EU Climate Ambition: Falling Short of Long-term Targets?

Abstract

The EU is divided over whether to make changes to its climate targets following the Paris Agreement. According to the European Commission, the EU’s target to cut emissions by at least 40 percent by 2030, approved prior to the Paris COP, is in line with the Paris Agreement. This is because, the Commission states, the 40 percent target places the EU on track for an 80 percent reduction by 2050, which the EU has defined as its domestic contribution to the 2°C goal. However, we find that the 40 percent target keeps the EU off track towards its 80 percent target. Moreover, we note that the post-2020 EU ETS legislation proposed by the Commission puts off efforts to reduce emissions and relies on uncertain technological improvements to help the EU deliver its 80 percent target. These findings call into question the credibility of EU’s plan to deliver on its contribution to the 2°C goal.

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WHITE PAPER
EU Climate Ambition: Falling Short of
Long-term Targets?
The EU is divided over whether to make changes to its
climate targets following the Paris Agreement. According
to the European Commission, the EU’s target to cut
emissions by at least 40 percent by 2030, approved prior
to the Paris COP, is in line with the Paris Agreement.
This is because, the Commission states, the 40 percent
target places the EU on track for an 80 percent reduction
by 2050, which the EU has defined as its domestic
contribution to the 2°C goal. However, we find that the
40 percent target keeps the EU off track towards its 80
percent target. Moreover, we note that the post-2020
EU ETS legislation proposed by the Commission puts
off efforts to reduce emissions and relies on uncertain
technological improvements to help the EU deliver its
80 percent target. These findings call into question the
credibility of EU’s plan to deliver on its contribution to the
2°C goal.
TO THE POINT CONTENTS
2 Introduction
2 Short, medium and long-term
targets
3 Is the annual reduction factor
consistenet with EU’s 2050
target?
4 Is the EU on a cost-effective
track towards its 2050 target?
5 Conclusions
6 Colophone
Authors:
Emil Dimantchev
Senior Analyst
emil.dimantchev@thomsonreuters.com
Stig Schjølset
Head of carbon analysis
stig.schjolset@thomsonreuters.com

