The term energy transition refers to the shift from current energy production and consumption systems, relying primarily on fossil-based energy sources such as oil, natural gas, and coal, to a system with lower greenhouse gas emissions. Typically, such systems are based on renewable energy sources, such as wind, photovoltaics, or hydropower.
Energy transitions are nothing new. The energy mix has been transformed several times in the past: First by the introduction of coal in the mid-19th century, then by oil in the mid-20th century, and nuclear power in the 1970s. Although these new forms of energy added to, rather than replaced, existing sources. The energy transition we are talking about today aims at substituting non-renewable energy sources by renewable ones. In this sense, the challenge is unprecedented.
Why is the energy transition important?
Luxembourg is one of almost 200 countries that signed the 2015 Paris Agreement. The country committed to determined efforts to limit the world’s average warming to well below two degrees centigrade compared to pre-industrial levels, and making efforts to limit it to 1.5 degrees.
The United Nation’s Intergovernmental Panel on Climate Change (IPCC), concluded that limiting the increase to 1.5 degrees centigrade would significantly reduce the risks and impacts of climate change. It would mean less exposure to extreme weather events, fewer water shortages, and less crop yield reductions. Countries around the world, however, would need to reach net-zero CO2 emissions by around 2050.
On the way to 2050, the EU has set its Member States three key targets to be reached already in 2030; those objectives must be reached by the EU as a whole:
– At least 32.5 percent improvement in energy efficiency;
– At least 30 percent cuts in greenhouse gas emissions, compared to 2005;
– At least 32 percent share for renewable energy in the consumed energy mix;
It furthermore adopted rules of the EU Emissions Trading System (EU ETS) seeking to increase the price of emissions permits for energy-intensive industries.
Today, Europe is a frontrunner in climate actions, actions that bear their fruits. The International Energy Agency (IEA) reports that while Europe’s economy expanded by 1.8 percent in 2018, its energy demand increased by only 0.2 percent. On a global scale, the economic expansion in 2018 was at 3.7 percent, but the additional energy it consumed for this increase was at 2.3 percent. In this comparison, Europe’s growth was almost six times more efficient than elsewhere. China, India and the United States together accounted for nearly 70 percent of the rise in energy demand. This is due to Europe’s more mature economy, at least compared to the mentioned Asian countries, but undoubtedly also due to its climate efforts.
Nevertheless, global CO2 emissions increased by further 1.7 percent in 2018, hitting a new record high. While the EU’s successful climate policy must be acknowledged, it is the absence of a global level playing field, between the EU and its principal business partners such as the US, China, Japan, or India that represent one of the biggest challenges for the local industries. The EU’s ambitious climate actions are not equally responded to by its business partners, which inflicts unilateral climate-related constraints and costs to EU’s businesses. This is weighing heavily on the global economic competitiveness of EU’s energy intensive industries.
Luxembourg’s climate objectives
Luxembourg’s and all other EU member states’ climate objectives are defined by the European
Commission. EU’s global objectives, as described above, are broken down to each member state according to its situation and its capacity to take actions. The capacity to act is tied to the gross domestic product (GDP) per capita of each Member State. As such, Luxembourg has been attributed the most ambitious target value to be reached by 2030:
– The EU’s objective for Luxembourg is to reduce emissions by 40 percent, and while this objective puts the country already in the top position in sharing this effort, Luxembourg further intends to set even higher goals at
-50 percent or even -55 percent.
– In energy efficiency, the EU’s objectives for Luxembourg require a reduction by 32,5 percent compared to a fixed baseline, called Primes 2007; Luxembourg is discussing to set its goals at -40 to -44 percent.
– The share of renewable energy in the consumed energy mix shall be at 23 to 25 percent.
Luxembourg has defined those objectives as well as a draft about how to reach them in its National Energy and Climate Plan (NECP). All EU countries are required to draft ten-year NECPs for 2021-2030, outlining how they intend to meet the 2030 climate targets. The final plans must be submitted to the European Commission by 31st December, 2019.
Challenges for Luxembourg’s Industry
Fedil – The Voice of Luxembourg’s Industry, together with its members, is ready to engage in the debate to contribute to mitigating climate change. Already today, we see that more and more companies have either already made significant investments in low-emission technologies or have announced to do so in the coming years.
Here are some sector achievements on energy and climate actions:
– Luxembourg’s industry has reduced its CO2 emissions by almost 45 percent between 2006 and 2016.
– The 50 most energy-intensive companies of Luxembourg have increased their energy efficiency by 20 percent between 1990 – the year of reference – and 2010 thanks to the voluntary agreement negotiated by Fedil, and they have further agreed to improve energy efficiency by seven percent on average between 2017 and 20201.
While these are remarkable climate actions, from a business perspective, such actions must always go hand in hand with economic competitiveness. In other words, climate actions need to make business sense. As simple and obvious as this may sound, the energy transition bears many non-trivial challenges for the industry. We chose to describe three of the most important ones here,
For many energy-intensive industrial processes, low-CO2 emitting production technologies are still pre-mature or only exist at the laboratory scale. For steel, glass, aluminium or cement production, all of which are implemented in Luxembourg, there are only a few proven alternative low-CO2 emitting production processes. Most of them are still far from being exploitable at an industrial scale and at affordable costs. The industry is intensively working on elaborating alternative technologies, and political climate actions must make sure to support those efforts.
