think of energy storage technologies, there are other ways to store energy too. For instance, energy can be stored thermally by heating a medium and converting that heat into electricity when it is needed.

The most common medium for thermal storage today is molten salt, which can be heated to more than 500 degrees Celsius using the thermal output of a fossil plant or a concentrating solar power (CSP) facility and then stored in an insulated tank. This molten salt can then be run through a heat exchanger to generate steam to drive a turbine, creating electricity when needed. Molten salt can also be used to store energy as heat by using either resistive heating or a heat pump cycle and heat engine cycle. Researchers are also looking at new forms of thermal storage, such as phase-change materials and a variety of options for both hot and cold storage.

Clean Hydrogen CATHODE ANODE

POWER SUPPLY

R&D VALIDATION SCALE e-

e- In a polymer electrolyte membrane electrolyzer, shown here, water reacts at the anode to form HYDROGEN OXYGEN oxygen gas and positively charged hydrogen ions, and the hydrogen ions move selectively across the membrane to combine with electrons at the anode to form hydrogen gas. HYDROGEN OXYGEN BUBBLES BUBBLES MEMBRANE

e- e-

H+ H+

Hydrogen can be used as a fuel in stationary fuel cells that help stabilise the grid under increasing penetrations of variable renewable energy, in fuel cell vehicles, and as a fuel or feedstock in industrial processes. Most hydrogen today is produced through a carbon-intensive process called steam methane reforming (SMR), which derives hydrogen from natural gas through an

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industrial process. An alternative approach is electrolysis, which uses electricity to split water molecules (H2O) into hydrogen (H2) and oxygen (O2). Depending on how the electricity used for electrolysis is generated, this approach can be much less carbon intensive than SMR.

As the grid relies more heavily on wind and solar, hydrogen production is one way that excess generation from these VREs can be stored. The hydrogen made is subsequently used in a fuel cell to generate electricity during periods when wind and solar do not fully meet energy demand. To achieve this goal, electrolysis costs will have to decline substantially.

Hydrogen can have a zero (or very low) carbon footprint when produced from electrolysis via electricity from renewable sources or natural gas with carbon capture and/or utilisation (CCS/CCU).

Additional Resources

→ European Parliament, Energy storage and sector coupling: Towards an integrated, decarbonised energy system (2020) → EU Commission, Energy Storage Study: Contribution to the security of electricity supply in Europe (2020)

→ US DoE, Energy Storage Technology and Cost Characterization Report (2019) → National Grid Ventures, Comparing the Costs of Long Duration Energy Storage Technologies (2019) → EU Commission, Long Term Strategy, Technical Report (2018) → European Academies Science Advisory Council, Valuing dedicated storage in electricity grids (2017) → European Association for Storage of Energy, Pumped Hydro Storage → Batteries Europe Platform → Battery Alliance → Revision of the TEN-E Regulation: Reviewing the EU rules on trans-European energy infrastructure → Directive on Common Rules for the Internal Market for Electricity (EU) 2019/944; Regulation on the Internal Market for Electricity (EU) 2019/943; COMMISSION REGULATION (EU) 2017/2195 (Electricity Balancing Guideline) → IRENA, Dynamic Line Rating, Innovation Landscape Brief (2020) → IRENA, Innovation Landscape Briefs: Market Design (2020)

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ELECTRICITY POLICIES Policy Overview

Phase: Research and Development

RESEARCH & VALIDATION & EARLY LARGE SCALE DEVELOPMENT DEPLOYMENT DEPLOYMENT

European investment in research and development (R&D) supports economic development, drives down costs for key technologies, and promotes European leadership on clean energy and climate. Investment in R&D is driven primarily by various instruments and institutions operating within the Horizon Europe and InvestEU programmes.

European policymakers should increase investment and enact programmatic reforms to ensure a sufficient level of R&D in the following areas:

– Next-generation solar materials, including super-efficient perovskite solar cells;

– Next-generation onshore wind technologies, including larger diameter wind blades, taller wind towers, and optimization/control of fleets of wind plants;

– Offshore wind technologies including floating offshore wind foundations;

– Concentrated solar power;

– Synthetic inertia from renewable generation or standalone technology; and

– Improved VRE generation forecasting using machine learning algorithms.

For more, see the deep dives on → EU R&D Programmes → Stimulation of Clean Energy Entrepreneurship and Scale-up

Phase: Validation and Early Deployment

R&D VALIDATION SCALE

Demonstration Promising clean energy technologies face many challenges before we can deploy them at scale. Until we can demonstrate and validate their cost and performance in real-world conditions, potential buyers may be deterred. Demonstration reduces the economic and institutional risks of new technologies.

The EU will continue to support demonstration of technologies that align with its missions through various funding programmes, such as the Innovation Fund (which will provide around €10 billion supplemented through EU ETS revenues), Horizon Europe (EU’s flagship research and innovation programme),

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and InvestEU. The EU should continue to support a robust portfolio of demonstration projects for VRE technologies. In the near term, these should focus on floating offshore wind and concentrating solar power.

For more, see the deep dive on → Validation, Demonstration and Testbeds

and the policy (below) on Subsidies and Financial Incentives for Demonstration.

Subsidies and Financial Incentives for Demonstration Without targeted financial support to promote early-stage deployment, producers often do not have sufficient incentives to develop new technologies. The EU supports investment in green technologies, business cases, and pre- commercial manufacturing practices through a variety of different funding streams including InvestEU, Horizon Europe, the Innovation Fund, Connecting Europe Facility, the Modernisation Fund, and The Just Transition Mechanism. These funding streams are implemented by institutions such as the EIB Group via project-development assistance and an extensive range of instruments to mobilise public and private sector investors and fund projects at different risk levels. To maximise effectiveness, these funds should be targeted towards green technologies by following the EU taxonomy for sustainable activities and the “do no harm” principle. Creating green labels for financial instruments in line with the EU taxonomy will help mobilise and channel private investment towards green technologies.

For more, see the deep dive on

→ Validation, Demonstration and Testbeds

Local Markets for Flexibility As renewable generation and significant additional loads in form of EVs and heat pumps are connected to the distribution grid, network operators will have to take on more responsibility for system operation and become Distribution System Operators (DSOs). The EU Clean Energy Package requires Member States to incentivise DSOs to procure flexibility services—including from distributed generation, demand response or energy storage—in market-based procedures where this is a cost-effective alternative to grid reinforcement.

European policymakers should ensure proper implementation of the Clean Energy Package by Member States, particularly the establishment of transparent and non-discriminatory local markets for flexibility. Independent third-party market platforms should operate where unbundling of the DSO is incomplete. Establishing open standards for services-procurement platforms can further promote competition. Portfolio-based bidding should always be allowed where possible, and products should be defined for the largest possible market area to enable further aggregation. Finally, all services should be procured in public auctions and tenders. Bilateral contracts between DSOs and providers without tender should be limited as much as possible, and information about such bilateral contracts should be made public.

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Modernisation of Distribution Grids The transition to a renewables-based power system will require unprecedented innovation and change in electricity networks, especially at the distribution level. Historically, power generation was centralised and power flowed in one direction: from large power stations to consumers. In renewables-based electricity systems, power can flow in two directions due to both distributed renewable generation and storage. Furthermore, achieving high levels of renewable penetration will require a smarter electricity system that can coordinate the activities of multiple assets—from distributed renewable generation to electric vehicles and heating systems to distributed storage.

For more, see the deep dive on → Modernisation of Distribution Grids

Integrated Resource Planning Delivering the infrastructure for a carbon neutral energy system will require long-term planning that compares technology options in a non- discriminatory manner to identify cost-optimal solutions. To achieve such unbiased assessment, we need to further develop energy infrastructure planning processes—particularly those that have to do with electricity and gas networks.

Aligning infrastructure deployment policy, especially the Trans-European Networks for Energy (TEN-E) and Connecting Europe Facility (CEF) regulations, with long-term decarbonisation goals will help ensure European funds are only used to deploy resilient infrastructure that is compatible with climate neutrality. Electrification in transport, heat, and industry offers significant potential benefits for the electricity system in form of flexible demand. Through closer coordination across energy sectors, energy system planning can seize potential synergies of smart sector integration.

Providing the necessary mandate and resources to ACER or an independent observatory to make sure network operators’ Ten-Year Network Development Plans (TYNDPs) are based on latest available evidence will help identify lower-cost infrastructure alternatives for climate neutrality. System operators should justify their choice of measures transparently, especially the choice for network reinforcement over non-wire alternatives such as storage or demand-side response. Making far-reaching choices at a time when future outcomes may be uncertain may require more involvement in infrastructure planning from a body with the necessary democratic mandate (such as the EU Commission or the EU Parliament).

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Long-term planning documents should define segments of markets for flexibility services and identify the required volumes for each segment. They should particularly specify in a technology-neutral manner the requirements for diurnal as well as long-term storage in different decarbonisation scenarios. Based on the identified system requirements, electricity network operators should set in place fair and stable market mechanisms for flexibility technologies that enable them to capture the full value they provide to the system.

For more, see the deep dive on → Integrated Resource Planning

Targeted Support for Strategic Value Chains The EU Commission has identified strategic value chains that it wants to particularly support: hydrogen and batteries, for instance. Scaling up these value chains will require strong cooperation between industrial actors, concerted action to accelerate lab-to-market innovation, paired financial instruments from both private and public sectors, and a fit-for-future regulatory framework.

The EU Commission can facilitate this by bringing together stakeholders in cross-sector and cross-institutional platforms and public-private partnerships. It can establish strategic research interests and improve coordination across national and regional government departments, regulators, universities, EU institutions and businesses. It can also set technology-deployment targets and set up frameworks and mechanisms for government support. The process for Important Projects of Common European Interest (IPCEI) can facilitate a higher level of collaboration between the public and private sectors and relax some state aid rules. (See, for example, the case of the Battery Alliance’s research and innovation project.)

Phase: Rapid, Large-Scale Deployment

R&D VALIDATION SCALE

Permitting Reform Achieving the EU’s 2030 and 2050 climate goals will require a substantial and rapid expansion of Europe’s capacity to generate electricity from wind and solar resources. Consequently, policy makers need to reform permitting procedures for new wind and solar plants. Streamlined and simplified permitting procedures for renewable energy projects are encouraged in the revised Renewable Energy Directive (RED II). EU policy makers should monitor and support proper implementation at the national level and ensure Member States provide sufficient technical and administrative resources to permitting agencies.

Smaller-scale renewable energy projects can empower local communities and improve public perception of renewable energy, thereby increasing public acceptance of renewable energy projects on a larger scale. State Aid Guidelines should create sufficient space for Member States to support renewable energy in communities through specific support mechanisms such as Feed-in Tariffs.

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Carbon Price A carbon-pricing system that accurately conveys the true costs of GHG emissions can raise the relative cost of coal, oil, and natural gas to reflect the environmental harm they cause. This also lowers the overall cost of green technologies and fuels relative to fossil-based alternatives. Electric power is the economic sector in which carbon pricing can be most effective, because there already are cost-competitive alternatives to fossil fuels.

The EU uses a carbon price in the form of the Emissions Trading System (ETS), which works on a cap-and-trade principle. It covers 45 percent of the EU’s greenhouse gas emissions (the power, manufacturing, and aviation sectors). To ensure continued decarbonisation and the competitiveness of renewables versus fossil electricity, regulators must constantly adjust the number of issued allowances to maintain high carbon prices and avoid oversupply.

For more, see the cross-cutting policy on → EU Carbon Price

Clean Electricity Standard A good complement to carbon pricing for the power sector is a sector-wide Clean Electricity Standard (CES) that enables the government to specify a maximum carbon intensity for electricity-generating plants. The Clean Energy Package has already introduced a carbon intensity threshold of 550 gCO2/kWh for electricity plants to receive capacity payments. This prevents unabated coal plants from receiving such payments.

EU policymakers should consider introducing an EU-wide carbon-intensity limit for new electricity plants. Such a limit could be introduced in the framework of the Industrial Emissions Directive, which sets several pollutant limits for large industrial plants, including power plants, but currently excludes GHG emissions. The limit should be set at a value that ensures low-carbon electricity so that fossil-based power plants can only be built if they are equipped with CCS.

Renewable Energy Targets Renewable energy deployment targets offer investors and developers of renewable and flexible technology a long-term perspective and reduce the risk (and thus the cost) of corresponding projects. The Clean Energy Package sets a renewable energy target of 32 percent of final energy consumption by 2030, which all Member States must achieve collectively. Reaching this target will require dedicated policy measures.

The EU should continue to promote collaboration across Member States to achieve the EU-wide renewable target and encourage deployment of renewable energy projects at locations with the most abundant renewable resources. Such cross-border renewable projects can be financed using European funds. Access to de-risked finance, fast-track regulatory approval, and EU guarantees against policy risk will increase the attractiveness of

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investment in countries with less mature renewable sectors. EU policy makers should also enable coordinated development of a meshed offshore grid by supporting offshore wind farm and grid development in integrated projects via the CEF and TEN-E framework. Moreover, the EU Commission could help Member States facilitate the repowering of existing renewable energy plants by ensuring the simplified and swift permit-granting process the Clean Energy Package requires. Finally, EU policymakers should revise the 2030 EU renewable energy target upward and include that revision in the Clean Energy Package by 2023 at the latest.

Support mechanism for VRE Electricity A feed-in premium (FIP) for electricity from renewable energy generators provides these generators with additional income on top of electricity sales in wholesale markets. This is a more targeted form of support than the carbon price. Importantly in such a system, RES generators must sell their electricity at the power market. This support strategy offers them a guaranteed income per MWh: the strike price. If the price at which the RES plant sold its electricity at the market is lower than the strike price, the plant is paid the difference. If the price at which the plant sold its electricity is higher than the strike price, the plant pays the difference back.

A feed-in premium shields RES generators from wholesale price risk by offering them a guaranteed income while requiring them to sell their electricity directly in electricity markets. This reduced risk allows developers of RES projects access to lower cost financing. The EU requires Member States to use a feed-in premium if they choose to support renewables via direct price- support schemes to maximise their market integration.

As wind and solar have close to zero marginal costs, capital costs dominate the cost per MWh of electricity they generate. By contrast, fuel costs are much more significant in fossil-fuel generation. To reduce the cost of generating electricity via wind and solar, it is necessary to reduce the costs associated with building generation plants. In the case of fossil generation, the fuel efficiency of plants as well as the development of fuel prices are more important factors.

FIP contracts are awarded via competitive auctions, which has led to significant capital-cost reductions in wind and solar technology in recent years. Since auctions can be technology specific, the EU should consider targeted auctions for less-mature renewable technologies (such as concentrated solar power) in the framework for cross-border renewables projects. Furthermore, FIP schemes could be combined for technologies with R&D and demonstration support such as through the Innovation Fund, Horizon Europe, and funding by the European Innovation Council.

While FIP auctions have been highly successful at driving down the capital cost of wind and solar plants, they have also led to decreasing wholesale power prices and even periods of negative prices. To prevent further distortion of electricity wholesale prices, different forms of support mechanisms, particularly ones directed towards capacity (in MW) rather than output (MWh), should be considered.

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Market Design Reform Wholesale power markets in the EU were designed around dispatchable fossil generation and are adapting to an electricity system based on variable renewable energy sources. As such, market design and regulatory frameworks need to be improved to attract investment in flexibility resources that can balance variable energy production, including Demand Side Response (DSR), energy storage, increased interconnections and cross border trade, and flexible dispatchable generation.

Establishing price signals which accurately reflect the value of electricity services during different times of the day and in different regions of the network can guide investment and operational decisions to system-optimal choices. Shorter trading intervals and real-time markets can help market actors to respond faster and more accurately to short-term events in the system such as fluctuations of variable renewable output. Increased temporal resolution of price signals, nodal pricing, or locationally varying grid tariffs could help guide providers of flexibility such as storage developers on where their service could be most valuable to the system. Continuing exchange via channels such as ACER and the European electricity regulatory forum will help Member States share learnings and best practices on the development of electricity price signals.

Giving a more prominent role to PPAs will also help develop a more decentralised market for renewables and flexibility sources. Regulators should remove barriers to PPAs in existing RES support mechanisms and could further develop Renewable Guarantees of Origin to encourage offtakers of PPAs to invest in flexibility technology.

Integration of all electricity markets across Member States is a long-established goal of the European Union. It will improve the seamless exchange of power and enable Member States to share renewable energy and flexibility sources across borders. Various initiatives are ongoing to integrate electricity day-ahead, intraday, and balancing markets and increase cooperation in managing security of supply. However, significant work remains to complete the coupling of markets and realise the target model of a single European market for electricity. ACER plays a critical role in facilitating this transition through monitoring the level of integration across European markets and drafting European network codes.

Roll-Out of DSR Technology Demand response means allowing consumers to adapt their energy usage to different energy prices throughout the day. Due to the increasing share of VREs like wind and solar in power generation, the importance of demand response in supporting the power system will grow. Additional electricity loads from EVs and electrified heat will offer more flexibility than many traditional electricity loads, significantly increasing the potential for demand side response. A barrier to DSR today is the high share of retail price components that do not vary with time, such as levies, taxes, and fees. These make the retail price less volatile and reduce incentivisation of flexible demand.

The Clean Energy Package aims to enable consumers to actively participate in electricity markets either directly or through aggregation. It requires every consumer to be able to provide demand side response and receive remuneration that reflects the value of this flexibility. (This includes access

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to a smart meter and fully dynamic price tariffs.) Furthermore, where possible, regulators should remove disproportionate technical, administrative, and financial burdens for consumers. By monitoring and supporting the implementation of the Clean Energy Package by Member States, the EU Commission can continue to advance a more active role for consumers in power systems. The implementation could be streamlined through the development of a network code on Demand Side Flexibility up to 2023 that addresses, among other things, market-engagement rules, standardization of flexibility products, and interoperability of ICT systems. Member States should also be encouraged to promote efficient and flexible regulatory frameworks and allow regulatory sandboxes to test real use cases.

For more, see the deep dives on → Market Design Reform → Integrated Resource Planning

and compare the policy on Local Markets for Flexibility.

Strengthening Electricity Transmission Grids and their Interconnection Transmission lines and interconnectors are needed to connect renewable energy sources to centres of demand and provide flexibility to electricity systems by smoothing the output of wind and solar plants across larger geographical regions. A continental approach to renewable integration can be facilitated through increased coordination between Transmission System Operators across national borders. This will help deliver infrastructure at lower cost (in the form of meshed offshore grids, for instance) and enable cross-border renewable projects such as those envisioned by the Renewable Financing Mechanism.

To deliver the transmission infrastructure required for a renewables-based electricity system in a timely and efficient manner, several further policy measures are required. For one, today’s mostly reactive infrastructure planning needs to become more anticipatory. The EU needs to align its infrastructure deployment policy (particularly the TEN-E and CEF regulations) with 2030 and 2050 decarbonisation goals. Currently, the European bodies of transmission system operators for electricity and gas (ENTSO-E and ENTSO-G) publish Ten- Year Network Development Plans every two years. These plans determine which infrastructure projects are selected as Projects of Common Interest and thus benefit from accelerated permitting procedures and European funding. Stricter oversight by ACER or an independent observatory on the scenario assumptions of these plans—especially those on electrification rates, renewables growth, energy efficiency, and decarbonised gas—will help identify the least cost infrastructure that serves long-term needs. Electricity interconnection projects that help integrate renewable electricity should be a priority of European infrastructure deployment. Increasing coordination among Member States on developing European transmission grids, particularly a meshed offshore grid connecting clusters of windfarms to different markets, will help create zero carbon infrastructure at lowest cost. This will also be crucial for the deployment of cross border renewables projects. Such projects, which the EU Commission intends to promote via the Renewable Financing Mechanism, could enable Member States to collaborate on reaching renewable targets and thus help

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achieve decarbonisation at lower cost. To make the best possible choices at a time when future outcomes (such as the degree of renewable penetration and electrification of heat) are uncertain, a body with a democratic mandate like the EU Commission or the EU Parliament might need to get involved in infrastructure planning.

For more, see the deep dive on → Strengthening Electricity Transmission Grids and their Interconnection

Maximising the Use of Power Lines Transfers of energy across long distances can be expanded by deploying technologies, including advanced power-flow control and dynamic line rating, that maximise the amount of electricity that an existing power line can transport, thereby helping to reduce grid congestion and curtailment of renewable energy.

Right now, the principal barrier to deploying such grid optimisation technologies is a lack of incentives for regulated transmission owners. Modernised regulation should offer these owners better incentives to make the low-cost operational improvements that will enable them to deliver more energy over existing lines.

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ELECTRICITY DEEP DIVES Market Design Reform

Overview Many of the rules and practices governing the electricity system were designed decades ago when electricity was mainly generated by large fossil-fuelled power stations that were operated according to demand, and consumers were expected to be passive participants with no active role in managing demand. With higher penetration levels of variable renewable energy sources (VREs), this approach is less and less viable. As VRE deployment rises, the grid will require more flexibility technologies, including storage and demand-side response, to manage the increase in variability of supply.

The 2019 Clean Energy Package (CEP) aims to establish a market framework suitable for generation predominantly from distributed VREs and integrated into the electricity system by flexible technologies such as storage and demand-side response.

To drive renewables expansion and the uptake of flexible technologies, Member States will need to prioritise adequate implementation of the CEP in the years ahead. Establishing a market framework in which renewable and flexible technologies can flourish and develop multiple business models will enable these technologies to become less dependent on direct subsidies.

At the EU level, upcoming revisions of instruments relevant for renewable and flexible technologies (such as the Energy Taxation Directive) as well as actions under the Green Deal can further adapt the market framework to serve an electricity system largely based on VREs. In addition, monitoring Member States’ progress on CEP implementation and sharing best practices through existing and new forums such as ACER, ENTSO-E, and the EU DSO will facilitate the required, consistent, and systemic transformation of the regulatory framework. Policy Principles Coherent definition of energy system actors across national legal frameworks: The rollout of renewable and smart technology introduces new kinds of actors in electricity systems such as electricity storage: active customers and renewable energy communities who provide demand-side response or sell energy generated on their premises. The Clean Energy Package (CEP) defines these new actors. However, in many Member States, their roles and responsibilities—as well as their relationship to traditional

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actors in the electricity system—are not yet a clear and coherent part of the national legal framework. By establishing these roles and responsibilities, Member States can provide certainty to developers and investors of renewable and smart-grid projects, thus driving the uptake of new business models.

Price signals, tariffs, and nearly real-time markets that accurately reflect the value of electricity services: Dynamic electricity prices, i.e. ones that reflect the system cost of electricity consumption at different times of the day and different regions of the network, can guide investment and operational decisions to system-optimal choices. Setting price caps in wholesale markets and imbalance charges (for differences between declared and delivered energy) at commensurately high levels will help signal generation scarcity to market actors, improving the investment case for storage and other flexibility technologies. Increasing the temporal resolution of electricity prices and moving towards real-time energy markets can also help send more refined price signals to market actors. Similarly, Member States should ensure that the different value of electricity depending on location is properly signalled to market actors. Instruments that could help achieve this include nodal pricing, locational variation of network tariffs, and local markets for flexibility (see our policy summary on such markets). Currently, retail electricity prices in many Member States are flat-rate-based or non-dynamic. Introducing fully dynamic retail prices is crucial to increase the responsiveness of consumers and build demand for flexibility technologies at lower voltage levels, such as smart EV charging. At the same time, retail tariffs should be designed to ensure that consumers share the cost of energy infrastructure fairly (instead of transferring wealth from poor households to rich ones with smart technologies). Similarly, the high network costs that could affect remote customers in a potential location-based pricing system should be constrained.

Phase out net metering: To support the rollout of rooftop PV, some Member States have introduced net-metering schemes. Under such a scheme, a consumer with rooftop PV only pays the difference between gross consumption and PV generation, usually without distinguishing times and thus values for importing and exporting power. Net metering disincentivises consumers to invest in flexibility, as their bills do not change depending on when they use electricity. Furthermore, peak demand in most Northern European countries is in the winter evenings when the sun is not shining. Net metering leads to PV households paying lower network charges than households without PV even though they use the grid to the same extent for access to reliable power in the winter peak hours. Phasing out net metering will improve the business case for demand flexibility and share infrastructure costs in a more equitable way.

Non-discriminatory access for new technologies to ancillary and congestion markets: Storage and demand-side response technologies have started to enter ancillary services markets, especially frequency-regulation markets. However, in some Member States, design parameters such as minimum bid sizes and auction schedules as well as prequalification rules are tailored to incumbent technologies and can present barriers to new technologies. In many Member States, non-frequency ancillary services such as voltage control and black start services are currently not procured as a service, but large conventional power plants are obliged to provide the service. Similarly, distribution-network operators have managed congestion mainly with non-market-based procedures. By ensuring that TSOs and DSOs establish non-discriminatory markets for all ancillary and congestion-management services where this is cost-efficient, as the CEP requires, Member States can

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help enable further business models for storage and demand-side response technologies. Furthermore, it will make system operation less reliant on fossil- fuel generation and thus enable further increases of renewable penetration.

Access to capacity mechanisms: In some Member States, storage and DSR technologies have started to participate in capacity-remuneration mechanisms. The CEP requires non-discriminatory design of capacity mechanisms open to all technologies able to provide the required technical performance, including storage and DSR. Certain design aspects of capacity mechanisms can act as a barrier, such as applying low derating factors to technologies like batteries independent of their duration, or changing these abruptly as has occurred in the UK. Member States should ensure such design parameters are informed by the latest evidence on system requirements and differentiated according to storage durations. To ensure such revenues can contribute to investability, regulators should account for impact on consumer confidence when they consider changing derating factors. This will result in a broader range of technologies, including low-carbon technologies, which will contribute in turn to security of supply. By aligning the Guidelines on State Aid for Environmental Protection and Energy (EEAG) with requirements for capacity mechanisms in the CEP (regarding CO2 emission limits and non- discriminatory procurement, for instance) the EU Commission can increase the coherence of support of storage and DSR across the EU legal framework.

Standardisation and interoperability: Interoperability is essential to leveraging the potential of response from aggregated demand, including EVs. To ensure seamless communication among EVs, charging infrastructure, stationary battery systems, and aggregator platforms, regulators should consider EU- wide harmonised and open communication protocols and test procedures. Continued support for the EU Interoperability Centre for Electric Vehicles and Smart Grids and its global cooperation activities—with the US Department of Energy’s Argonne National Laboratory, for example—will help define a single language for smart grids and create a harmonised framework for innovators and investors.

Remove disproportionate burden on distributed resources: Network codes governing energy-system operation have become overly complex and their development is fragmented and lacking coordination. This poses a barrier for new and smaller market entrants such as demand-side aggregators or active customers who would like to sell or consume self-generated electricity. The CEP requires the elimination of disproportionate burdens such as testing procedures for active customers. Trials are looking into new ways of testing and commissioning large numbers of residential-scale assets, moving away from an asset-based to a portfolio performance-based approach. This could help parties meet system reliability requirements more easily and economically. The CEP-required removal of administrative and procedural barriers by Member States will enable consumers to play a more active role in the energy system and spur the rollout of smart-grid technologies. Along with standardisation, this reduced administrative burden will be instrumental to increasing consumer engagement in the energy system and creating demand for smart-grid solutions.

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Internal electricity market: The realisation of an internal electricity market in which electricity and ancillary services can be traded seamlessly between EU Member States is a key goal of the Energy Union. Such an internal market can allow Member States to operate and plan electricity systems more efficiently and reliably and increase their ability to integrate renewable energy. Key advances to date towards this target are the coupling of day- ahead and intraday electricity markets in a majority of Member States. The goal of market coupling is to reduce price differences by using the available interconnection capacity between markets as efficiently as possible. The establishment of several cross-border procurement platforms for electricity- balancing services has enabled further progress. Extending market coupling to all Member States, integrating parallel market-coupling initiatives, increasing the efficiency of market-coupling mechanisms, and harmonising day-ahead and intraday products will further increase the integration of European markets. Continued integration of balancing services markets will increase liquidity and competition in these markets and thus help reduce the costs of system operation.

For more information on interconnection, see our deep dive on → Strengthening Electricity Transmission Networks and their Interconnection

Strengthening the role of PPAs: Power purchase agreements, which have been pivotal to the rollout of renewables in the U.S., are long-term contracts under which a consumer agrees to purchase electricity from a generator at a fixed price. These can help reduce long-term risks and costs for seller and buyer respectively, and they will play an increasingly important role in Europe as operators of existing as well as developers of new renewable plants look for new business models outside of or complementing direct subsidies for renewables. Corporate commitments to green electricity have generated a growing demand for PPAs from large commercial and industrial users. By facilitating the uptake of PPAs as the CEP requires, Member States can enable renewable plants to become less dependent on direct subsidies. By procuring green electricity, public authorities can likewise use their purchasing power to accelerate the uptake of PPAs. The rollout of flexibility technologies, such as demand-side response and storage, could also be supported by PPAs. To achieve this, Guarantees of Origin (GOs)—certificates issued to a consumer of renewable electricity—could be developed further, and tied to a requirement to synchronise some amount of consumption with renewable generation. This could help increase the demand for flexibility considerably. Consumers could respond to this incentive by investing in flexibility technologies such as on-site storage or procuring flexibility services from third-party providers managing renewable generation risk. As PPAs reduce volumes on other markets, their use must be weighed against the primacy of the single European market for electricity. In this context, trading PPA contracts could be worth exploring, especially if liquidity concerns could be addressed.

Remove double-grid charges for storage: The imposition of grid charges when both consuming from and feeding into the grid is detrimental to many business models for storage. Currently, regulation on grid charges for energy storage vary significantly across Member States, and in many cases storage still faces double charges. The Clean Energy Package (CEP) requires the removal of such double grid charges. Charging and rewarding storage according to the cost and benefit it provides to the system will improve the business case for storage in many applications, accelerate the rollout of storage technologies, and help achieve the optimal level of storage deployment.

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Allow stacking of services for storage: Storage can provide multiple services to the electricity system. It can help stabilise the electricity grids by providing ancillary services such as frequency regulation, integrate variable renewable output, manage power flows along networks and use them more efficiently, and provide power at times of peak demand. Regulatory frameworks should ensure that storage can capture their full potential benefits to the system by allowing assets to provide several storage services where technically feasible (and where delivery of system-critical services can be guaranteed and not prejudiced by stacking). Implementing this CEP requirement will improve many business cases for storage, accelerating its rollout. Technical solutions to manage storage assets providing services across several markets are already commercially available.

Alignment of fuel taxation with climate policy across sectors and energy carriers: Taxation of energy carriers impacts their relative competitiveness and can be a crucial instrument to support the uptake of energy storage and demand-side response technologies. The revision of the Energy Taxation Directive (ETD) is an opportunity to make energy taxation better reflect carbon externalities. It will also help align EU energy-taxation and climate policy. Furthermore, taxation levels now differ significantly across sectors and energy carriers, and increasing the coherence of energy taxation will help increase smart sector integration and seize synergies between the electricity, gas, heat, transportation, and manufacturing sectors. Requiring the removal of undue burdens such as double taxes and other levies for storage in the ETD will help increase the viability of more business models for storage. Current Legislation Key legislation in the EU CEP regarding the electricity market framework are the Market Design Directive (Directive (EU) 2019/944), the Electricity Regulation (Regulation (EU) 2019/943), and the revised Renewable Energy Directive (Directive (EU) 2018/2001). The first and second set new rules for ancillary, wholesale, local flexibility, and retail markets as well as for capacity mechanisms, which aim to strengthen the role of active customers. The third defines rules and responsibilities for new kinds of renewable energy producers, households, or businesses consuming renewable electricity generated on their own premises and renewable energy communities.

Key EU legislation driving the integration of European electricity markets are the Regulations establishing a Guideline on Capacity Allocation and Congestion Management (CACM) (Regulation (EU) 2015/1222), on Forward Capacity Allocation (FCA) (Regulation (EU) 2016/1719), and on Electricity Balancing (EB) (Regulation (EU) 2017/2195). The first sets a framework for the efficient allocation of interconnection capacity and cross-zonal trading in the day-ahead and intraday timeframe. The second has similar objectives but focuses on forward markets. The third sets rules on the operation of balancing markets, aiming to increase opportunities for cross-zonal trading and real- time efficiency.

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ELECTRICITY DEEP DIVES Modernisation of Distribution Grids

Overview The transition to a renewables-based power system will require unprecedented innovation and change in electricity networks, particularly at the distribution level. Historically, power generation was centralised, and power flowed in one direction, from large power stations to consumers. In renewables-based electricity systems, power can flow in two directions due to distributed renewable generation as well as storage. Achieving high levels of renewable penetration will require a smarter electricity system that can coordinate the activities of multiple assets—from distributed renewable generation to electric vehicles and heating systems to distributed storage.

To achieve the level of innovation and change required, regulation of electricity networks will need to be adapted. Electricity network operators will need clear guidance on the outcomes they have to deliver and the pathway to a net-zero energy system along which they will operate. They will also need to be enabled and incentivised to invest in the modernisation of their information and control infrastructures and procure flexibility services from third-party providers including demand-side response and storage. At the European level, a closer alignment of innovation and deployment policies and removal of barriers in infrastructure policy for smart-grid projects will help accelerate the scale-up of smart-grid technologies. Policy Principles Define pathways and objectives for networks: Historically, National Regulatory Authorities (NRAs) have focused on incremental changes to existing industry structures and approaches, prioritising cost-efficient operation of utilities and fair competition in energy markets. The shift to a net-zero energy system requires much more fundamental changes to electricity grid infrastructure planning and operation than have been required in the decades since the introduction of electricity markets in the 1990s. These changes will also have to be made in the face of high uncertainty about what the future energy system will look like. (Uncertainties include the levels of electrification of heat and transport, the rollout of efficiency measures, and the pace and level

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of renewable expansion.) Electricity transmission- and distribution-system operators will need more clarity on the pathway to zero along with a clear set of outcomes (such as the network upgrades to accommodate demand of electric vehicles or the establishment of hydrogen infrastructure, for instance). These outcomes should be defined by a public body with the necessary democratic legitimacy such as the National Regulatory Authority or, potentially, a new independent body advising the government on infrastructure choices.

Adopt and improve distribution system planning: To improve the efficiency and transparency of network development, the Clean Energy Package requires distribution-network operators to publish network development plans. The development of the electricity grid should be part of a whole system plan which includes the development of gas, heat, and transport infrastructure, ensuring better alignment of infrastructure rollout between different parts of the energy system. Distribution-network operators should transparently justify their choices—especially the choice for network reinforcement over non-wire alternatives—and stakeholders should be able to review and comment on planning processes and challenge ingoing assumptions via consultations. One option to ensure unbiased assessment of infrastructure development options is to separate “system operation” from “network operation.” This has been implemented in the UK in the case of electricity transmission: A new entity, the electricity system operator, has been charged with wider electricity system planning and operation, while the transmission network is owned and operated by the electricity transmission owner. This could also be considered as an approach for distribution networks. The “distribution system operator” (DSO) to be established should represent a balance of expertise across sectors and be responsible for developing an integrated whole-system plan which delivers the outcomes the NRA or independent body set.

For more information, see the deep dive on → Integrated Resource Planning

Market-based procurement of flexibility: The Clean Energy Package requires Member States to allow and incentivise distribution network operators to procure flexibility services in non-discriminatory, market-based procedures open to distributed generation, demand response, and storage, if this is a cost-efficient alternative for network reinforcement. National Regulatory Authorities (NRAs) should ensure that all benefits of distributed flexibility sources across different layers of the electricity system, as well as in terms of reduced carbon emissions and local resilience, are adequately accounted for in cost benefit analyses. Moreover, ensuring that flexibility is remunerated at the full system value by distribution network operators will encourage further deployment of distributed energy and flexibility.

Incentivise minimisation of TOTEX: In many current Member State regulatory frameworks, capital investment in network reinforcement is preferable for network operators to procuring flexibility services from third-party providers such as storage or demand-side response. Network operators can recover capital investment, annualised over a 40–50-year period, at a guaranteed interest rate through grid fees. Procurement of flexibility from third-party providers, on the other hand, is treated as an operating cost which can only be recovered in the year it was procured and without interest payments. Adjusting regulation to incentivise network operators to minimise TOTEX (the sum of CAPEX and OPEX) will support the deployment of optimal solutions.

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Investment in innovation: The transition to a net-zero energy system will require a high degree of innovation in networks, especially at the distribution level. High renewable penetrations can only be achieved in a cost-effective manner if power generation and consumption are coordinated across as many assets in the electricity system as possible. Managing multiple actors— including distributed renewable generation, electric vehicles, and behind- the-meter storage—will increase the complexity of system operation and require the digitalisation of distribution networks. This includes the installation of control devices, the establishment and development of communication standards, and application of machine learning to improve forecasting and optimise system operation. As regulated monopolies, distribution network operators can only recover investments through grid fees, as approved by NRAs. Investment in smart information and control technology (ICT) hardware and software differs from traditional investment by distribution network operators in reinforcement and can involve more risk due to the novelty of the technologies. NRAs should therefore give clear guidance to network operators on the innovation required and approve investments in smart ICT systems. They could also allow the limited use of grid fees to fund pilot next-generation distribution-system upgrades.

Align innovation and infrastructure-deployment policy: Currently, EU network infrastructure deployment is dominated by conventional technologies, while many innovative technologies identified as EU innovation priorities and supported and successfully deployed in EU research projects, including smart network technologies, are underrepresented. Infrastructure-deployment policy represents a significant opportunity to scale up promising technologies developed in research initiatives. Establishing innovation as a sectoral objective and a requirement to keep up with innovative technological developments in the TEN-E regulation—similar to the TEN-T regulation— could align innovation and infrastructure policies.

Opening EU infrastructure support to smart grid technologies: The transition to a more decentralised energy system with distributed renewable energy and flexibility sources will require a wider rollout of smart-grid technology (as well as increased TSO-DSO cooperation) to manage increased complexity of system operation and optimisation. However, between 2013 and 2019, only three smart-grid projects were granted Projects of Common Interest (PCI) status. Broadening the PCI eligibility criteria in the TEN-E regulation to include smaller, decentralised infrastructure projects will enable increased EU support for smart-grid infrastructure. Current Legislation The Market Design Directive (Directive (EU) 2019/944) requires Member States to incentivise and allow distribution network operators to procure flexibility services from third-party providers including distributed generation, demand- side response, and storage. The TEN-E Regulation (Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure) defines criteria for infrastructure projects to be eligible for Projects of Common Interest status and thus accelerated permitting, preferable regulatory conditions, and EU funding.

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ELECTRICITY DEEP DIVES Integrated Resource Planning

Overview The transition to a carbon-neutral or even net-negative energy system by 2050 requires significant deployment of energy infrastructure that can meet unprecedented system functions within a comparably short period of time. Long-term system planning is necessary to ensure timely delivery of this infrastructure. Carbon neutrality will require the decarbonisation of all energy sectors, many of which have developed in isolation from each other. To achieve a cost-optimal system configuration and avoid stranded assets or a technology lock-in, we need an integrated view of the energy system across energy vectors (gas and electricity), end uses (electricity, transport, heat, and manufacturing) and competing technologies on the supply and demand sides.

Energy-infrastructure governance currently in place at the EU and Member State level was established with gradual development of energy systems in mind rather than the rapid and fundamental transformation required to reach carbon neutrality by 2050. Infrastructure transformation at the scale and pace we need will require governance reforms which address crucial questions such as who makes strategic infrastructure choices and how.

Currently, gas and electricity grid operators are mainly responsible for the planning of energy infrastructure. To deliver carbon-neutral energy infrastructure at lowest cost, they will need to align their network-development plans with 2030 and 2050 carbon-emission targets. In future decarbonised systems, different energy vectors (as well as technologies belonging to the same energy vector) will compete to provide low-carbon solutions at the lowest cost: for example, the decarbonisation of heating via heat pumps (with electricity-system impact) or hydrogen-gas boilers (with significant gas- system impact). Each option has different CAPEX and OPEX costs and places different burdens on consumers. Furthermore, within the electricity system, network reinforcements will compete with non-wire alternatives such as demand-side response and storage.