EU Climate Ambition: Falling Short
of Long-term Targets?
Introduction
The Paris Agreement commits signatories to the aspirational
goal of keeping global warming to “well below 2 °C above
preindustrial levels and pursuing efforts to limit the temperature
increase to 1.5 °C.” The agreement has prompted the EU to
question whether its goal of reducing emissions by 40 percent by
2030 (compared to 1990 levels) is in line with objectives the EU
signed onto in Paris. In this analysis, we assess this question and
discuss its implications for EU climate policy going forward.
Last week, the European Commission released its assessment
on the implications for the “Road from Paris” and concluded
that the EU’s 2030 target is in line with the ambition of the
Paris Agreement. Also last week, a debate in the Environment
Council showed that a large number of member states agreed
with the Commission, implying that a decision – which will
have to be agreed by all 28 member states - to increase the EU
climate ambition is off the table for now. However, the question
of whether EU’s plans are consistent with the Paris Agreement
remains far from settled. It will probably continue to surface in
decision-making processes related to climate and energy policy.
How do we assess the consistency of EU’s 2030 target with
the Paris Agreement? First, we leave out any considerations
of the ambition laid out in Paris to keep global warming “well
below” 2°C. We do so because, at this stage, it is unclear what
efforts to stay well below 2°C will mean for EU climate policy.
Such an assessment requires normative considerations of what
would constitute a “fair contribution” from the EU relative to
contributions from other countries. Instead, we evaluate whether
EU’s 2030 target is consistent with what the EU has already
committed to contribute to the Paris effort.
The EU has defined that its contribution to the 2°C goal would be
to reduce domestic emissions by 80 percent by 2050 compared
to 1990. The Commission’s logic is that the 40 percent target is
consistent with the 2°C ambition of the Paris Agreement because
it places the EU on a credible track to reduce emissions by 80
percent by 2050. Below, we assess whether the 2030 target
actually places the EU on track to deliver on its 2050 target and
thus whether it can be considered to be in line with the 2°C goal
of the Paris Agreement.
Short, medium and
long-term targets
EU’s 2050 goal is based on the 2007 fourth assessment report
by the IPCC, which suggested that developed countries reduce
emissions by 80-95 percent by 2050 to limit global warming to
2°C. On the back of this, the European Council adopted in 2009
a long-term target to cut EU emissions by at least 80 percent
by 2050. The progress towards EU’s long-term target was
set out in the 2050 Roadmap towards a low carbon economy
published by the Commission in 2011. In addition to indicative
reduction targets for 2030 and 2040, the Roadmap also
indicated a split between emission cuts in the EU ETS and non-
ETS sectors. Specifically, the roadmap recommended that, for the
reason of cost-efficiency, the EU ETS sectors reduce emissions by
90 percent by 2050, while the non-trading sectors deliver a cut
close to 70 percent (both compared to 2005 level).
The rationale for the 40 percent target was the Commission’s
2050 Roadmap which concluded that such a target would be
a cost-effective milestone on the way to an 80 percent 2050
target. The indicative 2030 target in the 2050 Roadmap was
adopted politically by the European Council in October 2014,
which committed the EU to the 40 percent reduction target
and confirmed the split between ETS and non-ETS sectors
which must contribute with cuts of 43 percent and 30 percent,
respectively, by 2030 (compared to 2005 levels).
Table 1 displays the various targets that define the EU climate
policy ambition. It should be noted that the overall targets have
1990 as base year, while 2005 is the base year for the individual
targets for the EU ETS and non-ETS sectors. Some targets are
enshrined in EU legislation (2020), while others are agreed
politically (2030 and 2050) or only indicative at this stage
(2040).
When it comes to the EU ETS, there are at least two questions
that are relevant to assess whether the 2030 target is in line with
the long-term 2050 target. Firstly, is the annual reduction of the
EU ETS cap on track towards the 2050 target? And secondly,
is the 2030 target setting a cost-effective pathway towards the
2050 target? As we will argue below, it is hard to give affirmative
answers to any of these questions.
The question whether EU’s plans
are consistenet with the Paris
Agreement remains far from settled
2020 2030 2040 2050
Total EU emissions
(cuts from 1990) 20%* 40%** 60% ***
80% **
EU ETS 21%* 43%** 90% ***
Non- ETS 10%* 30% **
70% ***
*Target set in legislation
** Target adopted politically, not yet in legislation
*** Target indicated in 2050 roadmap
Table source
Table 1: How to cut 80 percent by 2050?

