Summary – Ten Key Challenges in EU Energy and Climate Policy for 2024-2029
1. Ensuring internationally competitive power prices for European industry and security of supply
The substantial expansion of renewable electricity supply, synchronized with grid and storage expansion, could drive down power prices in the long-term. However, short-term measures to bring down electricity costs remain essential for bridging the time period in between. Moreover, to ensure security of supply, the EU should develop a comprehensive flexibility strategy that goes beyond energy storage and demand response.
2. Providing the necessary infrastructure for a successful green transformation
The successful green transformation of the European economy hinges on the timely development of essential energy and CO2 infrastructure Rising carbon prices via the EU ETS and other EU decarbonization requirements will act as a punishment rather than an incentive for production facilities if the required (cross-border) infrastructure for low-carbon electricity, hydrogen, and CO2 transport is missing
3. Facilitating a swift and cost-effective ramp-up of the European hydrogen market
To scale-up domestic renewable hydrogen production, an increased budget for the European Hydrogen Bank is indispensable. However, renewable hydrogen alone will not suffice to meet industrial demand in the short term, and is projected to remain significantly more expensive than low-carbon (such as blue) H2 by 2030. Thus, to ensure a rapid and cost-effective ramp-up of the European hydrogen market, the role of low carbon hydrogen in meeting industrial demand must be strengthened at EU level.
4. Preventing carbon leakage by ensuring a real level playing field for CO2 costs
The new Carbon Border Adjustment Mechanism (CBAM) is characterized by numerous flaws and shortcomings that threaten to jeopardize the global competitiveness of European industry if left unaddressed. Consequently, abolishing this new instrument altogether and delaying the phase-out of free allowances until effective carbon leakage protection can be assured through other instruments must remain a fallback option if adequate solutions cannot be found quickly.
5. Incentivizing private investments in new production processes
Provide CAPEX and OPEX support (e.g. through Carbon Contracts for Difference) for climatefriendly production processes that will remain (much) more expensive than their fossil counterparts for the foreseeable future, even when considering rising carbon costs under the EU Emissions Trading System (ETS).
6. Creating green lead markets
The public sector should lead the way with green public procurement becoming a mandatory instrument across the EU, followed by additional incentives in EU product policy, to help ensure a reliable demand for low-carbon and climate neutral goods.
7. Strengthening the business case for clean tech manufacturing in Europe
An ‘Industry Decarbonization Deal’, recently proposed by the Commission, must include a thorough review of EU environmental legislation to ensure policy coherence across various regulations impacting (the duration of) Member States' permitting procedures. Moreover, it must fill the clean tech financing gap by incorporating a strategy to mobilize both public and private resources.
8. Enabling sustainable transport in a technology-open manner while safeguarding international competitiveness
Having set ambitious targets for climate protection in transport, the EU must now create the necessary framework conditions for the rapid introduction of alternative drive systems and carbon-neutral fuels (particularly with regard to the necessary charging and refueling infrastructure), introduce technology-open incentives for emission reductions, and safeguard the international competitiveness of aviation and maritime transport
9. Decarbonizing the building sector by reducing energy consumption and using innovative building technology
More progress is needed in the building sector to meet the EU’s net-zero trajectory Thus, the full and timely implementation of recently adopted legislation, including the ETS 2 and the Energy Performance of Buildings Directive, will be decisive Simultaneously, in anticipation of the forthcoming review in 2028/29, it should be thoroughly assessed whether separate ETS schemes for buildings and road transport might present a more suitable long-term solution, given the different CO2-avoidance costs within these sectors.
10. Promoting a European Circular Economy as a key enabler for industrial decarbonization
Establishing a circular economy offers a pathway to make products more sustainable along their entire life cycle, minimize waste, and reduce emissions while creating new business opportunities. Hence, the European model of a comprehensive circular economy must be further refined within the context of (international) climate policy.
1. Ensuring internationally competitive power prices for European industry and security of supply
While wholesale electricity prices have moderated from their peak levels experienced during the energy crisis, the reinforced competitiveness gap between the EU and third-country competitors such as China and the USA – which already existed before the crisis – is likely to endure.
By 2030, at least a small group of very power-intensive companies could approach competitive electricity prices again, but only if several conditions are met.1 These conditions comprise, on the one hand, the accelerated and synchronized expansion of renewable energies, power plants, and grids, in line with the EU’s ambitious targets. Otherwise, significant increases in electricity prices could arise due to shortages in power generation. On the other hand, the continuation of current derogations (electricity price compensation, reduced grid fees, etc.) under existing national regulations, backed-up by a well-functioning EU State aid framework, will be imperative.
For all other, less electricity-intensive companies, which currently do not qualify for the aforementioned relief measures, the competitiveness gap is expected to widen 2 Hence, as out-of-market costs will constitute a significant portion of total electricity costs in the EU's future energy landscape, it is necessary to contemplate a framework for sharing network costs among end-users, including an enhanced systematic evaluation of end-user vulnerabilities. This might entail broadening the scope of industrial sectors considered at (significant) risk of carbon leakage in Annex I of the current CEEAG3. Indeed, taking into account a broader set of criteria – such as CO2 pricing, energy costs, international competition, and contribution to the EU's strategic autonomy – could help mitigate the competitiveness challenges encountered by these companies by potentially rendering them eligible for reductions in levies on electricity consumption as outlined in Point 400 of the CEEAG. Moreover, simplifying and extending the electricity price compensation by amending Annex I of the ETS State Aid Guidelines to include additional sectors listed in Annex I of the CEEAG could reduce electricity costs and thus also provide an incentive for electrification In general, it remains crucial to distinguish between long-term actions, notably the substantial expansion of renewable electricity supply, synchronized with grid and storage expansion to drive down future prices, and short-term measures (primarily at national level), which remain essential for bridging the time period in between.