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The need for any low-carbon infrastructure and the identified lowest-cost technology to provide it in long-term system planning will depend on ingoing cost assumptions and methodologies. Transparency on assumptions and approach as well as opportunities for stakeholder feedback will help guarantee this critical system planning is informed by the best available evidence. To make the best possible choices at a time when future outcomes are uncertain, a body with a democratic mandate like the EU Commission or the EU Parliament might need to get involved in infrastructure planning too.

Once future system needs for electricity infrastructure have been identified, publicising these needs widely will send the appropriate long-term investment signals. The establishment of fair and stable markets for electricity-infrastructure services should support the rollout of new technologies to meet those needs. Policy Principles Align system planning with decarbonisation goals: Systems should align their long-term planning with both the EU’s 2030 and 2050 decarbonisation targets and Member States’ National Energy and Climate Plans (NECPs). All future scenarios of the energy system, and especially the Ten-Year Network Development Plans (TYNDPs) submitted by ENTSO-E and ENTSO-G, should achieve the same emission targets and requirements concerning safe and secure operation of the system. TYNDPs identify which electricity (and gas) infrastructure projects will be Projects of Common Interest with access to accelerated permitting and EU funding. This status is governed by the Trans- European Networks for Energy (TEN-E) regulation—whose ultimate goal, when it was introduced in 2013, was security of supply. Revising the regulation to account for the new policy priority of climate neutrality will be crucial for the transformation of European energy infrastructure.

These network development plans need to be developed in harmony with one another. They also need to acknowledge that greater reliance on one vector for decarbonisation (such as electricity) may imply a lesser reliance on others (such as gas). (Note that solutions may include the complete removal of networks, a decision that these bodies would find institutionally challenging.)

Make transparent assumptions and use the latest available evidence: To a large extent, ingoing assumptions and methodologies determine the cost-optimal solutions that long-term system-planning processes identify. Therefore, these assumptions should be clearly stated and easily accessible, particularly those on renewables growth, electrification, storage technologies, demand-side response, energy efficiency, decarbonised gas, and carbon capture and storage. Stakeholders should be able to review and comment on planning processes and challenge ingoing assumptions via consultations. System planning should reflect the latest understanding of technology cost and deployment potential, and its priorities (both system expansion and contraction) should be continuously updated to reflect progress and learning.

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Non-discriminatory analysis by an independent body: All solutions to achieve a secure, affordable, and sustainable energy system must be considered in a non-discriminatory way. It is therefore vital that assumptions are not influenced by vested interests, which in turn will require new expertise in infrastructure planning. In electricity systems, non-wire alternatives such as demand-side response, storage, and flexible generation, and to some extent energy efficiency, represent “less-firm” substitutes for conventional network reinforcement. Furthermore, electrified solutions, such as for heating, compete with those based on gas. Therefore, planning processes of electricity and gas transmission-system operators could be complemented or to an extent replaced by planning via an independent technical expert body who could ensure that system planning is based on the latest available evidence and identify innovation priorities and needs for large-scale deployment trials. For example, the Committee on Climate Change and the National Infrastructure Commission in the UK act as this kind of independent expert body, giving objective advice to the government on infrastructure choices.

Make choices at a time of high uncertainty: Delivering decarbonised infrastructure in a timely manner will require significant investment in and deployment of infrastructure ahead of need. Keeping all options open will also result in redundant infrastructure and high costs. Therefore, systems will have to make choices on infrastructure deployment in the face of significant uncertainty about future demand for and use of infrastructure. This can be challenging for regulators as well as regulated monopolies such as gas and electricity networks, since their main mandate is ensuring cost reductions and efficient outcomes for customers. However, failure to make these choices can make infrastructure deployment reactive rather than anticipatory. The ability to make proactive choices can be improved by increasing the democratic legitimacy and accountability of planning processes. To make the best possible choices at a time when future outcomes are uncertain, an executive or legislative body with a democratic mandate like the EU Commission or the EU Parliament might need to get involved in infrastructure planning. Likewise, decision-making can be informed by evidence provided by an independent expert body (see above), which would represent a balance of expertise across various infrastructure and technology options. The upcoming revision of the State Aid Guidelines provides an opportunity to enable national governments to take a more proactive role in developing infrastructure and defining decarbonisation pathways.

Integrate views across system layers and sector borders: Some infrastructure technologies like storage are able to provide benefits across multiple layers of the electricity system, from reduced network reinforcement to reduced investment in generation capacity to more efficient short-term balancing of the system. Long-term system planning should take an integrated view across system layers and assess technologies based on the value they can provide to the whole system. The contribution of energy efficiency and renewable technologies to energy security should also be acknowledged in planning processes consistent with the European Investment Bank (IEB) energy- lending policy. Furthermore, electrification in transport, heat, and industry offers significant potential benefits for the electricity system in the form of flexible demand. Energy system planning should seize potential synergies of smart sector integration by promoting a closer coordination with further infrastructure rollout. At the European level this could be achieved by aligning the Trans-European Transport Network (TEN-T) and the TEN-E frameworks.

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Define markets: The service needs identified in long-term planning for energy systems should be procured via non-discriminatory market-based mechanisms. Where markets do not yet exist, network operators should establish them, with oversight by National Regulatory Agencies (NRAs). A challenge in establishing or reforming energy-services markets will be to define those markets’ granularity: A broad scope will increase the number of potential suppliers and technologies (and thus competition); however, due to the significant differences in cost structures and technology maturity, such a broad scope might exclude certain technologies from the market. This is particularly true for the storage sector. Storage technologies and economics vary significantly depending on the service a storage asset provides the system and therefore the length of storage duration required. Energy-system scenarios should therefore delineate the need for storage by determining the volumes required at distinct storage durations, from sub-second (response- type services, for instance) to zero-carbon seasonal storage (which is unprecedented). We should recognise the technological and commercial readiness of storage solutions providing system-security services. We should also support innovation, particularly for longer-duration storage technologies which are less mature.

Procure services: Once future system needs for electricity infrastructure have been identified, publicising these needs widely will send the appropriate long-term investment signals. The establishment of fair and stable markets for electricity-infrastructure services should support the rollout of new technologies to meet those needs. Current Legislation TEN-E Regulation (Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure). Impact Long-term energy scenarios differ significantly in their predicted balance of energy carriers and technology mix and therefore have significantly different implications for infrastructure requirements. For example, the ENTSO-E 2020 TYNDP draft scenarios project gross electricity generation of 5,500–6,000 TWh in 2050, while the Long-Term Scenarios of the EU Commission and scenarios of members of the Electrification Alliance project 6,700–8,000 TWh. The ENTSO-E 2020 TYNDP scenarios also project up to 4000 TWh of demand for gaseous energy carriers by 2050, compared to 2200–2700 TWh in the other sources. Furthermore, some have questioned whether the use of 3,500 TWh unabated natural gas in 2040 that the ENTSO-E TYNDP National Trend scenario projects is in line with EU 2030 targets. These figures illustrate how different assumptions in energy-system planning will lead to significantly different infrastructure outcomes. They also illustrate that midterm system planning up to 2040 needs to be aligned with long-term decarbonisation targets.

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ELECTRICITY DEEP DIVES Strengthening Electricity Transmission Networks and their Interconnection

Overview We need to develop and strengthen European transmission grids to enable electrification in manufacturing, transportation, and buildings as well as the expansion of variable renewable energy sources (VREs). Transmission lines and interconnectors connect renewable energy sources to centres of demand and support the transition to a renewables-based power system in multiple ways.

Siting renewable generation where its production is the cheapest and transporting it to centres of demand is in many cases ultimately more cost- efficient than siting renewable production close to demand at locations of suboptimal resource. Transmission grids also allow us to aggregate wind and solar plants across larger geographical regions, which helps smooth their output. Moreover, transmission grids allow flexibility in sharing the sources needed to manage the variability of renewable generation, such as dispatchable power generation or demand-side response across regions and countries, increasing their efficiency.

However, in many countries the reinforcement of the transmission grid lags behind VRE deployment, leading to high grid congestion and subsequent curtailment of VRE output. To deliver power infrastructure at the scale and pace we need to reach decarbonisation targets, developing electricity transmission that can integrate more renewables needs to become a priority of national and EU-level energy policy. A more coordinated approach among Member States will help develop and build transmission infrastructure fit for the long-term future in the most efficient and effective way. Strengthening national planning authority and streamlining permitting processes will help accelerate the delivery of new transmission lines. Communicating the role of electricity infrastructure to mitigate climate change and encouraging public participation will help increase social acceptance.

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Policy Principles Align infrastructure planning with decarbonisation goals: To deliver electricity infrastructure at the scale and timeframe required to reach the EU’s climate goals, investment in transmission grids must increase considerably. Today, the development of transmission infrastructure is largely reactive; for the future, it needs to become more anticipatory and prepare for the growth of both renewables and electricity demand due to electrification. The Ten- Year Network Development Plans (TYNDPs) produced by gas and electricity transmission system operators (TSOs) identify which electricity (and gas) infrastructure projects will be Projects of Common Interest with access to accelerated permitting and EU funding. Aligning these plans with 2030 and 2050 decarbonisation targets will help deliver the electricity infrastructure required in the long term. System operators should be required to state and justify ingoing assumptions, particularly those associated with electrification, renewables growth, and use of unabated fossil gas. Electricity interconnection projects that help integrate renewable electricity should be a priority of European infrastructure deployment. To make the best possible choices at a time when future outcomes are uncertain, a body with a democratic mandate like the EU Commission or the EU Parliament might need to get involved in infrastructure planning based on independent, scientific advisory services.

Increase regional coordination in infrastructure development: Reaching climate neutrality will require scaling up renewable capacity considerably. A piecemeal approach driven by national perspectives cannot connect and integrate the vast amount of renewable capacity needed to European electricity grids. Instead, a more coordinated international approach will help deliver infrastructure fit for the long term at lowest cost. Targeted policy frameworks and processes for long-term power transmission infrastructure planning, permitting, and construction at both the EU and national levels will yield the most efficient and effective results. A pan-European grid masterplan which identifies both offshore and onshore infrastructure needs in the long term to reach carbon-neutrality is essential to success: it will provide clarity to investors and developers and, in combination with opening transmission development to more competition, will help reduce costs. This is particularly true for transmission infrastructure connecting offshore windfarms. A meshed offshore grid that connects clusters of windfarms to different markets can reduce their cost and time requirements, accelerating their deployment. Cross-border coordination among TSOs, governments and National Regulatory Authorities (NRA) should be increased using existing channels such as the TEN-E and CEF frameworks and the Regional Security Coordinators platform as well as through new channels such as regional forums for offshore wind development in the Baltic and Mediterranean Sea.

Enable cross-border renewable projects: The EU intends to promote cooperation among Member States in reaching Renewable Energy Targets via the Renewable Financing Mechanism. This instrument will support the joint planning, development, and cost-effective exploitation of renewables across borders. The development of transmission infrastructure will be crucial to the success of such cross-border renewable projects, and broadening the scope of the TEN-E regulation to include projects which combine generation and transmission assets could help accelerate their realisation. Harmonised technical and environmental standards, grid development plans, and streamlined approval and permitting processes will reduce the administrative burden for developers. A clear legal framework specifying rules of ownership, operation, and liabilities for cross border infrastructure will reduce risks for developers and investors and therefore help make such projects investable.

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Complement large-scale transmission with smart grids: While significant investment in transmission infrastructure will be required in the next decades, smart-grid technologies such as demand-side response and storage and energy-efficiency measures can help use transmission infrastructure more effectively and thus reduce the investment levels required. TSOs should therefore integrate smart-grid technologies and energy efficiency in infrastructure planning, and infrastructure policy such as the TEN-E regulation should promote them. The local markets for flexibility that the Market Design Directive envisions will also be instrumental to scaling up smart-grid technologies.

Strengthening national planning authority: National governments should strengthen the authority of National Regulatory Authorities (NRAs) in grid development planning processes. Approval of routes currently assigned to local authorities should be transferred to NRAs. This helps to reduce the coordination effort among different local authorities and simplify permitting processes, and allows project developers to have one single point of contact.

Accelerate permitting: National governments and NRAs should eliminate unnecessary administrative burdens by simplifying and streamlining permitting processes for reinforcement, expansion, and optimisation of the transmission grid. Measures which can contribute to an acceleration of the permitting process include:

– Prioritising the reinforcement and optimisation of existing lines along existing corridors before the building of new lines. Planning procedures should be shortened in this case.

– Planning of new lines or reinforcement of existing ones should look ahead to requirements under 2050 climate goals; make long-term, appropriate use of strategic resources (such as landing beaches for connecting offshore generators); and involve flexibility to accommodate potentially higher transport demand at a later stage.

– Environmental impact assessments should be harmonised across all government levels (local, national, regional, and European). Developing coherent guidelines for the interpretation of Environmental Impact Assessment and Nature Directives can improve transparency and public acceptance of infrastructure projects. They also reduce uncertainty and administrative burden for developers who otherwise must comply with multiple frameworks.

Increase social acceptance through information and public participation initiatives: Since public opposition to energy infrastructure can delay or even prevent projects and increase their costs and risks, broad public support is crucial to successfully transitioning to a low-carbon energy system. Involving civil society through improved governance and information on climate change mitigation and the role of grid infrastructure, as well as through inclusive planning processes, could help increase public acceptance. Project promoters can also create local value through compensatory measures such as providing a percentage of grid fees or shares in infrastructure projects at favourable conditions to local communities or investing in local community projects using European or national funds.

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Fair allocation of costs: Right now, TSOs, renewable generators, and third- party developers share costs for electricity-transmission infrastructure integrating renewable-energy sources in different ways across Member States. These costs should be shared in a way that incentivises competition and cost efficiency while supporting the roll out of infrastructure and generation needed in the long term. For example, the connection of a renewable energy plant might trigger wider network reinforcement in the surrounding area. Allocating the total cost of the reinforcement to the renewable plant would be unfair, as existing and future generation and demand will also benefit from the reinforcement. Instead, NRAs should enable TSOs to take a proactive approach to network reinforcement required for renewable expansion by allowing them to recover a share of reinforcement costs through customer bills. Another question is how to distribute the costs and benefits of cross- border infrastructure projects between involved countries. The use of EU resources to compensate transit countries which do not benefit in the same way as main import and export countries may be appropriate for projects crucial to reach decarbonisation targets. Finally, while incentivising grid- responsive behaviour, charging methodologies for final consumers should share the fixed costs of energy networks as efficiently and equitably as possible. Consumers who use grid infrastructure for many hours of the year should not be exempted from almost all grid charges if they manage to not use electricity from the grid in the hours of peak demand, as is currently the case in some jurisdictions. Current Legislation The support of energy infrastructure through European resources is governed by the Trans-European Networks for Energy (TEN-E) and Connecting Europe Facility (CEF) regulations, Regulation (EU) No 347/2013 and No 1316/2013 respectively. When it was introduced in 2013, security of supply was the TEN-E regulation’s primary goal, so the EU’s decarbonisation commitments following the Paris Agreement in 2015 require an update of the regulation to align the EU’s infrastructure and climate policies. (To date, a large share of funds in the TEN-E framework has been allocated to fossil-fuel-based infrastructure.) A review process of the TEN-E regulation started in May 2020 and the European Investment Bank has declared it will stop to finance unabated fossil fuel projects, including gas, from 2021 onwards.

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April 2021 | 58 GRAND CHALLENGE | TRANSPORTATION

TRANSPORTATION Overview

The internal combustion engine revolutionised transportation: increasing human mobility, opening new educational and economic opportunities, and facilitating the movement of goods around the world. But that mobility has come at a steep cost to the climate. Fossil-fuel combustion in cars, trucks, trains, planes, and ships is one of the leading sources (27 percent in 2017) of GHG emissions in the EU-27 and in the UK.

Road transport is the largest contributor to these emissions. It was responsible for 71.7 percent of all transport emissions in 2017, including emissions from cars (43.5 percent), light-duty trucks (8.5 percent), heavy-duty trucks and buses (18.8 percent), and motorcycles (0.9 percent). The remaining 28.3 percent is made up of aviation (13.9 percent), maritime (13.3 percent), railways (0.5 percent), and other transportation modes (0.5 percent). While cars are currently the largest source of transportation emissions, trucks, planes, and ships were the fastest growing transport modes by emissions in the EU in 2017, relative to emission levels in 1990.

Decarbonising transportation is critical to mitigating the most catastrophic impacts of climate change, and will require a complete transformation of the way goods and people move from place to place. The key components of this transportation revolution are electrification, low-GHG liquid fuels, and more efficient mobility. Electrification (plus a decarbonised grid) is one

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of the most promising solutions for vehicles that travel shorter distances between refuelling. For longer-distance and off-road applications, low-GHG liquid fuels can accomplish the same goal. More efficient vehicles and increased access to transit are also essential components of a comprehensive transportation- decarbonisation strategy.

Smart, well-designed policies can shape the technology and investment decisions that will put the entire EU transportation sector on a path to net-zero emissions.

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Electrification TRANSPORTATION SOLUTION Electrification

Overview Electric vehicles (EVs) are an essential technology for transportation decarbonisation. EVs are zero-emission at the point of use: the only emissions they generate are those associated with electricity generation (an area of rapid decarbonisation) and manufacturing.

Between 2010 and 2020, the cost of lithium-ion batteries declined by 89 percent, making EVs increasingly competitive with their gas-powered counterparts. Over the same period, annual sales of electric passenger vehicles in the EU have grown from under 10,000 a year to around 540,000. Electric buses are beginning to hit the streets (12 percent of new city buses in 2019), and electric trucks are already available from manufacturers including Tesla, Daimler, VW, and Volvo.

If EVs are going to change the overall trajectory of EU emissions, they will need to be supported by key technological innovations, such as batteries with ranges competitive with internal combustion engines; market reforms, such as well-designed market-based standards to accelerate vehicle deployment; and smart public policies, such as greater investment in charging infrastructure. Further R&D is needed to make maritime and aviation technology viable. Market Challenges

Charging Infrastructure Though most EV owners charge their vehicles at home, a robust network of public charging infrastructure can alleviate drivers’ anxiety about their range.

Charging infrastructure deployment in the EU has increased from 4,000 stations to about 170,000. This infrastructure is distributed in line with the development of the EV market: 76 percent of all charging points can be found in the Netherlands, Germany, France, and the UK. To meet charging needs and ease both range and infrastructure availability anxiety, the Sustainable and Smart Mobility Strategy sets the targets of at least 3 million charging points across the EU by 2030 to serve 30 million EVs. The EU needs to deliver a harmonised deployment plan for widespread charging points along with legislation on technology types and requirements for deployments in public places.

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Cost Barriers From 2010 to 2020, the cost of lithium-ion batteries has dropped by 89 percent, and current projections show that costs will reach the $100/kWh (€84/kWh) mark by 2023. Nonetheless, batteries are currently the most expensive component of an EV. Despite these falling costs and fuel savings, the high EV purchase price continues to be a barrier to widespread adoption. In addition, the costs of building EV infrastructure can delay the rollout of public charging options that would mitigate public perceptions of range anxiety.

Public Perception

Electric mobility still faces some public uncertainty. Consumers may be inclined to resist new technologies that are considered unproven and express anxiety over electric vehicle range and charging. While EVs currently meet Europeans’ average workweek kilometres driven (a 200-kilometre range covers the daily driving distance of 96% of Germans) and battery costs are steadily decreasing, public perception continues to present a barrier to EV market penetration.

Heavy-Duty Technology Zero-emission drivetrains for lorries and trucks are nearly market-ready, but uncertainty about European and Member State technology strategy means that original equipment manufacturers (OEM) are not aligned on which technologies to push. A concerted effort is required to assemble clear strategic roadmaps and deploy supporting infrastructure (such as mega chargers and electric and hydrogen refuelling stations). This will increase OEM confidence and facilitate faster deployment of zero-emission freight.

For maritime vessels, coastal vessels can particularly benefit from electrification. Industry is trending towards energy storage systems with high energy densities that can recharge onshore from a renewable electricity network, though this technology is not yet mature. For larger vessels, electrification is not necessarily the answer. Research priorities need to address different shipping segments and analyse drivetrain opportunities.

Vehicle Availability and Supply Chains As the EV automotive market grows, more focus is needed on the supply of raw materials. Traceability and transparency of raw material supply chains will remain important to ensure the sustained and sustainable production of batteries.

To address the increase in resource demand, managing products’ end of life—by reusing and setting high recycling targets for end-of-life batteries— is critical. New regulations should allow the use of these batteries in second- hand markets to encourage reuse, and standards must be introduced to set minimum recovery rates per key material for battery recycling across the EU.

Implications of Electric Mobility for Power Systems As the number of EVs increases, the demand on the power network also increases. This uptake needs to be carefully considered when planning for and managing power systems. Further research is needed to understand the implications of smart charging and vehicle-to-grid technologies to mitigate network constraints and ensure that these vehicles support an increasingly flexible power network.

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Technologies

Advanced Battery Technologies

, R&D VALIDATION SCALE >KM

New battery chemistries under development have the potential to unlock cheaper, longer- >KM range batteries compared to today’s technology. >KM Source: Based on original from Nature Materials. TODAY KM >KM ¯¹ ) KG WH ENERGY SPECFC KM KM KM

PBACD NCD NMH LON FUTURE ZNAR LS LAR LON

PRCE < < < < US$ KW H¯¹ AVALABLE UNDER DEVELOPMENT R&D

As the power sector continues to move away from carbon-emitting technologies, one of the most promising opportunities to reduce emissions in transportation lies in electrifying cars and trucks. But to make plug-in vehicles ubiquitous, they will need to approach the performance, cost, range, and fuelling time of today’s gasoline and diesel-powered vehicles—which will in turn require continued dramatic improvements in battery and battery- charging technologies.

The development of a new generation of cost-competitive, energy-dense, and quick-charging batteries would allow electric cars and trucks to replace traditional vehicles much more rapidly. Examples of long-range battery technologies include all-solid-state lithium-metal batteries (which use lithium metal as the anode and a solid electrolyte) and comparatively lightweight lithium-sulphur batteries. Commercialised versions of these could result in smaller batteries that are cheaper on a per kilowatt-hour basis.

Charging Infrastructure

R&D VALIDATION SCALE

Technologies such as increased deployment of DC fast chargers, advancements in vehicle- to-grid (V2G) connectivity, and inductive charging can reduce electric vehicle charging time, optimise the use of renewable electricity, and improve transit efficiency.

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Technologies that expand and expedite electric and hydrogen vehicle charging are also needed to achieve deep decarbonisation in the transportation sector. Technologies that advance hydrogen storage and transport, including cold or cryo-compressed hydrogen storage and cryogenic liquid tanker trucks or gaseous tube trailers, are required for large-scale deployment of fuel cell vehicles.

Technology advancements for electric vehicle and equipment charging include increased deployment of DC ultra-fast chargers, advancements in vehicle-to- grid (V2G) connectivity, and inductive charging. These can reduce charging time, optimise the use of renewable electricity, and improve transit efficiency.

Battery Materials

R&D VALIDATION SCALE

An aerial view of the brine pools and processing areas of the Soquimich lithium mine on the Atacama salt flat. Lithium is a key material in batteries, and directly extracting lithium from brines could reduce the costs of both lithium production and battery storage.

As demand for electric vehicles grows, demand for battery materials— particularly cobalt, nickel, and lithium—and battery disposal will grow as well. New approaches to digitising and leveraging geological data could identify and open new supplies of cobalt. Lithium, meanwhile, is found in brine and hard-rock deposits and is extracted via evaporation ponds or hard-rock mining, respectively. Evaporation ponds, however, are land-use intensive and difficult to develop, and hard-rock mining has high environmental impact and higher costs. Directly extracting lithium from brines could enable lithium production at a lower cost.

In addition, battery recycling can serve as an important source of materials for new batteries and encourage responsible end-of-life treatment for used ones. To enable battery recycling on a wide scale, we must improve collection systems and develop recycling technology and capacity.

Additional Resources

→ ACEA: Making the Transition to Zero-Emission Mobility → IEA: Global EV Outlook 2019 → Element Energy: Vehicle to Grid Britain → European Commission: Strategic Transport Research and Innovation Agenda → INEA: Connecting Europe Facility for Transport → EUR-Lex: Access to European Union Law → https://www.transportenvironment.org/sites/te/files/publications/01 percent202020 percent20Draft percent20TE percent20Infrastructure percent20Report percent20Final.pdf

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Low TRANSPORTATION SOLUTION Carbon Fuels Low-Carbon Fuels

Overview In long-haul transportation sectors such as freight, aviation and maritime travel, the distance between refuelling opportunities makes today’s batteries impractical. In those cases, low-carbon fuels, such as advanced biofuels and electrofuels created with clean-power generation, are essential. Electrofuels can also complement variable renewable energy sources (VREs), such as solar and wind power, whose availability fluctuates over the course of the day (This is known as “load balancing”).

New policies that drive innovation and investment will reduce costs and hasten widespread deployment of these necessary technologies. Market Challenges

Advanced Biofuel Ramp-Up Advanced biofuel production has been demonstrated and is close to commercialisation. However, the industry has been beset by delays in the ramp up of production capacity. As a result, the advanced biofuels industry has struggled to move from success at the R&D level to large-scale production in commercial markets. To overcome this hurdle and provide industry stability, greater regulatory certainty and policy support is required, particularly in bridging the gap from incumbent fossil fuels while production reaches scale. Structural financial mechanisms that aid with the cost of capital and provide access to project finance can also help.

Fragmented Implementation of Regulatory Framework The EU provides guidance and sets targets for renewable fuels in road transport for Member States via the Renewable Energy Directive (RED, recently updated to REDII), covering biofuels and electrofuels. These directives set Member State targets for proportions of renewable and low-carbon road fuels, GHG emission thresholds, and feedstock-emission values. While the EU’s experience with biofuels can inform effective legislation, REDII’s rules on hydrogen production are still under development. For example, regulations on carbon accounting will not be introduced before December 2021. Furthermore, different hydrogen production modes (electrolytic and reformed) need further classification under this scheme.

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One of the main challenges from these directives is a fragmented approach to policies from Member States. Member States develop their own policies to meet targets and comply with rulings, but the lack of direction at the EU level creates an ambiguous policy space that leads to uncertainty for new fuels such as hydrogen.

Cost Barriers High feedstock and production costs are market barriers to advanced biofuels. Feedstock price is often seen as the single most important influence on overall advanced biofuel production. For electrofuels, the high cost of renewable hydrogen and challenging production processes also limit market adoption. Costs also present significant market barriers for hydrogen—the costs of production, distribution, and on-board storage systems have all constrained adoption—and for the market penetration of synthetic hydrocarbon fuels whose infrastructure and energy requirements are still expensive relative to fossil fuels. Policies that bridge the financial gap between advanced technology fuels and conventional fuels can spur additional demand and work to eliminate these market barriers.

Hydrogen Technology While some hydrogen vehicles are on the market, there remain a number of technical barriers to the development of heavy-duty hydrogen vehicles— including the conversion of demonstrated technologies to mass-produced products and improvement on key performance indicators such as fuel economy and maintenance routines. Along with cost barriers, these will need to be overcome to reduce the green premium of these vehicle options compared to fossil-based alternatives.

Refuelling and Distribution Refuelling hydrogen vehicles is a circular problem. Despite improvements in station availability, the geographical spread of stations is still poor. At the same time, the low number of hydrogen vehicles leads to low levels of station use, discouraging further investment. Member States and the EU need to address this challenge and learn from case studies in Germany, where station deployment has been more prevalent.

For some heavy-duty vehicles such as trucks, the problem is more complex. In addition to the challenges listed above, there is no refuelling protocol yet for hydrogen trucks. This includes the pressure of refuelling (350 bar or 700 bar). Regulators need to develop these protocols to ensure station and vehicle designs can be further developed for a European market.

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Technologies

Refuelling

HYDROGEN HGHPRESSURE GENERATOR BAR STORAGE BAR REFRGERATON Electrolysis, Steam Methane UNT º C (Natural Gas Reforming) R&D VALIDATION SCALE

Cryo-compressed hydrogen storage involves putting the gas under high pressure at extremely low temperature to achieve a high energy density. Source: Modified from Science Direct

LOWPRESSURE LMTS FLOW RATE ONBOARD TANK BAR TO . KGMN BAR COMPRESSOR BAR

The opportunities for technology-enabled greenhouse gas emission reductions from the transportation sector go beyond improvements in vehicles and fuels alone, extending into the realm of system level efficiency and refuelling infrastructure improvements. For large-scale deployment of fuel cell vehicles, the world needs technologies that advance hydrogen refuelling systems, storage, and transport—including cold or cryo-compressed hydrogen storage and cryogenic liquid tanker trucks or gaseous tube trailers.

Advanced Biofuels

Lignocellulosic Fermentation R&D VALIDATION SCALE 5 Main Markets: feedstocks Renewable transport fuels as gasoline components A variety of sustainably-sourced non-food biomass can be transformed into all types of Sugars renewable transport fuels through fermentation, Biological biological and/or chemical processes, and and/or microorganism-based production. Sustainable 6 Chemical All types of renewable Energy Crops Processes transport fuels for jets and diesel engines

Microorganism- Aquatic Biomass Based (e.g macroalgae, microalgae) 7 Production All types of renewable transport fuels

Low-carbon biofuels made from sustainably produced non-food biomass have the potential to dramatically reduce CO2 emissions from the transportation sector while providing the high energy density and easy storage of a liquid transportation fuel. The second European directive on Renewables (REDII) has a sub target of 3.5 percent advanced biofuels on the roads of Europe by 2030.

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To produce biofuels cost-effectively at global scale, transformational innovations are needed that reduce the costs of energy crop production, harvesting, and transportation, as well as higher yield, low-cost technologies for biofuels conversion.

Electrofuels

DC POWER H₂ H₂

R&D VALIDATION SCALE CONVERTOR H₂

HYDROGEN A variety of electrofuels can be produced H₂ ELECTROLYSS by reacting hydrogen (produced from the STORAGE electrolysis of water) and CO2. For example, methane and methanol can be produced CH through the Sabatier reaction. AC POWER CO₂ CO₂ METHANE

CO₂

CO₂ SOURCE SABATER REACTON METHANOL

Electrofuels (also called power-to-gas or synthetic fuels) are fuels produced from electricity, CO2, and water. Electrofuels are produced by mixing hydrogen and CO2 in a synthesis reactor, resulting in a range of liquid and gaseous fuels that includes gasoline and diesel. The production process also generates marketable by-products: high-purity oxygen and heat.

Electrofuels can help manage variations in electricity production, reduce the need for biofuels, and aid in transportation sectors where fuel switching is difficult, such as shipping. If electrofuels are produced from renewable electricity and CO2 from either sustainable bioenergy or air capture, they could also be a carbon-neutral alternative that enables the continued use of existing investments in vehicles and fuel infrastructure.

Fuel Cells

R&D VALIDATION SCALE ELECTRCAL CURRENT TO POWER CAR OXYGEN A hydrogen fuel cell utilises hydrogen and HYDROGEN FROM AR oxygen to power a vehicle through a chemical GAS conversion process, with heat and water as O O H

H MEMBRANE the only byproducts. H H+ O

H+ H+

H+ H O H H O H HO

ANODE ELECTROLYTE CATHODE WATER VAPOR AND HEAT

Electrochemical conversion technologies such as fuel cells can convert hydrogen into automotive power with almost 60 percent efficiency—and are

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theoretically capable of exceeding 80 percent. In addition to solving other challenges, such as the development of high-density onboard hydrogen storage technologies and low-cost hydrogen production and distribution, the cost of fuel-cell technology needs to be significantly reduced to encourage the widespread deployment of fuel-cell-powered vehicles.

Key challenges for fuel-cell cost reduction include reducing the use of precious-metal catalysts, improving the performance of potentially cheaper anion-exchange-based fuel cells, and finding transformational new fuel-cell technologies that can efficiently convert easily distributed and storable liquid fuels (like alcohols or hydrocarbon) into low-carbon automotive power. In addition, more hydrogen infrastructure must be deployed to support hydrogen fuelling for transportation.

Recycled Carbon Fuels

R&D VALIDATION SCALE

Liquid and solid waste (or waste processing gas) of non-renewable origin—for example, fossil waste such as plastics—can be used to produce liquid or gaseous fuels. Plastics PYROLYSS can be converted into liquid fuels in industrial GASFCATON HYDROGENATON processes such as gasification and subsequent AND REFNNG refining. This reduces the carbon intensity of the fuel used by vehicles. RECYCLED CARBON Source: Modified from Bellona

CRUDE OL NATURAL GAS

As they are produced, these fuels—either liquid or gaseous—reuse carbon- process streams or products produced from non-renewable source material. These can be solid or liquid waste streams, waste processing, or exhaust gas. These fuels are now considered under the second European renewables directive (REDII) and can be promoted through the low-carbon fuels transport targets applicable to the transport sector. However, they cannot contribute to overall renewable energy targets.

Additional Resources

→ IRENA: Hydrogen: A Renewable Energy Perspective → ADVANCEFUEL: Barriers to Advanced Liquid Biofuels and Renewable Liquid Fuels of Non-Biological Origin → European Commission: Strategic Transport Research and Innovation Agenda → INEA: Connecting Europe Facility for Transport → EUR-Lex: Access to European Union Law → The ICCT: Final Recast Renewable Energy Directive for 2021-2030 in the European Union

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Efficient TRANSPORTATION SOLUTION Mobility Efficient Mobility

Overview To increase efficiency in transportation, we need to move more goods and passengers while emitting fewer harmful greenhouse gases (GHGs). Some efficiency improvements, such as reducing vehicle kilometres travelled (VKT) and the carbon footprint of freight and cargo handling, can create economic benefits across the transportation sector. Increasing mobility and transit options can also provide health and community benefits while expediting near-term decarbonisation.

Technologies that increase fuel economy and reduce the weight of vehicles and equipment will further amplify the carbon reductions achieved through electrification and low-GHG liquid fuels. Market Challenges

Land Use and Permitting At a local level, policy makers must develop transportation systems that balance the needs of all users—freight carriers, motorists, transit riders, bicyclists, and pedestrians. Land use and permitting can be a significant barrier to the development of efficient, balanced, multimodal transportation networks. Planners must consider existing housing and development polices and zoning requirements when considering major investments in transit or improvements to freight facilities. Policies should link housing, land use, and mobility and work to streamline the permitting processes for projects that show net benefits in housing and environmental attributes.

Public Perception In Europe, public transport continues to draw record numbers of users. In 2014, it reached a total of 57.9bn journeys. However, the rate of increase varies by Member State, and public perception of transit as unreliable, inefficient, and inconvenient has slowed the rate of market adoption. Transit demand has also been hampered by low fuel prices in some Member States and the rise of transportation network companies (TNC) like Uber and Lyft. Policies that increase investment in public transit and result in more reliability and reduced cost can reduce these market barriers.

Shifting public expectations of freight-delivery systems also impede the development of more efficient mobility. The race towards ever-faster shipping is driving companies like Amazon, UPS, and FedEx to increase delivery trips. Instant (and often free) shipping encourages consumers to make multiple

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small purchases, which can increase vehicle kilometres travelled (VKT) and reduce efficiency. Policies that encourage reductions in freight VKT and require adoption of zero-emission freight equipment can reduce the carbon footprint of what is becoming the new reality of instant delivery.

Cost Barriers Large upfront capital costs are a huge market barrier to the purchase of zero- emission freight equipment at transportation hubs such as ports, distribution centres, airports, and rail yards. Despite potential long-term cost savings due to reduced operating and maintenance costs, zero-emission equipment remains out of reach for most transit and freight operators. Procurement policies that require EU and Member State purchases of advanced technology equipment can drive down production costs through economies of scale. Fiscal incentives can further reduce the green premium of zero-emission equipment and help encourage market penetration. Technologies

Lightweight Materials

R&D VALIDATION SCALE

Manufacturing vehicles with advanced lightweight materials can significantly improve their efficiency, thereby reducing emissions.

One of the best ways to reduce carbon emissions from transportation is to make all vehicles—cars, trucks, planes, trains, and ships—lighter. In a typical light-duty car, every 10 percent reduction in weight increases fuel efficiency by 6-8 percent, and a 30 percent weight reduction improves efficiency by up to 20-25 percent.

The use of strong, lightweight materials like carbon-fibre–reinforced plastics and metals such as aluminium or magnesium present tremendous opportunities for vehicle-weight reduction. However, these materials are currently too expensive to manufacture, and cost-effective technologies for joining them together into lightweight structures do not yet exist in many cases. To successfully enable dramatic GHG reductions, we need to develop transformational new lightweight materials, inexpensive manufacturing processes, and new material-joining processes.

The development of innovative lightweight materials should include due consideration for their recyclability. It also should not preclude downsizing vehicles as part of the effort to decrease their weight.

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Mobility as a Service (MaaS)

R&D VALIDATION SCALE

To provide sustainable alternatives to the use of a private car, various forms of transport are combined into a single, on-demand mobility service covering public transport, vehicle- sharing, rentals or leases. Source: Modified from Medium

Mobility as a Service integrates various forms of transport into a single, on-demand mobility service covering public transport, ride-, car-, or bike- sharing, taxis, and car rentals or leases. Private companies in this space are continuing to work on new business models to encourage consumer interest. The aim is to provide alternatives to the use of a private car that are as convenient, but more sustainable, cheaper, and with less congestion in the transport system.

Physical Internet

R&D VALIDATION SCALE

Standardised, modular containers enter the physical Internet from the supplier and move along the network to the designated end user. These containers are easy to handle, store, interlock, build and dismantle—much like digital data packets. Source: Modified from ALICE-ETP

The physical Internet takes the concept of an interconnected network of nodes (whether they be supply or demand) and applying this to logistics. The physical Internet will deliver operational connectivity that replaces much of our existing logistical models. Containers that enter the physical Internet from the supplier or distributor move along the network to the designated end user. These containers will be modularised and standardised to meet the requirements of the physical Internet. Currently, this remains just a concept, but several projects, including the European project SENSE, are exploring the technology.

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Additional Resources

→ European Commission: Strategic Transport Research and Innovation Agenda → INEA: Connecting Europe Facility for Transport → EUR-Lex: Access to European Union Law → The ICCT: CO2 Emission Standards for Passenger Cars and Light-Commercial Vehicles in the European Union → European Commission: Transport in the European Union, Current Trends and Issues → Transport and Environment: Road to Zero: The Last EU Emission Standard for Cars, Vans, Buses and Trucks

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TRANSPORTATION POLICIES Policy Overview

Phase: Research and Development

RESEARCH & VALIDATION & EARLY LARGE SCALE DEVELOPMENT DEPLOYMENT DEPLOYMENT

European investment in research and development (R&D) supports economic development, drives down costs for key technologies, and promotes European leadership on clean energy and climate. Various instruments and institutions operating within Horizon Europe and InvestEU, as well as IPCEIs such as the European Battery Innovation, drive investment in in R&D for mobility-electrification technologies. European policymakers should increase investment and enact programmatic reforms to ensure sufficient level of R&D in the following areas:

– Lithium-ion battery performance, reliability, cost-effectiveness, and lifetime improvements;

– Reducing lifetime emissions by increasing the recovery rates and energy footprint of recycling processes;

– Battery monitoring to support reconditioning / repurposing of battery packs;

– Long-range vehicle batteries, including solid state electrolyte and lithium sulphur; and

– Charging infrastructure (including DC fast chargers and vehicle-to-grid connectivity) and hydrogen vehicle charging.

For more, see deep dives on → EU R&D Programmes → Stimulation of Clean Energy Entrepreneurship and Scale-up

Validation and Early Deployment

R&D VALIDATION SCALE

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and InvestEU. The EU should continue to develop a robust portfolio of demonstration projects focussed on the electrification of transport, especially Vehicle-to-Grid or Mega Charging Systems for heavy-duty vehicles.