WHITE PAPER
10 March, 2016 3
by its long term target. This is the equivalent of the annual
emissions of about 650 medium sized coal plants.
One option for the EU to deliver on its 2050 target is for the
non-ETS sectors to provide a greater reduction than what is
implied in the Commission’s roadmap. However, in its Council
Conclusions from October 2014 the European Council set the
target for the non-ETS sectors to a 30 percent cut from 2005
levels. This is in line with a trajectory towards a 66 percent to 71
percent cut in 2050. Therefore, there is no indication that the
underperformance in the EU ETS will be compensated with a
correspondingly larger cut in the non-ETS sectors.
Another option is for the EU to steepen the annual reduction in
the EU ETS cap after 2030 to align it with the goal to reduce EU
ETS emissions by 90 percent by 2050. We calculate that this
would require a 2.5 percent linear reduction factor starting in
2031. We estimate this by first projecting the EU ETS cap out to
2030 using the 2.2 percent linear reduction factor. The 2030 cap
in this case will be 1,333 Mt. For this cap to reach a 90 percent
reduction in 2050 compared to the 2005 baseline (meaning a
2050 cap of 234 Mt), it would have to drop by 55 Mt per year,
or 2.5 percent of the baseline used to calculate the ETS linear
reduction factor.
Is the annual reduction
factor consistent with
EU’s 2050 target?
To assess whether the EU ETS is on track to deliver the necessary
emission cuts, we must look at the so called “linear reduction
factor”, which defines the rate at which the EU ETS cap declines
every year. Currently, the EU ETS cap declines by a linear
reduction factor of 1.74 percent every year (a reduction in the cap
by 38 Mt per year). In line with the guidance from the European
Council, the Commission proposed a linear reduction factor of 2.2
percent for after 2020, in its phase 4 review proposal presented
last summer. This implies a reduction of 48 Mt/year in the ETS
cap.
However, a linear reduction factor of 2.2 percent places the ETS
sectors on track for only an 84 percent reduction by 2050, not 90
percent as the Roadmap suggested as the required cut in order to
meet the 2050 target in a cost-effective manner. The Commission
admits this in the fine print of the impact assessment to its 2030
framework (didn’t you notice footnote 122?).
Therefore, the Commission’s proposal for a 2.2 percent linear
reduction factor will keep the ETS off the course necessary for
the EU to meet its 80 percent 2050 target. To be in line with
the long-term target, the ETS cap must be reduced by a linear
reduction factor of 2.4 percent (53Mt/year) from 2021 onwards
(illustrated by the grey line in Figure 1). The difference between
a factor of 2.2 percent and 2.4 percent will accumulate to 2,045
billion tons over the period from 2021 to 2050. Therefore, the
EU is on track to emit two billion tons more than what is implied
*We note that this figure does not take into account how actual emissions in the EU ETS will turn out. While emissions may be lower than the cap, we choose
to focus this analysis on the EU ETS cap. The cap is what legislators can control, while emissions are inevitably highly uncertain.
Figure 1: Aiming for the long-term target?
0
10
20
30
40
50
60
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80
90
2020
2022
2024
2026
2028
2030
2032
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2042
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2046
2048
2050
ETS cap
percent of 2005 level
2.2% Linear reduction factor Cap w/ 90% target
Shortfall = 2 billion
tons CO2
84%
cut
90%
cut
The EU is on track to emit 2 billion
tons of CO2 more than its 2050
target implies

WHITE PAPER
10 March, 2016 4
Is the EU on a cost-
effective track toward its
2050 target?
According to the 2050 Roadmap, a 40 percent cut by 2030
and a 60 percent cut by 2040 would represent a cost-effective
pathway towards the 2050 target. The main argument why
these milestones represent a cost-effective trajectory is that the
“reduction effort would become greater over time as a wider set
of cost-effective technologies becomes available”.
To what extent the reduction effort increases over time is clearly
illustrated by the linear reduction factor in the EU ETS. The
reduction factor is expressed as a fixed percentage of the average
annual cap over the 2008-2012 period. This means that the
reduction factor does not represent a percentage change in the
annual cap, as it is often presented and perceived. Instead, the
2.2 percent linear reduction factor is equal to a fixed cut in the
allocation of 48 Mt/year. However, as the annual cap declines
steadily, the annual reduction effort in relative terms will increase
significantly over time.
As shown in Figure 2, this year-on-year cap reduction will start
at 2.7 percent in 2021, increase to 3.5 percent in 2030 and 5.4
percent in 2040. In the last decade before 2050 the relative
annual reduction effort will increase sharply and end with five
consecutive years where the EU ETS has to deliver additional
reductions of more than 8 percent compared to the previous year.
If the EU wants to reduce the ETS cap by a constant percentage
every year, it would have to reduce the EU ETS cap by 5.2 percent
per year.
In the 2050 Roadmap, the Commission assumes that
increasingly larger cuts can be delivered because more cost-
effective technologies will become available over time. That
might be correct, but it is a highly uncertain assumption. Another
scenario is that it could be more and more challenging to make
additional cuts as the low-hanging fruit will be taken first, leaving
more expensive and technologically challenging abatement
measures to the later years. As a large share of the future
abatement must be achieved by technology that is currently
unproven or very expensive, all assumptions about cost-effective
pathways towards the 2050 target are by definition highly
uncertain.
The Commission’s analysis illustrates the significant effort it
would take to achieve the emission reductions displayed in Figure
2. According to the 2050 roadmap, the EU ETS carbon price
would have to reach somewhere between €100/t and 370/t by
2050, levels which may be politically unrealistic. It is important
to note that these carbon prices do not include inflation, but are
expressed in real 2008 euros.
Figure 3 shows a more accurate picture of the emission reduction
effort implied by the EU ETS cap. The grey line shows the
logarithm of the annual cap with a 2.2 percent linear reduction
factor, while the orange line displays the logarithm of the annual
cap with an equal year-on-year reduction factor (5.2 percent). The
advantage of looking at the cap in logarithmic terms is that the
slope of the lines in the figure represents the actual percentage
reduction in the cap (for the purposes of this analysis, the values
on the vertical axis are less relevant than the slope of the lines).
The EU ETS reduction effort
increases significantly over time in
relative terms
Figure 2: Kicking the can down the road?
0%
2%
4%
6%
8%
10%
12%
14%
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2.2% Linear Reduction Factor
Actual year-on-year EU ETS cap reduction

