What does the EU’s new decarbonisation roadmap mean for its carbon economy?

On 6 February, the EU released three documents that together redefine its roadmap for decarbonisation to 2040 and beyond: its 2040 Climate Target, Net Zero Industry Act (NZIA) and Industrial Carbon Management Strategy. As with other decarbonisation policies, in time other major economies are likely to follow the EU’s lead – making their implications doubly important. Let’s take a look at what they mean for the bloc’s low-carbon economy. 

Bold intentions but funding is needed to deliver 

The big headline is a 90% net greenhouse gas (GHG) emissions reduction by 2040. This target bridges the gap between the bloc’s 55% 2030 emissions reduction goal and its aim of reaching climate neutrality by 2050. It would require a tripling of the average rate of emissions reductions in the EU since 1990. 

The Industrial Carbon Management Strategy details how carbon capture and removal technologies will help the bloc reach its emissions reduction goals. It envisages capturing 280 million tons annually by 2040, rising to around 450 million tons by mid-century.  

Finally, the NZIA incentivises investments in solar, wind, battery, grid and other key technologies. By 2030 it seeks to cover 40% of the bloc’s needs with domestically produced technologies.  

Currently, a lack of sufficient funding and policy support mean the EU is behind schedule for its existing 2030 and 2050 goals. Achieving these ambitious new targets will require a huge scale-up of electrification, together with the right balance of sticks and carrots. So, does this new roadmap deliver? 

1. CCUS: lofty ambitions and clear direction, but the clock is ticking 

Having previously lagged the UK, US and Canada, the EU’s Industrial Carbon Management Strategy finally catapults it to the front of the carbon capture, utilisation and storage pack. It aims to double the current pipeline of projects operating or in advanced development by 2030, while the 2050 target represents around 35% of the bloc’s current emission levels from power and industry.  

Proposals to reach these targets include a multi-modal trans-European CO2 transportation network, and an aggregation tool matching supply and demand across the value chain for capture, transportation, use and storage. The obligation for storage will be placed on oil and gas producers, while the Carbon Border Adjustment Mechanism (CBAM) and reduction of free allowances will in theory encourage emissions intensive industries including cement, steelmaking and chemicals to adopt carbon capture. However, additional incentives will be needed to kickstart CCUS at scale. 

2. Emissions trading: expect carbon removal to scale rapidly 

The bloc’s Emissions Trading System (ETS) will remain central to reducing industrial emissions. The annual cap will be tightened further to drive down gross emissions beyond 2030 and new targets in both the flagship ETS and ETS 2 caps may be subject to further review.  

Recognising industrial carbon removals in the EU ETS will incentivise the development of bioenergy with carbon capture and storage (BECSS) and direct air capture (DAC). The review of the EU ETS in 2026 will provide clarification about whether the block will incorporate industrial carbon removals into the EU ETS or create a separate trading mechanism. A higher ETS price will be essential to drive uptake, while additional government support may also be needed to close the gap with the costs of carbon removals. 

3. Voluntary carbon markets: domestic carbon offsets to be given preference 

While the EU ETS focuses on scaling industrial carbon removal, the Carbon Removal Certification Framework (CRCF) being developed in parallel also aims to mobilise private finance for a broader range of technologies through a voluntary market for removals, farming and storage. As UN-backed carbon removals are not yet available, other countries could follow similar approach and establish domestic carbon removal markets. However, the bloc’s policy could separate the EU’s carbon offset market from the rest of the world, encouraging companies to source domestic rather than international offsets for compliance and voluntary purposes. 

4. Clean hydrogen: strong support through the NZIA 

The NZIA will streamline the permitting process for clean hydrogen projects, with strategically important projects given special priority. At the same time, sustainability and resilience criteria in the Act aim to boost EU manufacturers by discouraging non-EU procurement. 

Currently, the biggest challenge for the EU hydrogen sector is that stubbornly high costs are holding back growth. The target of 50 Mt of CO2 storage capacity by 2030 could help by accelerating cost reductions and driving CCUS infrastructure development, benefiting blue hydrogen. However, faster permitting will be of limited benefit while demand remains sluggish, while discouraging non-EU procurement could result in higher prices and actually constrain growth of the sector. 