For more, see the deep dive on → Validation, Demonstration and Testbeds

and the policy (below) on Subsidies and Financial Incentives for Demonstration.

Subsidies and Financial Incentives for Demonstration Without targeted financial support to promote early-stage deployment, producers do not often have sufficient incentives to develop new technologies. The EU supports investment in green technologies, business cases, and pre- commercial manufacturing practices through a variety of different funding streams including InvestEU, Horizon Europe, the Innovation Fund, Connecting Europe Facility, the Modernisation Fund, The Just Transition Mechanism, and sector-specific funds such as STRIA. These funding streams are implemented by institutions such as the EIB Group via project-development assistance and an extensive range of instruments to mobilise public and private sector investors and fund projects at different risk levels. To maximise effectiveness, these funds should be targeted towards green technologies by following the EU taxonomy for sustainable activities and the “do no harm” principle. Creating green labels for financial instruments in line with the EU taxonomy will help mobilise and channel more private investment towards green technologies.

Green Procurement Procurement policies targeting the next generation of electric vehicles, intermediate products (batteries, vehicle materials), and equipment such as charging infrastructure can reduce costs and drive private-sector demand. Procurement policies that focus on categories with little electric-technology penetration—including heavy-duty vehicles and equipment and marine vessels—can also spur market adoption and encourage long-term deep decarbonisation.

Leveraging the purchasing power of public institutions can similarly create initial markets for emerging low-carbon technologies and demand for more circular products and cleaner modes of transport, contributing to overall decarbonisation.

Currently, the EU has a voluntary Green Public Procurement (GPP) instrument, and Member States are encouraged to use common sustainability indicators determined by the EU when they buy products and services. As a part of its New Circular Economy Action Plan, the EU will propose minimum mandatory GPP criteria and phase in compulsory reporting to monitor the uptake of GPP.

This new set of criteria should go beyond the EU’s directives on the Deployment of Alternative Fuels Infrastructure (DAFI) and Promotion of Clean and Energy Efficient Road Transport Vehicles.

For more, see the deep dive on → Green Procurement

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Supporting Low-Carbon Hydrogen Production Hydrogen, acting as an alternative energy carrier, is needed to decarbonise those areas of the energy sector which cannot feasibly be electrified. This includes applications across the manufacturing, transport, power, and buildings sectors. To align with the EU’s ambition for net-zero emissions by 2050, a bulk supply of low-carbon hydrogen is needed that is significantly larger than the current relatively small-scale supply produced from fossil fuels. Decreasing costs of renewable power, rapid technology developments, and increased urgency to address climate change have made this the opportune time to develop the European hydrogen economy.

The growth of a low-carbon hydrogen economy in the EU should by underpinned by clear definitions for different methods of hydrogen production based on their respective carbon intensities and a roadmap that reinforces technology development and wide-scale deployment.

Policy measures such as quotas for hydrogen in sectors such as manufacturing (carbon free products, for instance) or aviation (such as synthetic fuels) are essential for increased large-scale adoption. Incentives such as contracts for difference, guarantees of origin, and a Clean Fuel Standard are required to bridge the gap with incumbent fuels and create operational incentives for electrolysis. Getting to scale should be supported by a comprehensive portfolio of cross-supply chain projects supported by EU and Member State financing. Combined, this will create markets for low-carbon and renewable hydrogen and will eventually eliminate the need for policy interventions.

For more, see the deep dive on → Supporting Low-Carbon Hydrogen Production

Phase: Rapid, Large-Scale Deployment

R&D VALIDATION SCALE

Carbon Price A carbon-pricing system that accurately conveys the true costs of GHG emissions can raise the relative cost of coal, oil, and natural gas to reflect the environmental harm they cause. This can also lower the overall cost of green technologies and fuels relative to fossil-based alternatives and the overall relative cost of electric vehicles and equipment.

The EU uses a carbon price in the form of the Emissions Trading System (ETS), which works on a cap-and-trade principle and covers 45 percent of the EU’s greenhouse gas emissions (the power, manufacturing, and aviation sectors). To ensure continued decarbonisation and the competitiveness of renewables compared to fossil electricity, regulators must constantly adjust the number of issued allowances to maintain high carbon prices and avoid oversupply.

Including the maritime sector in the EU ETS can accelerate the sector’s decarbonisation. Similarly, phasing out the level of free allowances for the aviation sector can accelerate the uptake of alternative low-carbon fuels, such as synthetic fuels, which aligns with the EU’s climate ambitions.

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For road transportation, a Clean Fuel Standard and an Efficiency and Emissions Standard are effective policies to drive emission reductions. If the EU-ETS expanded and included road-transport, targets should be set at a level that does not deflate the value of the carbon price.

For more, see the policy on EU → Carbon Price

Supporting the Production of Batteries The development and production of next-generation battery technologies is critical to the electrification of transport. The EU is working on its ambitions to develop a world-class battery industry to provide this technology domestically. The European Battery Alliance has worked across the whole value chain, from mining of raw materials to cell production and recycling useful products. This is leading to the creation of “Giga-factories” such as the Northvolt factory in Sweden or all-value-chain IPCEIs (European Battery Innovation).

Clean Fuel Standard As the power sector becomes cleaner, electricity has the potential to be a zero-emission fuel that can displace gasoline and diesel. Electrofuels also show great potential in aviation and maritime applications and provide alternatives to fossil fuels for vehicles and other equipment that are difficult to decarbonise.

A Clean Fuel Standard (CFS) can encourage producers (such as refineries), importers, and retailers (such as forecourts) of transportation fuels to reduce the carbon intensity of the fuels they sell over time via technology neutral trading mechanisms and subsidies. A version of a CFS currently exists in the form of the EU’s Renewable Energy Directive II (RED II). The Directive covers low-carbon fuels such as biofuels, advanced biofuels, recycled carbon fuels, hydrogen, and electricity.

For more, see the deep dive on a → Clean Fuel Standard

Efficiency and Emissions Standards An Efficiency and Emissions Standard (EES) can achieve long-term decarbonisation by introducing measures which force original equipment manufacturers (OEMs) to manufacture the cleanest vehicles and equipment possible. This currently exists in the EU through the Euro Emissions Standards and Carbon Emissions Standards for light-duty vehicles and trucks. These measures set targets on vehicle GHG emissions as well as pollutants such as particulate matter (PMs) or Nitrogen Oxides (NOx), thereby improving air quality too. As the EES becomes more stringent, OEMs are required to increase the proportion of clean vehicles they sell. These include hybrids, battery electric, and fuel cell electric vehicles as well as, to a much lesser degree, more efficient internal combustion vehicles, with pollutant filters and catalysts in the near term.

Zero- and/or low-emission vehicle (ZLEV) standards and mandates should also include buses, off-road equipment, and even marine and rail applications—not just cars, light commercial vehicles, and trucks. These standards help ensure the supply of clean technology is available to meet consumer demand.

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The next European standard should prepare OEMs for the complete phase-out of pollutants and align with the EU’s 2050 net-zero ambitions. Various Member States are setting targets for the ban on new sales of polluting passenger cars by 2030, for example.

For more, see the deep dive on → Efficiency and Emissions Standards

Infrastructure Widescale adoption of electric vehicles requires a robust EV charging infrastructure. This becomes increasingly important as measures such as a Clean Fuel Standard and Efficiency and Emissions Standard drive the uptake of electric vehicles.

Several funding mechanisms already exist to support this critical decarbonising infrastructure, including increasing investment in the expansion of fast-charging infrastructure for electric vehicles in Central and Eastern Europe under InnovFin EDP. However, further deployment of charging infrastructure across Europe is required to ensure that all Member States have the opportunity to shift towards zero emission mobility. This strategy should be underpinned by a clear methodology in siting charging points that aligns with the EU’s deployment targets.

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TRANSPORTATION DEEP DIVES Efficiency and Emissions Standards

Overview Transport made up 27 percent of the EU-28’s total GHG emissions in 2017. (See Figure 1.) Unlike other sectors of the EU energy system, transport emissions increased by 235MtCO2e between 1990 and 2018, largely due to increases in demand for the transportation of goods and passengers. To reach net-zero by 2050, we must decarbonise the transport sector and move more people and goods with fewer emissions.

FIG. 01 EU Transport Greenhouse Gas Emissions Share of Transport GHG Emissions Road Share of Transport GHG Emissions by Transport Type by Road Transport Type

80% 13.3%

60% 13.9%

40% 71.7%

20%

0% EU28 (convention)

Road Transport Railways Cars Motorcycles

Aviation Other Heavy Duty Trucks Other Road Transportation & Buses Transportation Maritime Light Duty Trucks

Source: Modified from European Environment Agency

An Efficiency and Emissions Standard (EES) can achieve long-term decarbonisation by introducing measures which force original equipment manufacturers (OEMs) to manufacture the cleanest vehicles and equipment possible. This currently exists in the EU through the Euro Emissions Standards and Carbon Emissions Standards for light-duty vehicles and trucks. These measures set targets on both vehicle GHG emissions and pollutants such as particulate matter (PMs) or Nitrogen Oxides (NOx), thereby improving air quality. As the EES becomes more stringent, OEMs are required to increase

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the proportion of clean vehicles that they sell. This will increasingly include zero- and low-emission vehicles (ZLEVs), defined for LDVs as having GHG emissions less than 50gCO2/km, such as battery electric, hydrogen fuel cell, and plug-in hybrid-electric equipment. The EES will hopefully culminate with the end of sales of vehicles with harmful tailpipe emissions within Europe.

The EU can enhance an EES with: ZLEV mandates and/or incentives; directives which support Green Procurement of ZLEVs (i.e. Clean Vehicle Directive); an action plan on ambient air quality (i.e. Zero Pollution Action Plan); and reconsideration for the inclusion of certain vehicle types in the EU ETS. These measures can further encourage OEM activity in the development of ZLEV options and provide consumers with a greater variety of choices, creating larger markets. Member States can use an EES to direct national strategies and roadmaps for the phasing out of the sale of polluting vehicles and the development of low-emission zones. This can lead to an accelerated phaseout and greater pressure on OEMs to manufacture ZLEVs for these markets.

An EES alone will not deliver a zero-emission transport sector by 2050, but these measures are required to drive change and encourage the development of zero-emission technologies. An EES should work in tandem with other EU climate policies on transport to provide support to all Member States throughout the transition period. Policy Principles Covered Entities, Pollutants and Qualifying Technologies: An EES should apply to all OEMs who manufacture and sell vehicles in the EU. Current legislation on pollutants only covers light-duty vehicles (LDVs) and heavy-duty vehicles (HDVs) as well as non-road mobile machinery, while legislation on GHG emissions only covers LDVs and trucks.1 These standards should be expanded to cover the entirety of the HDV sector as well as trains and maritime vessels. Activity in these markets would support Green Procurement practices and increase the market size for zero and low-carbon fuels, supported by a Clean Fuel Standard. The EU should also extend standards on pollutants to cover all emissions that are harmful to public health for all vehicle types, such as ammonia for LDVs and non-methane organic gases.

Point of Obligation and Labelling: At the point of sale, vehicles must be compliant with the latest EES measures. Vehicles must be labelled, i.e. Euro 6 compliant, and this information must be clearly presented and communicated to consumers to inform their decision making.

Targets, Ambitions and Expiration: The ultimate ambition of an EES should be to reduce harmful tailpipe emissions from all targeted vehicle types by 2050, at which point the EES will expire. To ensure that industry is prepared, a series of intermediary targets on both GHG emissions and pollutants and a corresponding roadmap (see Figure 2 for Euro Standards, for instance) are needed. This requires increasing the current GHG emission reduction targets, for example up to 4070 percent for passenger cars by 2030. These

1. Small-scale manufacturers (those who register less than 1,000 car and/or van sales per year) are exempt. Those who sell less than 300,000 per year will no longer be exempt after 2028.

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standards should be coherent with other policies in the EU’s climate strategy on the uptake of ZLEVs, such as support for alternative fuels through a Clean Fuel Standard, and should last across the vehicle’s lifetime. (See Emission Accounting and Testing & Verification.) The EU should also set minimum reduction targets and ensure alignment with ZLEV Incentivisation and overall GHG emission reduction targets.

FIG. 02 Roadmap to Zero Pollution: A Stepwise Reduction of Vehicle Emission Limits

2025: Lowest 2030: Further 2035: Zero possible level reduction emission for all based on to ultra low new cars, vans 2040: Zero best available emission level and all heavy emission for technology (subject to a duty vehicles all new heavy review smaller than duty vehicles 26 tonnes POLLUTANT EMISSION LIMITS POLLUTANT

Present 2025 2030 2035 2040

Source: Modified from Transport & Environment (transportenvironment.org)

Emission Accounting Mechanism: Under an EES, OEMs will need to demonstrate that all vehicles sold are compliant with pollutant emissions, as defined under the EU Euro Standards. These are measured and recorded as defined under Testing & Verification. To demonstrate compliance with GHG emission standards, OEMs must demonstrate that average GHG emissions from vehicle sales, on a gCO2/km basis, are below the target. (See Figure 3.) To guarantee like-by-like comparisons of different vehicles, this standard scales depending on vehicle weight. OEMs are fined €95 for each gCO2/km above the average for each car registered.

Testing and Verification: The EU needs to determine that vehicles sold to consumers are compliant with an EES. The EU’s new on-road (RDE) testing must be representative of real-world driving conditions across the EU and demonstrate that vehicles are compliant at all times. This includes differences in ambient temperature, altitude, road incline, and variations in vehicle speed and loading, particularly for HDVs. Regular vehicle testing is also required to ensure that vehicles are compliant with an EES across their operational lifetime, including second-hand use.

ZLEV Incentivisation / Mandates: The introduction of ZLEV incentives/ mandates can accelerate the rate at which OEMs manufacture clean vehicles. Current incentives are based on fraction of sales that are ZLEVs and allow OEMs to increase the average CO2e intensity of their sales proportionally. The EU should ensure these measures are up-to-date and go beyond OEM ambitions for the manufacture of ZLEVs. This would otherwise risk OEMs being rewarded by the scheme for their baseline plans. The EU should consider revising regulations to increase the rate of ZLEV production, including mandating percentages of sales that are ZLEV and introducing meaningful penalties for non-compliancy.

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Current Legislation GHG Emission Standards: The EU has set mandatory GHG emission targets for new cars since 2009 and new vans since 2011. Regulations on trucks were introduced in August 2019, and new standards for cars and vans came into force in January 2020. These new regulations require that:

– Cars GHG emissions per kilometre need to reduce by 15 percent by 2025 (81gCO2/km) and by 37.5 percent by 2030 (59gCO2/km) relative to 2021 (95gCO2/km).

– Vans GHG emissions per kilometre need to reduce by 15 percent by 2025 (125gCO2/km) and by 31 percent by 2030 (101gCO2/km) relative to 2020 (147gCO2/km).

– Trucks GHG emission per kilometre need to reduce by 15 percent by 2025 and 30 percent by 2030 against a 2020 baseline.

FIG. 03 Average Historical CO2 Emission Values and Adopted CO2 Standards for New Passenger Cars in the EU

Historical 150 Emissions

2015 Target: 130 g/km

100 2020 Target: 95 g/km 2025 Target: 81 g/km EMISSION VALUES (G/KM NEDC) (G/KM EMISSION VALUES

2 2030 Target: 50 59 g/km

AVERAGE CO AVERAGE 1ST STANDARD 2ND STANDARD 3RD STANDARD 2009–2015 2015–2021 2021–2030 0 2000 2010 2020 2030

All CO2 values refer to New European Driving Cycle (NEDC) measurements

These standards also provide incentives for OEMs to increase the number of ZLEVs they manufacture. These incentives relax the standards on the average GHG emissions of vehicles sold. A 1 percent performance above the ZLEV manufacturing benchmark increases the OEMs GHG emissions target by

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1 percent up to a vehicle-specific cap. Different weights are also applied to the number of ZLEVs sold, depending on the time of sale and the Member State conducting the sale.

– Cars From 2025, average GHG emissions levels are relaxed if ZLEVs registered in a given year exceed 15 percent from 2025 and 35 percent from 2030 up to a cap of 5 percent.

– Vans From 2025, average GHG emissions levels are relaxed if ZLEVs registered in a given year exceed 15 percent from 2025 and 30 percent from 2030 up to a cap of 5 percent.

– Trucks A cap of 3 percent is in place up to 2025 and this is reduced to 2 percent out to 2030.

Euro Standards: Since 1992, the Euro Emission Standards have become increasingly stringent. Euro VI has been in place since 2014 with amendments in September 2017 and September 2020. New iterations of Euro VI have focussed on improved testing and the shift to RDE testing.

These standards set limits on carbon monoxide, NOx, hydrocarbons, and particulate matter. The Euro VII regulations are currently in development, beginning with a consultation period in spring 2020. Commission adoption is expected in Q4 2021. Impact As emissions standards have become more stringent, vehicle OEMs have had to adapt. While manufacturing fewer polluting vehicles, European OEMs have also increased the size of their zero-emission technology portfolio. The number of electric vehicle models—including hybrid, battery-electric, and fuel-cell electric—increased to 176 in 2020 and is expected to reach 333 by 2025. (See Figure 4.) With an increasingly decarbonised power network and low- and zero-emission fuels, this will significantly decrease emissions from road transport over time.

FIG. 04 EV Models Available on the Market in Europe by Brand (Recorded in 2019)

350

300

250

200

150

100

50 TOTAL NUMBER OF EV MODELS TOTAL

0 2012 2012 2014 2014 2016 2016 2018 2018 2020 2020 2022 2022 2024 2024

Volkswagen Group PSA Toyota Daimler BMW FCA Renault-Nissan-Mitsubishi Volvo/Geely Hyundai-Kia Jaguar-Land Rover Ford Honda Tesla Mazda Suzuki Subaru

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Setting clear standards for these vehicle types also enables Member States to refine their own policies for road transport and encourage private sector investment in emerging technologies. These include:

– Developing clean air zones or low emission zones where charges depend on the emissions from the driver’s vehicle.

– Financing schemes and fees to improve the business case for zero- and low-emission vehicles.

– Developing Green Procurement initiatives for state run fleets and routes.

– Empowering consumers to make more informed choices about vehicle emissions when renting or purchasing their own vehicles.

– Setting deadlines for banning the sale of polluting vehicles. For example, France, the UK, Sweden, and Ireland have announced that they will phase out the sale of all diesel and gasoline vehicles between 2025–2040.

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TRANSPORTATION DEEP DIVES Clean Fuel Standard

Overview Transport made up 27 percent of the EU-28’s total GHG emissions in 2017. (See Figure 1.) Unlike other sectors of the EU energy system, transport emissions increased by 235 MtCO2e between 1990 and 2018. This is largely due to increases in demand for the transportation of goods and passengers. Strong policy interventions are required to shift users from petroleum-based fuels to sustainable zero- and low-carbon alternatives by 2050.

FIG. 01 EU Transport Greenhouse Gas Emissions Share of Transport GHG Emissions Road Share of Transport GHG Emissions by Transport Type by Road Transport Type

80% 13.3%

60% 13.9%

40% 71.7%

20%

0% EU28 (convention)

Road Transport Railways Cars Motorcycles

Aviation Other Heavy Duty Trucks Other Road Transportation & Buses Transportation Maritime Light Duty Trucks

Source: Modified from European Environment Agency

A Clean Fuel Standard (CFS) can reduce emissions over the long term by introducing a roadmap to complete decarbonisation for different modes of transport (such as road, rail, maritime, and aviation). The CFS should encourage the use of zero- and low-carbon transportation fuels based on their Carbon Intensity (CI), including lifecycle greenhouse gas emissions, and the indirect land use change (ILUC).

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The EU can enforce minimum Member State targets on renewable fuels as a fraction of road and rail transport and is considering targets for other sectors such as aviation. It cannot, however, implement policies that will deliver these targets. This is the responsibility of the Member State. The EU has used two directives, through the EU2020 Climate and Energy Package of 2009, to increase the percentage of renewable energy in transport and reduce the carbon intensity of incumbent fuels. Specifically:

– The Fuel Quality Directive (FQD) set a greenhouse gas reduction target for fuel suppliers of 6 percent by 2020.

– The Renewable Energy Directive (RED) introduced a sub-target of 10 percent of energy used in transport to come from renewable sources by 2020.

Member States have, by and large, focussed on the RED (since replaced by RED II). The EU introduced this legislation in November 2016 as part of the “Clean Energy for all Europeans” initiative. Adopted in December 2018, RED II includes a minimum sub-target of 14 percent for energy used in road and rail transport fuel originating from renewable sources by 2030.

In this way, a CFS can drive the commercialisation and transition to zero- and low-carbon fuels by 2050. A CFS should work in tandem with other EU climate policies on transport to provide support to all Member States throughout the transition period. Policy Principles Covered Entities and Point of Obligation: A CFS should apply to commercial entities from the point of production of transport fuel to distribution. This includes fuel producers, distributors, traders, and suppliers. In this way, the cost is borne by commercial entities, not the consumer, when the fuel is dispensed. This is enforced by Member States in accordance with EU targets under RED II.

Targeted Transport Modes: A CFS should apply to all transport modes and incentives should not be tailored for different markets. This will allow producers of advanced biofuels to target their fuels at markets with the greatest economic benefit, allowing them to ramp up production and reduce costs more quickly.

Mechanisms and Targets: A European CFS should have targets set by the EU and legislation to meet these targets introduced by individual Member States. A European target on the consumption of fuels derived from renewable energy sources in road and rail transport should align with the EU’s ambition to reach net-zero emissions by 2050. The EU should supplement this target with sub-targets for specific zero- and low-carbon fuels to maintain technology neutrality. (See further discussion of these sub-targets under Current Legislation.) Member State legislation should consider both operational and capital interventions to help meet targets in the most appropriate way for their country. Operational interventions, such as certificates or a CfD mechanism, can encourage fuel adoption, while capital interventions can bridge high upfront costs that obstruct starting production of alternative fuels.

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Qualifying Fuels: There is a risk that mandating targets may push resources towards near-term solutions that will not deliver long-term decarbonisation. For example, hydro-processed esters and fatty acids (HEFA) are an existing alternative to jet fuel but come with high land use change (LUC) emissions. A CFS should remain technology-neutral while providing strong price signals plus sub-targets for fuels based on their CI and associated LUC and ILUC emissions, without choosing winners. A tiered support system would provide greater support to fuels with higher barriers to market due to upfront and operational costs. These include advanced biofuels, low-land use change fuels such as cellulosic crops, landfill destined waste, sustainably harvested crops, forestry residue, hydrogen, and synthetic fuels. Fuels such as biofuels and electrification should still be supported (but less so, due to LUC/ILUC and commercial readiness respectively). This will aid the transition to replacing all polluting fuels with zero- and low-carbon fuels. (See below for the aviation sector.)

FIG. 02 Development Steps Necessary for Decarbonisation of Aviation Fuel

Invest in Advanced Build Alternative Sustainable Reduce Fuel Feedstock Technologies Liquid Fuel Use in Supply Demand Strong policy Chains Aircraft support Maximized Investment in Increased for emerging electrification sustainable share of advanced and efficiency biomass and advanced technologies in all transport renewable power fuels used in modes aviation

Source: https://theicct.org

Definitions, Verification and Emissions Accounting: Fuels must be defined based on their CI. This requires carbon accounting methodologies for different fuel production measures and default GHG emission values. These methodologies and emission values should not discriminate on emerging business cases that can support deep decarbonisation. Member States must demonstrate compliance and verify practices with the EU, as enacted in Current Legislation. The EU should ensure there are strict eligibility criteria on the origin of these fuels to deliver the required carbon reductions. An example of such legislation is given below, where, among other criteria, fuels must exceed the minimum targets to be eligible.

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FIG. 03 Greenhouse Gas Savings Threshold for Transportation Biofuels

VALID FOR PLANTS ENTERING TRANSPORT TRANSPORT RENEWABLE FUELS INTO OPERATION BIOFUELS OF NON-BIOLOGICAL ORIGIN

Before October 2015 50% *

After October 2015 60% *

After January 2021 65% 70%

After January 2026 65% 70%

* No mandatory GHG savings threshold until 2021

Tradability: Certificates and operational interventions should reflect the CI of the retailed fuel. Certificates should support emerging low-and zero-carbon fuels. Trading certificates should reward producers of the most low-carbon fuels and offset high-feedstock costs. Where a trading system is introduced, the system should enable over-and under-achievers to trade certificates, encouraging the adoption of low-carbon fuels. Where retailers fall below their legislated targets, regulators should levy fines depending on the shortfall. Current Legislation The EU’s current implementation of a CFS is in the Renewable Energy Directive (RED). The EU replaced RED (Directive 2008/28/EC) with RED II (Directive 2018/2001) in December 2018. This increased the percentage of road and rail transport fuels derived from renewable energy sources from 10 percent by 2020 to 14 percent by 2030.

RED II considers biofuels, electricity sourced from renewable energy sources, renewable fuels of a non-biological origin (RFNBOs), and recycled carbon fuels. Within the target of 14 percent are further sub-targets for advanced biofuel production from a list of pre-agreed feedstocks. The minimum targets for advanced biofuels are 0.2 percent in 2022, 1 percent in 2025 and 3.5 percent by 2030. (See Figure 4.)

Some fuels come with a multiplier in achieving the sub-target of 14 percent. For example, renewable electricity counts four times its energy content when used in road vehicles and 1.5 times for rail to account for its greater efficiency. Furthermore, while the maritime and aviation sectors are currently exempt from the 14 percent target, Member States can opt to include these sectors where non-food renewable fuels are used. They have a multiplier of 1.2. Advanced biofuels are double counted towards both the 3.5 percent sub- target and the 14 percent target due to their desirability and lack of impact on land use.

The directive also includes limits on specific biofuels from food and feed crops at 2020 levels plus 1 percent. The maximum cap is 7 percent for road and rail transport in each Member State. Member States can reduce their target below 14 percent by the amount they come under the limit of 7 percent. Some crops, known as “Intermediate Crops,” are exempt from this cap.

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The EU will continue to review how this legislation is enforced, introducing additional legislation throughout the 2020s. This includes:

– Reviewing the 14 percent target in 2023, with an option of increasing but not decreasing it.

– Reviewing the feedstock list every two years, with the option to add but not remove.

– Reviewing the high and low ILUC risk criteria in 2023.

– Defining operational guidance to demonstrate compliance with sustainable forest management criteria and the Land Use, Land-Use Change and Forestry (LULUCF) requirements.

– Proposing a regulatory framework for the promotion of renewable energy post-2030.

FIG. 04 The EU’s Current Goals Target 14% Renewable Fuels by 2030 – Certain Uses Receive Multipliers Because of Their Added Impact

14 Multipliers: 14% 12

10 x 4 10% 8 6 x 1.5 4

2 3.5% Advanced Biofuels FROM RENEWABLE SOURCES RENEWABLE FROM x 2 TARGET PERCENTAGE OF FUEL OF FUEL PERCENTAGE TARGET 0 2020 2022 2024 2026 2028 2030

Under the Renewable Energy Directive II, some fuels come with a multiplier in achieving the 14% target. Renewable electricity counts 4x its energy content when used in road vehicles and 1.5x for rail. Advanced biofuels are counted 2x due to their desirability and lack of impact on land use. Source: Modified from EU presentation “The New Renewable Energy Directive and Implementation Steps”

The Commission can revise and update the default GHG emission values when technological developments and updated data sources provide more information on the GHG emissions of listed fuels.

Member States must make proposals in their National Energy and Climate Plans on how to meet these targets with national legislation introduced by 30th June 2021. Member States must produce National Energy Progress Reports every two years to further demonstrate compliance.

RED II is more flexible than RED, allowing Member States to make certain fuel suppliers exempt from meeting the minimum targets for advanced biofuels where they supply fuel in the form of electricity or RFNBOs. As in RED, Member States can also choose how to account for emissions from electricity. They can either use the average CI of the EU grid or of the source for the energy. However, the Commission is developing a framework to guarantee that the electricity supply for transport is additional to the baseline generation. The EU should align RED II with the CFS guidelines outlined in the policy principles here.

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Impact The EU measures progress through the National Energy Progress Reports that Member States publish every two years. For example, the 2015-16 reports show that the uptake rate of renewables in road and rail transport slowed: eight Member States had a renewable energy share of less than 5 percent in 2016. The reports highlighted that the uptake of renewable energy sources need to increase substantially to meet the 2020 targets (See Figure 5.) The EU’s report did highlight, however, that the transport sector consumed 23.65 Mtoe of renewable energy in 2017.

For biofuels, the EU reported total emission savings in transport amounted to 33.2 MtCO2e in 2016. Accounting for ILUC emissions estimated using 2016 crop feedstock volumes multiplied by the corresponding mean ILUC values from the ILUC Directive, total emission savings from the use of biofuels in transport in the EU are reduced to 11.8 MtCO2e (with a range from 7.4 to 20.4 MtCO2e savings).

FIG. 05 Actual and Planned Renewable Energy Shares for the EU-28 (2005–2020)

10 CONSUMPTION (PERCENT) CONSUMPTION RES SHARE IN FINAL SECTORAL RES

0 2005 2010 2015 2020

Actual RES-E Share Actual RES-H Share Actual Overall RES Share NREAP RES-E Trajectory NREAP RES-H Trajectory NREAP Overall RES Trajectory

Actual RES-T Share Indicative Trajectory Defined NREAP RES-T Trajectory in the RES Directive

Source: Modified from Eurostat and National Renewable Energy Action Plans (NREAP)

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MANUFACTURING Overview

Manufacturing—the cement in our buildings and bridges, the steel in our cars and appliances, the clothes we wear, the books we read, the plastic toys and containers we buy—accounted for 20 percent (877 MtCO2eq) of GHG emissions in EU-27 and the UK in 2017, making it the second largest source after energy supply. (That number excludes emissions from the production, transportation, and transformation of oil and gas, but includes the combustion of those fuels in industrial processes.)

Two major industries with high emissions are iron and steel with 164 MtCO2eq (19 percent of the manufacturing total) and chemicals with 135 MtCO2eq (15 percent of the total). Other notable industries with non-combustion emissions are cement (9 percent), lime (2 percent), and glass (0.5 percent). Combustion related emissions from non-metallic minerals (10 percent), food and beverage (4.6 percent), and pulp and paper (3 percent) were also large contributors to the EU’s industrial emissions in 2017.

To reach net-zero emissions in our manufacturing sector, policy action must encourage the deployment of new clean technologies. Currently, low-GHG technological options in this sector are more nascent than in power generation, buildings, or transportation, and EU policies have had less success decarbonising manufacturing to date. Fortunately, there are emerging opportunities to help get European manufacturing to net-zero emissions—including electrifying industrial processes that currently use fossil fuels, developing low-GHG alternatives to fuels where electrification is not cost-effective, increasing efficiency, deploying carbon-capture technologies, and reducing methane emissions from the production and transportation of oil and gas.

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Additional Resources

→ ETC – Mission Possible: Reaching net-zero carbon emissions from harder-to-abate sectors by mid-century → Material Economics – Industrial Transformation 2050 → European Commission: A new industrial strategy for Europe → E3G – A policy vision for the EU industrial strategy → Climate Strategies – Building blocks for a climate neutral European industry sector → Wuppertal Institut – Infrastructure needs for deep decarbonisation of heavy industries in Europe → Lund University – A European industrial development policy for prosperity and zero emissions → ICF Consulting Services – Industrial Innovation: Pathways to deep decarbonisation of Industry – Part 3: Policy implications → Bellona – Climate solutions for manufacturing

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MANUFACTURING SOLUTION Electrification

Overview A primary source of manufacturing sector emissions is the fossil-fuel combustion used to create the heat that many industrial processes require. New heat pumps, boilers, and furnaces powered by clean electricity can provide a low or zero emissions alternative to these existing fossil-fuelled heat sources.

Electrification is particularly promising for processes requiring relatively low heat, such as space heating and cooling, which comprise around 13 percent of industrial heat requirements. Other production processes, like drying and curing, can also use electricity in place of fossil fuels. Electrification may also indirectly lead to decarbonisation if used for hydrogen or ammonia production, which are then used as fuels for industrial processes.

While almost all manufacturing processes can theoretically be electrified, developing electric furnaces and kilns for energy- intensive industries will require significant RD&D and weighing the implications of increased load for the power system. Some processes, such as aluminium production, already consume significant electricity, while the ammonium sector is more likely to decarbonise by using hydrogen produced via electrolysis.1 Market Challenges

Stock Turnover Many fossil fuel-powered systems are already in place in manufacturing 1. The effectiveness of electrification, compared to other options from a GHG facilities and are designed to last for over 50 years. Replacing functional emissions perspective, depends on the equipment with electric technologies, especially if it is still within its useful regional carbon intensity of power. It is life, is a difficult market barrier to overcome. Since most industrial heat estimated that electrification of steel, is produced on-site, it is hard to track equipment age and replacement cement, and plastics production lead opportunities at individual industrial plants. Similarly, collecting reliable data to carbon savings when grid intensities are below 500 gCO2eq/kW, 300 gCO2eq/ on individual plant equipment to develop a baseline and determine the most kW and 60 gCO2eq/kW (60 for olefins profitable investment option is difficult. and 0.03 for BTX), respectively. Given that average EU grid carbon-intensity was just under 300 gCO2eq/kW in 2018 and is projected to be ~140 gCO2eq/ kW by 2030, electrification is a viable long-term solution for the EU industry, except for some types of plastics.

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Technology Limitations Many industrial processes require very high temperature heat, above 500 degrees Celsius. To reach such high temperatures, there are few options currently available other than fossil fuel-fired technologies like boilers and furnaces. Innovations such as high-temperature electric heat pumps are not yet capable of providing this level of heat.

Access to Capital The upfront capital costs associated with replacing existing equipment with new electrification technologies is high, especially if the equipment is still in its useful life. Industrial corporations tend to operate with tight profit margins and can get a higher return on internal investments in new production or product development than energy upgrades at existing facilities. Even if the economics are justified over the equipment lifetime, securing enough capital up front to make investments is a barrier to electrifying the manufacturing sector. Technologies

Electrification Technologies

R&D VALIDATION SCALE

Electrifying technologies—such as new high- temperature heat pumps, boilers, and furnaces powered by carbon-free electricity—provide a critical opportunity to reduce greenhouse gas emissions across the manufacturing sector.

The electrification of technologies across the manufacturing sector can replace today’s carbon-intensive systems with low-carbon options. For instance, a large fraction of the energy used by the manufacturing sector is for process heating, which is almost entirely powered by fossil fuels. The development of new high-temperature heat pumps, boilers, and furnaces powered by carbon-free electricity has the potential to shift manufacturing away from non-electric sources of energy and significantly reduce emissions. Other potential industrial processes that are good candidates for electrification include machine drives and facility HVAC. Depending on the application, certain electrification technologies are commercially available while others are still early stage.

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Low-GHG Steel BLAST FURNACE GAS CO SOURCE

RON ORE SNTER BOF GAS

R&D VALIDATION SCALE SNTER PLANT

Two process integration (PI) pathways for SCRAP COAL COKE reducing emissions from existing steelmaking CRUDE processes are shown: biomass substitution for STEEL HOT METAL HOT coal and CO2 capture and recycling. COKNG PLANT CO

BASC OXYGEN SEPARATON BLAST FURNACE BOF BOMASS FURNACE

PARTAL COAL AND COKE CO GAS SUBSTTUTON P

BLAST FURNACE GAS RECYCLNG CO PURE CO AFTER CO STORAGE SEPARATON P

The production of iron and steel is responsible for about 5 percent of global greenhouse gas emissions. Most of these emissions come from the fossil fuels used to convert iron ore into steel through carbothermic reduction, particularly in the blast furnace. Mature technologies that can reduce emissions from iron and steel production include using natural gas to convert iron oxide to steel, CO2 capture and storage, the recycling of steel using electric arc furnaces, and the replacement of coal in the steelmaking process with plant-based charcoal. At present, some these technologies are not cost-competitive with incumbent processes for primary steel production, and slow stock turnover of industrial facilities also frustrates the rapid diffusion of lower-carbon production approaches. Other potentially transformative technologies to substantially reduce steel emissions include the direct reduction of iron oxide to iron and steel using low-carbon electricity or low-GHG hydrogen.

Low/Negative GHG Cement

CO CO CO R&D VALIDATION SCALE

Cement production releases a significant CO amount of CO2 emissions, but new processes and materials are under development that CO could consume more CO2 than was generated over the cement’s life cycle.

CO CO

Cement CO Plant

The production of cement is responsible for about 7 percent of global GHG emissions, around 40 percent of which is from energy and the rest from CO2 released chemically by the heating of limestone. Opportunities for significant emissions reductions in cement and concrete include CO2 capture and storage;

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the development of low-cost, low-emission substitutes for cement/concrete, recycling end-of-life concrete for reuse, and the development of processes and materials that consume CO2 as opposed to generating it in cement or cement- replacement production—thereby enabling emissions-negative cement production.

Zero-Carbon Plastics

DEPOLYMERZE R&D VALIDATION SCALE

Recycling is the key strategy to reduce the amount of plastics produced and its EXTRACT environmental impact. Complementary to TRKETONE that, there are new approaches to reduce the emissions in the process making plastics. These include CO2 capture and storage, powering facilities with low-carbon electricity, USED PLASTC PRECPTATE and using biomass like agricultural residue, COMMERCAL RECYCLNG EQUPMENT TRKETONE algae, or other biofuels as a feedstock to NEW PRODUCTS ON SHELF replace traditional fossil fuels. N WEEKS FLTER AND DRY

The use of petroleum-based plastics has skyrocketed in recent decades. According to the International Energy Agency, petrochemical feedstocks currently account for 12 percent of global oil demand. As the consumption of plastics and other products continues to grow, petrochemicals are poised to account for almost 50 percent of global growth in oil demand by 2050. Strategies to reduce the emissions associated with plastic production include CO2 capture and storage, powering facilities with low-carbon electricity, and using biomass like agricultural residue, algae, or other biofuels as a feedstock to replace traditional fossil fuels. In most scenarios, however, these strategies remain too costly to be market competitive. In terms of plastic consumption, efforts such as recycling and demand management can further reduce emissions from the plastics industry. While recycling has become commercial, more research and development is still needed to make plastic a zero-carbon product.

Additional Resources

→ BNEF, Eaton and Statkraft – Sector coupling in Europe: powering decarbonisation → ZEP – Electrification and CCUS for European Industries

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MANUFACTURING SOLUTION Low-Carbon Fuels

Overview Low-carbon fuels—such as biofuels, hydrogen produced via steam methane reformation with CCUS and electrolysis, and other electrofuels derived from clean electricity— can provide heat for industrial processes and replace conventional fossil fuels. In some instances, they can also replace other feedstocks. These low-GHG fuels are important in applications for which electrification is too costly or that require very high temperatures.

While many alternative fuels exist today, they are not yet commercially competitive at scale. Policies are needed that can drive investment in the production of low-GHG fuels, reduce costs, and accelerate the rollout of new technologies.1 Market Challenges

Technology Development Levels Though pathways to producing synthetic liquid fuels and biofuels exist today, technologies to produce low-GHG liquid fuels are still in development and not yet available at scale or cost parity with GHG-emitting alternatives. This is especially true for producing direct reduced iron from hydrogen and using biomass as feedstock for chemicals, which may take until 2040 to fully mature. Although heating applications of biomass and hydrogen are more 1. Sustainability of biomass feedstocks technologically established, biomass is not recommended for wide use in are highly variable and depend on the type of biomass, region, how it is industrial heating and low-carbon hydrogen production pathways, especially grown, land use change effects and electrolysis, are still at low commercial maturity levels. All these technologies competition with food systems. It is require more research and development before they can become commercially estimated that globally 70-100 EJ of available. sustainable biomass can be produced annually. Compared to the global primary energy supply of 590 EJ in Cost Barriers 2017, biomass is likely to be a limited resource which should be prioritised Biomass costs vary widely across types and sources. Current wood pellet for sectors without many alternatives. prices in North-West Europe (€8.50/GJ) compare unfavourably with coal Although bioenergy can directly prices (€3.40/GJ), meaning significant continued policy support is needed to be used as heat in most industrial make bioenergy a viable decarbonisation option. Similarly, IEA estimates that processes, these supply-side emissions the cost of producing hydrogen from natural gas with CCS (€2/kg) is higher can also be mitigated by electrification, CCUS and hydrogen. Biomass can very than without CCS (€1.4/kg) in Europe. Electrolysis, at €3.4/kg, is still more effectively be used in the chemicals expensive than both technologies in the short term. Thus, significant cost sector, however, as feedstock to reduction through R&D, scaling up, and policy support is needed to make produce monomers. This would reduce low-carbon fuels economically viable. process emissions as well as emissions from the end-of-use-phase when the product is discarded.