Finally, ensuring a stable and secure electricity supply is paramount for European industry. With the EU's power system expected to increasingly rely on intermittent renewable energy sources, it becomes crucial to introduce adequate flexibility measures. This does not merely encompass electricity storage and demand response, which were the primary focus during the recent overhaul of the Union’s electricity market design, but must also include securing adequate levels of dispatchable power generation. In the case of Germany, this entails the addition of more than 40 GW of new flexible ('H2ready') gas-fired power plants by 2030 4 However, the initial outline of the German Kraftwerksstrategie merely includes plans for 10 GW 5 Therefore, the EU should promptly develop a comprehensive flexibility strategy that goes beyond energy storage and demand response, based on the
1 These are the results of a recent study conducted for Germany on behalf of BDI, see BDI, BCG and IW (2023): 'Industrie unter Spannung: Deutsche Strompreise im internationalen Vergleich', p. 10
2 These are the results of a recent study conducted for Germany on behalf of BDI, see BDI, BCG and IW (2023): 'Industrie unter Spannung: Deutsche Strompreise im internationalen Vergleich', p. 10.
3 See Climate, Energy and Environmental Aid Guidelines (CEEAG) 2022
4 See BDI and BCG (2021): 'Climate Paths 2.0 - A Program for Climate and Germany's Future Development', p. 13.
5 See German Federal Government (2024): 'Kraftwerksstrategie für wasserstofffähige Kraftwerke'
fundamental principle that demand-side flexibility must be market-based, provided voluntarily, and remunerated appropriately.
2. Providing the necessary infrastructure for a successful green transformation
The successful green transformation of the European economy hinges on the timely development of essential energy and CO2 infrastructure. In fact, rising carbon prices via the ETS and other EU decarbonization requirements will act as a punishment rather than an incentive for production facilities if the required (cross-border) infrastructure for low-carbon electricity, hydrogen (H2) and CO2 transport is missing.
One overarching obstacle for cross-border projects is the insufficient public support to mitigate investment risks for private investors, who play a key role in advancing infrastructural projects. While the Connecting Europe Facility for Energy (CEF-E) offers some funding for cross-border infrastructure, it fundamentally lacks the capacity to facilitate the enormous private investments needed. One way to unlock additional funding would thus be to significantly expand Union programs such as CEF-E to kick-start investments in most urgently needed (cross-border) infrastructure projects now. Additionally, the Commission and EU Member States should increasingly initiate Important Projects of Common European Interest (IPCEIs), particularly for cross-border carbon value chain projects. In its recent Industrial Carbon Management Strategy, the Commission proposes to collaborate with Member States on a potential IPCEI for CO2 transport and storage infrastructure via the Joint European Forum for IPCEIs, which is a positive step that should be pursued promptly. To address the excessively lengthy IPCEI notification procedures, it seems appropriate to oblige the Commission to process applications within a limited timeframe. Finally, to ensure that infrastructure is scaled optimally and cost-effectively, there needs to be enhanced integrated planning among the gas, hydrogen, electricity, and CO2 sectors.
2.1 Electricity grids and storage
The revised Renewable Energy Directive (RED III) sets ambitious renewable energy targets for 2030, accompanied by several measures to promote the uptake of renewables such as the mandatory designation of dedicated acceleration areas, which must now be swiftly implemented at national level. However, to accommodate the anticipated larger proportion of variable renewable power and the significant rise in electricity demand, grids will have to be updated accordingly. This entails substantial expansions and reinforcements, both at transmission and distribution level. According to the latest (confirmed) version of the German Network Development Plan for 2023-2045, approximately 4,800 kilometers of new transmission lines and about 2,500 kilometers of existing connection reinforcements are required in Germany alone. The plan further shows how far behind schedule the necessary expansion of the transmission grid is, and that Germany is currently still far away from reaching the agreed-upon targets.
The expedited adjustment and expansion of grid infrastructure faces three main obstacles, which were all recognized by the Commission in its recently released Grid Action Plan, and urgently need to be addressed:
▪ Access to financing: The Commission estimates that investments totaling EUR 584 billion are needed for electricity grids (at both transmission and distribution levels) in this decade
alone,6 with investment needs expected to increase even further in the next decade. However, investments are currently not taking place at the necessary pace and magnitude, underscoring the need for instruments to frontload and de-risk private investments in long term infrastructure projects (incl. cross-border projects), as well as to facilitate access to private capital and EU funding. For cross-border investments in particular, a substantial increase in funding opportunities such as CEF-E is needed. Moreover, fragmented capital markets hinder the flow of private capital into infrastructure investments. To address this, the current momentum on integrating EU capital markets should be translated into swift action during the upcoming legislative term. Additionally, competitive regulatory returns are needed to make grid expansion attractive for such investments. However, it is important to note that this implies increased grid fees, including for industrial users, underscoring the need for a strategic and well-balanced cost-sharing framework.
▪ Permitting procedures: To ensure the rapid development of grid infrastructure, Member States should swiftly implement and make full use of the permitting acceleration provisions offered by RED III.
▪ Supply chains: Strengthening supply chains and bolstering their resilience to ensure timely deployment of grid infrastructure remains crucial. In this regard, the EU’s Net Zero Industry Act has taken an initial step by requiring pre-qualification criteria to be met concerning delivery reliability and timeliness. To enable a fast transformation of the energy system, the necessary components for grid expansion need to be available. This requires long-term planning and a ramp-up of additional production capacities from manufacturers. Coordinated efforts to achieve further standardization for strategic assets and common specifications can contribute to this, leading to more serial production where possible and providing benefits through economies of scale. At the same time, unfair trading practices that undermine EU resilience must be prevented. Additionally, resilience criteria, as outlined in the Net Zero Industry Act, must be implemented in a practical way to secure EU production capacity in strategic sectors and maximize value creation in Europe.
In addition to speed, enhanced coordination among EU Member States in planning grid infrastructure is essential to capitalize on cost-saving opportunities. For instance, increasing the physical transmission capacities between European countries leads to integrated markets, lower average wholesale power prices, and higher levels of price convergence. In this regard, the EU adopted the ’70 percent rule’ in 2019, 7 which will become fully applicable from 2026 onwards and according to which at least 70 percent of interconnection transmission capacity must be available for cross-border electricity trading. Yet, the EU’s Agency for the Cooperation of Energy Regulators (ACER) has recently warned that Member States still need to make significant additional efforts to be able to meet it 8 It is important to note, however, that the 70 percent rule as such neither leads to an optimal use of the grid as a whole, nor ensures non-discrimination. Coming closer to the target may reveal suboptimalities at system level, which need to be addressed accordingly.