It must be avoided that climate regulations tighten at such a pace that energy-intensive industries are forced out of business while trying to comply. After all, their contribution to a successful energy transition must not be underestimated; they supply the primary materials necessary for a successful energy transition. Wind turbines, solar panels, hydropower generators, low energy buildings and electric vehicles all rely on steel, glass, aluminium, or cement. To keep those essential industries alive in the EU, the CO2 reduction trajectories set for those industries by the EU ETS must align with feasible performance improvement potentials of critical production processes.
Low-carbon transition strategies, as described in the National Energy and Climate Plans (NECPs), must be backed by equally ambitious trade protection and investment strategies.
Trade protection strategies
The impact of climate regulations on trade issues may not be apparent, but it is highly sensitive indeed. Energy-intensive industries as the ones described in the previous paragraph are often multinational and globally operating organisations. They compete in many different international markets with different legislations and climate regulations. For example, steel produced in the EU is sold on markets around the world. Hence it also competes with steel offered from around the world, such as from India, China, the United States or Japan. All the latter countries have less stringent climate regulations than the EU which makes their steel less expensive to produce. Without trade protection, climate regulations tend to erode the EU steel products’ competitiveness in the global markets.
One protection approach, recently suggested by Ursula von der Leyen, the EU Commission’s next President, may be through border adjustment taxes, also referred to as carbon taxes. There are different concepts of border adjustment tax (BAT). The tax is either levied at the import of emission-intensive products manufactured outside the EU in a country that hasn’t signed up to the Paris Agreement, or at the moment it is further transformed to be used in a next product. At the same time, a BAT approach also subsidises exports from EU producers to “non-Paris-compliant” countries to compensate for EU producers’ additional climate regulations related costs, such as EU ETS and other constraints.
Investment strategies
CO2 reduction efforts in energy-intensive industries often represent significant investments, investments into research and development and investments in new operating infrastructure. Since investment cycles in these sectors vary between 15 and 30 years, the investment decisions of the coming years determine the company’s situation for the 2040-2050 deadlines, where the EU wishes to be carbon neutral. Such investments can hardly be justified if no clear business case is in sight. In addition to the industries directly exposed to the climate agenda, there are also the technology companies who develop and supply the solutions. They are reticent to commit to new and costly technology development as long the future of their customers is unclear.
Policymakers who are serious about climate change mitigation must, therefore, act rapidly and come up with strategies that give investors the security they are looking for to reinvest in the EU. Investments deviated outside of the EU, harm twofold: economically and ecologically. Economically due to the lost business opportunity for the EU, and ecologically because the investment is most likely going towards a region of the world with less stringent climate regulations and thus causing higher levels of pollution.
Luxembourg’s NECP plans to accelerate the deployment of renewable energy (RE) dramatically and to increase its share within the country’s energy mix. Compared to 2016, it intends to increase the national wind energy production by over five times and solar energy production by over ten times until 2030. Across all renewable electricity generation technologies, the National Energy and Climate Plan (NECP) targets a share of 33.6 percent of renewable electricity in the final electricity mix of 2030. This represents a fivefold increase compared to 2016.
Fedil stands behind the government’s ambitions to accelerate the deployment of RE and to increase the share of renewable electricity in the overall power mix. Accessible low-carbon electric power represents a fundamental prerequisite to allow businesses to comply with ever stringent climate policies focused on decarbonising the economy. It is safe to assume that significant decarbonisation efforts will rely on the electrification of industrial processes or their switch to low-carbon e-fuels. Furthermore, the increasing digitalisation across all business sectors, as well as the electrification of the transport and mobility sectors, will massively drive demand for low-carbon electricity. Consequently, the whole economy’s need for low-carbon power will increase, and it will do so across a broad spectrum of sectors, surpassing the ones identified today as electricity-intensive. As such, the ability to offer low-carbon, competitively priced electric power will become a factor for Luxembourg’s economic attractivity in the future.
This offer can most probably not be delivered by local renewable energy production only. Policymakers must, therefore, rapidly start looking for solutions to further integrate the internal energy market and to strike long-term cross-border renewable power purchase deals.
Doomed to succeed
It must be the ambition of national and European climate policies to create framework conditions and attractive, long-term investment perspectives to motivate businesses to continue doing business from Europe while reducing emissions. The following figures demonstrate straightforwardly the global economic and ecologic benefits of a healthy and export-oriented EU economy: Between 2012 and 2015 EU exports in clean energy technologies worth 71 billion euros were realised, creating a trade surplus of 11 billion. Furthermore, according to the European Commission’s 2050 Long-Term Strategy, the EU’s exports between 1995 and 2016 have helped the world save around 200 million tonnes of CO2 compared to if the EU’s exports had been produced locally in the importing countries.
This shows that the industry stays one of the most significant contributors to make the energy transition a success. The key, therefore, is to realise the transition together with the industry and to make sure that Luxembourg remains attractive for the industry to continue doing business from here.
If we want to make a difference, we need to successfully demonstrate to emerging countries, whose energy consumption and emissions are still increasing, that the energy transition can be successfully realised while keeping the industry in business. Any other outcome would largely overshadow the success of the EU’s climate policy, thus discouraging emerging economies to follow the path of climate change mitigation.
Fedil’s role
Fedil has initiated three project-groups to work with its members on the issues of CO2 reduction, energy efficiency, and renewable energies. These project-groups assess how the different sectors of the industry are exposed to energy and climate policies, how technological developments deal with them, and what their impacts are on doing business in Luxembourg. The project groups are synchronised with the political agendas of national and EU climate actions. They make Fedil an informed partner to discuss positions on behalf of its members with the government, to make recommendations about the risks and opportunities of the energy transition.
The ultimate goal is to support policymakers in successfully realising the energy transition while working on climate actions that make business sense.