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Sustainable Energy Sources Low-carbon fuels are also limited by the sustainable energy sources that can produce them. As noted earlier, sustainable biomass supply is likely to be limited. Expanding the supply of waste feedstocks is not viable because the supply of used cooking oil, animal fats, tall oil, and palm fatty acid distillate (PFAD) is relatively fixed and limited. The use of forest residues or forest woody biomass is another option, especially in North America and in parts of Europe, though there is significant regional variability in the timing and availability of wood waste. Therefore, biomass should be prioritised for industries where it can deliver the most impact.

Production of clean hydrogen is also limited by building rates of large SMR facilities and carbon transport and storage infrastructure. Even if hydrogen production can be expanded this way, CCS facilities have residual emissions that ideally require external renewable electricity input to eliminate. The electrolysis route for hydrogen and ammonia production also increases demand for renewable power to levels which cannot be met by current deployment rates. Meeting marginal electricity demand through fossil power plants defeats the purpose of low-carbon hydrogen, requiring significant system-wide adoption of renewables. Technologies

Low-GHG Hydrogen Conventional Storage Hydrogen Vehicle Power Synthetic Renewables Generation Fuels R&D VALIDATION SCALE

Upgrading Low-GHG hydrogen has the potential to Biomass drastically reduce emissions from a variety of industries as a fuel or feedstock, as well as from the transportation and power sectors.

Nuclear Hydrogen Ammonia/ Fertiliser Electric Grid Generation Hydrogen Infrastructure

Metals Refining

Fossil with CCUS Gas Infrastructure Other End Use Heating

Low-GHG hydrogen is an alternative fuel or feedstock that can be attractive for a wide range of applications. Produced at a low cost and without generating CO2, hydrogen has the potential to revolutionise almost every emissions-intensive industry on earth, from fuels to fertilisers and steel to cement. Hydrogen also offers energy storage capabilities, which can help variable renewable energy sources (VREs) such as wind and solar capture a larger share of the electricity market. Recent technical breakthroughs and the changing nature of zero-carbon electricity production offer a plethora of new approaches to the production of hydrogen, including thermochemical, electrochemical, and geologic (mined) hydrogen generation technologies.

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Low-Carbon Synthetic Fuels

R&D VALIDATION SCALE

ELECTRCTYNTENSVE Low-carbon synthetic fuels are produced H PRODUCTON CO by coupling large amounts of electricity and inexpensive fossil CO2. By requiring the use of CO2 captured from the ambient air for its production, it can be ensured that the resulting fuel is low in carbon. Source: Modified from Bellona.org.

SYNTHETC FUEL MADE CO BACK N THE FROM FOSSL CO ATMOSPHERE AND ELECTRCTY

FOSSL CO

While short-haul and rail transportation are amenable to electrification, long- distance travel and/or heavy freight loads require high quantities of energy. As a result, energy carriers with much higher energy densities than batteries are required. Liquid hydrocarbon fuels presently fulfil this need but cause air pollution and GHG impacts. By combining renewable production of hydrogen with atmospheric CO2 as feedstocks, thermo-catalytic conversion into hydrocarbons can create fuels that are cleaner burning and have very low lifecycle carbon intensities. This is often called Power-to-Liquids and provides a scalable energy pathway that may allow for creation of marine and aviation fuels with little or no net GHG impact.

Negative-Emissions Combined Heat and Power (CHP) Traditional Renewable System Sources

R&D VALIDATION SCALE

Negative-emissions CHP systems feature a BOLER HEAT gasifier that heats agricultural and municipal waste to more than 800°C, releasing a mixture of flammable gasses called syngas. The syngas BOMASS FUEL is filtered, and then used to power a generator & WASTE to make electricity. Source: Modified from Biomax.

POWER PLANT POWER

CHP from municipal solid waste (MSW) or woodchips coupled with CCS (BECCS) can supply negative emissions electric power and district heating, displacing fossil based dispatchable electric power production and natural gas-based heating. In the case of MSW this also helps avoid GHGs generated from landfills.

Additional Resources

→ European Commission – Knowledge Centre for Bioeconomy

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MANUFACTURING SOLUTION Energy and Materials Efficiency

Overview Energy efficient manufacturing means it takes less energy to make the same product, thus reducing GHG emissions on a per-unit basis. Strategies for increasing efficiency vary across industries but include replacing old equipment with newer energy-saving models, switching processes, and using intelligent energy management systems to turn equipment down or off when it is not needed.

Material efficiency measures through application of circular principles can also reduce overall energy and decarbonisation requirements via increased reuse, recycling, and extended lifetimes. A more efficient manufacturing sector will reduce overall costs of decarbonisation by requiring less low-GHG fuel or carbon-capture deployment.1 Market Challenges

Stock Turnover Fossil fuel-powered systems are usually already in place in industrial facilities and still within their useful life. Replacing functional equipment with more energy efficient technologies will be a difficult market barrier to overcome due to long investment cycles and the associated technology lock-in risk. Since most industrial heat is produced onsite, it is hard to track equipment age and replacement opportunities at individual industrial plants.

1. The cement, steel and plastics Access to Capital industries may adopt more energy efficient processes, such as switching to The upfront capital costs of replacing existing equipment with new dry kilns, adopting coke dry quenching electrification technologies remains high, especially if the equipment is still or naphtha catalytic cracking. This has in its useful life. Industrial corporations tend to operate with tight profit the potential to reduce their emissions margins and can get higher investment returns on new production or product by 10 percent, 15-20 percent and 15-20 percent, respectively. development than from energy upgrades at existing facilities. Even if the Furthermore, according to an IEA economics are justified over the equipment’s lifetime, securing enough capital analysis, adopting a material efficiency upfront to make these infrastructure investments is a challenge, and the based scenario for decarbonisation threshold is much larger for SMEs than larger players. requires 4 percent less capital investment and 45 percent less CO2 capture in the global manufacturing sector by 2060 compared to a clean energy focussed approach.

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Difficulty of Measuring Savings Savings associated with specific industrial energy efficiency measures may be difficult to estimate since they are highly plant-specific. Detailed and expensive engineering studies may have to be conducted to measure savings accurately, and these savings may not justify the cost of such studies, let alone the cost of efficiency improvements.

Behaviour Change One key to the success of energy efficiency policies, technologies, and services is user behaviour—whether companies or consumers choose to adopt them. For example, many manufacturers focus on upfront costs and delivery times when purchasing equipment rather than long-term lifecycle costs. Also, larger industrial facilities tend to concentrate on optimising their main production processes and consequently overlook smaller efficiency improvements such as buildings’ energy use or smaller appliances. Consumer behaviour is another important driver for establishing demand for products. Technologies

Industrial Energy Efficiency

R&D VALIDATION SCALE

Smart manufacturing can increase energy efficiency and reduce emissions by optimizing industrial processes through the use of sensors and data processing.

The manufacturing sector has a solid track record of adopting energy efficiency measures, contributing to the declining carbon intensity of manufacturing over time. As RD&D continues in this field, there will be additional opportunities to reduce carbon emissions through more energy- efficient technologies and practices in manufacturing. One particularly promising area of research is smart manufacturing: the practice of using sensing and data processing capabilities to optimise industrial processes and reduce energy consumption. In smart manufacturing, advanced sensors are placed at key points through an industrial process, collecting mountains of data on production conditions, inputs, and outputs. This data is then analysed using models and algorithms, leveraging advances in computing ability to adjust facets of these industrial processes. These changes can be made at many stages: in-situ via real-time controls, via changes to human-technology interfaces, or in complete overhauls of processes.

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Circular Economy

New Make Remanufacture R&D VALIDATION SCALE material will almost with clean energy parts or whole always be needed and sustainable products to return materials to the supply chain A circular economy model, shown here, reduces energy intensity and emissions by retaining the value of goods and materials Design Use for as long as possible through improved for longevity, reuse, and repair for as design, reuse, repair, remanufacture, recovery, and recyclability long as possible and recycling.

Sell Recycle Recover Landfill a lower value chemically or physically 100% of waste biodegradable or recycled feedstock back to feedstock natural materials into a new market

A circular economy is a more sustainable alternative to the linear “take, make, dispose” model of consumption. As the world population increases, urbanises, and becomes more affluent, consumption and material intensity will rise accordingly. This will drive up input costs and price volatility at a time when access to new resource reserves is becoming more challenging and expensive. But the circular economy—reusing, recovering, and recycling—is less energy- and emissions-intensive than producing goods from virgin materials. Key materials that can contribute to emissions reductions are aluminium, steel, plastics, paper, cement, and food. New business models, practices, and technology solutions are in various stages of development and deployment for transforming how goods are designed, made, and used and recyclables are collected, sorted, and recovered.

Additional Resources

→ ODYSSEE & MURE – A database of European energy efficiency trends and policies → European Commission – Energy Efficiency → EEFIG: Energy Efficiency – The first fuel for the EU economy → IEA – Material efficiency in clean energy transitions → UNIDO – Barrier busting in energy efficiency in industry

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MANUFACTURING SOLUTION Carbon Capture

Overview To limit emissions, industrial facilities can install technology that captures CO2 before it is released into the atmosphere. Carbon Capture and Storage (CCS), and Carbon Capture, Utilisation and Storage (CCUS) technologies allow captured carbon to be stored underground or used to produce carbon-based products such as electrofuels, concrete, and chemicals.

Combined with bioenergy, CCS (BECCS) can also deliver net-negative emissions. Direct Air Capture (DAC) is another related technology that pulls CO2 out of the air for use or storage. CCUS and DAC technologies can be important tools in reaching net-zero emissions across the economy, but they cannot scale up to the level needed without durable policy support to accelerate investment and deployment.1 Market Challenges

Insufficient Availability of Revenue Industrial CCS and DAC are currently expensive processes that require additional financial incentives to justify investment. Although captured carbon 1. As of mid-2020, there are only two can be used in various industrial processes such as enhanced oil recovery operational CCUS facilities in Europe (EOR) or carbonated beverages, there are long-established and much cheaper (with a total capacity of 1.5 MtCO2/ year), both in Norway capturing CO2 supply chains. The EU ETS aims to provide this extra economic incentive CO2 from natural gas processing for CCS by requiring companies to pay for emissions allowances, but the EU and storing it dedicated offshore ETS prices have historically been too low to incentivise many CCS projects. formations. Another two projects, Furthermore, negative emissions through DAC are not recognised by EU ETS. in Norway and Netherlands, are in Long-term economic incentives through market creation, subsidies, or taxes advanced development stages. They aim to capture a total of 2.8 MtCO2/ are needed for carbon capture and negative emissions to incentivise industrial year in the early 2020s from various decarbonisation. industrial and power facilities in nearby areas. Projects in earlier stages suggest that the industrial cluster model is the Long-Term CO2 Storage Liability preferred CCUS model in Europe as Although the European CCS Directive creates a regulatory regime for costs of transport and storage can permitting of CCS activities and sets provisions for transferring post-closure significantly be reduced by sharing infrastructure. Comparatively, most storage liabilities from companies to governments, risks and insurance CCUS projects in the U.S. currently requirements remain high for many projects. The directive encourages waiting opt for standalone, full-chain facilities 20 years before liability is transferred to the Member States and requires with onshore storage sites. North America is far ahead of Europe in term of industrial CCUS capacity: it has 10 facilities that together capture a total of 24 MtCO2/year.

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project developers to have enough financial insurance to cover the future carbon costs (determined by EU ETS) in case of a leakage. Long time periods for receiving permits and uncertainty about the conditions required for transferring liabilities to the state may discourage investors from pursuing CCS and DAC projects.

High Risks for Early Projects Industrial sites and power stations considering deploying CCUS may have limited capital resources and/or a high credit risk, limiting their ability to attract external corporate funding. This uncertainty has a ripple effect down the CCUS value chain, resulting in cross-chain risks where both carbon capture and CO2 transportation and storage (T&S) businesses may be negatively impacted by the other side defaulting. Capture plants may suffer from lack of sufficient T&S infrastructure and prohibitively high T&S fees, while the T&S businesses may face uncertainties around total demand for T&S capacity. Moreover, without protective policies such as border carbon adjustment measures, industries deploying CCUS risk losing their competitiveness to offshore markets, resulting in more carbon leakage and economic damage. Technologies

Industrial CCUS

POWER PLANT EXHAUST N N N N R&D VALIDATION SCALE N N N N CO N N N N CO Carbon capture can be used to remove N N N the CO from waste streams of industrial N 2 N N N N N facilities or power plants to be stored safely N underground or used in products. N CO N CO CO CO CO

Power Carbon Plant Capture

CCUS technology removes CO2 from the exhaust created by industrial processes and power plants at the point source. Instead of being released into the atmosphere, the captured CO2 can either be used in products or safely stored deep underground. CO2 can be captured from the fuel prior to its combustion through gasification or reforming, or it can be captured from the exhaust gas of the plant, typically using a thermally regenerated amine-based process. The fuel can also be combusted in pure oxygen, resulting in a purer CO2 stream that is more easily captured and purified. Using CCUS at industrial plants is a viable means of cutting emissions from carbon intensive processes such as steel and cement production. Further development of transformational low-cost, high efficiency CO2-capture technologies can make this potentially powerful emissions-reduction solution a widespread commercial reality.

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CO2 to “X” FEED OF CO ELECTROLYTES

R&D VALIDATION SCALE CO

Electrochemical reduction of CO2, conceptualized here, is one method to REACTOR convert captured CO2 into value-added small molecules and chemicals using METHANOL renewable energy.

FORM C AC D

Ag Cu Sn Ag Cu Sn

METAL ELECTRODE

RENEWABLE ENERGY CATALYSTS HYDROCARBONS

Coupled with either industrial CO2 capture or DAC capabilities, captured CO2 presents opportunities for further deployment of both existing industrial processes and emerging technology approaches. Both carbon-neutral fuels and carbon-negative materials offer significant GHG offset potential. Syntheses of small molecules from CO2 enable the production of other chemicals, fuels, and materials. Manufacturing these versatile building blocks also incorporates both thermochemical and electrochemical technologies and encourages more use of renewable electricity, enabling renewables to further decarbonise industrial processes. It is, however, vital to consider lifecycle assessment of these CO2-based products, as they usually have impact on multiple sectors and require several resources including CO2, hydrogen, electricity, and others.

Additional Resources

→ INEA – Connecting Europe Facility for Energy → European Commission – CCS → CCS Association – CCS in Europe → ZEP – Electrification and CCUS for European Industries

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MANUFACTURING POLICIES Policy Overview

Phase: Research and Development

RESEARCH & VALIDATION & EARLY LARGE SCALE DEVELOPMENT DEPLOYMENT DEPLOYMENT

European investment in research and development (R&D) supports economic development, drives down costs for key technologies, and promotes European leadership on clean energy and climate. Institutions operating within Horizon Europe and InvestEU programmes drive most investment in R&D for low-carbon fuels and associated technologies.

European policymakers should increase investment and enact programmatic reforms to ensure sufficient level of R&D is carried in the following areas:

– Electrification of process heating at very high temperatures;

– Electrolytic cells and other novel smelting approaches for steel making; and

– Electric-arc steel production processes.

For more, see deep dives on → EU R&D Programmes → Stimulation of Clean Energy Entrepreneurship and Scale-up

Phase: Validation and Early Deployment

R&D VALIDATION SCALE

The EU will continue to support demonstration of technologies that align with its missions through various funding programmes, such as Horizon Europe (EU’s flagship research and innovation programme), the Innovation Fund (which will provide around €10 billion supplemented through EU ETS revenues), and InvestEU. The EU should continue to support a robust portfolio of demonstration projects for industrial electrification, including electrification of process heating and low-GHG electric-arc steel production.

For more, see the deep dive on → Validation, Demonstration and Testbeds

and the policy (below) on Subsidies and Financial Incentives for Demonstration.

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Subsidies and Financial Incentives for Demonstration Without targeted financial support to promote early-stage deployment, producers do not often have sufficient incentives to develop new technologies. The EU supports investment in green technologies, business cases, and pre- commercial manufacturing practices through a variety of different funding streams including InvestEU, Horizon Europe, the Innovation Fund, Connecting Europe Facility, the Modernisation Fund and The Just Transition Mechanism. These funding streams are implemented by institutions such as the EIB Group via project-development assistance and an extensive range of instruments to mobilise public and private sector investors and fund projects at different risk levels. To maximise effectiveness, these funds should be targeted towards green technologies by following the EU taxonomy for sustainable activities and the “do no harm” principle. Creating green labels for financial instruments in line with the EU taxonomy will help mobilise and channel more private investment towards green technologies.

Green Procurement Procurement policies targeting low-carbon manufacturing materials can reduce costs and drive private-sector demand for industrial electrification. Leveraging the purchasing power of public institutions can similarly create initial markets for emerging low-carbon technologies and spur demand for more circular and cleaner manufacturing processes.

Regulators must design green procurement policies in a technology-neutral way. They can set maximum embedded carbon limits for intermediate products (such as cement or steel) or final products (such as cars or buildings), or they can award higher points in a tender for lower-carbon products. The carbon intensity of materials, or the lifecycle GHG emissions involved in their production or use, can be used as a key criterion for procurement decisions for publicly funded projects.

The EU can help set common GPP standards across Member States and support local green procurement capabilities by maintaining a common product database, disseminating best practices, and holding information campaigns. Linking procurement to labelling standards that disclose environmental impact data can also create a market for low-GHG materials.

For more, see the deep dive on → Green Procurement

Operational Financial Support for Deep Decarbonisation Technologies Currently, industrial deep decarbonisation technologies such as CCS, fuel switching to hydrogen, electrification, and process-switching to low-carbon production methods have a high-cost premium compared to fossil-fuel alternatives. Until there is a commercial market for low-carbon products and/or a high enough carbon price coupled with measures to tackle carbon

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leakage, temporarily adopting one or more operational support policies for deep decarbonisation technologies can help reduce project risk and accelerate the demonstration of carbon-reducing industrial electrification solutions. Measures include Carbon Contracts for Differences (CCfDs), Feed-in Tariffs, Production Tax Credits, public-ownership options such as regulated asset base (RAB) or cost-plus open book, or market-based mechanisms, like decarbonisation obligations with tradable certificates.

Operational financial support mechanisms are better suited for individual Member States to implement. However, the EU has a key role in supporting the early deployment of deep decarbonisation projects through its various programmes. The Innovation Fund, Connecting Europe Facility, and Invest EU are European instruments that provide grants and loan support to cover a portion of the upfront capital expenses of these projects. The EU should work closely with national authorities to coordinate different funding schemes to avoid double funding and maximise impact.

Supporting Low-Carbon Hydrogen Production Low-carbon hydrogen can be used as a feedstock, a fuel, or an energy carrier and storage, and has many possible applications that can reduce GHG emissions across the manufacturing, transport, power, and buildings sectors. It is essential to the EU’s commitment to reach net-zero emissions by 2050, as it can decarbonise areas of the energy sector that cannot feasibly be electrified. To meet its decarbonisation targets, the EU will need 114-398TWhth of hydrogen by 2050—a significant increase from the current relatively small- scale supply produced from fossil fuels. Decreasing costs of renewable power, rapid technology developments, and increased urgency to address climate make this an opportune time to develop the European hydrogen economy.

The growth of a low-carbon hydrogen economy in the EU should by underpinned by clear definitions for different methods of hydrogen production based on their respective carbon intensities, along with a roadmap that reinforces technology development and wide-scale deployment.

Policy measures such as quotas for hydrogen in sectors such as manufacturing (carbon free products, for instance) or aviation (such as synthetic fuels) are essential for increased large-scale adoption. Incentives such as contracts for difference, guarantees of origin, and a Clean Fuel Standard are required to bridge the gap with incumbent fuels and encourage incentives for electrolysis. Getting to scale should be supported by a comprehensive portfolio of cross-supply chain projects, supported by EU and Member State financing. Combined, this will create markets for low-carbon and renewable hydrogen and will eventually eliminate the need for policy interventions.

For more, see the deep dive on → Supporting Low-Carbon Hydrogen Production

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Infrastructure A low-carbon hydrogen economy that can supply the manufacturing sector will require Supporting Low-Carbon Hydrogen Production and proportional investment in distribution, storage, and process-conversion equipment. It will also require significant investment in associated infrastructure to support cluster, national, and European-wide development.

An EU strategy and associated funds can support regional transitions, leveraging investment where it is most impactful. This industrial-cluster approach will deliver regional distribution of hydrogen production as well as the capabilities to import and export low-carbon fuel. A targeted approach should also combine parts of Europe’s TEN-T and TEN-E networks, ensuring that investment into hydrogen distribution (via tube trailer or pipeline) can support both manufacturing and transport.

For more, see the deep dive on → Supporting Low-Carbon Hydrogen Production

Effective CCS Regulations and Permitting Effective CCS regulations and permitting can contribute to decarbonisation by accelerating technology deployment through reducing project costs and timescales. Currently, the EU CCS Directive regulates lifetime operations of CCS facilities, instructing Member States to establish competent authorities to oversee CCS projects and develop and implement regional regulations within the flexibility allowed. The Directive requires all storage sites to receive storage permits from authorities after extensive appraisal work and demonstration of limited leakage or safety risks.

Storage-site operators are required to continuously monitor the site, including for a period of up to 20 years after closure. After that, liabilities can be transferred to Member States. Operators are listed under the EU ETS and are required to surrender EU ETS allowances in case of a future leakage, meaning operators potentially face liability proportional to leaked volumes of CO2 and future prices of EU ETS. Storage operators are also required to provide financial securities prior to receiving permits to demonstrate that they can meet these obligations in case of leakage.

To increase the effectiveness of EU CCS regulations and remove barriers for project developers, regulators should:

– Reduce project insurance costs storage-site operators incur by encouraging a risk-based financial-security requirement in which projects with lower CO2 leakage risks are asked to provide lower levels of financial insurance, rather than a blanket level of financial security.

– Emphasise the areas where the Directive provides flexibility to Member States and encourage Member States to share a larger portion of risks with storage operators by capping their post-closure liabilities.

– Currently the CCS Directive requires all new fossil power plants above 300 MW to be ready to retrofit full-chain CCS. This requirement should expand to cover large energy-intensive industrial facilities where CCS is a feasible option.

– Regulators should change requirements from “CCS readiness requirements” to “decarbonisation readiness requirements,” which would allow facilities to plan alternative decarbonisation strategies such as electrification and hydrogen fuel switching.

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Phase: Rapid, Large-Scale Deployment

R&D VALIDATION SCALE

Carbon Price A carbon-pricing system that accurately conveys the true costs of GHG emissions can raise the relative cost of coal, oil, and natural gas to reflect the environmental harm they cause. This can also lower the overall cost of green technologies and fuels relative to fossil-based alternatives and lowers the overall relative cost of electric vehicles and equipment.

Currently, many industrial facilities receive free emissions allowances and export-heavy sectors with a carbon leakage risk are set to receive free allowances until at least 2030. To ensure continued decarbonisation in European industries, free allowances for all sectors should phase out in favour of other policies addressing carbon leakage risks such as a Carbon Border Adjustment or a Clean Product Standard. The EU must also ensure that future EU ETS prices are at a high enough level to drive clean energy investments.

For more, see the cross-cutting policy on → EU Carbon Price

Clean Product Standard A Clean Product Standard (CPS) is a technology-neutral approach to reducing emissions from the manufacturing of energy-intensive industrial products. A CPS sets decreasing limits on the total allowed emissions per unit of an industrial product manufactured in the EU. Similar to the EU ETS, manufacturers can employ different technological solutions to reach the targets, and they are allowed to trade allowances with other manufacturers to achieve the emissions limits. The stringency of the standard for each product category tightens over time, creating regulatory certainty for an ambitious but achievable path towards deep decarbonisation. Although most industrial sites have long investment cycles (equipment lifetimes can be decades), an initial voluntary compliance period, an ability to trade allowances, and/or an option to pay reasonable non-compliance fees (at least initially) may overcome the challenge of meeting dynamic CPS emissions limits.

A CPS may be further supported by ensuring policy buy-in and labelling schemes. Lifecycle emissions of materials must be transparent and kept in public databases that are integrated into Green Procurement strategies.

Currently, there are no regulations on the embedded carbon content of products released to the EU market. In its new Circular Economy Action Plan, the EU suggests developing a Sustainable Product Policy Framework which widens the Eco-design Directive to include many types of new products and services, beyond the current energy-intensive appliances. This new policy would be a good opportunity to integrate a CPS with the Eco-design Directive

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and widen the emissions coverage of EU climate policies. A CPS would be most effective if applied at the EU level with full commitment and support of the Member States. However, if the EU does not go forward, individual Member States may establish their own policies.

The interaction of a CPS with EU ETS for the manufacturing sector must be considered carefully during policy design. CPS should not apply to imported goods if a Carbon Border Adjustment is in place.

For more, see the deep dive on → Clean Product Standard

Carbon Border Adjustment The Carbon Border Adjustment (CBA) proposed in the EU Green Deal can address the potential loss of international competitiveness and carbon leakage by introducing a carbon tax that is linked to EU ETS prices and applied to certain imported goods in proportion to their carbon footprint.

Regulators should first introduce a CBA scheme for trade-intensive industries with high price sensitivities and relatively well-understood production processes, such as steel, chemicals, and aluminium. They should combine it with the phase-out of free EU ETS allowances for European industries and be fully compliant with World Trade Organization (WTO) rules. In order to reduce administrative burdens, the CBA should use a common benchmark based on average global emissions intensities for all imported products and should give individual manufacturers the opportunity to demonstrate lower emissions if they want to pay lower taxes. Revenues from the CBA should be re-invested in decarbonisation projects domestically and to help decarbonisation efforts in non-EU countries.

A CBA would be an alternative to Clean Product Standards for imports.

For more, see the deep dive on → Carbon Border Adjustment

Clean Fuel Standard Replacing fossil fuels with low-carbon substitutes can help reduce industrial emissions while improving efficiency and encouraging electrification. A Clean Fuel Standard (CFS) can encourage producers (such as refineries), importers, and retailers (such as forecourts) of fuels to reduce the carbon intensity of the fuels they sell over time via technology-neutral trading mechanisms and subsidies. A version of a CFS currently exists in the form of the EU’s Renewable Energy Directive II (RED II). A dedicated industrial CFS offers an alternative or complementary approach to a Carbon Price for the manufacturing sector.

Replacing petroleum-based fuels with low-carbon substitutes, such as biofuels, low-carbon hydrogen, and synthetic fuels, can help reduce manufacturing emissions. A CFS should increase the fraction of low-carbon fuels required through time, based on their carbon intensity. This will reduce the green premium of these fuels by increasing their scale of production. For many manufacturing sites, incremental introduction of clean fuels is not possible, and equipment has a long lifetime. Therefore, there may need to be a voluntary period and the ability to trade or purchase credits to meet the obligation.

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The CFS must align its ambitions with the EUs 2050 net-zero targets and increase the rate of decarbonisation in industry. By providing certainty to producers making near-term capital investments, a technology-neutral CFS that incentivises fuel use based on its carbon intensity can propel long-term deployment of the lowest-carbon fuels.

For more, see the deep dive on → Clean Fuel Standard

Carbon Pollution Controls As an alternative or complement to carbon pricing or a Clean Product Standard, carbon pollution controls limit the amount of CO2 manufacturing facilities can emit. These pollution controls apply to new and existing facilities, and regulators can make them more effective by pairing them with financial- support mechanisms.

Currently, the Industrial Emissions Directive requires large manufacturing facilities to obtain a permit from each Member State, which will be awarded based on their integrated environmental impact. This is measured against Best Available Technologies (BATs), which are regularly reviewed and updated by experts from Member States, industry, and environmental organisations. These permits cover non-CO2 pollutants and non-CO2 emissions (the EU ETS covers CO2 separately). In special circumstances, limits may be relaxed if the cost of complying with the BAT outweighs environmental benefits of the facility.

The new Circular Economy Action Plan reflects the EU’s interest in updating the Industrial Emissions Directive so that BATs encourage circular-economy practices. The EU should include CO2 as a regulated pollutant in future revisions of the directive and reduce the maximum emissions limitations in accordance with its net-zero targets.

Carbon Pollution Controls are an alternative or complement to carbon pricing or a Clean Product Standard.

Minimum Efficiency Standards The EU uses the Eco-design Directive to set minimum mandatory energy- efficiency requirements for small appliances such as lights, refrigerators, ovens, space heaters, electric motors, water pumps, and air conditioners. The Energy Labelling Regulation sets labelling standards for some of these appliances to provide clear information to consumers, thereby increasing demand for more efficient products. Although these technologies account for a relatively small share of overall energy use in the manufacturing sector, efficiency standards have a very successful track record of delivering energy savings and emissions reductions and should not be overlooked.

In its New Circular Economy Action Plan, the EU considers expanding the scope of these directives via a Sustainable Product Policy Initiative that establishes material-efficiency standards for new types of products in addition to existing energy-efficiency measures. If the proposed changes are not implemented, Member States may introduce their own regulations which go beyond the Eco-design Directive. To accelerate decarbonisation of European industries, the EU should widen the scope of the products the directives cover to include high environmental-impact products (such as batteries and plastics)

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and more appliances commonly used in industry (such as electric motors and boilers) which are above the size limit the Eco-design Directive regulates. It should also introduce product-specific durability, repairability, reusability, and upgradability standards as well as minimum recycled-material limits. Lastly, regulators should develop labelling standards alongside efficiency standards and integrate them with databases used by other policies such as Green Procurement or Clean Product Standards.

Infrastructure Scaling carbon capture technology deployment will require a commensurate scaling of pipelines to transport captured CO2 to sites for utilisation or storage. The transport and storage (T&S) infrastructure for CCS projects requires major investments which are very expensive for individual companies to finance alone. They also present significant first-mover risks, thereby requiring support from the government. Furthermore, there are many dispersed industrial facilities within the hinterlands of Europe which may require CCS to fully decarbonise. Only a few Member States have direct access to offshore storage sites. Decarbonising the industry across Europe would therefore necessitate cross-border CO2 T&S infrastructure.

EU financial support can accelerate CCS infrastructure deployment across Europe and direct European industries’ decarbonisation ambitions. The EU could consider investment in CO2 pipelines across Europe through a range of programmes and funding mechanisms, including making loans or loan guarantees available to pipeline developers. It should keep considering CCS infrastructure projects as Projects of Common Interest (PCI) within the Trans-European Networks for Energy (TEN-E) policy and use the Connecting Europe Facility (CEF) to provide direct funding to supplement existing private investments in pipeline development—particularly for the most critical trunk pipelines that could enable high CO2 throughput.

The total budget should expand in accordance with the 2050 CCS infrastructure requirements. The EU should also facilitate a just transition to net-zero by supporting the development of CCS infrastructure in less-developed regions and the establishment of fair T&S fees.

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MANUFACTURING DEEP DIVES Clean Product Standard

Overview Traditionally, industrial decarbonisation policies prioritised reducing combustion emissions through energy efficiency measures. However, efficiency measures are limited in the emissions reductions they make, and deeper decarbonisation options are needed. These must include solutions to address direct process emissions, which can be as much as 50 percent of total emissions in key sectors like steel and cement. Just five widely used products that form the backbone of manufacturing—steel, cement, aluminium, paper, and plastic—account for about 20 percent of global emissions, proving how urgently solutions are needed.

Several EU policies such as the EU ETS and the Eco-design Directive aim to reduce manufacturing emissions through an emissions cap and minimum efficiency standards for energy consuming products. Thus far, these policies have only incentivised limited GHG emissions reductions, since carbon prices are low and process emissions or embedded carbon are not covered by the Eco-design Directive. Additionally, current buildings regulations do not set any limitations on embedded carbon in construction materials, and thus do not incentivise the decarbonisation of industries producing these products.

A Clean Product Standard (CPS) establishes the maximum amount of greenhouse gases (GHGs) that can be emitted in the production of industrial products sold in the EU. This policy approach establishes a technology- neutral pathway to industrial decarbonisation: manufacturers can employ any technological solution that will allow them to achieve the emissions limit. The stringency of the standard for each product category tightens over time, creating regulatory certainty for an ambitious but achievable path towards deep decarbonisation. Since under a CPS the carbon footprint of construction materials decreases over time, a CPS is an effective measure to indirectly reduce embedded carbon in buildings as well.

To maximise the impact of a CPS, it should apply to imported goods as well as domestic production. However, a CPS on imported goods may clash with a Carbon Border Adjustment as both policies aim to reduce carbon leakage risks. Furthermore, interactions between a CPS and EU ETS must be considered carefully to design both policies in an efficient and complementary way. The EU is considering introducing a Sustainable Product Policy Framework as an expansion of the Eco-design Directive, which may present an ideal opportunity to establish a CPS.

To run a CPS efficiently, policy buy-in has to be achieved and customers must be informed of sustainable products in the market through labelling schemes. Lifecycle emissions of materials must be transparent and kept in public databases which are also integrated into Green Procurement schemes.

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Policy Principles EU vs MS response: Member States and regional authorities are well-placed to launch information campaigns and engage with local stakeholders and industrial partners. However, the central structure of the policy—especially emissions reduction targets—are better and more consistently managed at the EU level. (Since many manufacturers sell their goods in different Member States, conflicting targets would risk increasing compliance costs and reducing regulatory pressure to adopt sustainability measures.) If an EU-wide initiative does not materialise, individual Member States may launch their own national CPS. However, they would need to coordinate with other potential initiatives at the EU level, such as Carbon Border Adjustment.

Point of obligation: Any industrial facility that produces a regulated product, whether for sale or for use within that facility, should report the total greenhouse gases it emits during its production. The facility should also demonstrate compliance with the product’s emissions limit, either directly or through purchasing CPS emissions credits, similar to the EU ETS. These reports shall be subject to periodic audits.

Scope of coverage: All industries that meet a threshold of GHG emissions intensity, as determined by the designated European agency, can be subject to regulation under the CPS. Some initial sectors may include steel, cement, glass, aluminium, chemicals, and pulp and paper.

Reporting metrics: The compliance metric used under a CPS would be the total GHG emitted per unit produced. The designated agency shall calculate this metric for each obligated entity, based on that entity’s annual reporting of three main pieces of data for each product class:

– Direct facility emissions from the combustion of fossil fuels and from industrial processes that result in GHG emissions (scope 1 emissions).

– A facility’s use of purchased electricity (or heat) based on an appropriate regional electric sector emissions rate (scope 2 emissions).

– The total quantity of product produced each year. Depending on the product, this may be reported in terms of weight or volume of output, total number of discrete items produced, or another appropriate output measure.

Governance: Clear and independent climate governance is a key factor in reaching national and international sustainability targets. A future CPS must be delivered under strong EU guidance and in close coordination with all other relevant stakeholders to effectively manage interdependencies among various climate-related policies. This would ensure clear direction to Member States and manufacturers and the efficient operation of all policies. Benchmarks set for CPS should tighten in line with the net-zero targets, and periodic reviews should receive stakeholder feedback to improve the policy as needed.

Investment cycles: Companies often make industrial investments, whether construction of new plants or significant upgrades to existing facilities, with the expectation that they will use the new technology for several decades. However, an emissions limit that tightens continuously over time may require individual plants to implement changes almost every year or over-achieve in some years. Since this may prove challenging, a CPS should be designed

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with this consideration in mind. A voluntary compliance period (see below) lasting several years, combined with clear signals for near-zero emissions regulations coming at a predetermined time in the future, may be effective in encouraging industries to develop long-term full decarbonisation plans. Additionally, manufacturers may trade emissions allowances (see below) or be given an option to pay a reasonable penalty fee until they can make full decarbonisation investments.

Voluntary compliance period: To incentivise early deployment of clean manufacturing technologies, the CPS may have a voluntary compliance period before mandatory targets are implemented. In this period, obligated entities with emissions below a benchmark would generate CPS compliance credits, which can be banked and used to demonstrate compliance once targets become binding.

Tradability: Compliance instruments under the CPS shall be tradeable in a limited fashion: by averaging one producer’s output across multiple facilities, for instance. Regulators could expand tradability to allow trading between any producer of a specific product as the standard’s stringency increases, minimising sector-wide compliance costs while providing a financial incentive for early overachievement.

Labelling: A future CPS would greatly benefit from including products in relevant labelling schemes, as labels can pull demand by appealing to environmentally conscious consumers. Regulators may develop these labels in consultation with industry stakeholders to maximise policy buy-in. Labelling for CPS may also be coordinated with Green Procurement and Minimum Efficiency Standards policies.

Database: To implement an effective CPS and inform customers about the best products on the market, all goods covered by the policy can be integrated with EU databases currently being kept for public procurement schemes and the Level(s) framework for the buildings sector. This would also increase confidence in the policy by providing transparency around lifecycle emissions of products and materials. This database and best practices for CPS should also be open to countries outside the EU that may wish to establish similar initiatives or voluntarily be part of the CPS.

International trade: As imports to the EU are projected to grow in the medium and long term, it is increasingly necessary to cover imported emissions in future policies. A CPS may achieve this by requiring all imported goods to comply with maximum embedded carbon limits. Imports may also be covered with a Carbon Border Adjustment policy. It is important to make sure these policies do not compete and are intelligible to international trade partners.

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Current Legislation Currently, a CPS does not exist in the EU. At the same time, multiple policies aim to reduce emissions associated with industrial products, and these must work in harmony with a future CPS. For example, the EU ETS puts a cap on the total amount of emissions permitted from power production and energy- intensive industries, but its impact is limited by allocation of free allowances, especially for export-heavy sectors.

Similarly, the Eco-design Directive sets minimum energy performance standards (MEPS) for many industrial and domestic energy-consuming appliances such as lighting, washing machines, air conditioners, boilers, motors, etc. Products that fail to meet specified efficiency limits are pulled from the market. Targets are updated regularly in consultation with industry stakeholders, and should provide a market push for energy efficiency.

On the other hand, the Energy Labelling Directive works in conjunction with Eco-design standards to establish a common set of rules to classify, label, and communicate the energy performance of appliances to consumers. Energy labels increase demand for more efficient products by allowing consumers to make more informed decisions and companies and governments to procure products with the highest performance. Additional labelling schemes, such as EU Ecolabels, have more stringent and comprehensive sustainability criteria.

FIG. 01 Market Push and Pull Effects of Various EU Policies on Energy Efficiency

1 2 3 Ecodesign Energy Endorsement (MEPS) Labels Labels NUMBER OF MODELS A PRODUCT

INCREASING ENERGY EFFICIENCY

1) Ecodesign addresses the product supply side; it pushes the market. 2) Categorical energy labeling addresses the demand side; it pulls the market. 3) Endorsement labeling provides further pull toward premium models Source: Modified from “Towards an EU Product Policy Framework contributing to the Circular Economy,” EBB, 2018

A voluntary Green Public Procurement (GPP) programme, in which participating Member States include sustainability criteria when purchasing goods and services, supports the above policies, Covered categories include building materials, textiles, food, electricity, furniture, appliances, IT, and office supplies. The EU works with Member States to establish standard methodologies to calculate environmental impact and level the playing field among different jurisdictions.