Complementing the necessary grid updates, electricity storage will also play a vital role in stabilizing and optimizing the EU’s future power system. In fact, the use of batteries and other flexibility options9 can make a considerable contribution to the stability of distribution grids and overall system efficiency.
6 See Commission Communication (2023): 'Grids, the missing link - An EU Action Plan for Grids', p. 2.
7 See Art. 16(8) of Regulation (EU) 2019/943 on the internal market for electricity
8 See ACER Opinion 02/2024 'on the necessary developments for the fulfilment of the minimum cross-zonal capacity requirements
9 such as heat pumps, Battery Electric Vehicles (BEVs), and (‘H2-ready’) gas-fired power plants
In Germany alone, the use of large-scale battery storage has the potential to generate economic benefits of at least €12 billion by 2050 10 It is therefore essential to create a regulatory environment that encourages Member States to:
▪ remove market barriers that prevent electricity storage and other flexibility options from reaching their full potential, such as treating batteries as both consumer and producer, leading to double fees by default;
▪ enable electricity storage to participate in capacity markets on par with other flexibility options;
▪ set ambitious national electricity storage and flexibility targets that reflect the respective market;
▪ provide internationally competitive R&D funding programs in a holistic and coordinated manner.
2.2 H2 and CO2 transport infrastructure
A prerequisite for transporting H2 and CO2 across borders is the development of common standards. In fact, as markets for hydrogen and CO2 are still being developed, the need for a Union-wide set of rules is key to securing a strong Single Market and avoiding fragmentation resulting from varying national standards and definitions. While there has already been progress in this regard with the recent adoption of the hydrogen and decarbonized gas market package, a legislative framework for the (EUwide) transportation of CO2 is still missing. Hence, the next European Commission should come up with a proposal for a CO2 transport regulatory package, as foreseen in its Industrial Carbon Management Strategy, as soon as possible. Moreover, in line with the Commission’s strategy, the deployment of both CCU and CCS technologies must be adequately promoted. When discussing ways to create the right investment incentives for the urgently needed development of (new) hydrogen and CO2 pipelines, the financing model of the German H2 core network may serve as a useful reference point The Commission should push for rapid joint network planning, focusing particularly on network interconnection points. Furthermore, ensuring equal access to H2 and CO2 infrastructure for all companies, including SMEs operating in rural and landlocked areas outside of big industrial clusters, will be paramount.
3. Facilitating a swift and cost-effective ramp-up of the European hydrogen market
Industry, transport, and the energy sector are driving the demand for hydrogen and PtX-products. Europe will therefore need large volumes of renewable and low-carbon hydrogen at economically attractive cost to make the net-zero transition possible. As part of this effort, REPowerEU has set ambitious targets of ten million tons of domestic renewable hydrogen production and an additional ten million tons of renewable hydrogen imports by 2030. Consequently, the EU needs to accelerate investments in hydrogen production by enhancing and streamlining multiple overlapping efforts across the Union, and simultaneously secure the required import volumes.
One key financing instrument at Union level is the European Hydrogen Bank, which is designed to support the scale-up of the domestic renewable hydrogen production market, bridge the gap between supply and demand and, ultimately, facilitate and coordinate imports of renewable hydrogen into the
10 See Kyon Energy (2024): 'How expanding large-scale battery storage will reduce energy costs in Germany by 12 billion euros'
EU. Unfortunately, the H2 bank currently faces a lack of funding that hinders its ability to effectively fulfill its intended role. However, if Member States utilize the Hydrogen Bank and contribute individually to bridge the financing gap, it has the potential to become a game changer for the rampup of the renewable hydrogen market in Europe. That being said, renewable hydrogen alone will not suffice to meet industrial demand in the short term, and is projected to remain significantly more expensive than low-carbon (such as blue) hydrogen by 2030.11 Therefore, the latter needs to be better integrated into the EU policy framework, which first necessitates a swift adoption of the delegated act defining low-carbon fuels (covering H2 and H2 derivatives), as required by Article 9 of the revised Gas Directive. It will be vital for the forthcoming delegated act to establish a flexible set of criteria that facilitate the import and production of the required volumes of low-carbon H2. Following the evaluation of the Hydrogen Bank’s initial auction round, further changes to the auction design, such as prioritizing certain sectors, and establishing criteria to ensure a robust European electrolyser manufacturing value chain12 may prove necessary. Finally, given that H2 imports are indispensable for the EU to achieve its decarbonization goals, a swift presentation of an import strategy and inauguration of the anticipated international pillar for the European Hydrogen Bank (already announced by the Commission at its launch in 2022) are imperative.
RED III, adopted in October 2023, establishes a separate renewable hydrogen (RFNBO) target for the industrial sector. According to Article 22a of the revised Directive, Member States must ensure that the share of RFNBO of the total hydrogen consumption in industry is at least 42 percent by 2030 and 60 percent by 2035. From the perspective of German industry, it will be necessary to also use low-carbon (e.g. blue or turquoise) hydrogen until sufficient quantities of RFNBO will be available at competitive prices to meet the growing hydrogen demand. Thus, to ensure a rapid and cost-effective scale up of the European hydrogen market, the role of low carbon hydrogen in meeting industrial demand must be strengthened at EU level. This should include a targeted revision of the industrial RFNBO quota in RED III, so that additional use of low-carbon H2 is not (indirectly) penalized through an inflation of the denominator, which currently encompasses all forms of hydrogen, including low-carbon H2. In the meantime, it is crucial that Member States follow the intention of the Directive and implement the quota at national level instead of passing on responsibility and liability to individual companies. Such an entity-level approach, not mandated by RED III, would create further obstacles for the urgently needed ramp-up of the hydrogen economy. In fact, it would render investments in low-carbon hydrogen even less economically viable, possibly incentivizing companies to use natural gas much longer instead of switching to hydrogen. This, in turn, would impede the necessary scale up of the hydrogen economy and may eventually lead to carbon and investment leakage, further undermining the competitiveness of European industry. Similarly, following the Directive’s language suggests that the denominator should strictly cover hydrogen alone, excluding its derivatives (such as ammonia and methanol). Including derivatives in the denominator would substantially increase the RFNBO volumes needed to meet the industrial quota, further diminishing the feasibility of the latter
Finally, it should be noted that the RFNBO production criteria outlined in Delegated Act (EU) 2023/1184 (additionality, temporal and geographical correlation) are highly restrictive and could also potentially slow down the ramp-up of the hydrogen market. This particularly applies to the criterion of temporal correlation, which will require the electricity consumed by the electrolyser to be produced in the same hour as the hydrogen production from 2030 onwards.13 Hence, the Commission report prescribed by Article 27(6) of RED III, due no later than 1 July 2028 (and assessing the impact of the three criteria
11 See, for instance: TNO (2023): 'Effecten van een productiesubsidie voor elektrolysers' and BCG (2023): 'Turning the European Green Hydrogen Dream into Reality: A Call to Action' (2023).