WHITE PAPER
10 March, 2016 5
As the grey line shows, the EU ETS cap with a 2.2 percent linear
reduction factor declines at a relatively slow rate at first and then
forces large relative emission reductions later on. The figure
illustrates the fact that the 2.2 percent linear reduction factor
does not place the EU ETS on a steady pathway towards the 80
percent target for 2050.
Conclusions
We conclude that it is false to claim that the EU is on a credible
or cost-effective track towards its self-determined contribution
to the Paris Agreement. The first main reason is that the
current proposal for phase 4 of the EU ETS does not add up to
a sufficient contribution from the EU ETS to EU’s 2050 target,
and this shortfall is not compensated by an additional cut by
the non-trading sectors. The second reason is that the proposed
reductions in the EU ETS cap mean that the EU ETS is putting off
efforts to reduce emissions by relying on uncertain technological
improvements. It is questionable whether this is the most cost-
effective pathway towards EU’s 80 percent target for 2050.
It currently appears very unlikely that the EU changes its 2030
targets during the on-going phase 4 review or the upcoming
process to set new targets for the non-trading sectors under
the Effort Sharing decision. However, the question will not go
away. There will be a global stocktake to assess the progress
towards the targets under the Paris Agreement both in 2018
(called “facilitative dialogue”) and in 2023, and all Parties are
encouraged to communicate updated long-term climate targets
and strategies before 2020. This will keep the debate going in
the EU for several years, but we still find it quite unlikely that this
actually will lead to a higher reduction target for 2030.
Yet, the fact that the 2.2 percent linear reduction factor is not in
line with the 2050 target means that the EU may steepen it after
2030. The EU could do that as part of the 2025 review in light of
the Paris stocktake and its upcoming mid-century low emissions
development strategy. To align the ETS cap reduction with the
goal to reduce ETS emissions by 90 percent by 2050, the EU
would have to adopt a linear reduction factor of 2.5 percent from
2031 onwards.
In any case, even if the EU aligns the EU ETS cap with the 90
percent goal for 2050, the nature of the linear reduction factor
will still mean that annual emission reductions will become
progressively greater and, possibly, harder.
The implication of this analysis is that the EU will have to step
up its efforts after 2030 if it is to meet its 80 percent target for
2050. This fact raises the possibility that the EU will be unable
to meet this target. While the Commission presents the case that
the EU is on track towards delivering this target, our assessment
suggests that the EU may have an even chance of either meeting
or missing the target. Brussels is rolling the dice.
Figure 3: How linear is the linear reduction factor?
6
6
7
7
8
8
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
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2037
2038
2039
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2044
2045
2046
2047
2048
2049
2050
Annual EU ETS cap (log)
2.2% Linear reduction factor ETS Cap (equal reductions)
84% cut from
2005 CO2
levels
Annex: Analysis Probability Guidelines
Probability Percent
Extremely likely
95-100%
Very likely 82-94%
Quite likely 69-81%
Somewhat likely 56-68%
Even chance 45-55%
Somewhat unlikely 32-44%
Quite unlikely 19-31%
Very unlikely 6-18%
Extremely unlikely 0-5%

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