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In addition to the wide range of policies above, there are buildings-specific policies and tools in the EU. For instance, the Energy Performance of Buildings Directive sets requirements for Member States to renovate a portion of their existing building stock, ensure that new buildings are nearly zero-emissions, set minimum energy efficiency standards for buildings, and issue energy- performance certificates to buildings when they are sold or rented. The EU is also developing a new common buildings sustainability reporting framework called Level(s), which, among other things, aims to standardise embedded emissions reporting and databases among countries.

In its new Circular Economy Action Plan, the EU is proposing a Sustainable Product Policy Framework that expands the scope of the Eco-design and Energy Labelling Directives to cover more products and circularity related attributes. The proposal is initially focused on electronics, information and communication technologies, textiles, furniture, and major intermediary products such as steel, cement, and chemicals. The existing buildings directive may be amended to include targets on embedded carbon in construction materials. This framework goes far beyond a CPS by setting many targets about recycled material content, product lifetime, and lifecycle-analysis– based sustainability criteria. However, a CPS may be well placed as part of a future Sustainable Product Policy Framework. Impact The impact of a CPS is difficult to estimate, since such a policy does not yet exist in the EU and current policy proposals focus on a package of measures including many product-design criteria. One study estimates that 40 percent of EU emissions are related to supply chains of material-intensive goods and only 38 percent of these are covered by EU ETS. Moreover, about 30 percent of buildings related emissions in the EU are out of scope of EU standards and EU ETS. Therefore, a CPS, either directly or indirectly, has the potential to significantly expand the coverage of EU emissions addressed by climate policies.

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MANUFACTURING DEEP DIVES Carbon Border Adjustment Mechanism

Overview Between 1995 and 2015, production-based emissions in the EU-28 decreased by 13 percent, while consumption- based emissions fell by just 8 percent and one-third of all EU consumption-based emissions occurred abroad. Carbon leakage describes this phenomenon of industrial production (and related emissions) potentially moving overseas owing to increased costs of climate-policy compliance. Despite the uncertainty of the EU ETS price development, as the EU ETS prices increase, carbon-intensive products made in the EU get more expensive. Therefore, slow-to-decarbonise manufacturers could risk losing both foreign market share (reduced exports) and domestic market share (more imports from outside the EU).

Carbon Border Adjustment (CBA) is an adjustable charge for imported products based on their carbon content. This mechanism aims to level the playing field by not allowing countries with lax carbon pricing to profit unfairly. CBA also exerts political pressure on other parties to adopt stricter climate policies. Although CBA may be perceived as a tax, technically it is likely to be part of the future EU ETS. Since a CBA would target international trade, it must comply with World Trade Organization (WTO) rules and not be used as an excuse to practice protectionism. A CBA should treat all countries equally, charging products by the benchmark carbon content for each product multiplied by the EU ETS price.

CBAs are likely to be complicated mechanisms with many potential administrative burdens. Therefore, efforts may focus on implementing them first for a few energy-intensive primary products with high export potentials, such as steel, aluminium, and chemicals. To improve regulatory efficiency, global average emissions for each product category may be used as the benchmark instead of attempting to calculate facility specific emissions. Ultimately, international trade rules must treat all countries similarly under a CBA, and exporters to the EU should not be subject to higher costs than domestic producers.

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Policy Principles Coverage: Applying CBA to imports and concurrently waiving EU ETS cost for exported products is likely to achieve the greatest reduction in the risk of potential future carbon leakage. However, focusing only on imports and keeping the carbon price for exports is likely to reduce political opposition from other countries. This combination would also prevent EU manufacturers from ramping up emissions for exported products, thereby having the best overall emissions-reduction outcome. A CBA is likely to be most efficient when applied to industries with high export potential and high price sensitivity to carbon costs. Steel, cement, and aluminium are ideal initial sectors, since they fulfil these requirements and have relatively well understood production processes, which would thus reduce administrative burdens.

Fair treatment: Under international trade law, CBA should not discriminate between specific countries. Therefore, when determining the emissions embedded in a product, factors relating to their country of origin (such as average grid intensity in the imported country) should not be used. If a specific product already complies with strict carbon content limitations, exporters should be given the chance to prove the lower carbon content to get an exemption or reduction on CBA. Moreover, international trade principles also dictate that imported goods should be treated “at least as favourably as the domestic goods,” meaning they cannot be charged more than the domestic product. One way to satisfy this requirement is to link the CBA to the EU ETS, so that domestic producers and exporters to the EU face the same costs.

Benchmark and emissions calculations: Calculating specific emissions factors for each facility in the world is highly impractical and may raise opposition on the grounds of discrimination if specific country data is used. An alternative approach is to use sectoral average data for each product category. This methodology calculates average global direct emissions (from a facility itself) and indirect emissions (associated with electricity and heat consumption) and sets them as the benchmark for each type of product. Imports would then be charged for this average value unless they demonstrate their real emissions are lower than the benchmark. If global-average emissions are difficult to calculate, or politically unacceptable (because they are too high), EU averages may also serve as the benchmark.

Adjustment level: The base charge of CBA would be equal to the EU ETS price multiplied by the benchmark carbon emissions unless the exporter proves lower emissions. However, the CBA should also be reduced proportionately to reflect benefits provided to domestic producers, such as free allocations, and carbon prices paid by exporters in their country of origin, such as countries with carbon taxes in place.

Revenues: In line with the limitations in place for the use of EU ETS revenues, income generated through CBA should be used for investment in climate change measures and compensating for the potential negative impact of the policy. This may be done by partially re-investing the revenues in developing countries to help with their mitigation measures. Although redirecting financial flows to these countries would prevent the EU from using revenues domestically, it would help reduce potential international opposition to CBA and convince the international community that CBA is not a protectionist policy.

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Expiration: As more countries develop stringent climate policies, regulatory and technological differences among regions shrink and the CBA approaches obsolescence. Furthermore, if more regions develop CBAs, their administrative burden increases. Therefore, CBA should not be viewed as a long-term solution, and the policy design should include a clear exit strategy.

Process: Introducing CBA as an amendment to the EU ETS is likely to be more successful since it requires support from a qualified majority of Member States and a majority in the European Parliament, whereas creating a new tax would require unanimous support in the Council. Additionally, including all parties, especially developing countries, in the CBA’s design process would help clear political hurdles and encourage greater international cooperation. The design and implementation of CBA should be fair, transparent, and predictable, and should give ample time for other countries to adjust and prepare.

Governance: Having clear and independent climate governance is a key success factor in reaching national and international sustainability targets. A future CBA must be delivered under strong EU guidance and in close coordination with all other relevant stakeholders to effectively manage interdependencies of various climate related policies. This would provide clear direction to Member States and industry and ensure the efficient operation of all policies. Benchmarks set for CPS should tighten in line with the net-zero targets, and periodic reviews should receive stakeholder feedback to improve the policy as needed. Current Legislation Although some form of CBA has been proposed in the EU, the policy has not got traction until recently. Currently, EU ETS uses free allocations of allowances to prevent carbon leakage in most exposed industries. Free allocations are based on benchmarks, which represent the average carbon intensity of 10 percent of the most efficient facilities in Europe. These facilities effectively receive all their allowances for free, whereas the rest of the facilities must cover the difference between emissions and allowances by purchasing credits. From 2021 onwards, it is planned that most highly exposed industries will continue receiving 100 percent free allocations and other industries will gradually receive fewer free allocations (0 percent by 2030). The EU ETS provides a further opportunity for Member States to use some of the generated revenues to compensate for high electricity prices in power intensive industries.

The current EU ETS directive states that the European Commission should review the directive regularly in light of international developments and consider whether it is necessary to adapt, complement, or replace it to tackle the risk of potential carbon leakage. This provision gives further justification for the Commission to investigate the feasibility of introducing a CBA in the EU. Recently, the Commission stated its interest in developing a CBA in its Green Deal and Industrial Strategy, by emphasising it is likely to focus on imports, fully comply with WTO regulations, and create synergies with existing EU mechanisms. The European Commission currently concluded its public consultations with stakeholders and expects to propose and adapt a CBA mechanism by the second quarter of 2021.

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Impact Since a large-scale CBA has never been implemented anywhere, the assessment of its impact is limited to theoretical studies and models. Several studies showed that a CBA can indeed reduce carbon leakage, but risks reducing welfare in non-acting countries. Another theoretical study modelled the ratio of change in carbon leakage to emissions reduction for four energy- intensive industries (power, steel, cement, and aluminium) in the EU under different policy scenarios. See the figure below (Aggregate Carbon Leakage) for results. “Auction” refers to selling all EU ETS allowances in auctions, “BA” refers to scenarios with CBA (covering imports or imports + exports; direct or direct + indirect emissions), and OB refers to output-based allocation scenarios, where EU ETS allowances are distributed freely proportional to previous outputs.

Currently, EU ETS allowances are auctioned for the power sector, while other export-sensitive industries are slated to continue receiving free allocations until 2030. Therefore, output-based allocation scenarios represent the most likely alternative futures for the EU ETS. Results suggest that a CBA based on imports only (using the rest of the world’s average emissions as a benchmark) or a CBA (with imports + exports) which uses EU average emissions as a benchmark for industries significantly decrease leakage-reduction ratios, compared to just auctioning or distributing some allowances for free based on outputs.

Although output-based allocation scenarios appear to only cause marginally higher carbon leakage compared to CBA, ultimately consumption of energy and carbon intensive products must decrease under more stringent climate targets. Thus, free allowances can only serve as a transitionary policy.

FIG. 01 Carbon Leakage-to-Reduction Ratios Under Different EU Policy Scenarios

-2

LEAKAGE-TO-REDUCTION RATIO LEAKAGE-TO-REDUCTION -4

-6 Auction BA Full BA Import BA Direct BA EU BA Import OB Full OB Exp. OB Exp. Only Only Average Direct Direct Direct & Indirect Variant L Variant H

Aggregate carbon leakage to reduction ratios of steel, aluminium, cement, and electricity industries under different EU climate policy scenarios. BA: border adjustment, OB: output based. OB Exp means that electricity allowances are auctioned, and other sectors receive free allocations. L, H: sensitivities. Source: ScienceDirect.com

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In addition to reducing carbon leakage and maintaining the competitiveness of EU manufacturers, CBA can encourage other countries to adopt stringent climate policies and level the global policy space. Studies indicate that a growing coalition of countries with CBA have the potential to successfully exert pollical pressure on other countries to develop their own carbon constraints, reducing leakage and global emissions even further. These measures are likely to be most effective against countries with relatively cheap carbon abatement potentials and high exports.

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April 2021 | 127 GRAND CHALLENGE | BUILDINGS

BUILDINGS Overview

Buildings emit carbon in two ways: through daily use (known as operational carbon emissions) and via the manufactured cement, steel, and iron used to make them (known as embodied carbon emissions). Operational carbon emissions can be reduced over time as things like HVAC systems become more energy efficient. Embodied carbon emissions, by contrast, are locked in place as soon as a building is built. That means we cannot decarbonise the building sector without getting the manufacturing sector to net-zero at the same time.

The EU estimates that the built environment accounted for approximately 40 percent of energy consumption and 36 percent of CO2 emissions in the EU as of 2018. While this sector’s emissions have decreased by 22 percent since 1990, further decarbonisation is vital to meeting European greenhouse gas (GHG) emission reduction targets. As of 2015, 35 percent of the EU’s buildings were over 50 years old and nearly 75 percent are energy inefficient. Only 1 percent are renovated each year.

To reduce building emissions, we need policy action that encourages the deployment of new technologies, such as low- GHG building materials and ultra-efficient heat pumps, and creates additional incentives for the electrification and improved efficiency of clean technologies that already exist.

Additional Resources

→ IEA – Material Efficiency in Clean Energy Transitions (2019) → ECF – Zero Carbon Buildings 2050 Summary Report

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BUILDINGS SOLUTION Electrification

Overview A primary source of building sector emissions is fossil-fuel combustion to create heat. In 2018, roughly 45 percent of households in EU 28 were heated using natural gas, which often relies on aging infrastructure in lower income communities. Moreover, oil accounted for 14 percent and coal for some 5 percent.

Air-source heat pumps offer an alternative to existing fossil sources for space and water heating and cooling. When powered by clean electricity, and combined with energy efficiency improvements, building electrification will help accelerate the path to net-zero emissions. Market Challenges

Consumer Inertia Most European consumers have grown accustomed to using natural gas or other fossil-based appliances. Limited awareness of the health and safety risks of gas, the methane leakage and carbon impacts of gas, electric alternatives, misperceptions of electrification, consumer preferences, and product experiences all serve to slow the shift away from fossil fuels. Consumer inertia also means that long-term investments are disadvantaged against lower cost options, even if a recovery on investment exists for a technology. The economic benefits of building electrification are not immediate. Building electrification is usually cost-effective over an asset’s lifetime, but high upfront capital costs, short supply of the right financial products, and split incentives between tenants and landowners tend to prevent heat pump deployment. Even if electrifying makes economic sense, consumers can face long payback periods for devices while gas is cheap.

Energy Poverty Energy poverty (or fuel poverty) is broadly defined by the European Commission as the “inability to keep homes adequately warm.” However, it can also refer to adequately “meet[ing] other energy service needs at affordable cost.” The two main root causes of energy poverty are poor-quality housing and low incomes. Unless investment in efficiency improvements is incentivised for both private and tenement housing, raising building stock’s energy performance to satisfactory levels will remain an uphill climb.

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Existing Infrastructure and Stock Turnover Most existing building stock and electric distribution infrastructure was not built with the intention of complete electrification, presenting a critical barrier to faster progress. Increases in peak demand and insufficient demand-side management could require costly upgrades to power systems on a local and regional scale. In addition, gas appliances and distribution infrastructure are already in place and providing easy and cheap access to gas for many customers. At the building level, architectural challenges can hinder fuel- switching retrofits (buildings may lack appropriately sized and ventilated space for heat pump water heaters, for instance) and the replacement rate of combustion devices with 15–20 years of useful life is slow. Technologies

Grid Interactive Heat Pumps Winter Summer

R&D VALIDATION SCALE

Air-source heat pumps use electricity to provide space heating and cooling by using the outside air as a heat source or sink, respectively.

COOLED AR HEATED AR HEATED AR COOLED AR

COOL AR WARM AR OUTSDE AR OUTSDE AR

Heat pumps use electricity and can be used for space heating and cooling, water heating, and clothes dryers. Grid-interactive heat pumps can shift the timing of demand based on grid signals (such as pricing or carbon). The broad categories of heat pumps—air-source, water-source, and ground-source— each use these respective materials as a heat source or sink. Due to significant technological advances over the last decade, and contrary to popular belief, many heat pumps today can function cost-effectively even in the coldest climates. Heat pumps are also reversible: one piece of equipment can provide both heating and cooling services, where traditionally two would be needed. These systems can be designed for all building types, from single family homes to large commercial buildings. Barriers to further adoption include awareness, relatively higher upfront costs, potential noise, and, for geothermal heat pumps, wider availability of drilling. Flexible financing approaches can help reduce the upfront cost issue.

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Induction Stoves CONDUCTVE UTENSL

R&D VALIDATION SCALE

Induction stoves use electricity to generate a magnetic field, inducing many smaller currents in iron and stainless steel cookware MAGNETC FELD and converting the energy from those currents CERAMC TOP PLATE into heat.

POWER COL

ELECTROMAGNET

ELECTRONC SUPPLY

The induction stove, a growing alternative technology, allows for both electrification and improved efficiency over gas and electric heaters. Induction stoves use electricity to generate a magnetic field: once a pot or pan is set on the burner, the magnetic field induces many smaller currents in the cookware’s metal. Since cookware such as cast iron and stainless-steel pots are poor conductors of electricity, much of the energy from the current running through them is converted into heat. The fact that the heat is coming from the pan itself rather than the burner makes for a more efficient cooking process. In addition, induction stoves can offer a cooking experience that rivals gas cooking, including faster cooking times and a high degree of control and simmering.

Two principal barriers to the wider adoption of induction stoves in the EU are their high upfront cost (incl. new cookware) and the misperception of many consumers that gas stoves provide the best cooking experience. Broader deployment of induction stoves will therefore rely on cost reductions to make induction stoves more competitive and educational efforts to drive greater interest and adoption.

Additional Resources

→ European Technology and Innovation Platform on Renewable Heating and Cooling – 2050: Vision for 100 percent renewable heating and cooling in Europe (2019)

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BUILDINGS SOLUTION Efficiency

Overview When buildings operate more efficiently, they consume less energy, reducing GHG emissions on a per-unit area basis. Strategies for increasing efficiency include replacing old equipment, upgrading the building envelope, and using energy-management software to track and report information about a building’s emissions and energy use.

Installing efficient equipment also presents an opportunity to reduce emissions from hydrofluoride-based refrigerants used previously in heat pumps and air conditioners. More efficient buildings will reduce the overall costs of decarbonisation and are critical for reducing demand for electricity. Market Challenges

Information Gaps Energy waste and carbon emissions are often invisible problems. Thus, making good investment decisions regarding efficiency requires both an understanding of a building’s relative performance and awareness of cost- effective improvement opportunities. Each Member State discloses building energy performance information (energy use, costs, and related emissions) by requiring Energy Performance Certificates (EPC) for public and private buildings, and as mandatory for sale or renting processes. Despite this, the success of EPC’s is still limited due to lack of consumer awareness, low to no enforcement, and an unwillingness to implement suggested recommendations. There is also a chronic lack of consumer awareness about the economic, health, climate, and comfort related benefits of implementing efficiency upgrades which are not captured by most EPCs.

Split Incentives Efficiency improvements can require considerable upfront capital expenditures. Split incentives occur when those responsible for paying and/or making the capital investment decision for the retrofit or renovation project (usually the owner) does not directly reap the financial savings for energy bills achieved after the implementation of the project. Split incentives effectively delay the implementation of measures which help reduce GHG operational emissions, such as insulation, more-efficient appliances, or newer heating and cooling equipment.

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Energy Poverty Energy poverty (or fuel poverty) is broadly defined by the European Commission as the “inability to keep homes adequately warm.” However, it can also refer to adequately “meet[ing] other energy service needs at affordable cost.” The two main root causes of energy poverty are poor-quality housing and low incomes. Unless investment in efficiency improvements is incentivised both for private as well as tenement housing, raising building stock’s energy performance to satisfactory levels will remain an uphill climb.

Sector Conservatism and Behavioural Challenges Conservatism in the buildings sector makes it harder to implement efficiency measures and other new approaches to reducing GHG emissions. Multiple stakeholders in the buildings and construction industries—suppliers, contractors, and even clients—often default to lowest-cost or conventional options and materials which do not offer the best environmental performance. This kind of sector conservatism and perceived risk aversion can be difficult to overcome. It may even lead to the perception that there is a higher risk associated with innovative, energy-efficient materials. Technologies

Ventilation Technology: CO2/Contaminant Filtering & Outside Air Reduction

OUTDOOR AR R&D VALIDATION SCALE RETURN AR DUCT SUPPLY AR DUCT AHU enVerid’s HLR® (HVAC Load Reduction) system ° ° is an example of an advanced ventilation technology that can provide energy and cost savings for buildings. By scrubbing return air for indoor air contaminants, the HLR module minimises the need for outdoor air, thereby TREATED AR TREATED reducing the amount of heating or cooling HLR required by the air handler unit (AHU). EXHAUST REGENERATON Source: enVerid.

Ventilation Reduction through Advanced Filtration can provide significant HVAC savings for commercial buildings. Reducing the amount of outside air introduced to commercial buildings minimises the need to constantly heat, cool, or manage the humidity of that air to match indoor conditions. This reduction in outside air enables the use of smaller HVAC systems (CAPEX reduction) and improves operational efficiency of the HVAC equipment for the life of the system (OPEX reduction). Technologies that enable a reduction in outside air improve building operations efficiency and help manage 17 contaminants, including CO2, formaldehyde, and a full range of volatile organic compounds (VOCs) in commercial buildings and multi-unit residential buildings.

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Advanced Envelope Solutions

NTEROR SHEATHNG R&D VALIDATION SCALE FOAM CORE Advanced building-envelope solutions such as structural insulated panels (SIPs) and thin-center glass triple-pane windows can GAS FLLED, make heating and cooling more efficient. TRPLE GLAZED WNDOWS

EXTEROR SHEATHNG OSB

In Europe, 79 percent of buildings’ energy demand (192.5 Mtoe) is for heating and hot water alone, making advanced building envelopes one of the biggest areas of opportunity for savings. Advanced envelope solutions encompass a variety of established and emerging technologies and strategies that help prevent the loss or gain of heat in and out of a building, either through heat transfer or air leakage. Super high efficiency envelope solutions, such as modified atmospheric insulation panels, polymeric vacuum insulation spheres, and ceramic aerogels, require more R&D to bring down costs. More established envelope solutions that can benefit from additional deployment efforts include structural insulated panels (SIPs) and thin-centre glass triple pane windows. Other solutions include external window shades, which can keep homes cool by blocking the sun’s heat before it passes through the window itself, and green walls, which take advantage of plants’ ability to absorb the sun’s energy.

Advanced Motors for Pumps, Compressors & Fans

R&D VALIDATION SCALE

This pump, designed by Turntide Technologies, combines two proven technologies: the switched-reluctance motor and the computing technology used in smart phones and cars. The result is a motor system that consumes energy only when needed. Source: Image courtesy of Turntide Technologies.

Electric motors consume approximately 45 percent of global electricity production and represent a €85B+ annual market. Advanced high efficiency motors and motor control technologies such as variable frequency drives

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(VFD’s) are critical to enabling drastic building energy efficiency improvements through higher efficiency HVAC systems, fans, and refrigerators. Significant advances in power electronics, control algorithms, machine learning, and novel fabrication techniques are enabling new generations of motors (such as switch reluctance and axial flux) that can improve system level power consumption for HVAC, fans, and refrigerators by 10–50 percent.

Super-Efficient Cooling Technology SOLAR and Heat Pumps PANEL

R&D VALIDATION SCALE

A geothermal heat pump uses the temperature NTEROR of the earth to either circulate warm or cool UNT air. The heat pump is buried in the shallow ground and can either take cool air and transfer it to a warm area or take warm air and transfer it to a cool area. EXTEROR UNT

Air conditioners (ACs) use a significant amount of energy, contributing to higher emissions and rising temperatures. This is a dangerous feedback loop, since more warming leads to more air conditioning. Also, most ACs use high- global warming potential (GWP) refrigerants that are often leaked during equipment operation, maintenance, or end of life. Considering the rapid increase in AC use due to rising global temperatures, incomes, and urbanisation, developing cooling technologies that use no or low-GWP refrigerants and are much more efficient is critical. Promising solutions being developed include novel membrane materials, vapor compression control technologies, and unique dehumidification methods. Some approaches also take a “systems engineering” approach to build better cooling systems without major tech development. These innovations can also achieve significant reductions in emissions relative to conventional cooling technologies.

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Super-Efficient Heating Technology

R&D VALIDATION SCALE

Efficient heating technologies, such as renewables-powered heat pumps, enable buildings to decrease their carbon footprint. Source: Modified from OVO Energy OUTSDE AR

Heating in buildings (both space and water) uses a significant amount of energy, contributing to high operational GHG emissions in Europe. Compared to cooling technologies, many heating technologies in Europe still use fossil fuels. Consequently, they offer promising opportunities to increase efficiency. Some examples of super-efficient heating technologies include electric boilers and heat pumps (either ground or air source) that can be coupled with on-site renewable electricity production, such as solar PV installations. Other super- efficient heating technologies can produce electricity from waste heat that would otherwise be lost, such as combined heat and power boilers. These can be made sustainable if fired with biomass.

Next Gen Building Management

R&D VALIDATION SCALE

Advanced building management systems reduce energy consumption by using connected ANALYZE CENTRAL CONTROL UNT CCU sensors, wireless controls, and big data to CONTROL OUTSDE AR OPTMZATON OAO optimise building performance.

SENSORS HUMDTY CONTROL SMART & TEMPERATURE BULDNG AUTOMATON

Next gen systems to manage building HVAC and lighting have been proven to improve comfort and air quality and reduce energy consumption by 20-30 percent, all with relatively low cost and fast installation. These systems include intelligent data dashboards, fault detection and diagnostics, and AI-drive optimisation of building systems. They generate savings by using wireless controls, big data, and connected sensors to implement strategies

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such as optimising trade-offs between compressors, chillers, and fans and reducing simultaneous heating and cooling. These systems also typically reduce operations expenses and improve comfort by controlling temperature more tightly.

Grid Interactivity Shift it Demand Flexibility KW HOURS R&D VALIDATION SCALE

Demand flexibility allows buildings to act like 3 batteries, shifting the timing of their energy consumption to optimise for saving energy or money and/or reducing emissions. 2 NORMAL LOAD

1 FLEX BLE LOAD

0 4 8 12 16 20 24

Advances in networking and sensors have made it possible for building equipment to be connected to cloud-based software systems. These 24/7 systems can automatically respond to signals from the electric grid to shift timing and optimise for saving energy, money, and/or emissions. Shifting timing is called demand management or flexibility. Demand flexibility solutions include hardware (e.g. connected thermostats, or timed or remotely controlled EV chargers) and software controls and algorithms that manage a building’s response to a signal to use less energy for a short period of time. This capability also allows the building to act like a battery, making it easier for grid operators to use more renewable power.

Additional Resources

→ European Parliament – Boosting Building Renovation: What potential and value for Europe? (2016) → European Commission – Department: Energy - In focus: Energy Efficiency in Buildings (2020)

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BUILDINGS SOLUTION Low-Carbon Building Materials

Overview Embodied carbon emissions originate from activities at the top of the construction supply chain, such as the mining and transportation of raw materials and the operation of manufacturing facilities. Opportunities to reduce these emissions are available throughout the design and construction process.

Since embodied carbon impacts are set forever at the beginning of a building’s lifecycle, the development of low-carbon materials for building construction is critical to reaching net-zero. Market Challenges

Actionable Data The data currently available for embodied carbon assessments is of varying quality. It is typically sourced from national lifecycle assessment databases, which tend to be generic (average values for the country) and are rarely updated. Environmental data can also be reported by manufacturers in either product-specific or industry average reports. In some product categories, suppliers have reported product data, while in others only industry average data exists. Without standardised metrics to assess embodied carbon, decision-makers have difficulty setting appropriate limits or targets.

In short, embodied carbon data for the building industry must improve in terms of coverage and quality to become more actionable. Europe’s voluntary reporting framework, Level(s), aims to standardise buildings sustainability accounting, but this system is in its trial phase and currently only covers residential and office buildings. Reaching alignment on embodied carbon metrics and assessment methods will require collaboration by a range of industry organisations, green building programmes, government, and industry.

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Prescriptive Standards Highly codified to protect life and safety, innovations in the buildings industry can often be slow. Building codes tend to be prescriptive instead of performance-based, so codes often limit the introduction of new technologies that could support embodied carbon reductions. For example, cross-laminated timber (CLT) is a promising low-carbon wood alternative to concrete and steel, but building codes often limit how tall a CLT building can be, which restricts how and where it can be used. Similarly, building codes will often define the precise chemical composition of the cement that can be used, which may rule out low-emissions cement even if it performs just as well as the conventional type.

Green Premium Currently, cost is the most common driver of change in the construction industry. Construction specifications define the performance metrics builders must meet to enable competitive and comparable bidding. Carbon-efficient material decisions are typically not prioritised by designers because they still cost more than traditional materials do (this is called the green premium). Without a significant driver (cost, code requirement, or voluntary measure like LEED), designers will typically choose the lowest-cost material that meets the project performance requirements without considering the carbon impact of the decision. While the reuse of materials can be a cost-effective way to avoid embodied carbon, the vast majority of building materials, with the notable exception of steel, are landfilled at end-of-life. For many materials, the cost difference between recycled and new products is not favourable enough to encourage reuse.

Energy Poverty Energy poverty (or fuel poverty) is broadly defined by the European Commission as the “inability to keep homes adequately warm.” However, it can also refer to adequately “meet[ing] other energy service needs at affordable cost.” The two main root causes of energy poverty are poor-quality housing and low incomes. Unless investment in efficiency improvements is incentivised both for private as well as tenement housing, raising building stock’s energy performance to satisfactory levels will remain an uphill climb.

Sector Conservatism and Behavioural Challenges Conservatism in the buildings sector makes it harder to implement efficiency measures and other new approaches to reducing GHG emissions. Multiple stakeholders in the buildings and construction industries—suppliers, contractors, and even clients—often default to lowest-cost or conventional options and materials that do not offer the best environmental performance. This kind of sector conservatism and perceived risk aversion can be difficult to overcome. It may even lead to the perception that there is a higher risk associated with innovative, energy-efficient materials.

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Technologies

Low-GHG Steel BLAST FURNACE GAS CO SOURCE

RON ORE SNTER BOF GAS

R&D VALIDATION SCALE SNTER PLANT

BASC OXYGEN SEPARATON BLAST FURNACE BOF BOMASS FURNACE

PARTAL COAL AND COKE CO GAS SUBSTTUTON P

BLAST FURNACE GAS RECYCLNG CO PURE CO AFTER CO STORAGE SEPARATON P

The production of iron and steel is responsible for about five percent of global greenhouse gas emissions. Greenhouse gases are emitted both in the combustion of fossil fuels, particularly in the blast furnace, and in the conversion of raw materials into iron and steel products. Technology-enabled opportunities for significant emissions reductions from iron and steel production include CO2 capture and storage, direct reduction of iron oxide to iron using natural gas, and the replacement of coal in the steelmaking process with plant-based charcoal. Other, longer-term, and potentially transformative improvements include the direct reduction of iron oxide to iron using low-GHG hydrogen or low-carbon electricity and combining scrap steel input with electric arc furnaces, if copper contamination can be addressed. At present, many of these technologies are not cost-competitive with incumbent processes, and slow stock turnover of industrial facilities further hinders the rapid diffusion of lower-carbon production approaches.

Low-GHG Cement

CO CO CO R&D VALIDATION SCALE

CO CO

Cement CO Plant

The production of cement is responsible for about five percent of global greenhouse gas emissions: about 40 percent from the energy used to power

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the production process and the rest from the CO2 released during the chemical conversion process. Opportunities for significant emissions reductions in cement production include CO2 capture and storage; the development of low-cost, low-emission substitutes for cement/concrete; concrete recycling; and new processes and materials that consume CO2 as opposed to generating it in cement or cement-replacement production— thereby enabling emissions-negative cement production.

Modular/Off-Site Construction

R&D VALIDATION SCALE

Container City II was constructed in east London in 2002 from standard shipping containers to produce flexible accommodation and workspaces at low cost. The installation took only 8 days.

Modular or off-site construction is the process of designing, engineering, and producing components for buildings away from the construction site. Examples include componentised, panelised, and modularised elements deployed as structural, enclosure, service, and interior partition systems. This type of construction can have significant benefits over conventional on-site construction, including: 1) significantly faster build times on site; 2) higher- performance, tighter tolerance structures; 3) lower overall cost; 4) reduced onsite skilled labour requirements; and 5) reduced jobsite and overall waste. While these types of buildings represent only a small fraction (less than 5 percent) of total new construction today, we expect it will grow as technologies improve and builders are able to realise cost benefits associated with modern industrial practices and supply chain improvements.

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Bio-Based Materials Cross-laminated Timber

R&D VALIDATION SCALE

Nail-laminated timber is a type of engineered wood product, a bio-based material that Nail-laminated can significantly lower the embodied carbon Timber of buildings. Source: Thinkwood.com. Dowel-laminated Timber

Glue-laminated Timber

Bio-based or biogenic materials derived from plant or animal sources have a long history of use in buildings. These include engineered wood products, engineered bamboos, hempcrete blocks, and other plant-derived materials. They typically require only moderate amounts of processing energy to create effective building materials and therefore tend to have very low embodied carbon, often an order of magnitude lower than more highly processed materials such as steel and cement. Bio-based materials also grow by absorbing CO2 from the atmosphere and using the carbon to build cellulose, with half the weight of most biogenic materials composed of atmospheric carbon. This embodied carbon, when stored within a building for the 50+ year lifetime of the building, remains out of the atmosphere for that duration, often enabling these buildings to have a net carbon benefit.

Additional Resources

→ IDDRI – State of the Low-Carbon Energy Union: Assessing the EU’s progress towards its 2030 and 2050 climate objectives (2016) → World Green Building Council – Bringing Embodied Carbon Upfront (2019) → AECOM for the Committee on Climate Change – Options for incorporating embodied and sequestered carbon into the building standards framework (2019)

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BUILDINGS POLICIES Policy Overview

Phase: Research and Development

RESEARCH & VALIDATION & EARLY LARGE SCALE DEVELOPMENT DEPLOYMENT DEPLOYMENT

European investment in research and development (R&D) supports economic development, drives down costs for key technologies, and promotes European leadership on clean energy and climate. Institutions operating within Horizon Europe and InvestEU programmes drive most investment in R&D. In addition, R&I partnerships can reduce the fragmented approach to R&D across the built environment supply chain by providing pathways based on a holistic view of the building sector.

European policymakers should increase investment and enact programmatic reforms to ensure a sufficient level of R&D is carried out in the following areas:

– Integrated solutions with dual-purpose heat pumps (HVAC and water heating), extreme cold climate heat pumps, thermally driven heat pumps, and heat pump enabling-technologies such as high-density thermal storage;

– Induction stoves and electrification solutions for historic applications (such as radiators);

– Strategies to repurpose gas distribution infrastructure (such as internet cables, hydrogen blends for heating, low-carbon heating networks);

– Solutions for the cost-effective integration of renewable sources of energy at the building and neighbourhood levels, energy demand flexibility, integrated heat and electricity storage (including EV charging), and heat and electricity exchanges with industrial zonings1 ; and

– Social norms and consumer perception as well as consumer-oriented financial product innovation.

For more, see deep dives on → EU R&D Programmes → Stimulation of Clean Energy Entrepreneurship and Scale-up

Phase: Validation and Early Deployment

R&D VALIDATION SCALE

1. As suggested in EC’s Annex 5 – Horizon Europe Cluster 5: Climate, energy and mobility

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The EU will continue to support demonstration of technologies that align with its missions through various funding programmes, such as Horizon Europe (EU’s flagship research and innovation programme), the Innovation Fund (which will provide around €10 billion supplemented through EU ETS revenues), and InvestEU. The EU should continue to develop a robust portfolio of demonstration projects focussed on the electrification of heating and cooling systems including heat pumps and induction stoves, as well as electricity storage solutions to handle peak loads.

For more, see the deep dive on → Validation, Demonstration and Testbeds

and the policy (below) on Subsidies and Financial Incentives for Demonstration.

Subsidies and Financial Incentives for Demonstration Without targeted financial support to promote early-stage deployment, producers do not often have sufficient incentives to develop new technologies. The EU supports investment in green technologies, business cases, and pre- commercial manufacturing practices through a variety of different funding streams including InvestEU, Horizon Europe, the Innovation Fund, Connecting Europe Facility, the Modernisation Fund and The Just Transition Mechanism. These funding streams are implemented by the European Commission or institutions such as the EIB Group via project-development assistance and an extensive range of instruments to mobilise public and private sector investors and fund projects at different risk levels. Additional funding for green projects can increase investment in, and the deployment of, electrified home appliances and heating systems including heat pumps, on-site renewable electricity generation, and use of small blends of hydrogen in specific parts of the heating network. To maximise effectiveness, these funds should be targeted towards green technologies by following the EU taxonomy for sustainable activities and the “do no harm” principle. Creating green labels for financial instruments in line with the EU taxonomy will help mobilise and channel more private investment towards green technologies.

Green Procurement Procurement policies targeting the next generation of electric equipment for home heating, cooling, and cooking can reduce costs and drive private-sector demand. Procurement policies can also spur market adoption and encourage long-term deep decarbonisation. Leveraging the purchasing power of public institutions can similarly create initial markets for emerging low-carbon technologies and demand for more circular products and cleaner modes of transport, contributing to overall decarbonisation.

The EU can help set common GPP standards across the Member States and support local green procurement capabilities by maintaining a common product database, disseminating best practices, and holding information campaigns. Linking procurement to labelling standards that disclose environmental-impact data can also create a market for low-GHG materials.

For more, see the deep dive on → Green Procurement

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Building Performance Disclosure and Labels Information about a building’s emissions and energy use is largely invisible to its owners, occupants, and the market at large. Similarly, it is not always easy to identify cost-effective upgrades when there is no clear data or metric for performance. Improved disclosure of building-level energy consumption, costs, and emissions will increase awareness, fill information gaps, inform retrofitting strategies, incentivise competition between owners, and facilitate standards for efficiency.

Energy Performance Certificates (EPCs) can provide an energy performance rating as well as recommendations for cost-effective efficiency improvements. These certificates are issued and advertised when a building is being constructed or is put up for sale or rent. The Energy Performance of Buildings Directive (EPBD) requires Member States to provide information on certificates and inspection reports. In response, Member States have established their own energy-performance certification systems and databases. However, Member States apply different disclosure policies on building performance, and in many cases their databases are not used beyond the minimum requirements set out by the EPBD.

Leveraging EPCs by mandating the sharing of building performance data with all relevant stakeholders (from occupant to regional governments) can be used to inform other policies implemented by Member States, such as long-term renovation strategies or codes for existing buildings. Additionally, harmonising and sharing building-performance data for consistency among Member States can help European bodies assess their progress towards decarbonisation of the buildings sector by 2050.

Phase: Rapid, Large-Scale Deployment

R&D VALIDATION SCALE

Renewable Energy Targets The use of renewable energy for heating and cooling in buildings has the potential to reduce GHG emissions if these sources substitute fossil-fuel use. Currently, policy at the European level to increase renewable energy use comes through the recast of the Renewable Energy Directive (2018/2001). RED II sets a new, cross-sector, and EU-wide binding renewable energy target of at least 32 percent of final energy consumption by 2030. The Directive also includes indicative targets for renewable energy use in heating and cooling, requiring each Member State to increase the share of renewable energy in the heating and cooling sector by an average of 1.3 percent annually between 2021 and 2030. However, this target is cross-sectoral and not specific to the buildings sector.

Implementing distinct, sector-specific renewable-energy targets for heating and cooling would help meet the 1.3 percent annual target by 2030. To ensure renewable energy targets are achieved collectively, it is important to encourage collaboration among Member States in transforming heating and cooling.

The Directive includes a clause for a possible upwards revision of the targets by 2023. Electrified heating and cooling technologies such as heat pumps have recently experienced cost reductions, which is expected to encourage their adoption. Because of the decarbonisation potential of these technologies, a thorough evaluation of progress ahead of this date would help evaluate whether more ambitious renewable energy targets are plausible.

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The EU ETS already applies to some construction material, such as cement, metals, glass, aluminium, ceramics, and steel, as well as heating fuels, but not to buildings themselves. Proposals from the EU Green Deal could change this, including by subjecting emissions associated with heating and cooling buildings to some form of emissions trading. However, this should not be done if it deflates the value of the ETS. Greater focus should be placed on Financial Incentives for consumers to improve the energy efficiency of their homes and Long-Term Renovation Strategies to ensure buildings meet Member States’ energy standards.

For more, see the policy on → EU Carbon Price

Access to Finance and Financing Instruments Financing for green building improvements currently comes from both the traditional system of grants and subsidies and some new innovative pathways. Innovative financing instruments that spread costs over time are needed to overcome high upfront capital costs to renovations and split incentives between building owners and tenants. Some of these innovative financing instruments include flexible guarantee facilities, dedicated credit lines, green mortgages, citizen financing, or heating as a service.

Implementing these mechanisms while providing a range of financing options will facilitate access to finance throughout Member States. Innovative access to finance can also help address the issue of energy poverty, which has not been adequately addressed by previous financing mechanisms.