12 in line with the goals of the Net Zero Industry Act.
13 Currently, the temporal correlation is four weeks.
on production costs, greenhouse gas emissions savings, and the energy system), should be presented as soon as possible. Moreover, the report should examine the ability of non-EU (exporting) countries to meet the additionality criteria for RFNBOs and their importance in satisfying the EU’s hydrogen demand. If needed, a differentiated approach for these non-EU countries could be considered for a transitional period (until they have adequate certification schemes in place). Similarly, Delegated Act (EU) 2023/1185 restricts international trade in hydrogen derivatives containing CO2 from industrial sources unless the producer country has an ‘effective carbon pricing system’ in place.14 As only a few countries outside the EU currently meet this criterion, the Commission must find a practical solution to eliminate this trade barrier during the market ramp-up phase to avoid delays in the decarbonization of hard-to-abate sectors such as aviation and maritime
4. Preventing carbon leakage by ensuring a real level playing field for CO2 costs
The EU ETS is a cornerstone of the Union’s decarbonization efforts and a key tool for reducing industrial greenhouse gas emissions15 in a cost-effective manner. Yet, in the absence of comparable carbon pricing schemes in other countries, especially the EU’s main trading partners, effective complementary measures are imperative to maintain the global competitiveness of European industry and prevent carbon leakage. To date, this has been accomplished through the allocation of free allowances, focusing on sectors facing a significant risk of carbon leakage due to intense international competition. However, free allowances are set to be gradually phased-out from 2026-2034 and replaced by a new Carbon Border Adjustment Mechanism (CBAM), covering iron, steel, cement, aluminum, hydrogen, fertilizers, and electricity.
The European Commission claims that the newly established CBAM will prevent carbon leakage just as effectively as the allocation of free allowances used so far, even though this is a completely new instrument and there is no experience to draw on. Even more importantly, the EU’s CBAM has several major shortcomings that threaten to jeopardize the global competitiveness of European industry if left unaddressed beyond the ongoing transitional phase:
1. No solution for exports: Industries exporting EU-produced goods outside the EU risk losing competitiveness in those markets due to higher costs This affects both CBAM-covered and noncovered sectors. For instance, EU-based car manufacturers may encounter elevated steel costs (via the ETS and/or CBAM) compared to competitors in third countries, who may choose to manufacture their cars with cheaper, locally produced steel with a much higher carbon intensity. Moreover, in many of the sectors covered by CBAM, exports make up a significant portion of overall production,16 making their continued viability crucial. In fact, the absence of a level playing field for exports not only affects the proportion of EU production being exported, but may also reduce capacity utilization Yet, maintaining a certain level of capacity utilization is essential for installations to remain economically viable. Furthermore, in terms of carbon intensity, EU exports often compare favorably to foreign production. Thus, a loss of market share for European producers in global markets could not only lead to job losses but also result in carbon leakage by increasing the average carbon intensity of goods consumed outside the EU, undermining the overarching goal of global decarbonization. This issue may be further exacerbated through ‘resource shuffling’: companies in third countries are incentivized to export the products with the
14 See Delegated Regulation (EU) 2023/1185, Annex A, Point 10(a).
15 And soon also from other sectors.
16 For instance, in 2020, the share of EU exports was around 17-18 percent in the fertilizers, iron and steel sectors, and more than 20 percent in the aluminum sector. See ERCST Report (2024) 'Review of Carbon Leakage Risks of CBAM Export Goods', p. 3.
lowest embedded emissions into the Union (to avoid or minimize CBAM costs) while retaining or expanding their CO2-intensive production at home.17
2. Lack of protection along the entire value chain: Since the CBAM only covers some (upstream) parts of the value chain, it induces shifts of imports along the value chain as a result, enabling circumvention through the import of downstream products. In fact, one (simple) additional production step would often be enough to circumvent the new mechanism The Commission must therefore urgently advance its analyses to extend the scope of application to prevent the relocation of value creation from the EU to third countries.18 Thereby, it is crucial to involve the affected companies, including the processing industry and relevant trade associations, at an early stage. However, a rushed scope extension along the value chain could result in an overwhelming bureaucratic burden for affected companies (see Point 3). Hence, any scope extension would have to be accompanied by a concerted effort to enhance internationally agreed-upon concepts for embedded emissions / Product Carbon Footprints (PCFs) and tools for information exchange.
3. Implementation issues and effective functioning: The effectiveness and efficiency of CBAM depend on adequate, realistic rules and procedures for authorities and businesses. These will need to emerge fast to enable compliance of importers that are sourcing from non-EU suppliers. To alleviate the enormous bureaucratic burden imposed on importers by the CBAM, it is indispensable to raise the de minimis threshold considerably, either as a value or weight limit 19 Moreover, a solution needs to be found for the specific situation of B2C20 e-commerce, as an individual consumer cannot be expected to become an authorized CBAM declarant, for instance for a box of specialized screws bought online. Furthermore, the possibility to use default values for the embedded emissions need to be prolonged and access to customs data facilitated. Many additional flaws and faults need to be rectified, and industries are working on feasible and realistic ideas to propose to the Commission during the ongoing transitional phase. This includes topics such as effective and unambiguous calculation methods that can be easily verified,21 as well as customs implementation and recognition of third-country carbon pricing systems. A major hazard could arise if, due to not or only ill-functioning CBAM rules, international value chains are disrupted. It is imperative to prevent this scenario as it would completely thwart the basic idea of promoting a more level playing field for EU producers.