5. Power sector: rapid electrification of transport and heating & cooling will be critical 

In our 2040 base case, we see 80% of power supply from renewables and 94% overall from zero-carbon sources, with power demand up to around 4,100 terawatt hours (TWh), compared to 2,700 TWh today. However, that’s considerably lower than the 4,600-5,200 TWh of supply estimated by the European Commission.  

The investment and change in consumer behaviour to transform energy demand will likely prove to be a much bigger test than the decarbonisation of supply. In parallel, to support the huge growth in market size, commercial arrangements, planning and permitting processes, infrastructure capacity, and flexibility resources must all ramp up at an unprecedented pace. 

6. Nuclear: new legislation gives SMRs a boost 

Proposed policy support including contracts for difference, concessionary financing and expedited permitting will support the deployment of nuclear small modular reactors (SMRs) in the EU. Initial project costs are around US$180/MWh, but we expect costs to fall 40% by 2030 as the industry scales. Clear technology licensing frameworks across Europe’s national nuclear regulatory bodies are also needed, while further investment in domestic uranium enrichment will be required. Together, these measures will help diversify Europe’s nuclear sector and de-risk dependence on Russian technology and uranium imports. 

7. Solar: achieving 40% domestic manufacture solar will be a tough challenge 

Despite installing 50 GW of solar capacity in 2023, the EU didn’t fully utilise its operational solar module manufacturing capacity of only 6 GW due to the dominance of cheap Chinese imports. Achieving the 40% domestic supply target in the NZIA will therefore be a significant challenge for the sector. New facilities take years to finance and build, so the bloc will need to rapidly create better conditions for domestic manufacturers and more clear guidance for investors.  

More positively, the NZIA’s updated auction criteria could help address a key factor limiting European solar growth: the lack of energy storage and transmission grid capacity. At least 30% of future auctioned capacity will be non-price related, and the integration of energy systems is specifically referred to. 

8. Offshore wind: changes to permitting and auction design to strengthen the sector 

Under our base case, the EU will meet only 63% of its ambitious 2030 offshore wind target. The NZIA’s streamlined permitting processes and changes to wind energy auction design are therefore much needed to give the sector a boost.  

The standard of participation in future auctions will be improved by legislating a more significant role for non-price pre-qualification criteria in selecting winners. Prerequisites will include local content, project deliverability, bidder competency, ecological mitigation and ESG. This will help reduce the risks and additional costs posed by uncapped negative bidding.

9. Onshore wind: streamlined permitting but no financial grants 

EU manufacturers were responsible for more than 90% of onshore wind installations in the bloc in 2023. However, the NZIA raises the prospect of domestic content levels deteriorating.  

The Act aims to lower the administrative burden and streamline the permitting process for onshore wind, while supporting best practices. It also provides a legal framework for national authorities to use to prioritise projects in the national interest. However, it offers no unique financial grants for onshore wind manufacturing. 

10. Batteries & raw materials: production targets will require EUR37 billion in capex 

To protect its EV sector from supply bottlenecks and third-party competition, the NZIA seeks 90% self-sufficiency for batteries and 40% for components by 2030. This is a tall order given its parallel ambition to ban new sales of petrol and diesel cars and vans from 2035. We estimate an additional capex requirement of EUR37 billion, with EUR31 billion needed for gigafactories alone. 

At the same time, in a bid to reduce dependence on China, the Act’s ‘resilience’ caveat enforces a 50% limit on battery raw materials sourced from a single non-EU. However, the EU’s future supply pain point could simply shift to the midstream, which isn’t explicitly covered by the parallel Critical Raw Materials Act either. Even with economic encouragements, new EU midstream material suppliers will face hurdles – not least a knowledge gap in value-added processing. 

Thanks to: Lindsey Entwistle (Energy Transition), Mhairidh Evans (CCUS), Nuomin Han (Carbon Markets), Greig Boulstridge (Power & Renewables), Peter Osbaldstone (Power & Renewables), David Brown (Energy Transition), Yana Hryshko (Solar Supply Chain), Juan Monge (Distributed Solar), Michelle Davis (Global Solar), Sasha Bond (Power & Renewables), Zoe Grainge (Power & Renewables), Max Reid (Electric Vehicles & Battery Supply Chain), Prateek Biswas(Transport & Materials) and Suzanne Shaw (Energy Transition & Battery Raw Materials).

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