Minimum Efficiency Performance Standards The EU uses the Eco-design Directive to set minimum mandatory energy- efficiency requirements for small appliances such as lights, refrigerators, ovens, space heaters, electric motors, water pumps, and air conditioners. The Energy Labelling Regulation sets labelling standards for some of these appliances to provide clear information to consumers, thereby increasing demand for more efficient products. Although these technologies account for a relatively small share of overall energy use in the manufacturing sector, efficiency standards have a very successful track record of delivering energy savings and emissions reductions and should not be overlooked. The Eco- design and Energy Labelling measures for space and water heaters are currently being revised. More stringent energy efficiency requirements for heating appliances could deliver 110 Mt CO2 emission savings by 2050 and significantly scale up the market for heat pumps.

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In its New Circular Economy Action Plan, the EU considers expanding the scope of these directives via a Sustainable Product Policy Framework that establishes material-efficiency standards for new types of products in addition to existing energy-efficiency measures. If the proposed changes are not implemented, Member States may introduce their own regulations which go beyond the Eco-design Directive. To accelerate decarbonisation of European industries, the EU should widen the scope of coverage to include high environmental-impact products (such as batteries and plastics) and more appliances commonly used in industry (such as electric motors and boilers) which are above the size limit the Eco-design Directive regulates. It should also introduce product-specific durability, repairability, reusability, and upgradability standards as well as minimum recycled-material limits. Lastly, regulators should develop labelling standards alongside efficiency standards and integrate them with databases used by other policies such as Green Procurement or Clean Product Standards.

Long-Term Renovation Strategies Strategies for building renovation can drive efficiency by allowing Member States to better plan for the phased and incremental renovation of their building stock. Long-term renovation strategies should include annual renovation rates for both public and private owned buildings, a targeted approach that brings the worst-performing buildings to a minimum level of energy performance, and support for sharing information on the benefits of building-level renovation on energy consumption, costs, and emissions.

Various policies at the European level support long-term renovation strategies. The National Energy and Climate Plans require Member States to specify strategies to i) improve energy efficiency in buildings in alignment with the Directive on Energy Efficiency and ii) provide long-term renovation strategies to decarbonise the building stock by 2050, as set out in the Energy Performance of Buildings Directive. In addition, the Renovation Wave Initiative announced in the European Green Deal will be implemented in line with circular economy principles, such as. longer life expectancy of built assets. The European Commission will rigorously enforce the legislation related to the energy performance of buildings. This will start in 2021 with an assessment of Member States’ national long-term renovation strategies.

The EU can also ask Member States to include annual renovation rates for privately-owned buildings as they do for public buildings. To ensure that renovation costs do not exacerbate the issue of energy poverty in European households, the EU can offer financial support (soft loans or grants) for some households. Given that goals set in the Directive on Energy Efficiency are communal and EU-wide, it is important to provide financial support fairly across Member States.

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New Building Codes Constructing new zero-emission residential and commercial buildings can help lock in emission reductions in the coming decades, since constructing new buildings to higher standards is significantly more economical than implementing future retrofits. To reach this goal, Member States and municipalities can require new construction to be highly efficient, supplied by low-carbon or all-electric heating networks, and zero-emissions by a specified year through building codes or other authorities.

Under European legislation, all new buildings are required to be nearly zero- energy buildings (nZEBs) as of the end of 2020. Developing new building codes that require net-zero emissions buildings can have an even greater impact by incorporating policies which promote the use of low-carbon building materials, increase the rates of electrification, and ensure that best practices for efficiency are adopted.

The EU can and should encourage Member States to implement net-zero emission building codes, linked to the European Commission’s Strategy for a Sustainable Built Environment, under its Circular Economy Action Plan. This Strategy has the potential to increase material efficiency and reduce climate impacts in the buildings sector by promoting circularity principles. The Strategy should be used to guide Member States in composing new building codes in national legislation.

For more, see the deep dive on → New Building Codes

Existing Building Emissions Standards and Code-Compliance Requirements Mandated emissions-based building performance standards can drive efficiency, electrification retrofits and reduce total GHG emissions in existing commercial and residential buildings at a scale and pace that voluntary market-based mechanisms and incentives cannot achieve on their own. These performance-based and prescriptive requirements should be supplemented with clear guidance on effective enforcement mechanisms.

The EU can influence existing building emissions standards elaborated by Member States through various mechanisms, such as the Energy Performance of Buildings Directive, which requires Member States to introduce minimum energy and efficiency standards for buildings undergoing renovation and/ or retrofits and to maintain buildings to a certain standard through periodic mandatory inspections of heating and cooling equipment. In addition, Member States need to ensure that buildings sold or rented out to a new tenant are issued with an Energy Performance Certificate.

Influencing Member States to encourage the expansion of these inspections to also include important areas which contribute to GHG emissions from buildings, such as overall efficiency of the building envelope, can result in better compliance with national building emission standards. In addition, it is also important for the EU to ensure that gradual tightening of the building emissions standards of Member States is aligned with EU’s emissions reduction ambitions for 2050, by encouraging Member States to take inspiration from emissions standards for new buildings.

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Fluorinated Gases Hydrofluorocarbons (HFCs) are industrial coolants used for air-conditioning, heat pumps and refrigeration. Per unit of mass, they have a higher Global Warming Potential than CO2 emissions. As a result, eliminating these super- pollutants is among the most cost-effective opportunities for GHG mitigation in the short term.

Alternative refrigerants such as unsaturated HFCs exist in the market, and their use in Member States doubled each year from 2014-2017. The revised Fluorinated Gas Regulation (Regulation (EU) No 517/2014) aims to reduce emissions by two thirds of the 2010 level by 2030 (on a CO2e basis). In addition to this EU policy, several polices to control HFCs have been introduced by Member States. These include restricting and prohibiting their presence in some applications and requiring specialist services to dispose of fluorinated gas-based appliances.

Taking a more ambitious approach and further increasing the emission reduction targets for fluorinated gases for 2030 is possible, given the mature technological development of alternatives for household appliances. Financial incentives are an effective mechanism to reduce upfront costs alternative technologies may incur for certain applications, with a particular emphasis on commercial buildings. Incorporating criteria in public- procurement processes for alternatives such as natural refrigerants can also complement existing EU regulation and encourage a faster transition to fluorinated-gas-free refrigerants.

A CPS may initially be introduced for key carbon intensive goods such as steel, glass, cement, aluminium and chemicals. Since some of these are also common construction materials, a CPS would reduce embedded carbon in buildings. A CPS may be further supported by ensuring policy buy-in and labelling schemes. Lifecycle emissions of materials must be transparent and kept in public databases which are integrated into Green Procurement schemes and the Level(s) framework for buildings.

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services, beyond the current energy-intensive appliances. This new policy would be a good opportunity to integrate a CPS with the Eco-design Directive and widen the emissions coverage of EU climate policies. A CPS would be most effective if applied at the EU level with full commitment and support of the Member States. However, if the EU does not go forward, individual Member States may establish their own policies.

The interaction of a CPS with EU ETS for the manufacturing sector must be considered carefully during policy design. CPS should not apply to imported goods if a Carbon Border Adjustment is in place.

For more, see the deep dive on → Clean Product Standard

Building and Material Reuse Typically, developers prefer new buildings because they offer nearly unlimited design options and are not subject to the constraints associated with repurposing an existing building. However, redeveloping existing buildings and reusing materials eliminates the embodied carbon that results from new construction. These approaches reduce waste and the associated energy needed to handle and dispose that waste. This is particularly important for the construction and demolition sectors, which accounts for 25-30 percent of total waste generated in the EU.

The EU has introduced targets for reusing and recycling building materials. In 2020, the Waste Framework Directive set a target of 70 percent (by weight) of reusing or recycling non-hazardous construction and demolition waste. As the Circular Economy Action Plan explains, the European Commission will launch a comprehensive Strategy for a Sustainable Built Environment to exploit the potential for increasing material efficiency and reducing climate impacts by promoting circularity principles throughout the lifecycle of buildings. To further incentivise this approach, the EU aims to boost the market for secondary raw materials under the Green Deal.

Increasing communication between stakeholders at different phases of the construction-materials supply chain can result in a higher supply-chain integration. Besides boosting the market for secondary materials, supply-chain integrability could lead to findings on additional applications for materials reuse. In addition, promotion of more durable materials with a high usable lifetime in the procurement processes for public construction projects in original designs can strengthen the case for more frequent building reuse.

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BUILDINGS DEEP DIVES New Building Codes Overview

Buildings produce GHG emissions at all stages of their lifecycle, and these can be broken down into operational and embodied emissions. Embodied emissions include material extraction, manufacturing, and material transport; construction, maintenance, repair, and replacement; and deconstruction and material disposal. Operational emissions are associated mainly with operational energy use of the building. Therefore, the total amount of building emissions depends on the definition of lifecycle boundaries.

Nearly zero-energy buildings (nZEBs) are characterised by a very high operating energy performance, very low embodied energy, and use of renewable energy sources—including those produced on-site or nearby.

Reductions of embodied emissions in the lifecycle of buildings—especially before the use phase—are derived from using low-carbon building materials. Cement and steel are two of the most material embodied carbon factors in new buildings. Other materials include those derived from naturally occurring substances, materials with recycled content, materials produced via low-carbon manufacturing processes, and materials whose use has been optimised.1

It is essential to reduce carbon emissions associated with the lifecycle of buildings and operational emissions at the same time. This can be achieved by targeting the adoption of low-carbon materials, increasing energy efficiency to reduce energy use, and ensuring that such energy use is electrified to exploit the low-carbon benefits of the increasingly decarbonised power sector. Policy Principles Targets and ambitions: A comprehensive range of energy-efficiency policies already exists at the EU and Member State levels. However, resource efficiency in construction has not benefitted as much from political support, which has had implications for the use of low-carbon materials in buildings. Stepping up the targets and ambitions for low-carbon building materials, in line with established targets for energy efficiency, can reduce embodied and operation emissions at the same time. An effective starting point for this alignment would be to encourage Member States to consider emissions across the building’s lifecycle.

1. Giesekam, J., Barrett, J. R., & Taylor, P. (2016). Construction sector views on low carbon building materials. Building Research & Information, 44(4), 423-444.

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Formal definitions: Even though the European Commission provides a general definition for nZEBs, each Member State applies its own definition. These definitions vary, and include Governmental decrees or laws, technical regulations, and national nZEB plans. Consequently, the details and coverage of technology options and performance indicators available to build nZEBs vary considerably. The definition of system boundaries also varies substantially among Member States: six variations are available. The EU can ensure more consistency among Member States around nZEBs while recognising the distinct features of buildings and energy use in different Member States. Implementing this common overarching framework would better align all Member States to meet the EU’s decarbonisation ambitions for the building sector.

Harmonising calculation methods: Member States currently set their own building-energy performance-calculation methods, but these can deviate from the calculation methodology the CEN EPB standards recommend. Therefore, Member States should work to apply the common calculation methods more consistently to be better aligned at the time of design and construction of nZEBs. Widespread use of this comparative methodology framework would also ensure fairer comparisons among Member States on nZEBs, as well as more streamlined reporting.

Electrification: The operational GHG emissions of buildings can be further reduced by encouraging the use of high-efficiency electrification technologies—particularly for heating (e.g. via heat pumps or low-carbon heating networks). When the power sector is already sufficiently decarbonised, Member States can mandate that all new buildings supply their energy demands using electricity, either through on-site generation or from the grid. Member States should work to remove barriers to electrification by carrying out grid reinforcement activities, accompanied by on-site electricity storage equipment, to smoothen residential and commercial demand peaks. They can also implement further complementary policies such as demand-side management. Regular revisions of Member State building codes will reflect the pace of change of decarbonisation on the electricity grid and ensure that outdated carbon factors do not disadvantage electrified building technologies.

Financial support through technical assistance: When it comes to using low-carbon materials in buildings, the key phase in the supply chain is the design phase. At present, there are limited reliable and comparable data and benchmarking methodologies. Computer software can help overcome this information gap by simulating energy performance and lifecycle analysis during the design phase, and this information can be shared with a multiplicity of stakeholders: procurers, constructors, the client, public estate owners, and others. These programmes can help select optimal designs that find the best compromise between electrification, energy performance, and lifecycle impact. Technical assistance to reduce the digital skills gap and ensure that SMEs have a rigorous understanding of such software would also help align design and real-life performance in new buildings.

Education and training: Especially in SMEs, construction companies’ core project managers and architects learn on a project-to-project basis, usually from direct interaction with the client. Thus, one important way to influence construction companies on the use of New Building Codes is by informing the demand side of the construction procurement chain. Facilitating the cataloguing of building level carbon and energy performance data can support decisions on suppliers’ emissions performance, improve transparency, and aid in the decision-making process when designing buildings with reduced carbon.

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Supply chain coordination: Many construction companies are small in terms of workforce and thus their R&D capabilities are limited. In addition, many stakeholders are involved in the supply chain of materials and communication among them can be fragmented. Encouraging more construction industry involvement in R&D activities can promote knowledge exchange, especially when engaging with research centres and universities on advanced materials. Increased communication between the downstream side of the supply chain and R&D organisations can also raise awareness of the lifecycle of building materials and help innovative materials and efficiency measures move quickly through the innovation chain.

Certification of new materials: Architects, contractors, clients, and even building insurers are cautious about novel low-carbon building materials. EU and Member States should ensure their respective codes do not discriminate against innovative low-carbon material products. They can achieve this by seeing that new low-carbon materials such as green cement are rapidly tested for performance and durability to remove the barriers of perceived unreliability and risk. In turn, New Building Codes of Member States can then be frequently updated to certify that new materials can be safely adopted. Current Legislation The Energy Performance of Buildings Directive (EPBD) of 2010 called for Member States to draw up nZEB national plans. The EPBD also stated that all new buildings should be nZEB by the end of 2020 and all new public buildings should be nZEB by the end of 2018. The Energy Efficiency Directive (EED) has required the Member States to produce Long-term Buildings Renovation Strategies since 2012. Reviews of the EPBD and the EED were part of the Clean Energy for All Europeans package of 2018. The revised EPBD includes revised rules to modernise the buildings sector to reflect technological improvements. Member States had to incorporate the new rules into national law by March 2020.

In October 2020, the EC published its Renovation Wave Strategy. To encourage higher energy and resource efficiency in existing buildings, the strategy calls for doubling the renovation rates in the next ten years. In alignment with the principles of the European Green Deal, the EC is reviewing and will revise the EPBD and the EED in 2021. This revision will strengthen Energy Performance Certificate requirements and compliance as well as Minimum Energy Performance Standards (MEPS) for existing buildings. Among other things, the Strategy looks to expand the market for sustainable construction products and services, with an emphasis on new materials.

Currently, there are no binding EU regulations on the use of low-carbon materials for construction or the reduction of operational emissions in terms of heat decarbonisation. The Construction 2020 strategy, published in 2012, partly aims to promote the sustainable competitiveness of the sector and to improve resource efficiency. A Communication on Resource Efficiency Opportunities in the Building Sector, published in 2014, advocated a more efficient use of resources in new and renovated commercial, residential, and public buildings and reduced overall environmental impacts throughout the full lifecycle. The Communication proposed a set of defined and measurable indicators to assess the environmental performance of buildings to inform the decision-making process.

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The need for action within the buildings sector has been identified in initiatives such as the Resource Efficient Europe flagship initiative under the Europe 2020 strategy, but legislation on low-carbon building materials per se has only been implemented in certain Member States such as the Netherlands, and prospectively France and Finland.2 The Roadmap to a Resource Efficient Europe contains 2020 milestones for the building sector and encourages lifecycle approaches to be widely implemented.

The EU is continuing to address sustainability in buildings. Level(s) is a voluntary reporting framework to assess the environmental performance of buildings. It encourages lifecycle thinking and is designed to link individual buildings’ impact to EU and Member States’ environmental policy goals. Following a testing phase which began in 2018, the final version of the Level(s) framework was launched in October 2020.

The European Green Deal will review the Construction Products Regulation, which lays down harmonised conditions for the marketing of construction products. This Regulation covers, albeit to a small extent, the use of environmentally compatible raw and secondary materials in construction. This review will work to ensure the design of new buildings at all stages is in line with the needs of the circular economy, particularly the sustainability performance of construction products and recycled content requirements.

According to the Circular Economy Action Plan, the European Commission is supposed to launch a comprehensive Strategy for a Sustainable Built Environment in 2021 to increase material efficiency and reduce the climate impacts of construction. This Strategy is expected to promote circularity principles throughout the lifecycle of buildings and bring coherence among the relevant policy areas. The European Commission has also announced it would develop a 2050 roadmap for reducing whole lifecycle carbon emissions in buildings by 2023. Impact In 2016, the European Commission issued a report to the European Parliament and the Council on progress by Member States towards meeting the Energy Performance of Buildings Directive’s target for nZEBs. It concluded that Member States needed to significantly step up their efforts for the construction of nZEBs.

Even though construction of nZEBs has been sluggish in the past, the European Environment Agency estimates that the use of building codes in the EU has led to an average annual decrease of heating consumption in new dwellings of 0.7 percent and existing buildings by 1.1 percent. These figures 2. Options for incorporating embodied are not enough for the building sector to meet emissions reduction targets. and sequestered carbon into the Besides a sluggish uptake of nZEBs, the modest reduction in heating demand building standards framework, of new dwellings may also be related to a performance gap between building AECOM for the Committee on Climate energy demand in theory and practice. Researchers explain this gap by citing Change, 2019. differences in the actual material and equipment properties relative to those 3. Aste, N., et al. “nZEB: bridging the stated in technical data sheets; deviations from the design due to a failure to gap between design forecast and install the materials as required (leading to “thermal bridges,” for example); actual performance data.” Energy and Built Environment (2020). inaccuracies in building-energy modelling; and occupancy factors which are not usually well integrated in the building design phase.3,4 4. Van Dronkelaar, Chris, et al. “A review of the energy performance gap and its underlying causes in non-domestic buildings.” Frontiers in Mechanical Engineering 1 (2016): 17.

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The total impact of actual GHG emissions reductions of new buildings is difficult to estimate, as few Member States have implemented an ongoing monitoring process.5 However, taking a mandatory approach to monitoring compliance with new building codes is more likely to have an effective impact in addressing GHG emission reductions in buildings than a voluntary approach.6 While automated post-occupancy monitoring is currently costly, spot checks of a small number of buildings is an effective short-term way of ensuring building compliance with energy performance regulations. In the longer term, reduction in monitoring equipment costs and detailed appliance smart meter data should enable the wider reporting of nZEB compliance.

Looking to the future, introducing New Building Codes in Member States that simultaneously encourage the use of low-carbon materials, energy efficiency, and electrification can have a substantial impact in moving the EU towards full decarbonisation of the buildings sector.

5. Atanasiu, Bogdan, et al. “Overview of the Eu-27 Building Policies and Programmes. Factsheets on the Nine Entranze Target Countries.” BPIE, settembre (2014).

6. Aecom for the Committee on Climate Change, Options for incorporating embodied and sequestered carbon into the building standards framework, 2019.

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AGRICULTURE Overview

The EU agricultural sector produced 426 Mt of CO2 equivalent in 2015, about 10 percent of the EU’s total. The vast majority came from three sources: agricultural soils (accounting for about one half of agricultural emissions), enteric fermentation by livestock (about one-third) and livestock manure management (about one-sixth).

Emissions from agricultural soils are mainly due to nitrous oxides (N2O) from the use of nitrogen fertiliser on farmland. Enteric fermentation of feed in the stomachs of livestock (particularly cattle) is the largest single source of methane (CH4) in the sector, while the decomposition of manure under anaerobic conditions adds to the accumulation of methane emissions.1

Slowing and reversing the rise of agricultural emissions while still meeting growing global demand for food will require significant innovations in agricultural practices. On the supply side, new technologies, practices, and policies will need to increase efficiency. reduce the use of fertilisers, increase carbon sequestration through soil management, and lower methane emissions from livestock. At the same time, demand-side measures can reduce the consumption and waste of GHG-intensive foods.

Additional Resources

→ EU Farm to Fork Strategy → The Common Agricultural Policy → European Network for Rural Development → European Commission: Metareview of climate mitigation measures in agriculture

1. https://ec.europa.eu/eurostat/statistics-explained/pdfscache/16817.pdf

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AGRICULTURE SOLUTION Soil Management

Overview Roughly half of all agricultural GHG emissions in the EU come from soil-management practices such as tillage, fertilisation, and irrigation. Scientific studies show that management systems designed to improve soil health can also increase carbon sequestration and reduce GHG emissions. At the same time, they provide environmental co-benefits: improving water quality, suppressing pathogens, and supporting safer pollinator habitats and biodiversity in general. They can also benefit farmers by increasing a soil’s available water-holding capacity and nutrient availability, boosting drought resilience, reducing input costs, and mitigating erosion.

Scaling up these practices can increase carbon sequestration and reduce GHG emissions across the agricultural sector. Market Challenges

Knowledge Gaps Different soils have different potentials to sequester carbon. This results in widely varying estimates of soil carbon sequestration potential for both crop land and grazing land. For the most meaningful impact, the actual sequestration potential for each soil (or group of similar soils) must be determined to provide accurate conservation practices and carbon management recommendations to farmers and ranchers for their specific soils, climates, and production systems. Determining actual carbon sequestration potential will require the integration of new and affordable soil carbon measurement technologies with digital soil mapping and simulation modelling.

Like carbon, nitrogen (N) is a key element required by plants and therefore food production. Sources for agronomic nitrogen include fertilisers, soil organic matter, crop residues, cover crops, animal manures, and others. To improve N use efficiency (NUE) and therefore reduce N losses, a better

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understanding is required of how soil N availability and plant N demand both change over time and space, as well as how N-fixing plants can be brought into crop rotations. Foundational research that integrates the dynamics of N availability, regulated by soil processes, weather, and other variables, with the dynamics of plants’ N demand as they grow in real time would allow for better N management and optimal recovery by the crop.

High Costs for Measurement Technologies Credible and transparent mechanisms for verifying how much carbon is sequestered in soil are needed to confirm that practices are successful in capturing and storing atmospheric CO2. While measurements of both soil carbon and soil bulk density are needed to calculate carbon stocks, current technologies are time consuming and expensive. Consequently, developing soil-carbon testing technology that is economical, accurate, and standardised is fundamental to scaling soil-carbon sequestration robustly. Without low-cost methods of estimating sequestration potential on individual farms, many researchers and policy makers rely on average sequestration estimates for practices.

Economic Incentives and Market Demand The costs and benefits of adopting practices are often unclear to farmers and agricultural producers, and reductions in GHG emissions and sequestration of atmospheric carbon involve public goods for which no commercial market currently exists. This means that farmers may need a regulatory or fiscal incentive before uptake becomes attractive, even where it can be proven that a practice reduces net GHGs in a cost-effective way.

A market in farm carbon sequestration involving either the taxpayer or market participants, such as those seeking to offset liabilities from the European emissions trading scheme (ETS), as buyers, could entice more farmers to sequester carbon. But several uncertainties hinder the development of such a market. These include a lack of standardised scientific measurement of sequestration and an understanding of carbon saturation, the heterogeneity in soil sequestration levels, the variable in implementation across farms, and risk of reversal.

Even if better estimates existed, potentially high upfront costs also limit adoption rates for some sequestration practices. In 2020, the European Commission announced in its Circular Economy Action Plan that it would create a regulatory framework for certifying carbon removals based on robust and transparent carbon accounting and monitoring.

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Technologies

High Sequestration Crops and Soil Normal Plant Salk Ideal Plant

CO CO R&D VALIDATION SCALE

Because of the suberin (a natural carbon RELEASES polymer) in their roots, Salk Ideal Plants CO AS IT REDUCED DECOMPOSES release significantly less CO2 when they RELEASE decompose than their normal counterparts. OF CO

MORE CO SUBERIN STORED RESISTS FOR LONGER DECOMPOSITION

Carbon sequestration in agricultural crops and soils has a high potential to contribute to climate change mitigation in the EU. Promising technical measures are linked to decreased soil disturbance and increased input of organic matter. The carbon sequestration potential may be improved by breeding plants with adapted root depth and structure.

Measurement Technologies

R&D VALIDATION SCALE

Developing accurate, low-cost, and efficient technologies for measuring soil carbon and nitrogen stocks in the field will be critical for scaling soil carbon sequestration and reducing nitrogen losses to the environment, respectively.

Carbon Management Decisions

Accurate, low-cost, and efficient technologies are needed for quantifying soil carbon (C) and nitrogen (N) stocks in the field. While technologies exist to measure soil C and soil bulk density, they are time-consuming and expensive. Consequently, developing remote sensing soil carbon technology that is economical, accurate, and standardised is fundamental to quantifying and scaling soil carbon sequestration. Nitrogen measurement technologies also have the potential to significantly improve nitrogen use efficiency, thereby reducing N losses to the atmosphere as nitrous oxide and to water as nitrate.

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Low-GHG Fertiliser

R&D VALIDATION SCALE

Microbial fertilisers could help reduce N2O emissions. Step 1: Identify millions of isolated N microbes in diverse soils, creating a sophisti- N cated map of the soil microbiome. Step 2: N Characterise key microbes’ genetic potential to fix atmospheric nitrogen and live in a symbiotic relationship with cereal crop. NH Step 3: Fine-tune these microbes so they 3 NH3 release nitrogen through the roots to meet the growing crop’s nutritional needs. 1. Identify 2. Characterise 3. Fine-Tune

While N2O emissions tied to nitrogen fixation and the decomposition of crop residues are particularly challenging to mitigate, there is substantial potential to reduce emissions arising from fertiliser application and manufacture. Development and adoption of technologies such as enhanced efficiency and microbial fertilisers could reduce the need for synthetic or organic fertiliser and reduce N2O emissions. Developing ammonia for use in fertiliser is also highly emissions intensive. These emissions can be reduced through direct electrochemical and solar conversion processes, as well as by implementing low-cost green hydrogen in traditional ammonia production.

Additional Resources

→ European Commission: Soil → Joint Research Centre: The State of Soil in Europe

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AGRICULTURE SOLUTION Agricultural Methane Abatement

Overview Several biological processes important to our agriculture and food systems emit methane, a greenhouse gas as much as thirty times more harmful to the environment than carbon dioxide. The most significant source of methane is livestock production, especially cattle, swine, and sheep. On the one hand, adjusted feeding practices and other technical interventions can lower these enteric emissions. On the other, controlling the way that manure decomposes can reduce emissions of both methane and nitrous oxides.

Another important source of agricultural methane is decaying plant and food matter, particularly in landfills. The diversion of most biodegradable waste away from landfill, together with mandatory landfill gas recovery, has greatly reduced landfill as a source of European greenhouse gas emissions over the last few decades, but more can still be done to accelerate these reductions. Market Challenges

High Capital Costs and Lack of Access to Low-Cost Capital Since methane abatement from livestock waste and municipal solid waste is capital intensive, access to capital and lenders is key to the widespread adoption of new technology. Anaerobic digestion facilities and methane control systems at landfills require large upfront capital investments that may be hard to finance through traditional loans due to uncertain future revenue streams. Policies that provide fiscal incentives for these facilities can reduce the capital financing requirements and facilitate project financing.

Reducing enteric fermentation through livestock feed additives also requires capital investments in research and development (R&D) of advanced feed technologies. But since many of these technologies are in the early development stages, traditional financing is often not available. Instead, developers rely on grants whose limited availability can slow the development and deployment of methane reducing technologies.

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Land Use and Permitting Methane abatement from livestock waste and municipal solid waste requires large-scale facilities to contain and digest methane emissions. These facilities must meet air, water, health and safety, and land-use requirements, and zoning ordinances and permitting requirements can delay or even prevent their construction. Despite advancing technologies that reduce the emissions impacts of handling livestock and municipal solid waste, as well as strict requirements to meet local and national codes for safety, permitting and zoning remain barriers to the widespread adoption of methane-reduction mechanisms.

Public Perception Public perception is another barrier to methane abatement from livestock and municipal solid waste. Many consumers are wary of the potential health impacts of some methane-abatement strategies, such as feed additives that may reduce enteric fermentation. Public sentiment can also prevent installation of waste-to-energy facilities for livestock and municipal solid waste—nearby residents may complain of odour and noise, for instance. Policies that support advanced technologies to limit the impact of waste-to- energy facilities on the local community, as well as neighbourhood outreach, can help limit the negative public perception of these critical methane- abatement technologies. Technologies

Cattle Productivity and Enteric Emissions

REDUCED REDUCED EM SS ONS EM SS ONS R&D VALIDATION SCALE CH METHANE Project “Clean Cow” aims to reduce methane Reduced by 25% emission by 25 percent. An enzyme inhibitor added to the feed helps reduce the amount of methane produced in the rumen.

+ Enzyme Inhibitor

Cattle contribute significantly to the EU´s greenhouse gas emissions. Methane released through enteric fermentation of feed in the stomachs of livestock, particularly cattle, is the largest source of both agriculture emissions in the EU-27 and the UK (40 percent in 2015) and methane (CH4) in the EU overall.1 Simply making cattle production more efficient (increasing cattle productivity while decreasing enteric emissions) is a strategy that is value-aligned with farmers. Technological opportunities include tools to increase livestock productivity and the development of advanced ruminant dietary additives to

1. Eurostat, Agri-environmental indicator – greenhouse gas emissions.

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reduce enteric methane emissions. Livestock produce significant amounts of methane as part of their normal digestive processes. Some feed additives can inhibit the microorganisms that produce methane in the rumen and subsequently reduce CH₄ emissions. Methane-reducing feed additives and supplements can be synthetic chemicals, natural compounds such as tannins and seaweed, and fats and oils.

Methane Digesters Anaerobic ELECTRCTY R&D VALIDATION SCALE Digester System AGRCULTURAL WASTE Advanced anaerobic-digester technologies THERMAL can reduce manure emissions while producing PRE PROCESSNG biogas and other useful nutrients. MPURTY REMOVAL

FUEL WASTED FOOD BOGAS POST PROCESSNG OF SOLD LQUD EFFLUENT LQUD PRODUCTS

ANAEROBC BOSOLDS & DGESTER ORGANC WASTEWATER SOLD PRODUCTS

Greenhouse gas emissions from animal manure represented about 14 percent of agricultural emissions in the EU in 2015.2 The breakdown of manure applied to soils and pasture results in significant emissions of the powerful greenhouse gas N2O, while manure management in low oxygen environments often found in open lagoons results in significant methane emissions globally. Technological opportunities to reduce emissions from manure include the development of advanced anaerobic digester technologies. Anaerobic digestion is a series of biological processes in which microorganisms break down biodegradable material in the absence of oxygen. One of the end products is biogas, which can be combusted to generate electricity and heat or processed into renewable natural gas and transportation fuels. In addition, separated digested solids can be composted, used for dairy bedding, directly applied to cropland, or converted into other products. Nutrients in the liquid stream are used in agriculture as fertiliser.

Additional Resources

→ European Commission: DG Environment → European Commission: Industrial Emissions Directive

2. idem

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AGRICULTURE SOLUTION Alternative Proteins

Overview Even with significant improvements in livestock production, meat and dairy will likely remain the most greenhouse-gas- intensive foods on our plates. Yet the plant-based meat and dairy market is taking off in the EU, driven by a spate of innovation in new food products that increasingly resemble conventional meat and dairy in terms of taste, texture, and price.

The European plant-based alternatives market leads the way in terms of market size, with European meat substitutes accounting for around 40 per cent of the global market. This is forecasted to grow from €1.5bn in 2018 to between €2.4bn and €7.5bn by 2025 1, 2. If products on the market today are any indication, plant-based pork and chicken could reduce emissions by 30–36 percent compared to their meat counterparts, and plant-based hamburgers could reduce emissions by 80–90 percent compared to conventional beef patties.

At the same time, emerging technologies to produce cell-based or “cultivated” meat in the lab are advancing rapidly and could be on consumers’ plates in the next 3–5 years. Initial studies suggest that cell-based beef could reduce the impact of livestock on land use by more than 95 percent and bring down GHG emissions by some 80 percent compared to conventional beef.

1. Allied Market Research – Meat Substitute Market –July 2018.

2. ING - Growth of meat and dairy alternatives is stirring up the European food industry – October 2020.

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Market Challenges

Supply Chain Constraints A transition from animal agriculture towards alternative proteins will have massive supply chain implications for global commodity markets, including expanding or retrofitting ingredient processing capacity to create suitable inputs for plant-based products, fermentation, and cultivated meat. Current agricultural supply chains are heavily optimised around commoditised feedstocks for animal agriculture, while alternative proteins will require novel crop development, clean regulatory pathways, and new processing methods. The variability and inconsistency of raw materials can cause supplier lock- in and elevated technical risk associated with reformulation or process alterations, which in turn can result in resistance from buyers to modify their supply chain.

Production Capacity and Cost Production capacity is one of the most significant constraints facing the alternative protein industry. Producers do not have the types and quantities of ingredients and other inputs they need, and production equipment is highly specialised and requires uncommon operational expertise. As a result, demand for high-quality alternative protein foods—especially for products like plant-based burgers that require specialised equipment and processes like high-moisture extrusion—has far outpaced supply, and even well-capitalised alternative-protein manufacturers have struggled to keep up with sales growth. Shortages are not the only problem: higher production costs and prices are among the most significant barriers to industry and consumer adoption of alternative protein foods. That said, economies of scale from higher production volumes will make high-quality alternative-protein foods and ingredient inputs more affordable. This, in turn, will unleash demand and expand consumer access.

Information Gaps and Consumer Awareness Because the alternative protein sector is still nascent, gaps in fundamental research result in redundant efforts and lack of consumer awareness leads to high barriers to entry. More informational resources would address knowledge gaps in key areas, thus catalysing greater participation in the alternative protein sector and minimising market inefficiencies. Research tools and comprehensive public databases are required to address critical technical challenges such as full genome sequencing for food-relevant species. Furthermore, consumers lack awareness on key aspects of alternative proteins, including the nutritional and health impacts of these foods and their small carbon footprint.

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Technologies

Plant-Based Proteins

Source Material Raw Material Optimisation Process Optimisation R&D VALIDATION SCALE

Food scientists produce plant-based meat through a series of optimization steps from source material to end product.

The process of plant-based meat production can be separated into four high-level steps. First, the best source material for the product is selected. Today this is often wheat or soy, but it need not be; it could be a novel plant source, or fungi, algae, insects, or bacteria. Next, that source is optimised so it has more of the attributes needed in the final product, such as higher protein content or reduced off-flavours. The desired raw materials are then isolated from the source materials and functionalised through mechanical and/or chemical processes to create optimal ingredients for the final product. Finally, art and science combine these ingredients to create the desired taste, texture, smell, and appearance.

Fermentation

Growth Factors

R&D VALIDATION SCALE Amino Acids, Precision Fermentation Enzymes Vitamins Microbes (small organisms) produce enzymes Purified Ingredients Flavourings, that break down and make use of foodstuffs. Pigments These microbes can be cultivated on a large Lipids, scale and made to produce ingredients and Protein Isolates enablers to the plant-based meat analogue and cultivated meat industry. Source: Good Food Institute Biomass Traditional Fermentation Tempeh Fermentation

Mycoprotein Cheese, Yoghurt DEGREE OF DOWNSTREAM PURFCATON REQURED PURFCATON OF DOWNSTREAM DEGREE Intact Cells Intact Inert Ingredients Active Processing Agents FUNCTONAL ACTVTY EXHBTED BY THE PRODUCT

Microbial fermentation (and also whole-biomass and precision fermentation) can play an important role in the development of alternative protein technologies. While the industry is faced with a shortage of the necessary ingredients for large-scale production, fermentation can provide ingredients

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and enablers (such as growth media) to the plant based and cultivated meat industry. For example, fermentation can help with the development of enzymes that modify the texture of plant protein to a structure that resembles animal protein, which is a fibular and cross-lined texture. It could also play a role in the development of the growth medium needed for cultivated meat. Currently the growth medium is a highly expensive ingredient, which is limiting the industry in its large-scale development.

Cultivated Meat Production Cell Sample Cell Proliferation Tissue Maturation at Scale

R&D VALIDATION SCALE CELL CULTURE MEDA SCAFFOLDNG

In the production of cultivated meat, a small sample of animal cells proliferates in a cultivator (bioreactor) and then differentiates into muscle, fat, and connective tissue. BOREACTOR

Cells at Maturation FAT MUSCLE FBROBLAST

The production of cultivated meat borrows technology from the cell therapy industry. A small biopsy of cells is obtained from an animal. Those cells are placed in a tank called a bioreactor or cultivator and “fed” with media containing nutrients that allow the cells to divide and multiply exponentially. Once they have increased to a sufficient quantity, the conditions in the cultivator are changed, and the cells differentiate to the cells that make up meat – muscle, fat, and connective tissue. This process takes around 6-8 weeks, far faster than the time required to raise an animal for slaughter.

Additional Resources

→ Meat: The Future series, Alternative Proteins, World Economic Forum (2019) → Meat Re-imagined: The Global Emergence of Alternative Proteins, Food Frontier (2019)

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AGRICULTURE SOLUTION Food Waste

Overview Some 88 million tonnes of food are wasted in the EU each year—an average of 173 kg per person. Just over half this food waste is generated by households, with food processing accounting for an additional 19 percent.

Given the complex nature of food systems and variety of food products in the EU, a suite of solutions will be required to comprehensively address this waste issue. These include improving the efficiency of operations and supply chains and finding productive uses for edible by-products. Market Challenges

Lack of Visibility and Measurement Since most businesses and households do not track or measure their food waste, its costs are essentially invisible. Businesses that do not track food waste in detail cannot identify the right changes to reduce it nor evaluate the cost-benefit of potential solutions. Local governments lack the level of information that could help design programmes, incentivise leaders and laggards, or evaluate progress. Individuals, too, are usually ignorant of their waste.

Misaligned Incentives Both food and waste disposal are relatively low-cost, either as a proportion of most households’ income or (for commercial providers) when compared with the costs of labour, real estate, or potential loss of customers. Therefore, wasting food can be a rational economic decision. Food businesses may prioritise lower labour costs or providing customers with more options, even if it means more food is thrown out. Additionally, many food businesses drive profits off high volume sales, leading to large portions and promotions that encourage overbuying—which in turn leads to waste at the consumer level. Some farmers will choose to leave entire fields or types of products unharvested if market prices do not warrant the costs of harvesting and transporting the product.

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Food Safety Requirements Food safety is of paramount importance to both the food industry and regulators. A single lapse can cause long-lasting reputational damage. Companies and regulations therefore give a wide berth to anything that would incur increased food safety risk, leading to huge amounts of food being discarded as a precautionary measure. However, the EU’s food safety legislation provides operators who trade in multiple Member States with a degree of reassurance that level playing field standards of food safety apply.

Cultural Norms Although attitudes to food vary greatly across the EU, wasting food is far too frequently regarded as acceptable. Often, consumers in the EU buy more pre- prepared meals than they can eat, order overlarge takeaways, and do not use all the edible parts of the raw food they buy. Choice and convenience are given priority over efficient use of resources. In addition, householders frequently waste food because they do not know what they have left in their fridge or larder and how much of it is still fit to eat. Technologies

Robot Harvesting

R&D VALIDATION SCALE

Robot harvesters use AI to know when it is best to pick produce. This helps make sure that the highest proportion of produce reaches the processing or retail stage in optimal condition.

Robot harvesters use AI to determine when fruit and vegetables are at the optimal stage of growth to be harvested. This can reduce losses by ensuring that the highest proportion of produce reaches the processing or retail stage in optimal condition.

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Measurement and AI-Powered Tools for Vendors

R&D VALIDATION SCALE

Software can adjust the price of a food item based on its expiration date in real time. Thus products with a shorter shelf life are automatically discounted, which likely accelerates consumer purchase and decreases food waste.

Precise measurement of expiration dates using AI can greatly decrease food waste at the retail level. Examples are software adjusting the price of an item based on its expiration date in real time, so products with a shorter shelf life are automatically discounted. This may accelerate consumer purchases of food soon to expire.