The ideal solution for these shortcomings would be to establish a global level playing field, at least among the G-20 countries. Ideas such as the ‘Climate Club’, launched by Germany et al., could be a step in the right direction. However, even assuming the EU’s best efforts in advancing this goal, it cannot reasonably be expected to be achieved any time soon. Consequently, it is imperative to find alternative practical solutions to the aforementioned problems as soon as possible. Concrete proposals for an export solution, for instance, have already been discussed years ago22 and must urgently be reconsidered, given that the severe repercussions of inaction become increasingly evident. In fact, a recent ERCST report found that maintaining the status quo beyond 2030 would likely result in a complete loss of export markets for European iron, steel, and fertilizer producers, with cement and aluminum expected to follow similar trends.23 Additionally, it is key for the competitiveness
17 For instance, electric arc furnace (EAF) steel from third countries could be exported to the EU whilst blast furnace (BF) steel would be diverted to other markets. In this way, EU primary steel producers would be heavily affected by the free allocation phase-out and replaced by EAF steel importers that would avoid (or minimize) their CBAM costs.
18 Further processed steel-intensive products, which consist primarily of products already subject to CBAM, should, for instance, be included in the scope of application before 2026.
19 The UK, for instance, proposes GBP 10,000 for the UK CBAM to be introduced as of 2027.
20 Business-to-consumer.
21 Fraud connected e.g. with the rules on calculation methods has very negative consequences and must be prevented (cf. the recently uncovered sham where falsified upstream emission reductions had been sold and used for compliance with obligations under the Fuel Quality Directive).
22 See, for instance, ERCST Report (2022) 'Border Carbon Adjustment in the EU: Treatment of Exports in the CBAM'
23 See ERCST Report (2024) 'Review of Carbon Leakage Risks of CBAM Export Goods'
of industries listed in Annex I of the ETS State Aid Guidelines24 that CBAM continues to exclude the indirect emissions of those sectors eligible for indirect CO2-cost compensation within the EU ETS, and that the latter remains fully in force beyond 2030.
Recognizing the absence of straightforward solutions and the presence of (legal) challenges, it is evident that time is running out and swift action is essential to remedy the most pressing issues Otherwise, instead of proceeding with a highly flawed and overly bureaucratic CBAM that threatens to jeopardize European industrial competitiveness, the fallback scenario after the anticipated review in 2026 should involve abolishing the new mechanism altogether and delaying the phase-out of free allowances until effective carbon leakage protection can be assured through other instruments
Finally, with the introduction of ETS 2, not only the building and road transport sectors will soon be subject to carbon pricing, but also small industries not covered by the ETS 1. These small installations will also need adequate protection from significant carbon leakage risks, as they are exposed to international competition as well This is exemplified by the German Carbon Leakage Regulation (BECV), which currently helps mitigate these risks for small installations under the national emissions trading system (BEHG). Furthermore, given the ambitious Linear Reduction Factors in ETS 1 and ETS 2, it is evident that the allowance budget will be exhausted during the fifth trading period (post-2030). The inclusion of maritime transport into the ETS 1, discussions about a potential ‘ETS 3’ for agricultural emissions, uncertainties about future ETS 2 prices, and the need to develop carbon dioxide removal (CDR) technologies inter alia contribute to growing regulatory uncertainty for ETS participants. The recent Communication on the EU’s 2040 climate target and speculations about potential future cap trajectories have further increased the nervousness among installation operators. Therefore, it becomes increasingly critical for the Commission to develop and communicate realistic plans and timelines for further structural reforms of the ETS sooner rather than later In fact, to maintain the credibility of European climate policy and the ETS as its cornerstone, clarity beyond 2030 is urgently needed. Otherwise, the necessary private investments required to meet the goals of the Paris Agreement and the European Climate Law may not materialize in time.
5. Incentivizing private investments in new production processes
Decarbonizing European industry presents an unprecedented challenge, marked by numerous uncertainties, including (future) policy decisions, the trajectory of carbon pricing, and the pace of the indispensable infrastructure development These uncertainties, combined with the long-term nature of the required investments, make the latter inherently risky and thus costly.25 Moreover, new production processes for energy-intensive industries typically run on decarbonized fuels and reactants, which are and will remain (much) more expensive than their fossil counterparts for the foreseeable future, even when considering rising carbon costs under the EU ETS, leading to escalating operating expenses (OPEX) for climate friendly installations and technologies. Consequently, the recently published Letta Report rightly acknowledges that “[f]inancial instruments that support operational expenditures have demonstrated their effectiveness in accelerating market development and the adoption of clean energy solutions”. 26 In this context, the Report recommends establishing a dedicated ‘Clean Energy Deployment Fund’ to complement the EU Innovation Fund, which currently exclusively supports
24 See Commission Communication (2020): ‘Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowance trading post-2021’
25 The Commission estimates additional investment needs of €140 billion during the 2021-2030 period for the industrial sector, see Commission Communication (2022): 'Towards a green, digital and resilient economy: our European Growth Model', p. 5.
26 See Letta Report (2024): 'Much More Than a Market', p. 67.
innovative flagship and ‘first-of-a-kind’ projects.27 Designing such a dedicated EU fund, encompassing both capital expenditures (CAPEX) and OPEX support, could indeed be a potential instrument to complement necessary State aid measures while mitigating internal market distortions. However, it would also likely require Member States to provide additional resources as part of the next Multiannual Financial Framework.
