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Step change in climate ambitions in the EU

Step change in climate ambitions in the EU

17-11-2020 | Insight

The EU has long had significant aspirations for the decarbonization of its economy. It was one of the first regions globally to implement a carbon trading mechanism. These ambitions were again revised materially higher in 2019 with the announcement of the European Green Deal.

  • Thomas Guennegues
    Thomas
    Guennegues
    Equity analyst

Speed read

  • To reach the EU’s 2030 Climate Target Plan a large increase in the share of renewables in the energy mix is necessary
  • Investment opportunities in companies that develop products and solutions for renewable energy, energy efficiency, distribution, and management, as well as electrification 
The Covid-19 crisis has now accelerated this agenda even further as the decarbonization efforts will be used as a way to support the economy after the contraction. The EU Commission President Ursula von der Leyen presented the 2030 Climate Target Plan at the State of the Union on 16 September 2020. This states that the 2030 decarbonization targets are going to become even stricter, aiming to reduce greenhouse gas emissions by 55% to below 1990 levels by 2030 (see chart) and net zero by 2050. This is a major increase compared to the former target of an “at least 40%” reduction by the same time 1. To achieve this target, the EU will be using a variety of levers and tools such as increasing the amount of renewable energy, promoting energy efficiency, and supporting and broadening carbon pricing. This new proposal, in line with the Paris Agreement objective to keep the global temperature increase to below 2°C above pre-industrial levels, will help allow a better planning for industrial participants.
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The solid line represents achieved emissions reduction, the dotted line represents the needed trajectories to reach targets.

Sources: European Environment Agency2, Robeco

To reach this new goal, there is no alternative to a large increase in the share of renewables in the energy mix

The EU has developed several scenarios for achieving their targets, which point to a share of renewables in the energy mix increasing to 38-40%3 (rather than the current 32% target) by 2030, up from a share of 18.9% achieved in 20184. The proportion of fossil fuels and in particular coal will need to be reduced very significantly. Coal is expected to quickly disappear as it is already uneconomical to run coal plants with the carbon prices at current EUR 25/MWh level (at 23/10/2020). Oil will lose market share to electricity mostly due to the electrification of the transport sector. We expect electric vehicles to reach a 50% market share in Europe by 2030, which will drive an increase in electricity demand. 

Most of the growth in the EU energy supply over the next ten years will come through electricity, driven by an acceleration of the already impressive gain in market share for renewables, as demand for wind and solar electricity is pushed by their lower cost already now visible in most regions (solar in the south of Europe, wind in the north), increase in carbon pricing, and corporate mandates for renewables. The EU expects the share of renewables in the electricity supply mix to reach 65% by 20305, up from 33% in 20186. This should lead to a very strong growth in annual installations and associated networks and smart grid investments, supporting the EU goal of having a fully integrated, interconnected and digitalized energy market. 

Carbon-free green hydrogen, generated though electrolysis using renewable electricity is crucial for the decarbonization of the European economy, replacing fossil-based hydrogen in industrial applications, as well as replacing fossil fuels in heavy duty transportation (buses, trucks, trains, ships and airplanes). This is why the EU has also put in place aggressive targets for the development of green hydrogen, providing another support for the development of renewables capacity. 

Finally, energy efficiency will also play a key role in decarbonizing the economy. The EU has put a strong focus on buildings, as they account for about 40% of the energy consumed. The renovation rate is expected to double, helping to lower energy bills and therefore reduce energy poverty, while providing a boost to the construction sector and local jobs. The State of the Union set an increased target of a 36-39% energy consumption reduction by 2030, up from the initial 32.5%7. This should provide a very strong boost to companies providing energy efficiency solutions, from insulation products to building automation. 

Overall we see the new proposal from the European commission for an increased target of a 55% net greenhouse gas emissions cut by 2030 to be fully aligned with our investment universe. The investments needed to reach that goal will have to be made through companies that develop products and solutions for renewable energy, energy distribution capacity and digitization, energy management, electrification of the building, industrial and transportation sector, and of course energy efficiency, all of which are a key focus of our RobecoSAM Smart Energy Strategy. The support delivered to these investments will be unprecedented and we believe our strategy is very well positioned to benefit from these unique market opportunities. 

1European Commission. (2020, September 16). President von der Leyen's State of the Union Address: charting the course out of the coronavirus crisis and into the future [Press Release]. https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1657
2European Environment Agency. (2020). EEA greenhouse gas - data viewer. https://www.eea.europa.eu/data-and-maps/data/data-viewers/greenhouse-gases-viewer
3European Commission. (2020). Stepping up Europe’s 2030 climate ambition. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0562
4Eurostat. (2020). Shedding light on energy in the EU. https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-4c.html
5European Commission. (2020). Stepping up Europe’s 2030 climate ambition. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0562
6Eurostat. (2020). Shedding light on energy in the EU. https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-3b.html
7European Commission. (2020, September 16). President von der Leyen's State of the Union Address: charting the course out of the coronavirus crisis and into the future [Press Release]. https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1657

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