Precision Food Safety GENOMCSBASED PHYLOGENETC AND TAXONOMC CLASSFCATON R&D VALIDATION SCALE GENOMCSBASED Genomics- VRULENCE AND based Genomics tools allow for precise pathogen ANTMCROBAL GENE surveillance identification, measurements, and disease DENTFCATON and monitoring outbreaks. These tools generate data that can Evidence- of policies & procedures GENOMC DATA be use to improve food safety and food waste. PHENOTYPC based PATHOGENCTY Source: Modified from ResearchGate DATA policies & procedures

GENOMCSBASED EPDEMOLOGCAL DATA

METAGENOMC EPDEMOLOGCAL DATA DATA RSK ASSESSMENT

Genomics tools can have important impacts on food safety and food waste, as they allow for precise pathogen identification, measurements, and disease outbreaks. The extensive data generated using these tools is expected to lead to a paradigm shift in the modern food safety approach.

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In-Field Loss and PHYSCAL FLOW Supply-Chain Waste Farmer Producer Distributor Retailer Customer REGSTER TEM MASS BALANCE DELVER TEM SELL TEM BACK TRACE TEM VERFCATON SUPPLY CHAN R&D VALIDATION SCALE

Digitally sharing information and data across food supply chains can help optimise the food system and reduce waste.

DGTAL FLOW

In developed economies, as much as 20 percent of production can be lost because of agronomic pest and pathogen pressures, in large part because of herbicide resistance and emerging pests pushed into new geographies by climate change. Technologies that include early detection, precision application, and novel discovery platforms for new modes of action are needed.

In the EU, Integrated Pest Management (IPM) helps encourage farmers to carefully consider all available pest control techniques, keeping Plant Protection Products (PPPs) to economically justified levels, and thus minimising risks to human health and the environment. An important contribution will also come from more resistant varieties breeding such as the CRISPR-Cas approach.

For consumers and retail, more action is needed to address food waste. In the EU, 70 percent of food waste comes from private households, food service, and retail.

Additional Resources

→ FUSIONS – EU food waste project → European Commission: Food Waste

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AGRICULTURE POLICIES Policy Overview

Phase: Research and Development

RESEARCH & VALIDATION & EARLY LARGE SCALE DEVELOPMENT DEPLOYMENT DEPLOYMENT

Much of the existing alternative protein research is currently privately funded. Increased public investments in R&D can fast-track the transition by creating open access research findings that benefit the whole industry. European investment in R&D for alternative protein technologies is driven primarily by various instruments and institutions operating within Horizon Europe.

The EU should invest in robust R&D on the alternative protein transition. This program should explore innovations such as:

– Microbial fermentation, including novel host strains, methods to address supply chain bottlenecks (e.g. bioprospecting), advanced expression toolkits to improve yield, cultivation of microalgae, and streamlined methods for food safety;

– Plant proteins, including novel sources for raw materials, protein extraction, improved protein functionality, and cost-effective manufacturing processes; and

– Cellular agriculture, including stable agriculturally relevant cell lines, optimised cell culture media for growing meat, novel methods of scaffolding support for muscle and fat cell growth, and improved bioreactor designs.

For more, see deep dives on → EU R&D Programmes → Agriculture R&D

Phase: Validation and Early Deployment

R&D VALIDATION SCALE

Financial Incentives Financial incentives such as subsidies applied at the Member State level can help drive early deployment of alternative proteins. Distribution channels (food distributors, restaurants, and grocery stores, for instance) can act as direct incentives to suppliers to stock and promote alternative protein products. Similarly, EU programmes to support the leasing and financing of production facilities and equipment would allow manufacturers to replace high-cost, episodic capital expenditures with lower-cost, predictable operating expenses.

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Promotion Promotion through advertising campaigns and subsidised access to new products can introduce consumers to novel foods. The EU spends approximately €200m a year promoting agricultural produce in domestic and overseas markets and €250m providing schoolchildren with subsidised milk, fruit, and vegetables. Promoting alternative proteins in a similar way would create awareness among consumers for a wider range of sustainable options.

Regulatory Approvals Regulatory schemes for this emerging method of food production must ensure public safety while offering producers a clear and efficient path to market and a level playing field with conventionally produced meat and seafood. In the EU, novel foods need to undergo special authorisation procedures before they can be placed on the market. These processes should be improved to give producers greater certainty and more timely decisions.

Green Procurement The European Commission’s Farm to Fork Strategy, published in 2020, supports a move to a more plant-based diet, with research to increase the availability and source of alternative proteins such as plant, microbial, marine, and insect-based proteins and meat substitutes. It also advocates reduced consumption of red and processed meats. Although most food procurement is by Member States and their public bodies rather than the EU, EU legislation sets the framework within which public procurement takes place. In 2019 new green public procurement criteria were set for food, catering services and vending machines—including increasing the offer of plant-based meals. The EU has published guidelines and promoted examples of how public bodies can work within procurement rules to offer more sustainable food choices. The EU should continue to spread best practices among Member States and their public agencies as to how alternative proteins can be more widely offered. In addition, the EU should potentially consider mandatory standards and support them through common databases and labelling standards.

For more, see the deep dive on → Green Procurement

Phase: Rapid, Large-Scale Deployment

R&D VALIDATION SCALE

CAP Reform The Common Agricultural Policy (CAP) supports farm incomes and could be a powerful lever for improving soil-management practices. It already ties funding to conservation practices that reduce erosion and build soil carbon, but these links could be stronger. Along with increasing the efficiency of nitrogen use, these practices can increase soil-carbon sequestration and reduce GHGs significantly. This will require making stronger soil-management standards a condition of income support, along with filling gaps in knowledge, technology, and data and developing a continuous program of learning and improvement. Setting stronger soil standards can also tie the receipt of future CAP funds more closely to good soil management.

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Financial Incentives In addition to its role in supporting incomes, the CAP is the largest provider of specific financial assistance to farmers seeking to improve environmental outcomes on their land. CAP funds have improved environmental outcomes, water quality, and soil health. However, the CAP rules do not require Member States to give a high enough priority to genuine environmental spending. A higher proportion of CAP funds spent on farm-level GHG reductions and sink creation, while requiring ongoing performance improvement linked to climate benefits, would strengthen existing working-lands conservation policy.

Sensible Food Labelling Standards EU regulation generally prohibits the use of terms such as “milk” or “cheese” for foods which are not of animal origin. Since nutritional guidelines often use these terms, consumers may be misled about the extent to which alternative proteins can satisfy their dietary needs. In addition, there is an opportunity to increase consumer awareness of how replacing meat and dairy in their diets with alternative proteins can reduce carbon footprints.

Clear principles should be established at the EU level to ensure cultivated meat can be labelled fairly and accurately as meat. Establishing a framework ahead of its commercialisation will prevent delays or complications upon the entry of cultivated meat to the EU market.

Product Standard The creation of a product standard for digestate would help ensure that the operators of anaerobic digesters can find a market for its by-product. The EU has taken steps to develop a product standard for digestate and enable a cross-border market to develop, and it should continue to do so.

Target Setting Methane abatement through agricultural activities is linked primarily to the management of manure and livestock. The EU’s climate targets, such as those in the Effort Sharing Regulation, require a contribution to GHG emission reductions from a shared set of sectors, including agriculture. However, there is no specific target for agriculture (nor any sub-sector within agriculture, such as livestock). Having a dedicated GHG reduction target for agriculture in EU policy could trigger greater development and adoption of technologies associated with methane abatement, such as dietary supplements, changed management techniques, and manure management (including biogas production).

Food waste is another significant contributor to GHG emissions. Setting a target for the diversion of organic waste from landfill reduces downstream methane formation. The Landfill Directive (1999/31/EC) mandates diversion of organic waste from landfill. According to the directive, by 2035, 10 percent or less of the total amount of municipal waste should be disposed through landfilling. The directive encourages municipalities to explore alternative ways to manage biowaste. The alternative of anaerobic digestion not only processes the biowaste, but reduces its GHG emissions and produces biogas, mostly used for heating.

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Utilising waste biomass or promoting the capture and use of methane can be promoted through end-use sectors. The EU’s Renewable Energy Directive (2018/2001) sets targets for a minimum share of renewable energy in final consumption and encourages the development of markets in biogas, landfill methane recovery, and other means by which renewable energy may be generated—including by using waste and residual materials from farmed land.

Pollution Control Pollution-control permits can reduce GHG emissions by mandating the use of best-available techniques (BAT). Intensive indoor livestock farms are significant contributors to agricultural methane. EU law requires those rearing chickens or pigs to use BAT to reduce emissions, but not cattle-rearing facilities. Greater use of BAT in the cattle industry would result in significant GHG savings.

Clean Fuel Standards Generating electricity and heat from methane from digesters is both a “win- win” for agriculture and energy policy and can result in deep decarbonisation. Potential methane emissions are mitigated, and fossil fuels are replaced in the energy mix. Methane from digesters can be turned into clean biogas which can help Member States increase their proportion of renewable energy as required by EU legislation. The targets in the Renewable Energy Directive II (RED II) help create a demand for biogas and other clean fuels. They can also provide certainty to producers who make near-term capital investments in those fuels, including advanced biofuels.

For more, see the deep dive on → Clean Fuel Standard

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AGRICULTURE DEEP DIVES Agriculture R&D

Overview EU and Member State investment in low-GHG agriculture research and innovation (R&I) can catalyse greater private-sector investment, help the EU reach its sustainable development targets, and maintain agricultural competitiveness. Currently developed technologies have the potential to achieve deep decarbonisation of agriculture. These technologies need stronger support in the form of higher research spending and an increased emphasis on research and demonstration (R&D) support for:

– Soil management: soil carbon measurement technologies; next generation nitrogen management in crop production; high carbon sequestration crops, including enhanced root systems; new forms of agriculture, such as paludiculture and agroforestry which can maximise agriculture’s role as carbon sinks, and low-GHG fertilisers;

– Plant proteins, including novel sources for raw materials, protein extraction, improved protein functionality, and cost-effective manufacturing processes;

– Precision food safety, including sensors or other technology that can evaluate food risks; and

– Refrigerator redesign, including built-in modified atmosphere, Internet of Things and smart features, and improved user interfaces.

Mission statements for Horizon Europe should explicitly identify these topics as priority areas. The Common Agricultural Policy should continue to support research and innovation activities by Member States, farmers, and academics.

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Policy Principles For key policy principles which should be part of an effective EU level R&D programme please refer to the deep dive on → EU R&D Programmes Current Legislation There are two main EU instruments supporting agricultural research and development: Europe’s flagship research and innovation programme, Horizon Europe (formerly Horizon 2020) and the Common Agricultural Policy (CAP) (in particular Rural Development policy), governing the majority of farming practice in the EU. The most relevant part of Horizon Europe is its Societal Challenge 2 that focuses on “Food Security, Sustainable Agriculture and Forestry, Marine, Maritime and Inland Water Research and the Bioeconomy.“ Themes discussed include sustainable productivity increase, fostering the delivery of ecosystem services, empowering rural populations, and developing sustainable forestry practices. In total, societal challenges represent around 38 percent (€29.7 bn) of Horizon Europe’s budget, with Societal Challenge 2 representing approximately 5 percent (€4 bn).

The specific themes of the research and innovation framework programmes are spelled out in “calls” in the 2-year work programmes. The Horizon 2020 Work Programme (2018–2020) allocated €1.3 billion for knowledge and innovation in agriculture, food, and rural development and responded to some of the key challenges our planet is facing: adapting to and mitigating climate change; ensuring food security, safeguarding the natural resource base, promoting alternatives to fossil-based economies, and sustainably using marine resources while protecting the oceans.

The next framework programme—Horizon Europe—will cover the 2021 to 2027 period.

FIG. 01 Preliminary Structure of Horizon Europe

Pillar 1 Pillar 2 Pillar 3 Excellent Global Challenges & EU Innovative Science Industrial Competitiveness Europe

• Health European European • Culture, Creativity and Research Council Innovation Council Inclusive Society • Civil Security for Society Marie Skodolowska-Curie • Digital, Industry,Space European Actions • Climate, Energy, Mobility Innovation Ecosystems CLUSTERS • Food, Bioeconomy, Natural Resources, Agriculture Research and Environment European Institute of Infrastructures Innovation & Technology Joint Research Centre

Widening Participation and Strengthening the European Research Area

Widening Participation and Spreading Excellence Reforming and Enhancing the European R&I System

Modified version of chart from ec.europa.eu

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These new additions to the framework programme “missions” are part of Pillar II (societal challenges) but separate from the six clusters. They are aimed at maximising the impact of investments, setting clearer targets, and making it easier for citizens to understand the value of research and innovation. Each mission puts forth a mandate to solve a pressing challenge in society within a certain timeframe and budget and using clear targets. One of the five mission areas, “Soil health and food,” will address fields including:

– Soil management in agriculture and forestry for food and nutrition security, and the delivery of non-food products and public goods;

– Soil management beyond agriculture and forestry, e.g. peatland, wetland;

– Restoration and remediation of soils, brownfields, soil sealing;

– Potential of soils and soil management practices for climate mitigation and adaptation;

– Soil functions and ecosystems’ services, and the role of practises to improve soil health; sustainable land(scape) management, land use and land use change, spatial planning; ecology, agroecology, soil microbiology; and

– Systems science / systems approaches, considering financial impacts of soil and land degradation.

Given the importance of novel forms of agriculture such as agroforestry (on arable land, in particular) and paludiculture (farming on wetlands) in developing agriculture as a negative emissions technology, it is particularly important these techniques are supported by sufficient research and demonstration. In addition, simpler and more cost-effective technologies to measure and monitor carbon fluxes at farm level are urgently needed to reinforce agriculture’s potential role as a carbon sink.

Horizon Europe funding will also be important in supporting the development of alternative proteins. This need is identified in the Commission’s March 2020 Farm to Fork strategy, which stressed that future research would focus on increasing the source and availability of alternative proteins such as plant, microbial, marine, and insect-based meat substitutes. This strategic aspiration should be explicitly reflected in the mission statement for Horizon Europe’s food security activity.

In addition to Horizon Europe’s research support, innovation is embedded in the rural development pillar of the CAP through the European Innovation Partnership (EIP) mechanism. This brings together actors such as farmers, advisors, researchers, businesses, and NGOs to better connect research and practice.

An additional bridge between scientific research and farm practices can be offered by so-called farm advisory services. Under the CAP, Member States are required to offer these to farmers, although currently only a basic service is required. A fuller role for compulsory farm advisory services would help ensure the spread of research, innovation, and best practices to farmers.

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Impact Evaluating the impact of research on agriculture is challenging for several reasons. For one, there is a significant time lag between research being undertaken and its impact in practice. Systematic surveys of the adoption of agricultural practices are very infrequent at the EU level. Several studies exist examining the relationship between innovation and agricultural performance, but very few attempt to incorporate environmental considerations (such as impacts on nutrient balance). This calls for further work in this field. When comparing public and private investment, private research expenditures mainly affected agricultural output, while public research had more complex ways of making an impact that improve competitiveness and quality of life (see Policy Brief, IMPRESA project).

The interim evaluation of Horizon 2020—Societal Challenge 2 programme (Food security, sustainable agriculture and forestry, marine, maritime, and inland water research and the bioeconomy) was published in 2017. The evaluation noted the development of low-carbon, resource-efficient, and competitive European agri-food and bio-based industries as an expected longer-term result from the programme and found several examples of promising projects expected to contribute to “the development of low-carbon, resource-efficient, and competitive European agri-food and bio-based industries, with the creation of new integrated value chains.” Regarding progress on attaining specific objectives at a project level, 75 percent of the projects funded were expected to contribute to sustainable and resilient production and consumption systems, 50 percent to food security, and 29 percent to empowering rural areas. While there is no specific category on decarbonisation, results on energy efficiency and food waste are reported: improved energy efficiency and reduced food waste along the value chain are expected from eight innovation projects respectively, while four projects expect to reduce food waste at the source.

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CROSS-CUTTING POLICIES Overview

The Cross-Cutting Policies cut across economic sectors. Without them, we cannot address the Five Grand Challenges, get emissions to net-zero, or create a world where everyone has access to clean, affordable, and reliable energy.

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CROSS-CUTTING POLICIES EU Research and Development Programmes

Overview Today’s technologies have the potential to bend the carbon- emissions curve—but new, better, and cheaper innovations are a key component of any achievable plan for a net-zero– emissions economy by 2050. In its special report on Clean Energy Innovation, IEA estimates that currently mature technologies may reduce global emissions by 25 percent until 2070—but at least 35 percent of emissions cuts are expected to be delivered by technologies in the prototyping or demonstration phases. In other words, accelerated clean energy technology is essential to stopping climate change and limiting the rise of global temperatures.

Government investment in clean energy research and innovation (R&I) can catalyse greater private-sector investment, help the EU reach its sustainable development targets, and maintain industrial competitiveness. Research and development (R&D) is usually understood as the first step in R&I. In 2017, total R&D spending in the EU was €317 billion, or 2.06 percent of its GDP. This was far below the official 3 percent target and behind Japan (spending 3.20 percent of its GDP), the U.S. (2.78 percent) and China (2.13 percent). Traditionally, around one-third of all R&D funding in the EU comes from public sources (some 10 percent from EU funds, 30 percent from national governments, and 60 percent from higher education). The rest comes from private R&D investments.

The EU collates many R&I-related institutions, initiatives, and funds under one programme, Horizon Europe, which will run from 2021–2027 and replace the earlier Horizon 2020. Horizon Europe will spend least 35 percent of its total €85 billion (in 2018 euros) budget on climate-related R&I. However, the current levels of public-sector R&D funding are not large enough to put the EU and the world on a trajectory to get to zero by 2050. Thus, the EU should increase funding to its energy R&D agencies and reorganise them to address the climate crisis more effectively.

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Policy Principles Future R&D policies and actions in the EU should build on and improve the following principles (most are already implemented or proposed in Horizon Europe and other initiatives):

Targeted Funding: The EU should spend R&D funds in a way that maximises potential technology breakthroughs to mitigate climate change. It should also add funding sustainable technologies and climate-related targets to the priorities of the European Research Area.

Governance: The EU should create a cooperative European scientific research ecosystem and ensure that its R&D programmes are in sync with other EU policies, targets, and initiatives. The EU should also ensure strong and clear climate-related guidance within Horizon Europe. The Strategic Energy Technology Plan (SET) and National Energy and Climate Plans (NECPs) are valuable tools for the Commission to guide national R&D activities.

Assistance to Member States: The EU R&D programmes should engage with and support national R&D programmes of the Member States to increase their impact and improve local research capacity. The expert Policy Support Facility should continue to advise Member States on how to enhance their R&I policies, funds, and institutions.

Mission Orientation: R&I efforts should be outcomes-based and mission- focused to maximise their impact and encourage a systemic approach to research. The research agenda should be created in consultation with Member States, NGOs, international researchers, corporations, investors, entrepreneurs, and the public.

Innovation Portfolio: A balanced portfolio of innovation projects that covers the whole scope of technologies needed to achieve the net-zero emissions target should be planned, developed, and maintained.

Patient Capital: It is vital for the R&I chain to continue supporting technologies that emerge from the R&D programmes for full-scale demonstration and commercialisation. The EU should allow greater access to patient capital for innovative companies helping to push for zero (through a strengthened European Innovation Council (EIC) or European Institute of Innovation & Technology (EIT), for instance).

Partnerships and International Collaboration: R&I partners and third- party countries should increase and continue to collaborate to maximise R&D impact by knowledge transfer. In accordance with the “Open to the World” principle, the EU should encourage international cooperation through reciprocal access to programmes, funding, resources, and networking.

Skills Development: The EU should continue to support developing the scientific-research skills and expertise of its workforce through institutions or initiatives such as the European Research Council and Marie Skłodowska- Curie Actions. It should also strive to attract outside talent and remove barriers that could keep international scientists from participating in the European research space.

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R&D Infrastructures: The EU should collaborate with Member States and other partners to increase the number and quality of European research infrastructures. These facilities, equipment, and data should be as open to the public and other parties as possible.

Simplicity: Building on gains achieved through Horizon 2020, Horizon Europe should continue to simplify its grant applications and funding and compliance requirements to increase efficiency and reduce administrative burdens. This may mean reducing reporting requirements, increasing lump-sum funding, having more flexible calls, speeding up decision-making, and providing more feedback.

Transparency: The EU should require scientific publications (and, where possible, their underlying data) to be open-access. FAIR principles should guide the responsible management of research data, and open science should be promoted in collaboration with countries and third parties.

Flexibility: Since strategic research priorities may change over the course of a programme due to unforeseen circumstances and emergencies, Horizon Europe and the EU’s Multiannual Financial Framework would benefit from having a flexible funding mechanism designed for fast R&D response.

Monitoring and Evaluation: Horizon Europe should track its scientific, social, and economic impact using performance indicators focusing on short-, medium-, and long-term effects. Comprehensive evaluations should take place at every programme’s midway point and conclusion, allowing for specific recommendations for improvement. In addition, the EU should monitor the target of 35 percent spending on climate-related research to keep on track to meet climate targets. Current Legislation The EU collates many R&I-related institutions, initiatives, and funds under one flagship programme, Horizon Europe, which will run from 2021–2027 and replace the earlier Horizon 2020. Horizon Europe goes beyond the traditional R&D activities to support demonstration of innovative technologies and businesses. Horizon Europe will spend least 35 percent of its total €85 billion (€3.5 billion from the InvestEU Fund) budget on climate-related R&I.

Horizon Europe has three main pillars. (See Figure below). The first pillar, Excellent Science, encourages bottom-up, high quality scientific research and improving the EU’s scientific leadership and skills.

The European Research Council (ERC) awards grants for promising research projects with the sole criterion of scientific excellence. Investigators are encouraged to submit their own research agendas rather than stick to predetermined topics; hence ERC contributes to bottom-up knowledge creation. It also aims to improve Europe’s wider scientific landscape by establishing international benchmarks for success, encouraging high-quality peer review, and assessing key factors for success.

Marie Skłodowska-Curie Actions (MSCA) provide grants to researchers at all levels (from doctoral students to senior researchers) to allow them to participate in international mobility and training programmes at partner research institutions and companies. MSCA aims to develop European researchers’ scientific knowledge and skill base.

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European Research Infrastructures include equipment, labs, and data catalogued and improved by the European Commission. Key facilities are given European Research Infrastructure Consortium status, allowing them to enjoy administrative benefits.

FIG. 01 Preliminary Structure of Horizon Europe

Pillar 1 Pillar 2 Pillar 3 Excellent Global Challenges & EU Innovative Science Industrial Competitiveness Europe

Widening Participation and Strengthening the European Research Area

Widening Participation and Spreading Excellence Reforming and Enhancing the European R&I System

Modified version of chart from ec.europa.eu

The second pillar. Global Challenges and European Industrial Competitiveness is a top-down R&I effort focusing on specific EU and international goals and targets such as the UN’s Sustainability Goals. This pillar aims to sort R&I work into six clusters: three related to climate concerns (Climate, Energy and Mobility; Food, Bioeconomy, Natural Resources, and Agriculture and Environment; and Digital, Industry and Space). Apart from these clusters, specific missions in this pillar will deliver measurable outcomes. Created with multiple stakeholders, Horizon Europe will sort these into five mission areas: Cancer; Climate-Neutral and Smart Cities; Adaption to Climate Change (including societal transformation); Soil Health and Food; and Healthy Oceans, Seas, Coastal and Inland Waters. Missions will have specific time-bound, measurable targets. The second pillar also includes the Joint Research Centre (JRC), which provides scientific evidence and technical support to policy makers in EU institutions.

The third pillar, Innovative Europe, focuses on innovation, aiming to improve entrepreneurship, help start-ups, and bring novel technologies to market. The European Institute of Innovation and Technology (EIT) facilitates cooperation between leading educational, research, and business organizations to promote entrepreneurship and improve European competitiveness. This third pillar also establishes the European Innovation Council (EIC) to fund promising innovations as well as businesses using more mature technologies, paralleling R&D funding of the ERC.

For more information on this third pillar, see the deep dive on → Stimulation of Clean Energy Entrepreneurship and Scale-up

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Together, these three pillars will be supported by the umbrella Widening Participation and Strengthening the European Research Area, which aims to mobilise resources from multiple organizations to engage third countries and develop R&I standards in Europe. The Horizon Policy Support Facility provides guidance for improvement of European and Member State R&I policies. Furthermore, the European Research Area aims to enable free circulation of researchers as well as scientific knowledge and technology by establishing a unified system of European research programmes.

Apart from the three main pillars, the Euratom Programme receives funds from Horizon Europe to pursue nuclear research and training activities. Several other initiatives outside Horizon Europe also provide scientific research and services relating to climate change: for example, Copernicus, the EU’s Earth Observation Programme, provides past, present, and future information about global climate change. Impact The interim evaluation of Horizon 2020 shows the programme was fit for purpose and shareholders welcomed it. More than half the participants were newcomers, an improvement over the previous Framework Programme 7, and the programme easily cleared its targeted 20 percent of the funds for industrial and enabling technologies allocated for SMEs. The programme also supported 17 Nobel Prize winners. Despite representing less than 10 percent of public R&D spending, researchers predict that by 2030, Horizon 2020 will generate 179,000 jobs and €600 billion added value. Furthermore, simplification efforts reduced average time to grant by 110 days and kept administrative overhead below the target of 5 percent (lower than the previous framework). Since 2007, ERC has funded 9,500 projects, resulting in more than 150,000 scientific papers.

Impact assessment for Horizon Europe projects even higher gains compared to earlier R&I programmes owing to increased funding, efficiency, and focus. Over the next 25 years, the programme may increase GDP by 0.08 percent to 0.19 percent, which implies a value gain of €11 for each euro invested. Researchers forecast that Horizon Europe will lead to 100,000 direct jobs in R&I while it is in operation from 2021–2027 and another 200,000 indirect jobs from 2027–2036. 40 percent of these are expected to be high-skilled jobs. On the other hand, not investing in the programme would reduce EU competitiveness and growth, resulting in losses of up to €720 billion in the next 25 years.

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CROSS-CUTTING POLICIES Validation, Demonstration and Testbeds

Overview Promising clean energy technologies face many challenges before we can deploy them at scale. Until we can demonstrate and validate their cost and performance in real-world conditions, potential buyers may be deterred. The validation and demonstration phase is a critical yet underfunded phase of the innovation process: It allows developers to overcome practical challenges that face complex systems, including those arising from integration and operation, and it can also reduce the economic and institutional risks of new technologies so that potential adopters can be confident that these risks will not impede deployment.

Many demonstration and validation projects are too risky and capital-intensive for the private sector to take on alone, and the private-sector rewards are usually modest. But sound public policy can facilitate much-needed demonstration and validation projects and share their benefits. A strong innovation system around demonstration will allow the EU, Member States, and the private sector to pursue multiple promising technologies while tolerating an appropriate degree of failure.

Different institutions which promote validation, demonstration and testbed projects exist both at the EU and Member State levels. The European Institute of Technology (EIT)’s innovation communities, such as EIT InnoEnergy, aim to accelerate sustainable energy innovation by investing in demonstration projects in order to take companies from start-up to scale-up. In addition, the European Innovation Council (EIC) has an Enhanced EIC Pilot programme which finances activities like demonstration, testing, piloting and scale-up projects in the energy sector.

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Policy Principles Public-Private Partnerships: These partnerships can manage project risks and benefits and unlock private funding. Governments can take some of the risk as part of a mission-oriented innovation strategy. The greater the reliance on the private sector, the greater the returns it will demand in compensation— so additional frameworks that decrease private investors’ exposure to risk can encourage increased private investment. Risk assessment should determine the breakdown of public-private investment in such frameworks, with public bodies providing most funding for riskier projects.

Knowledge Ventres: Sharing findings of validation and demonstration projects widely is essential for the success of sustainable technologies. Establishing additional knowledge centres at the Member State level to act as brokers of this information can help disseminate findings from demonstration projects and foster international knowledge-sharing on how to accelerate technology adoption. They can also help reduce fragmentation, avoid duplication, and enable replication of best practices throughout Member States. The EU can also play a pivotal role by collecting information from other regions and sharing it with Member States.

Centralization of Validation, Demonstration, and Testbed Projects: Centralised coordination can promote best practices by creating a connected, interoperable network of demonstration projects. Consolidating project management and giving additional authority in the decision-making process to public bodies would reduce cost overruns and project delays, bring together stakeholders and supply chains, and simplify project organization.

Strong Upstream and Downstream Connectivity: Linking demonstration and validation activities to upstream R&D and downstream deployment programmes can help promising technologies move as rapidly as possible through the full innovation cycle, ensuring more efficient technology push and market pull processes. In addition to upstream-downstream connectivity for same-technology projects, horizontal connectivity among projects focusing on different technologies that nonetheless share overarching themes can still provide valuable findings for Member States.

Robust Demonstration Portfolio: Usually, innovators need more than one demonstration or testbed project per technology concept to gather enough quality data to reduce risk before moving to the next stage of the innovation chain. The EU should develop and maintain a robust portfolio of demonstration projects for complex, capital-intensive technologies that can promote deep decarbonisation. This portfolio could then support key technologies through 5th-of-a-kind demonstration projects (technologies taken through five demonstration projects). It could also be geographically inclusive to account for differences in technology performance due to exogenous factors.

Build and Strengthen Expert Communities: To help build expertise in different communities and create ‘expert hubs’ for a certain technology, different validation and demonstration projects in the EU are currently carried out in different Member States. Regional involvement in the validation and demonstration phase results in more engagement and trust between local communities and technology experts. As not all Member States can host the various demonstration and validation projects needed to have a robust demonstration portfolio for a certain technology, it is important to ensure that each Member State has at least some level of project participation—via expert contribution or involvement in the supply chain, for instance.

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Funds: Bringing a more robust portfolio of demonstration and validation projects to Member States requires simplifying funding processes so that funds are more available, accessible, and easily disseminated. More alignment between EU and Member States’ funding programmes and their respective innovation priorities would similarly increase the effectiveness of funding for these projects. The primary funding criterion for validation and demonstration projects must be a technology’s decarbonisation potential; however, complementary projects which focus on exploring market-pull mechanisms (projects developing innovative business models, for instance) have the potential to further de-risk investment in technologies. Current Legislation Support for demonstration and validation projects and testbeds in the EU and Member States has come mostly in the form of funding streams and through public institutional support as opposed to dedicated legislation. However, policies which set out targets for renewable energy use or which set limits on the use of incumbent technologies, such as the revised Renewable Energy Directive (2018/2001/EU), indirectly support these types of projects. Although the Directive does not directly target demonstration and validation projects and testbeds, it does facilitate the development of demonstration projects, which will be exempted from some state aid rules to take into account their more limited capabilities as players that cannot yet compete in the market.

The EU supports demonstration projects that align with its emissions- reduction goals through a combination of financial mechanisms and project coordination. At present, the EU has a variety of financial mechanisms funded by the Multi-annual Financial Framework. A part of the €101bn European Social Fund is used for testing, evaluation, and scale-up projects. The LIFE fund uses some of its €5bn to cover demonstration projects. Another important source of funding is the Innovation Fund, which aims to develop both mature and innovative decarbonisation technologies such as carbon capture and storage, energy storage, and circular business models. The EU ETS directs part of its revenues towards the fund, and so the total funding volume is subject to the EU ETS carbon price. For instance, for the period 2020–2030, the projected carbon price could lead to a total funding of around €10bn (€1bn/year).

The Innovation and Network Executive Agency (INEA) supports the EU by providing expertise and programme management to infrastructure, research, and innovation projects for transport, energy, and telecommunications. It coordinates the Connecting Europe Facility (CEF), an instrument to promote growth, jobs, and competitiveness through targeted infrastructure investment, and Horizon Europe, the EU’s main programme for research. Through this agency, the European Commission can closely monitor the evolution of demonstration projects, informing future decisions on technology and stimulus development.

The call is focused on providing concrete and actionable solutions for the Green Deal’s main priorities. In the longer term, additional EU investment in validation and demonstration projects will come under the Horizon Europe funding programme. These investments will be key to implementing the Green Deal.

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Funding for validation and demonstration programmes should come via a mixture of financing instruments through the Multi-annual Financial Framework (MFF). The MFF is expected to lead to at least €1.1 trillion of investments from 2021–2027. The programme will mobilise public investment and help unlock private funds via the Just Transition Fund, InvestEU, and a public-sector loan facility within the EIB backed by the EU budget. InvestEU is the EU’s new approach for coherent financing of EU policy objectives. This includes access to debt instruments, equity instruments, loans, and private finance via programmes such as CEF and the European Fund for Strategic Investment (EFSI).

The NextGenerationEU initiative is a new recovery instrument designed to boost a green recovery, a temporary reinforcement to the 2021–2027 long-term budget. The NextGenerationEU initiative will add additional funds to Horizon Europe, the Just Transition Fund, and InvestEU. Impact The wide implementation of validation, demonstration and testbed projects in Europe has created low-carbon technology benefits for Member States as well as other countries. Moreover, because of the extensive deployment of demonstration projects for certain low-carbon technologies, these technologies have experienced considerable cost reductions and reduced their perceived risk. Consequently, they no longer depend on public subsidies.

The development of wind-farm technology in the EU is a great example of how demonstration projects and testbeds have brought a technology once thought too expensive to a competitive level in the current market: today, wind provides 15 percent of the EU’s electricity supply. Between 1982 and 1989, the EU supported 97 turbine-related demonstration projects and trials. These original 22kW turbines have scaled to MW in both onshore and offshore applications: their capacity has scaled from 2.4GW onshore in 1995 to 144.6GW onshore and 12.6GW offshore by 2016. The first unsubsidised offshore wind farms were built in the Netherlands in 2018.

Another demonstration and validation success story is battery electric vehicles. Technology demonstration projects carried out in the past showed that these vehicles’ performance is similar to that of vehicles powered by internal combustion engines. Many of these projects were the result of public-private partnerships which leveraged their different interests: manufacturers provided the technology, and public institutions provided funding to reduce project risks and reduce the carbon intensity of vehicles. As a result, demonstration projects for battery electric vehicles, along with other EU and Member States policies which support their adoption, have resulted in considerable benefits for this technology, both in terms of technical improvements and economies of scale.

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CROSS-CUTTING POLICIES Stimulation of Clean Energy Entrepreneurship and Scale-up

Overview Entrepreneurship is vital for the development of a green economy and for getting the EU to zero by 2050. Both established and newly formed small and medium-sized enterprises (SMEs) form the backbone of the economy in Europe. They employ many people, contribute significantly to GDP, and are led by ambitious entrepreneurs—many of whom are innovating in the clean-energy space.

To both stimulate and sustain the development of clean energy technologies at an appropriately ambitious speed and scale, EU policies must be designed to support entrepreneurs all the way from company formation to commercial success. This could include encouraging talented individuals to join entrepreneurial teams in the clean-energy space, directing more public funding to pre-venture start-ups, designing effective incentives for venture capital and later-stage investment, and creating large demand-side market signals for novel clean-energy technologies.

The EU partially addresses these needs by providing targeted funding and skills training via the European Institute of Innovation and Technology (EIT), granting bottom-up funding for innovative ideas through the European Innovation Council (EIC), and providing microfinance and business training through the European Social Fund (ESF). The EU also promotes its entrepreneurship competence framework through education campaigns, youth mobility programmes, and entrepreneurship awards. Member States and regional authorities supplement these with their own policies, including national funding schemes, incubators, accelerators, education programmes, tax reliefs, regulatory benefits, and entrepreneurship visas.

To boost the impact of their entrepreneurship and innovation policies, the EU and Member States may focus on attracting and recruiting new talent, simplifying grant programmes, providing clear climate governance and coordination, increasing funding for climate-positive businesses, continuing workforce training, improving the quality and scale of pre-venture patient capital funding, and maintaining a balanced innovation portfolio.

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Policy Principles Future European policies promoting climate-related entrepreneurship and rapid scale-up should build and improve upon the following principles, which are already implemented to various capacities:

Coordination and Governance: Various funds, initiatives, and information may be collated under one roof at the EU and Member State level to make entrepreneurship support easier to access. Governments must ensure that various programmes work in harmony and Member State initiatives leverage EU funding and programmes. The EU should structure its innovation programmes to provide clear climate guidance to all European stakeholders.

Talent Recruitment: The EU and Member States should increase funding for on-ramps to clean energy entrepreneurship, including modest incentive prizes, incubator networks, and lab-embedded entrepreneurship programmes—all proven to activate entrepreneurial talent and encourage them to pursue new technologies with high potential impact.

Innovation Portfolio: The EU should ensure that its portfolio of innovation investments includes all the diverse types of technologies and businesses which are necessary to meet its long-term climate targets.

Climate Impact: The total level of funding the EU allocates to clean-energy start-ups must be consistent with its net-zero emissions targets. That means it (as well as Member States) should increase the minimum share of funding allocated to climate-related technologies within entrepreneurship programmes. Furthermore, implementing robust-climate impact analysis for start-ups before deciding whether to invest would help ensure they can deliver scalable mitigation.

Pre-Venture Funding and Venture Investments: The EU and Member States should seek to increase the scale and impact of early-stage non-dilutive funding. Private venture capital funding can be incentivised through matching government funding, tax deferrals, and capitals gains tax exclusion, and additional incentives can direct these investments at clean-energy start- ups. Traditional venture capital finance seeks to recover its investment in the medium term (about 5 years), but many clean energy technologies usually require much longer timeframes (about 10 years) to become profitable. This requires patient capital, which the EU and Member States can support through fund of funds (FOF) programmes and other investment instruments such as the EIC, European Investment Bank (EIB), and European Investment Fund (EIF). As each Member State has its unique circumstances, the package of funding and incentives it chooses should depend on measured policy efficiency and be updated swiftly if deemed unfit for purpose.

Guaranteed Demand: One method of incentivising clean-energy innovation is creating large market signals for upstream investors and entrepreneurs. Such demand-pull mechanisms could include nine- or ten-figure incentive prizes, purchase commitments, and milestone-based payments rooted in an agency’s mission. Regulations restricting or banning high-carbon technologies may also supplement longer-term innovation.

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Simplicity: The EU and national innovation programmes can improve their financial efficiency by continuously simplifying funding applications and compliance requirements to reduce administrative burden on both the agencies themselves and the entrepreneurs. This must still be done in a way which allows tracing projects’ climate impact and ensuring that funds are used for proper causes.

Education and Training: All stages of education, from childhood to post- graduate studies and continuous education programmes, should provide entrepreneurial training. The EU and the national governments can build on their existing education policies (such as EIT Knowledge Innovation Communities) and infrastructures to improve the effectiveness of their workforce-training programmes.

Talent Attraction: The EU and Member States may significantly and rapidly improve their entrepreneurial workforce by attracting new talent from outside Europe. Measures may include allowing foreign nationals to participate in entrepreneurship programmes and funding opportunities as well as integrating them into the innovation ecosystem and job markets through mobility, networking, and orientation programmes. Current Legislation The EU and Member States have numerous institutions, initiatives, funds, and facilities which promote better entrepreneurship and innovation. The EU brought together many of these elements under its flagship research and innovation (R&I) programme, Horizon Europe, which will run from 2021 to 2027. The European Research Council (ERC), which provides scientific research grants within the first pillar of Horizon Europe, awards follow-up Proof of Concept grants to explore the innovation and commercialisation potential of new technologies.

For more information on Horizon Europe, see the deep dive on → EU R&D Programmes

The third pillar of Horizon Europe, called Innovative Europe, focuses specifically on enhancing entrepreneurial capacity through organizations such as the European Institute of Innovation and Technology (EIT) and European Innovation Council (EIC).

The EIT accelerates entrepreneurship and innovation through forming and monitoring Knowledge Innovation Communities (KICs). KICs are relatively autonomous institutions that bring together businesses, research centres and universities to facilitate creation of new products, services, and companies. Currently there are eight different KICs specialising in different fields such as climate (Climate-KIC), sustainable energy (InnoEnergy), and transport (EIT Urban Mobility). Each KIC runs incubator and accelerator programmes to launch innovative start-ups and help existing companies mature and penetrate markets. KICs also aim to improve the general entrepreneurial skill sets in Europe by participating in educational programmes. These span from summer programmes for undergraduate students to master’s and PhD programme partnerships which teach business and innovation skills to students in academia.