One effective tool for incentivizing private investments in new production processes is a Carbon Contract for Difference (CCfD), which is a reliable long-term collaboration between companies and governments to produce certain basic materials in a climate-neutral or less carbon-intensive manner. CCfDs encompass CAPEX and OPEX support, which is provided based on the difference between the costs of conventional (carbon-intensive) and sustainable production. CCfDs aim to incentivize the reduction of CO2 emissions, with the strike price for the contract conditioned on the CO2 price in the EU ETS, allowing for adjustments based on market conditions. A practical example is the tender process for German Klimaschutzverträge, which has recently started and for which the Commission approved four billion euros in State aid for the first round in February 2024. In its reasoning, the Commission acknowledged that the beneficiaries of these contracts “would not carry out the investments in decarbonization to the same extent without the public support”.28 Hence, if it is clear that certain investments will not take place in Europe within the (rather short) politically desired time frame without public support, the necessary resources should be provided in a swift and pragmatic manner This may involve establishing a dedicated EU fund and/or quickly approving relevant State aid measures. Otherwise, there is a high probability that production will be shifted to other countries, leading to carbon leakage and increased dependence on third countries to meet the EU's domestic needs for essential basic materials.
6. Creating green lead markets
While de-risking instruments such as CCfDs can contribute to incentivizing the deployment of climatefriendly production methods, thus enhancing the supply of green products, the demand for these lowcarbon or climate-neutral goods needs to increase accordingly. Establishing green lead markets begins with the labeling of green basic materials, necessitating a precise definition of what qualifies as 'green’. It is therefore crucial to advance this work promptly at EU level in close coordination with the relevant stakeholders. A positive example from Germany is the labeling system for CO2-reduced steel that was recently developed by the German steel association (WV Stahl) and the Federal Ministry for Economic Affairs and Climate Protection (Low Emission Steel Standard, LESS)29 and is set to be implemented during 2024. This initiative could lay the groundwork for a broader EU-wide labeling system that is both transparent and non-discriminatory, in line with WTO requirements.
However, even if green products are clearly and reliably labeled as such, a significant portion of consumers is still hesitant to pay 'green premiums' because, for instance, steel produced with (renewable) hydrogen does not differ from steel produced with coke. Hence, additional efforts are required to create markets for such goods Alongside product-specific sustainability requirements such as those to be developed under the Ecodesign for Sustainable Products Regulation (ESPR), public procurement30 should lead the way stimulating demand for green products The European Commission
27 The total funding requested during the Innovation Fund’s 2023 call for proposals (€24.6 billion) surpassed the available budget of €4 billion by over six times.
28 See EC Press Release (2024): 'Commission approves €4 billion German State aid scheme ... to help industries decarbonise production processes'
29 See WV Stahl (2024): 'LESS – Low Emission Steel Standard'
30 which represents around 15 percent of EU GDP
already outlined a common approach to ‘Green Public Procurement’ (GPP) in its 2008 Communication,31 where it is defined as "a process whereby public authorities seek to procure goods, services and works with a reduced environmental impact throughout their life cycle when compared to [alternatives] with the same primary function that would otherwise be procured."32 Unfortunately, the application of GPP in the EU is still largely voluntary,33 resulting in less than five percent of public tenders subject to Commission notification applying GPP criteria from 2006 to 2017.34 To substantially increase that share, introducing an EU-wide Green Public Procurement obligation for public tenders in all relevant sectors will be necessary.35 However, as life-cycle calculations rely on numerous input factors and the availability of robust data remains a challenge, a pragmatic approach is necessary to avoid overburdening companies, especially SMEs.36 EU product policy can play an important role by harmonizing data and information requirements, establishing labeling schemes, and incentivizing the uptake of low-emission products and materials (such as through the ESPR or the proposed Construction Products Regulation37).
7. Strengthening the business case for clean tech manufacturing in Europe
In its Communication on the EU’s climate target for 2040, the European Commission stresses the need for an ‘Industry Decarbonization Deal’, aiming for “a firmer and renewed European agenda for sustainable industry and competitiveness”, which complements the European Green Deal and builds on the Commission’s Green Deal Industrial Plan (GDIP).38 An essential part of the GDIP was the Net Zero Industry Act (NZIA), aimed at ensuring reliable access to net-zero technologies by significantly expanding the EU’s domestic manufacturing capacities. However, its potential impact in Germany is hampered by the absence of supplementary funding and the incapacity to effectively accelerate permitting procedures due to inconsistency with other legislative initiatives.
Regarding the acceleration of permitting procedures, the foreseen deadlines under the NZIA exceed those already prescribed by existing German legislation. 39 However, the underlying issue is that formal deadlines are rarely met because procedures are overloaded with substantive requirements stemming (primarily) from EU environmental law. Hence, there is an inherent contradiction in further tightening environmental legislation, such as through revisions of the Industrial Emissions and Ambient Air Quality Directives, while simultaneously expecting overloaded authorities to examine the resulting additional requirements within shorter timeframes. Moreover, it must be kept in mind that a significant portion of the workload falls on companies, which need to prepare all necessary documents before even formally requesting a permit – a burden that can likewise only be alleviated through overall simplification and the reduction of substantive requirements. An Industry Decarbonization Deal should therefore adopt a more holistic approach, including a thorough review of EU environmental legislation to ensure
31 See Commission Communication (2008): 'Public procurement for a better environment'
32 See Commission Communication (2008) 'Public procurement for a better environment', p.4.
33 For specific net-zero technologies, the Net Zero Industry Act has already introduced ‘minimum mandatory requirements regarding environmental sustainability’, which are yet to be further defined as part of an implementing act.
34 See EconPol Europe Policy Report (2024) 'Watts Next: Securing Europe’s Energy and Competitiveness', p. 52
35 Which may involve amendments to the Public Procurement Directives 2014/24/EU and 2014/25/EU
36 For example, a so-called ‘cradle-to-gate approach’ would ensure that companies do not need to access downstream application data (in the form of credible, so-called primary data) to which usually no straightforward approach is available.
37 See Proposal for a Regulation 'laying down harmonised conditions for the marketing of construction products'
38 See Commission Communication (2024): 'Securing our future - Europe's 2040 climate target and path to climate neutrality by 2050', p. 14.
39 See Bundesimmissionsschutzgesetz (BlmSchG)
policy coherence across various regulations impacting (the duration of) Member States' permitting procedures
With regard to funding, the Commission’s initial plan was to utilize the Strategic Technologies for Europe Platform (STEP) to support clean tech projects under the NZIA by reallocating funds from existing Union programs and supplementing them with an additional €10 billion, with the aim of facilitating €160 billion in combined public and private investments. While the European Parliament (EP) proposed to even increase the extra STEP funding to €13 billion, it was eventually diminished to just €1.5 billion, entirely earmarked for defense-related spending. At the same time, any mention of allocating a portion of national ETS revenues to support the NZIA's objectives, as suggested by the EP, was omitted in the final version of the law. When looking at the EU’s international competitors, it is noteworthy that while China remains the frontrunner in cleantech investments, accounting for nearly half of the global total in 2022,40 other major economies are striving to catch up. For instance, the US Inflation Reduction Act (IRA) is projected to unlock around $1.2 trillion of cleantech incentives by 2032.41 Hence, to level the global playing field, an Industry Decarbonization Deal must fill the financing gap by incorporating a strategy to mobilize both public and private resources, encompassing the following measures:
1. Catalyzing private investment and unleashing institutional capital:
▪ Cleantech companies require access to affordable debt instruments to build up manufacturing capacity. Hence, in line with the Letta Report, the European Commission and the European Investment Bank (EIB) should introduce a European Green Guarantee (EGG), an EU-wide initiative offering guarantees to support bank loans for green projects and enterprises. Under this scheme, the EIB would evaluate proposals from commercial banks or national financial institutions and issue guarantees accordingly, thus offsetting the inherent lending risks associated with green ventures.42
▪ In 2021, EU pension funds allocated less than 0.018 percent of their total assets to venture funds, whereas US public pension funds invested 1.9 percent – a difference of 100 times.43 To address this and other similar disparities, EU institutions should finally take resolute action to fundamentally deepen the integration of financial markets by realizing the Banking Union and the Capital Markets Union. Moreover, it might be necessary to reassess EU prudential rules to facilitate the participation of institutional investors (including commercial banks, pension funds, and insurance companies) in financing cleantech manufacturing in Europe.
2. Increasing public funding:
▪ To adapt to the evolving geopolitical landscape and maintain a competitive edge globally, Member States should at least have the tools to offer investment support that matches the incentives available to clean tech manufacturers for equivalent investments in third countries such as China and the US Therefore, key provisions of the Temporary Crisis and Transition Framework, such as aid for ‘investments in sectors strategic for the transition towards a net-zero economy’,44 should be extended beyond 2025 or integrated into regular State aid rules Additionally, as originally proposed by the Commission and the European Parliament, STEP should be equipped with additional resources exclusively dedicated to achieving the NZIA targets and supporting clean tech manufacturing in the EU in a technology-neutral manner. While this would mitigate potential internal market distortions arising from exclusive reliance on State aid, it would also require Member States to provide
40 See BloombergNEF (2023) 'Global Low-Carbon Energy Technology Investment Surges Past $1 Trillion for the First Time'
41 See Goldman Sachs (2023): 'The US is Poised for an Energy Revolution'
42 See Letta Report (2024): 'Much More Than a Market', p. 31.
43 See Cleantech for Europe Report (2024): 'A Cleantech Investment Plan for European Competitiveness', pp. 8f.
44 See Commission Communication (2023): 'Temporary Crisis and Transition Framework for State Aid measures' , Point 2.8.
the necessary financial resources, which should be kept in mind during the upcoming negotiations for the EU’s next Multiannual Financial Framework
8. Enabling sustainable transport in a technology-open manner while safeguarding international competitiveness
The transport sector creates jobs and prosperity, provides mobility for goods and people, and ensures an internationally connected and sovereign Europe. At the same time, transport plays a key role in achieving the EU’s climate protection targets. European industry is therefore investing in climatefriendly transport solutions and business operations such as innovative drive systems, carbon-neutral fuels, and sustainable transport services. However, having set ambitious targets, the EU now has the responsibility to adequately support the transport sector on the path to climate neutrality This implies creating the necessary framework conditions for the rapid introduction of alternative drive systems and carbon-neutral fuels (particularly with regard to the required charging and refueling infrastructure), introducing technology-open incentives for emission reductions, and safeguarding the international competitiveness of aviation and maritime transport. In the upcoming policy cycle, the EU should therefore set the following priorities:
▪ Monitor and evaluate the implementation and impact of the 'Fit for 55' package on transport. If needed, use available review clauses to ensure coherence across different dossiers, prevent carbon leakage and mitigate negative impacts on international competitiveness in aviation and maritime transport while ensuring the achievement of the EU’s climate protection targets
▪ Strengthen the reliability and efficiency of Europe's transport infrastructure by providing adequate funding, ensuring attractive options for combined transport, completing the TransEuropean Transport Network (TEN-T) in a timely manner, and advancing the comprehensive, demand-driven development of refueling and charging infrastructure across the EU.
▪ Decarbonize all modes of transport through tailored incentives in combination with a demand-driven and long-term financing framework for the transformation, particularly for the rapid deployment of charging and refueling infrastructure, alternative drive systems, and the uplift of carbon-neutral fuels for all modes of transport.
▪ Expand cooperation with PtL-producing countries through energy partnerships and the establishment of international markets for RFNBO and CO2, along with the establishment of efficient transport infrastructures to facilitate the import and distribution of renewable fuels Additionally, trade barriers should be removed, regulatory frameworks harmonized, and flexible uptake mechanisms such as Book & Claim promoted.
▪ Create a global level playing field for international transport through initiatives for internationally harmonized climate protection regulations and the introduction of instruments for the competition-neutral financing of sustainable fuels to prevent distortions of competition and carbon leakage. In aviation, for instance, the introduction of a European, final destinationbased levy represents an opportunity to finance the ramp-up of sustainable aviation fuels.