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EIT and KICs also create and maintain Innovation Hubs across Europe. These are physical clusters which are usually co-located with partner institutions and help KICs run their local operations, host their incubator or accelerator spaces, allow research and innovation through labs and prototyping facilities, and provide infrastructure to help and train students and entrepreneurs.

Another core institution of Horizon Europe is the EIC, which supports the commercialisation of high-risk high-reward ideas through grants and equity financing. EIC promotes international, interdisciplinary collaborations in the companies it funds by requiring some applicants to be consortiums of various sizes, often made up of organizations from different countries. EIC has numerous funding programmes targeting companies/technologies of different levels of maturity, from lab-based demonstration to more mature, established business models. Although most EIC funding is bottom-up and without sectoral limitations, some programmes target funding for innovation in priority areas, such as climate change.

The EU support for entrepreneurship and scale-up of innovative ideas go beyond Horizon Europe. For instance, instruments such as the Structural Investment Funds and COSME programme finance SMEs and entrepreneurs.

For more information on other funds, see the deep dive on → Demonstrating and Validating New Technologies

The European entrepreneurship competence framework (EntreComp) is the EU’s main policy instrument for entrepreneurial competences and skills development. It establishes 15 core competencies for effective entrepreneurship and provides educational guidance. The Commission promotes EntreComp through education workshops, local capacity building for entrepreneurship education, and various teacher-training initiatives.

In response to the global coronavirus pandemic, the EU’s strengthened ESF+ programme will run until 2027 and aim to increase employment levels, provide social protection, and develop a workforce ready for green and digital transformation. As the regular ESF provides funds and training for fresh entrepreneurs, the ESF+ will encourage some of the workforce negatively impacted by the pandemic to consider becoming low-carbon energy entrepreneurs.

The EU also has youth mobility programmes within Erasmus+, providing opportunities for young people in Europe and other partner countries to have training and networking experience abroad, indirectly supporting innovation training. On the other hand, the Erasmus for Young Entrepreneurs programme offers more direct support to emerging entrepreneurs by assisting their collaboration with established entrepreneurs from different countries.

The EU also has several special networking, fundraising, and training programmes dedicated to woman entrepreneurs, and has established European Enterprise Promotion Awards to recognise organizations and individuals who promote best entrepreneurship policies and practices. Furthermore, through the Directive on preventive restructuring frameworks and second chances, the EU aims to warn companies of potential future threats, provide advice for staying solvent, and give second chances in case of bankruptcy.

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In addition to the EU initiatives listed above, individual Member States have similar national programmes to promote entrepreneurship and innovation. Most Member States have regular funding mechanisms for innovative business ideas and provide knowledge support through national incubators and accelerators. Historically, several Member States have attracted more private funding for clean-energy technologies via angel funds and fund-of-funds programmes, which have effectively directed more patient capital to green companies. Higher-education institutions are other key innovation partners, as many universities also offer funding and training opportunities to start-ups which spin out of their R&D projects. Regulatory exemptions and tax-relief initiatives are some other tools available to Member States to incentivise innovation. Many countries also offer special innovation or business visas to attract successful entrepreneurs from other countries. Impact Combined, the EIT and its KICs are expected to bring in more than 1,000 European and international partners, support more than 4,700 innovative start-ups, incubate more than 1,200 business ideas, launch more than 1,300 new products and services, and raise more than €1.5 billion. Already, 18 EIT entrepreneurs were listed in Forbes 30 under 30 Europe list in 2017. There have also been great strides in academia, with 6,200 students expected to have graduated from programmes affiliated with the EIT by 2020. The EIT programmes are showing high rates of employment for graduates, with nine out of ten in employment within six months of graduating and 15 percent higher earnings on average.

For employment, the EIT community supported 429 FTEs directly in 2016. Indirectly, the activities from the EIT have supported a further 6,100 jobs— and we expect this number to continue to grow. As of 2016, the portfolios of individual KICs were valued at €1.5bn (EIT Digital) and forecasted to secure revenues greater than €3bn by 2023, generating 60,000 more jobs (EIT InnoEnergy). Between 2021 and 2027, EIT projects reaching 10,000 graduates from KIC’s Master and PhD programmes, helping 7,000 existing start-ups and forming 600 new ones, launching 4,000 new products and services, and partnering with more than 750 institutions of higher education.

The Erasmus for Young Entrepreneurs Programme aims to reach a total of 10,000 participants from 2009 to 2020. To date, the Erasmus+ programme has reached 500,000 participants in youth exchange schemes and 150 Sector Skills Alliances set up by more than 2,000 vocational Education and Training providers and enterprises. The European Enterprise Promotion Awards had 4,000 project entrants since 2006, which supported creation of at least 10,000 new companies.

It is difficult to measure and predict the GHG emissions reduction effects of policies providing entrepreneurship support, since these efforts usually have very long payback periods and technologies, and businesses are supported by many policies over their lifetime. Moreover, innovation created in Europe can easily influence significant emissions reduction elsewhere through knowledge dissemination or exporting talent and technology. In its special report on Clean Energy Innovation, IEA estimates that currently mature technologies may reduce global emissions by up to 25 percent until 2070, but at least 35 percent of emissions cuts are expected to be delivered by technologies in the prototyping or demonstration phases.

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CROSS-CUTTING POLICIES Green Procurement

Overview Public spending represents 14 percent of the EU GDP (accounting for about €1.8 trillion every year)—a number that includes Member States’ expenditures on goods, services, and construction and renovation. That means we can attribute a significant portion of the EU’s GHG emissions to the goods and services governments themselves buy.

Government procurement typically takes place using public tenders or bids. Green procurement aims to include green requirements in the public-tender documents Member States produce, encouraging the use of goods and services which demonstrate a better environmental performance relative to alternatives. Green procurement can work in several ways: requirements can encourage the use of products with lower carbon intensity, for example, or foster the circular economy by improving resource efficiency.

Green procurement therefore uses the purchasing power of public authorities to reduce emissions while creating market share for greener products that might otherwise struggle to reach customers. This influence is especially important in sectors where public purchasers command a significant share of the market, such as public transport and construction. Private-sector purchasers can also implement green procurement: In some sectors and product groups, like construction, private companies own and operate major parts of the supply chain. Policy Principles Criteria Targeting: Green-procurement requirements in tender documents can target sustainability of products and services in two main ways. Green procurement can limit the embedded carbon of products: in the Buy Clean California Act, for instance, companies whose products exceed the embodied- carbon limit are not eligible to respond to a call for tenders. Alternatively, governments can apply green-procurement criteria via a point-based system which awards points based on the environmental performance of a product. (See, for instance, the EU’s voluntary Green Public Procurement guidelines.) EU and Member States’ green-procurement mechanisms could take either or both forms, as long as the procurement process they choose creates a signal for innovation.

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Scope: Green procurement can have different levels of ambition, as it can be used to set sustainability guidelines and criteria for a product at any point in its lifecycle. As such, green procurement can target the intermediate materials used in the manufacturing process, the final form of the product or—most ambitiously—the embedded carbon across a product’s full lifecycle. EU and Member States can decide the scope of green procurement on a sector-by- sector basis based on the interplay between green procurement and other policies regulating embedded carbon in products like:

→ New Building Codes → Clean Product Standards

In the transportation sector, green procurement can use full-lifecycle environmental-impact assessment to focus on less-mature transport technologies such as advanced biofuels, intermediate technologies (batteries and vehicle materials), emerging technologies with little electric-technology market penetration, and charging infrastructure. In manufacturing, green procurement can target industrial manufacturing of the low-carbon materials used in large projects (such as infrastructure). Green procurement in buildings can focus on appliances and low-carbon construction materials as well as those which increase material circularity through reuse or recycle.

Technical Assistance: Typically, governments award public contracts based on purchasing cost rather than on other important criteria such as lifecycle costing and total cost of ownership. The EU and Member States can leverage their procurement power to help regional and local procurers further prioritise sustainability. They can, for example, help smaller public purchasers use innovation brokers who can support and facilitate the procurement of low- carbon technologies and materials for infrastructure and other projects. They can also promote green procurement by establishing public databases listing contractors and manufacturers who comply with sustainability and low-carbon requirements.

Accessibility and Transparency: Throughout the EU, use of public procurement varies by Member State. In general, however, simplifying procurement procedures for low-carbon projects, maximising the value for money, and increasing accessibility to tenders for SMEs can reduce the frequency of times where there is a single bidder in the procurement process. Additionally, increasing the transparency, efficiency, and accountability in green public-procurement process can minimise the number of contracts negotiated without any calls for bids.1

Education and Sharing of Best Practices: To maximise the value of public procurement, regional governments and Member States can share best practices. Communication between Member States on public procurement would also help maintain an updated assessment of market trends and technology options that includes the most innovative and environmentally friendly goods and services. This could also help Member States comply more frequently with the procurement criteria set at the EU level. Governments can use platforms like Interreg Europe, which have existing relationships with Member State delegates and secretariat, to share best procurement practices.

1. Policy principle and recommendation based on analysis provided by “Single market scoreboard: Performance per policy area (Public Procurement), European Commission, 2019”.

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Certification or Labelling: Standards for testing and labelling the environmental performance of products and services give public bodies the ability to increase awareness and compare the environmental impact of alternatives. However, goods and services at early stages of market penetration may lack recognition via a certificate or label. Member States can develop national standards for sustainability labelling and certifications where EU standards have not yet been established, but with the final goal of collaborating towards introducing those EU-wide standards. Green procurement can have a higher impact if it is combined with complementary policies and standards, such as Minimum Efficiency Standards.

Promotion of Innovation: Dedicated funding schemes can be used to help reduce the “Green Premium” that can increase the cost of innovative products or technologies. Member States should allow green-procurement processes to tap into existing external funds available to industry or suppliers which promote innovation. For instance, recovery funds paid to Member States could be linked to requirements for green procurement to kick-start a green recovery.

Digitalisation: In the procurement process for buildings, new Member State programmes encourage the digital representation of a building’s energy performance of the building across its whole lifecycle as well as the carbon intensity of the materials used to build it. Regional governments can encourage construction companies to include a digitalisation phase in the procurement process of buildings and their materials. Current Legislation The Directive 2014/24/EU on public procurement and repealing Directive 2004/18/EC are the main EU directives that regulate public procurement in general, and they also address and promote the integration of environmental requirements into public procurement. Directive 2014/25/EU and repealing Directive 2004/17/EC are the directives aimed at procurement by entities operating in the water, energy, transportation, and postal-services sectors. However, right now, they make green procurement voluntary.

Certain Member States, such as Austria and the Netherlands, have introduced mandatory green procurement for their central governments, whereas in France green procurement is mandated for certain product groups.2 In general, countries with a less centralised state structure are most likely to follow a voluntary approach to green procurement to preserve the autonomy of sub-national governments. Some countries have not set green-procurement scopes or goals at all.

The European Commission and certain Member States have developed green- procurement criteria which are to be considered in public-tender documents for certain product groups. The criteria used for the product groups are based on scientific information and a lifecycle approach. Two levels of stringency exist in the criteria—core criteria and comprehensive criteria—and the guidance they provide is extensive. For example, they give guidance in the form of product technical background, training toolkits for public procurers, and lifecycle assessment tools, among others.

2. The role of green public procurement, Global Efficiency Intelligence, 2019.

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The European Green Deal established that the European Commission would propose further legislation and guidance for green procurement. As part of the European Green Deal Investment Plan, the EU will facilitate public sustainable investment by encouraging green procurement. Building on the previous version and released in March 2020, the New Circular Economy Action Plan states that in 2021 the European Commission will propose minimum mandatory green public-procurement criteria and targets in sectorial legislation and will phase in compulsory reporting to monitor the uptake of green public procurement, without creating an undue administrative burden for public buyers. The European Commission will also continue to support capacity building with guidance, training, and dissemination of good practices and encourage public buyers to take part in a “Public Buyers for Climate and Environment” initiative. Impact The 2004/18/EC and 2004/17/EC Directives have had considerable impact when it comes to facilitating the procurement of products with improved environmental performance, both at the Member State and local levels. This impact is clear in a variety of areas, from buildings and energy-using products to transportation and energy efficiency. Because governments at many levels can implement green-procurement policies, their impacts can go beyond GHG reductions to include social, health, and economic benefits. However, it is difficult to assess the total amount of emissions reductions across all green- procurement projects.

A 2009 study on certain EU countries suggests that green-procurement measures implemented up to 2007 contributed to an average reduction of CO2 emissions of 25 percent per project. Other environmental benefits of green procurement include reduced deforestation and water use, increased energy efficiency, and reduced waste.

Accounting for lifecycle costs in the procurement process can also create economic benefits, including resource savings and lower prices for environmental technologies. The EcoBuy project in the City of Vienna, for instance, has enabled savings of over 40€ million from 2004 to 2007.

The GPP 2020 initiative, started in 2013 and finished in 2016, aimed to mainstream low-carbon procurement across Europe to support the EU’s goals to achieve a 20 percent reduction in greenhouse gas emissions, a 20 percent increase in the share of renewable energy, and a 20 percent increase in energy efficiency by 2020. Over the last three years, more than 100 low-carbon tenders were implemented under the GPP 2020, resulting in calculated savings of over 0.9 MtCO2e.

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CROSS-CUTTING POLICIES Supporting Low-Carbon Hydrogen Production

Overview Increasingly, the EU recognises that hydrogen is an answer to cross-sectoral deep decarbonisation— essential to those parts of the energy system which electricity cannot feasibly decarbonise. This includes applications in manufacturing, transportation, and buildings as well as long-term energy storage for an increasingly variable energy supply.

Many factors will facilitate the development of a world-leading hydrogen economy, including the falling cost of renewable electricity, rapid technology developments, and increased urgency to meet the EU’s net-zero 2050 target. To meet this target, we need a bulk supply of low-carbon hydrogen—much more than the current relatively small-scale supply produced from fossil fuels. Rapid activity is required to take hydrogen from 2 percent of the energy system in 2015 (325TWh) up to 23 percent by 2050. (See Figure 1 below.)

Accordingly, the EU and Member States are laying out their roadmap to 2050, including electrolyser-deployment targets, hydrogen quotas and supportive policy mechanisms. The EU has set targets of installing at least 6 GW of renewable hydrogen electrolysers in the EU by 2024 and 40 GW by 2030. In parallel, countries such as France (6.5GW), Germany (5GW), Holland (3-4GW) and Portugal (2GW) are setting their own electrolyser deployment targets and hydrogen funds to support the expansion of the market.

To reach these targets and deliver a hydrogen economy, the EU and Member States should continue to develop a hydrogen roadmap that bridges the gap between fossil-based production and the low-carbon and renewable hydrogen production of the future.

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FIG. 01 Consumption of Hydrogen and Share in Final Energy in EU Decarbonisation Scenarios in 2050

EC EC IEA ÖKO FCH ECF ECF ECF Navigant Shell LCEO TWh LTS H2 LTS P2X B2DS Vision Roadmap Shared Demand Tech. Optimised Sky Net Zero Effort Focus Gas

Power 148 142 112 485 515 786 785

Industry (Energy) 561 525 198 237 82 68 125 627 540

Transport 559 1,201 1,012 675 666 195 850 608 165 1,790

Buildings 432 604 105 579 46

Other 267 58 144

11,444 9,980 Final Energy, TWh 9,409 9,665 8,564 8,564 9,018 9,011 6,455 6,182 5,609

H2 and Synfuels 23% 16% 19% 21% 17% 13% Share Percentage <1% 11% 4% 10% 2%

Hydrogen for non-energy uses is not included, hydrogen for synfuels is included based on 75% efficiency (for EC, ECF and Öko scenarios. Hydrogen for power generation is not consumed as final energy.

EC: A Clean Planet for All – A European Long-Term Strategic Vision for a Prosperous, Modern, Competitive and Climate-Neutral Economy, European Commission, 2018, November IEA: Energy Technology Perspectives 2017, International Energy Agency, 2017, June ÖKO: The Vision Scenario for the European Union, 2017 Update for the EU-28, Öko-Institute, 2017, February FCH: Hydrogen Roadmap Europe, Fuel Cells and Hydrogen, Joint Undertaking (FCH 2 JU), 2019, February ECF: Net Zero by 2050: from Whether to How, European Climate Foundation (ECF), 2018, September Navigant: Gas for Climate, Ecofys / Navigant, 2019, March Shell: Sky – Meeting the Goals of the Paris Agreement, Shell, 2018, March (Regional Coverage is EU+) LCEO: Deployment Scenarios for Low-Carbon Energy Technologies, Joint Research Centre, 2019, January

Source: Joint Research Centre, ec.europa.eu Policy Principles Definitions and Accounting: Today, different modes of hydrogen production attach different names to the product that results. Electrolysis with renewable electricity produces green hydrogen; fossil fuels using carbon capture produce blue hydrogen; and fossil fuels without carbon capture produce grey hydrogen. In the future, we should define hydrogen according to its carbon intensity over its lifecycle. In this way, CO2 becomes the currency for hydrogen and energy in general. This needs to be supported by a carbon accounting methodology with clear system boundaries for different hydrogen-production options.

Technology Options: The EU recognises that zero-carbon hydrogen (or renewable hydrogen) is the only pathway to zero by 2050. However, low- carbon solutions will be needed in the meantime to increase scale of demand and utilisation. Governments need a clear, policy-supported roadmap for this transition to make sure the EU and Member States are not locked in on technology options.

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Hydrogen Roadmap and Ambition: Targets for hydrogen supply, demand, and technology maturity are needed at gateways out to 2050 to create investor confidence and to align projects with the level of ambition and funding available. This includes quotas for different sectors of the hydrogen economy, such as synthetic fuels for aviation. (See the Creating Markets policy.) The roadmap should support the transition through low-carbon hydrogen to renewable hydrogen.

Coordinated Hydrogen Projects: The EU, Member States, and industrial stakeholders should align and develop a portfolio of viable, bankable projects that align and exceed the EU’s ambition and coordinate its activity. This can also support MS-EU alignment on national hydrogen strategies.

Development of Infrastructure: Governments need to financially support the development and deployment of large-scale hydrogen infrastructure. They should also revise regulatory environments to address current permitting issues and support coupling between different sectors (renewable energy sources and electrolysers, for example). The EU and Member States should focus on the co-location of production and end users to ramp up capacity and technology commercialisation, creating clusters known as “Hydrogen Valleys” or “Hydrogen Clusters.” There should be some longer-term considerations for pipelines for dedicated networks as well as alternative refuelling infrastructure. Initial work should concentrate on the TEN-E and TEN-T networks, particularly linking industrial clusters as well as ports.

Electrolyser Operational Support: Alleviating green tariffs on the electricity electrolysers consume will improve the business case for many end users. In addition, governments should review regulatory barriers which prevent the exploitation of innovative business cases for hydrogen production with renewable-generation assets.

Creating Markets: Market design is essential for the growth of a hydrogen economy. Policy measures such as quotas for low-carbon hydrogen in sectors such as industry or aviation (via synthetic fuels) are essential for increased large-scale adoption, along with a comprehensive portfolio of cross-supply chain projects supported by European and national public funding. Other incentives such as Contracts for Difference (including Carbon Contracts for Difference), Guarantees of Origin, the EU ETS, a Clean Fuel Standard, and auctions will help reduce the cost of renewable and low-carbon hydrogen relative to fossil-fuel incumbents. Regulators should phase out these policies as the cost of hydrogen comes down.

Revision of Directives: Any hydrogen strategy needs to be translated into a renewable energy strategy to properly evaluate the potential for both low- carbon and renewable hydrogen. This will include revisions to the Renewable Energy Directive and the Directive for Alternative Fuels Infrastructure to support hydrogen uptake.

Promoting R&D: The EU and Member States should continue to fund Research and Development activities as well as Validation, Demonstration and Test Bed projects. This will support the ramp up in deployment scale, improve system efficiencies, and boost the development of the next generation of hydrogen technologies. Programmes such as the FCH have supported these activities to date, and the EU should continue to support them via programmes such as the Innovation Fund and mechanisms such as InnovFin Energy Demonstration Projects.

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Current Legislation Legislation on hydrogen largely comes through two directives, the Renewable Energy Directive (RED II) and the Directive on Alternative Fuels Infrastructure (DAFI).

RED II now considers renewable liquids and gaseous transport fuels on non-biological origin (REFUNOBIOs) as a transport fuel category. It also recognises renewable gases in the guarantees of origin (GO) market. However, hydrogen is currently constrained, since only production directly linked to the generation of new renewable energy qualifies as a REFUNOBIO. This definition excludes hydrogen produced on the grid using renewable electricity. Under the EU’s Green Deal, the EU will review this directive.

The EU adopted DAFI on 29th September 2014. This directive requires Member States to develop a national policy framework for the market development of alternative fuels and their infrastructure, foresees the use of common technical specifications for recharging and refuelling stations, and paves the way for setting up appropriate consumer information on alternative fuels, including a clear and sound price comparison methodology.

DAFI does not currently mandate hydrogen refuelling infrastructure; instead, it recommends infrastructure every 300km along the TEN-T Core Network. Member States are mandated to install infrastructure for electric vehicles, CNG, and LNG. This infrastructure must be put in place by 2025. Impact The hydrogen industry is increasingly ambitious: Every week it announces new investment plans, often at a gigawatt scale. Between November 2019 and March 2020, market analysts increased the list of planned global investments from 3.2 GW to 8.2 GW of electrolysers by 2030 (57 percent of which are in Europe) and the number of companies joining the International Hydrogen Council has grown from 13 in 2017 to 81 in 2020.

Another example of industry ambition is Hydrogen Europe’s 2x40GW Initiative, which would deliver 40GW in the EU and 40GW in Ukraine and Northern Africa and allow the EU to become a market leader in hydrogen technologies and access significant economic benefits. (See Figure 2 below.)

FIG. 02 Benefits of Hydrogen for the EU – Ambitious 2050 Scenario

~24% ~560 Mt ~€ 820 bn ~15% ~5.4 m of final energy annual CO2 annual revenue reduction of local jobs (hydrogen, 1 2 demand abatement (hydrogen & emissions (Nox) relative equipment, equipment) to road transport supplier industries)3

1 Including feedstock 2 Compared to the Reference Technology Scenario 3 Excluding indirect effects Source: Modified from Hydrogen Roadmap Europe

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CROSS-CUTTING POLICIES Negative Emissions Technologies (NETs)

Overview The special report by IPCC on limiting global warming to 1.5ºC shows that virtually all Integrated Assessment Models (IAMs) compatible with reaching this target require large- scale deployment of NETs. Active carbon removal from the atmosphere has two key benefits that complement other emissions reductions technologies: spatial and temporal decoupling of emissions sources from decarbonisation efforts. In other words, NETs allow for balancing emissions in hard to abate sectors where technological (industry, aviation) or biophysical (agriculture) limitations restrict carbon reduction by other means. NETs can also mitigate the impact of historical emissions, thus acting as a kind of insurance if emissions reductions are not met. Due to the unique significant features of negative emissions, IPCC’s 2ºC scenarios indicate that the EU should remove a total of 50 GtCO2 in the 21st century, which is more than 10 times its current annual emissions.

NETs are an umbrella term including many kinds of practices and technologies. Some of the most mature nature-based NETs are afforestation/reforestation activities, using wood in construction, agricultural practices which increase soil carbon content, and ecosystem restoration. Other nature-based options are still at lower technological development levels (TRLs) and need to be demonstrated at larger-scale. These include enhanced weathering, biochar applications ocean fertilisation, and ocean alkalinity.

Similarly, some technology-based NETs have been proven to work but are not yet scaled-up to necessary levels. These include bioenergy with carbon capture and storage (BECCS), direct air capture (and storage) (DAC(s)), and net- negative concrete production from captured carbon. BECCS and DACS have many common attributes with regular CCS projects since they all involve a capture facility and CO2 transport and storage infrastructure.

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Current policy or regulatory support for NETs in Europe is limited and mostly consists of inclusion in generic R&D programmes and funding for a few dedicated demonstration projects. Some mature agricultural NETs, such as afforestation and soil carbon sequestration, are supported through carbon credit sales in voluntary markets or payments to farmers based on adopting new practices. These are either not based on demonstrated carbon removal or are restricted in their scope and compensation.

Establishing a European carbon removal market capable of delivering the EU’s climate targets will require urgent policy actions and strong collaboration between many stakeholders, including the EU, Member States, technology developers, academics, the public, and the international community. Since carbon removal is fundamentally different from emissions reduction and most NETs are at low maturity levels, many different types of policies should be implemented cohesively. Below are the major policy priorities and principles which should be enacted soon to support negative emissions in Europe. Policy Priorities and Principles Research and Innovation: R&I policies are essential and urgent for bringing NETs to market. The innovation cycle traditionally follows three stages: lab- based R&D, demonstration at larger scale, and large-scale deployment in real life settings. Most NETs (except for afforestation/reforestation and some other nature-based solutions) are still in the first two stages of this cycle. Both the EU and Member States have multiple R&I programmes to facilitate technology deployment, such as Horizon Europe, the Innovation Fund, national R&D programmes, higher education institutions, and national innovation funds/competitions. NETs should be identified as a priority area within these programmes depending on their technological development levels (TRLs).

For more information on R&I policies see the deep dives on → EU R&D Programmes → Validation, Demonstration and Testbeds → Stimulation of Clean Energy Entrepreneurship and Scale-up

Separate Targets for Mitigation and Removal: In global climate models, NETs may allow cumulative emissions to overshoot target levels in the short- to medium- term, in exchange of future net-negative emissions. This leads to the perception that including NETs may reduce current emissions mitigation ambitions (mitigation deterrence) by offering hopes of future removal. An effective strategy to avoid mitigation deterrence should include separate targets for emission reductions and carbon removals (e.g., 95% mitigation and >5% removals by 2050) to reach net-zero and beyond. Other types of climate policies must also distinguish between emissions reductions and NETs. This ensures that NETs deployment levels are completely decoupled from ongoing mitigation efforts and countries or companies cannot keep emitting more by increasing carbon removal. Therefore, any rapid scale-up of NETs would only expedite reaching targets and would not cause mitigation deterrence. The EU is already familiar with separate GHG targets, as the EU ETS and the Effort Sharing Directive target different sectors of the economy. Future targets should be set at a level in line with EU’s longer-term goals, including delivering net removals after 2050.

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Diverse Portfolio: Due to current uncertainties about global deployment potentials of NETs and the pace of climate changes, all types of NETs should be supported to an extent. The EU and Member States should ensure they maintain a diverse portfolio by investing in different technologies for a low- regret scenario, until uncertainties are largely resolved, and investment may become more targeted.

Direct Procurement: Direct procurement of negative emissions by governments and volunteering private companies can create initial markets for NETs through a demand-pull mechanism. These should target NETs with medium level TRLs and significant cost reduction potential that struggle to find investment otherwise. Direct procurement should be considered a temporary solution that ideally will be replaced by a market-based mechanism as soon as possible. Corporate sector initiatives, such as pledges of carbon removal by large companies, should also be encouraged.

NETs Obligations and Market Creation: Large-scale cost-effective deployment of NETs requires the establishment of carbon removal markets. Negative emissions obligations with tradable certificates, ideally at the EU level but also potentially at the Member State level, can be an effective instrument for delivering NETs. Under this scheme, obligated parties would have to offset a certain portion of their emissions by securing negative emissions credits, in a way that will not reduce their mitigation efforts. They would be able to trade these certificates across the EU, and the obligations would gradually increase to cover larger portions of the products the companies serve. The obligations may be placed on fossil fuel suppliers, which would be in line with the “polluter pays” approach and help distribute costs along the value chain. This policy should be supplemented by robust accounting frameworks (see the MMV principle below) and the risk of double counting should be eliminated. Once this strategy grows to include all NETs and is proven efficient, it can form the basis for establishing a negative emissions trading scheme.

Complimentary NETs Markets: Carbon capture and utilisation (CCU), which may not always result in net carbon removals, may aid initial market creation for technologies such as BECCS and DAC and should be incentivised by the EU and Member States. Synthetic fuels derived from DAC should be included in future clean fuel policies. (See the deep dive on Clean Fuel Standards.) Minimum requirements for synthetic fuels from captured CO2 within the fuel blends may also be imposed. NETs markets can further be complemented by stimulating demand for NETs by-products, such as biochar, net-negative concrete, and wood in construction. Markets for these secondary products should be expanded through their inclusion in EU and Member State green procurement programmes, information campaigns, labelling schemes and regulations.

Regulations for Nature-Based NETs: Nature-based NETs, such as afforestation, reforestation, soil carbon storage, and ecosystem restoration, are relatively well-established low-cost carbon removal options that already provide considerable carbon sinks. Once detailed accounting and reporting frameworks are put in place for these NETs, the EU and Member States should work to scale them up through regulations and standards, taking their co-benefits into account. These could include requiring farmers or certain companies to follow certain carbon removing practices.

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Operational Financial Support: The market creation policies and regulations discussed above are not likely to deliver initial NETs capacity alone, as some of the technology-based NETs are still quite expensive.

These require operational financial support mechanisms until costs comes down. Member States may determine the best type of policies for financial support, depending on the type of NET and their own previous experience. Mechanisms currently considered for CCS and hydrogen projects can also be adapted for NETs. For instance, carbon contracts for differences may be an ideal option where NETs developers would be paid a top-up, depending on the market rate of future carbon removal credits or fuel prices in the case of fuel production through DAC.

MMV and NETs Certification: A robust NETs certification framework, supported by effective measurement, monitoring, and verification (MMV) standards, is needed to improve confidence in carbon removal and administer most NETs-related policies accurately. Ideally these should be international standards (ISO) utilising cradle-to-grave lifecycle analysis. The EU should partner with relevant stakeholders from academia, policymaking, and business to lead the creation of MMV regulatory frameworks.

Securities for Leakage: One major barrier for NETs is the concerns surrounding permanence of carbon removal. Nature based solutions such as afforestation and soil sequestration tend to be at a greater risk of carbon leakage, since fires or changing agricultural practices may eventually release the stored carbon back into the atmosphere. Future certification of carbon removals should address the leakage risk by requiring financial securities. Provisions for large-scale projects (BECCS and DACS) can follow those used for CCS as set by the CCS Directive, and the level of security can be determined based on different risk levels of NETs. Smaller NETs projects (such as agricultural options) may be required to set aside a portion of their NETs credits or revenues as insurance against future leakage.

Infrastructure and Industrial Clusters: Certain NETs, such as BECCS and DAC, use CO2 transport and storage (T&S) infrastructures just like regular CCS technologies. Infrastructure remains a barrier for deployment of these NETs, as it can be very capital intensive, especially for stand-alone systems. Both the EU and Member States should provide financial support for deploying CO2 infrastructure and consider NETs potentials when assessing future infrastructure projects. Deploying cross-border shared infrastructure would unlock BECCS and DAC potential in regions without access to North Sea offshore storage sites. Industrial CCS clusters should also be encouraged to incorporate NETs with other decarbonisation measures, since shared infrastructure would reduce costs. DAC in particular would benefit from utilising waste heat generated by industrial sites. Including NETs would make it easier for these clusters to reach net-zero and even net-negative emissions status, boosting public support and acceptability.

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Governance: Effective governance and directionality are necessary to accelerate development and scaling of NETs. Every Member State can establish national carbon removal institutions that would oversee and collate efforts and information regarding negative emissions. At the EU level, carbon removal should be integrated into all relevant climate policies and coordination between Member States should be maintained.

Non-Carbon Benefits: In some sectors, NETs will provide additional benefits for the environment, economy and society such as improved resource efficiency, ecosystem restoration, flood prevention, or biodiversity. Some of these benefits are positive externalities currently not captured by market mechanisms. These should be communicated in social outreach programmes and recognised in NETs policies to set financial compensation levels consistent with these non-carbon benefits.

Social Considerations: Since NETs are mostly new and relatively unknown technologies which need to be deployed at large-scales, their success depends on public approval. The wider public should be included in NETs discussions as widely as possible, with the hope that a better understanding of NETs’ co- benefits and social value will support positive perception and facilitate rollout. The UK Climate Assembly is a nice starting point for including the public in larger climate debates, and future work may build on this precedent.

International Cooperation and Leadership: The EU is in a key position to lead global efforts to establish and expand a carbon removal market. International cooperation is particularly instrumental in establishing global MRV standards for NETs, developing robust sustainability frameworks, and building cross- border CCS infrastructure. Strong leadership of the EU and individual Member States can be very effective in steering the international community towards Paris Agreement goals, which will undoubtedly necessitate significant NETs deployment. Current Landscape Current legislation and policy support for NETs is limited in Europe, since, thus far, most of the attention has been on research and innovation (R&I). Horizon Europe (formerly Horizon 2020) has been the EU’s main R&I programme for funding NETs research, along with many other technologies. Further funding for innovative low-carbon companies is available through the European Institute of Innovation and Technology (EIT) and the European Innovation Council (EIC), although historically funding for NETs has been very low.

Several other EU funds, such as the Innovation Fund and Connecting Europe Facility, offer financial support for deploying CCS projects and infrastructure. Although they do not target NETs specifically, initial BECCS and DACS demonstration projects are likely to benefit from these instruments.

EU ETS, which is the EU’s main carbon pricing mechanism, currently does not recognise net carbon removals, and there are no national or EU wide MMV standards for NETs. However, in its new Circular Economy Action Plan. the EU indicated its interest to develop a robust regulatory framework for certification of carbon removals by 2023.

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In addition to the EU efforts, the Member States also support NETs through national research and innovation strategies. For example, in the UK NETs are developed through R&D (e.g. UK’s GHG Removal Research Programme) and national demonstration programmes (e.g. UK’s GHG Removal Innovation Competition). Additionally, The UK Department for Business, Energy & Industrial Strategy (BEIS) is investigating potential business models and financial support schemes for BECCS.

In 2020, the Norwegian government announced that it will provide ~€280 million of funding for carbon capture at Fortum Oslo Varme’s energy from waste facility in Oslo. This project will result in net carbon removal through BECCS applied to the biogenic portion of the waste processed. It will also be connected to the Northern Lights Project, which aims to deploy a shared CO2 T&S infrastructure in the North Sea, and will seek to secure further EU funding through the Innovation Fund. Other energy from waste facilities, such as Copenhagen’s Amager Bakke waste incinerator, are also developing roadmaps to install CCS by securing backing from the national governments and the EU.

The Member States also support more mature nature-based NETs directly or indirectly through results-based payments or incentives for practice changes. For instance, the Woodland Carbon Guarantee in the UK provides afforestation/reforestation project developers with the option to sell captured carbon to the government in the form of verified carbon credits until 2055/56. Other examples include results-based voluntary carbon credits (Germany’s MoorFutures and French Label Bas Carbone) and the Austrian Healthy Soils for Healthy Food initiative, which pays farmers for adopting practices that increase soil carbon content.

In addition to the public policies and initiatives discussed above, the private sector has also been supporting NETs through direct equity investments in innovative start-ups, voluntary funding of carbon removal through corporate pledges, and participation in novel NETs markets, such as Finland based Puro Earth, which is the world’s first dedicated negative emissions marketplace. Impact NETs present two unique benefits compared to regular emissions reduction efforts: spatial and temporal decoupling of emissions sources and mitigation measures. This positions NETs as a “safety net” that can be used to bring atmospheric CO2 concentrations back down to acceptable levels in case of a potential overshoot.

According to the IPCC’s 1.5ºC special report, all scenarios limiting global temperature increase to 1.5ºC employ negative emissions in the range of 100–1000 GtCO2 (cumulative) in the 21st century. Figure 1 below illustrates these scenarios where annual global emissions mostly reach net-zero around 2050 and net-negative emissions are realised in the second half of the century.

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FIG. 01 Global Net CO2 Emissions

50 In pathways limiting global warming to 1.5ºC with no or limited overshoot as well as in pathways with a higher overshoot, CO2 emissions are reduced to 40 net zero globally around 2050.

Pathways limiting global warming to 30 1 1.5º with no or limited overshoot / YEAR

2 Pathways with higher overshoot 20

0 2 P1 P2 BILLION TONS OF CO BILLION TONS -10 3 P3

-20 P4

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

(1) An initial phase in which emissions from all sectors fall rapidly and deeply to reach (2) net-zero CO2 emissions by 2050, followed by (3) sustained net-negative emissions in the second half of the century.

Source: Modified from “Options for supporting Carbon Dioxide Removal“ New Climate Institute, July 2020

The importance of negative emissions in reaching global climate targets is also emphasised by IEA’s Sustainable Development Scenario (SDS). The SDS includes 250 GtCO2 of cumulative net-negative emissions by 2100, in order to have a 50% chance of limiting global temperature rise to 1.65ºC. IEA notes that although NETs can be totally omitted from global climate scenarios that reach the 1.5ºC goal, doing so would “pose challenges that would be very difficult and very expensive to surmount.”

The EU’s contribution to global carbon removal efforts in the IPCC scenarios is estimated to be 7.5 GtCO2 by 2050 and 50 GtCO2 by 2100 cumulatively. This compares with the annual EU-wide emissions of 4.4 GtCO2 in 2017. The scale of the NETs challenge becomes much more apparent when the EU targets are compared with the carbon removal potential of singular projects. Drax is a large bioenergy power plant (2.5 GW) in the UK that single-handedly supplies 12% of all the nation’s renewable energy. It aims to become the world’s first large-scale BECCS plant by the late 2020s and capture 16 MtCO2/year when fully retrofitted with CCS by 2034. For Europe to hit its share of NETs target by 2050, more than 23 Drax plants need to come online by 2030.

Additional Resources for NETs

→ New Climate Institute – Options for supporting carbon dioxide removal → Zero Emissions Platform – Europe needs a definition of carbon dioxide removals → The Royal Society – Greenhouse gas removal → Vivid Economics – GGR policy options → Negative Emissions Platform → The NEGEM Project – quantifying & deploying responsible negative emissions in climate resilient pathways

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CROSS-CUTTING POLICIES EU Carbon Price

Putting a price on greenhouse gas (GHG) emissions that reflects their true economic and environmental costs is a critical piece of a climate policy strategy. A carbon price makes carbon-intensive goods and services more expensive, providing a financial incentive to use fewer of these products and shift to lower-carbon alternatives.

The Emissions Trading System (ETS) is the main EU carbon pricing instrument for some 45 percent of the total GHGs in Member States (as well as Norway, Iceland, and Liechtenstein). It is the world’s largest cap-and-trade system: It sets an overall limit on total emissions and reduces this limit continuously to drive decarbonisation. The scheme applies to some 11,000 entities from power generation, commercial aviation, and energy-intensive industries such as refineries, as well as producers of steel, iron, aluminium, cement, glass, ceramics, pulp, paper, and bulk organic chemicals.

Currently, competitive auctions allocate all emissions allowances for the power sector, while trade-exposed industries receive a substantial portion of allowances for free. Sectors with a carbon-leakage risk are given free allocations equalling the average emissions of the best 10 percent of facilities, while other sectors receive only 30 percent of the benchmark, which will be phased out by 2030. Entities can trade unused allowances. Each Member State has authority over how revenues from EU ETS are used, but at least 50 percent must go towards energy and climate-related projects. Additionally, the Innovation Fund for encouraging demonstration of new technologies and the Modernization Fund for achieving a just transition across Europe re-invest a portion of overall EU ETS revenues into Member States.

The EU should ensure that the level of ETS carbon prices remains consistent with a pathway to net zero by 2050. It must phase out free allocation of emissions in the industrial sector in favour of a dedicated carbon leakage policy such as a Clean Product Standard and/or Carbon Border Adjustment. Since different sectors have varying carbon abatement costs, adding other sectors to the EU ETS must be done in a way that does not deflate the carbon price.

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