▪ Continue European programs for research and development for the mobility sector (such as Horizon Europe) with robust funding
▪ Implement technology openness as a guiding principle for sustainability in transport.
▪ Make consistent use of digitalization potentials in the mobility sector.
The BDI Priority Paper 'Transport' outlines more detailed recommendations.
9. Decarbonizing the building sector by reducing energy consumption and using innovative building technology
35 percent of energy related greenhouse gas emissions and 42 percent of final energy consumption in the EU stem from buildings,45 which is why the decarbonization of the building sector, combined with a sustainable reduction in energy consumption, is key to achieving the EU's climate neutrality goal. However, more progress is needed to meet the EU’s net-zero trajectory 46 Therefore, the full and timely implementation of recently adopted legislation, including the ETS 2 for buildings and road transport and the Energy Performance of Buildings Directive (EPBD), will be crucial. Simultaneously, in anticipation of the forthcoming review in 2028/29,47 it should be thoroughly assessed whether separate ETS schemes for buildings and road transport might present a more suitable long-term solution, given the different CO2-avoidance costs within these sectors.
Looking back, remarkable progress has already been made at EU level. In 2020, the Commission announced its goal to launch a renovation wave across the EU to achieve the required doubling of the energy renovation rate. In this context, there are three central levers that must be used holistically to make buildings both energy-efficient and CO2-neutral: Decarbonizing the heating system through electrification and the use of low-carbon fuels, ensuring appropriate insulation of buildings, and utilizing innovative building technologies. The adoption of the EPBD in April 2024 has further established a crucial foundation for advancing energy efficiency and lowering carbon emissions. Moreover, the implementation of the ETS 2, scheduled to commence in 2027, is expected to drive further reductions in energy consumption and CO2 emissions in the building sector.
Prioritizing the so-called ‘worst performing buildings’ (WPBs), as envisaged in the new EPBD, is the right starting point, as these buildings are responsible for a significant portion of the sector’s CO2 emissions. Moreover, the introduction of minimum energy efficiency performance standards for nonresidential WPBs is a necessary step. With increasing electrification of heat, for example through heat pumps, new questions of flexibility and digitalization arise for the power system, and buildings will take on a new role as both electricity storage and producers. Therefore, the timely roll-out of Smart Readiness Indicators to identify potentials for more energy and network efficiency is essential. Furthermore, it is important that Member States define suitable instruments to be able to reduce the average energy consumption of the residential building stock by 16 percent by 2030 and 2022 percent by 2035, as required. The European Commission must take on the core responsibility of closely and transparently monitoring the swift implementation of these EPBD measures at national level.
To facilitate these significant modernizations of both residential and non-residential building stocks, an appropriate financing environment is needed, 48 one that also leverages the potential of private capital.49 However, today’s EU Taxonomy does not yet steer capital flows towards WPBs, hindering the great potential for CO2-reduction in this building segment. Aligning the Taxonomy with the most recent EPBD-recast will therefore be an important step towards accelerating investment in refurbishments and advancing the decarbonization of the building sector.
Finally, the ongoing evolution of the EPBD, the ETS 2, as well as the Energy Efficiency Directive must be geared towards advancing the efficiency and sustainability of buildings. Moreover, active
45 See Commission Communication (2024): 'Securing our future - Europe's 2040 climate target and path to climate neutrality by 2050', p. 13.
46 See Impact Assessment Report (2024) Part 1 - Accompanying Commission Communication (2024): 'Securing our futureEurope's 2040 climate target and path to climate neutrality by 2050', p. 12.
47 See Articles 30i and 30k(2)(e) of Directive (EU) 2023/959
48 See Impact Assessment Report (2024) Part 1 - Accompanying Commission Communication (2024): 'Securing our futureEurope's 2040 climate target and path to climate neutrality by 2050', pp. 18f.
49 See Commission Communication (2020): 'A Renovation Wave for Europe - greening our buildings, creating jobs, improving lives', pp. 11f
engagement of citizens and businesses remains essential to ensure widespread acceptance and effective implementation of these measures.
10. Promoting a European Circular Economy as a key enabler for industrial decarbonization
Despite the multitude of remaining challenges, the transition to a climate-neutral economy also presents several opportunities for industrial innovation and growth. Notably, establishing a circular economy offers a pathway to make products more sustainable along their entire life cycle, minimize waste, and reduce emissions while creating new business opportunities. In fact, by rethinking traditional linear models of production and consumption, industries can optimize resource use, extend product lifecycles, and enhance overall efficiency. This, in turn, may lead to lower production costs and increased resilience against resource scarcity and price volatility.
Extending the lifespan of products and materials and utilizing recycled or by-product materials in circular systems already helps to reduce greenhouse gas emissions. The same applies to raw materials from biomass and, in the future, to the use of other alternative raw materials such as CO2. Measures for circular value creation are implemented at various stages of design, processing, production, distribution, (re-)use, repair, upgrade, and recycling processes. For instance, reuse, repair, and recycling each have effects on reducing greenhouse gas emissions at different points in the value chain. However, there is currently no internationally unified understanding of how such measures and impacts can systematically be integrated into the climate balances of States and companies Furthermore, in many Member States, large quantities of municipal waste are still landfilled without being used either materially or energetically beforehand. This presents significant potential for further reducing greenhouse gas emissions through waste treatment. By ending the landfilling of organic waste, more raw materials can be recovered for the cycle, and the energy content of non-recyclable waste can be utilized as a component of local energy supply.
It is therefore important that fostering a circular economy remains a central focus of EU lawmakers, which should involve continuing to harmonize (national) legislation and create marketbased incentives within EU funding programs and State aid policies. At the same time, there is a need to further refine the European model of a comprehensive circular economy within the context of (international) climate policy
Imprint
Federation of German Industries (BDI)
Breite Straße 29, 10178 Berlin www.bdi.eu
T: +49 30 2028-0
Lobby registration number: R000534
EU Transparency Register: 1771817758-48
Editor
Mr Jonas Wilden
Senior Manager EU Energy and Climate Policy
T: +32 27921004 j.wilden@bdi.eu
BDI Document number: D 1942
