The EU Decarbonisation Roadmap 2050: What Way to Walk?

The objective of this study is the economic analysis of the Decarbonisation Roadmap 2050, recently published by the EU Commission. The Decarbonisation Roadmap is the latest strategy to make the decarbonisation of the EU reality. It aims at a reduction in greenhouse gas emissions of more than 80% in 2050 vis-à-vis 1990 and an expansion of renewable energies to 50% or more in electricity generation in 2050. Since there is a lack in detailed economic analysis of this latest EU climate strategy so far, our study aims at shedding more light on it at the sectoral and the macro level. Compared to the EU Roadmap simulations, we examine especially welfare effects, carbon leakage and terms of trade on the macro level, and output, investment, emissions and competitiveness on the sectoral level.

The simulation of the Fragmented Action scenario yields the following key results: The costs for the EU-27 induced by the Decarbonisation Roadmap could stay below 0.3% until 2020 and below 2% until 2035 in terms of consumption losses (or welfare effects). They might increase to 3% thereafter and possibly increase significantly in later periods in the absence of breakthrough technologies. The international carbon leakage rate might reach up to 20%, presumably mainly through the fossil fuel price channel. Moreover, the changes in the output value of industry sectors could substantially differ in a range of around +1% to -15% in the 2040s.

The simulations of the other policy scenarios show that an extensive future use of CDM would have strong positive welfare effects on the EU and could widely disburden the EU from the additional costs of the Decarbonisation Roadmap. (Herein, we understand CDM in the sense of "where"-flexibility, this means the reduction of emissions where it is cheapest, such as in developing countries, not in the sense of a project-based mechanism associated with technology transfer.) CDM would not solve the global climate problem, though. A sustained allocation of free allowances (benchmarking) to leakage sectors, on the contrary, would slightly increase overall costs. Global climate action would improve the terms of trade in favour of the EU. Without international emissions trading, it would have limited positive welfare effects on the EU, though. However, the equalisation of the CO2 price across EU ETS and non-ETS sectors would significantly reduce the mitigation costs (under global action). Additionally allowing for international emissions trading (under global action) might disburden the EU from the additional costs of the Roadmap until 2040; and in the 2040s the mitigation costs for the EU could fall to less than 1.5%.

At the sectoral level, CDM could increase the output of all EU sectors compared to pure fragmented action, sustained free allocation of allowances could increase the output of most ETS sectors, and global climate action without international emissions trading would have diverse sectoral effects. When the carbon price were equalised across sectors and across regions via international emissions trading, global climate action would benefit most EU sectors. Climate policy induced changes in investment, emissions and competitiveness could have even more diverse sectoral patterns than the output effects under the different climate policy scenarios mentioned above.

We also discuss a number of uncertainties and limitations that numerical economic analyses in general face. Some of the most important uncertainties are future economic growth (against the backdrop of the current economic turbulences in the EU and the USA and political upheavals in middle-East and North African countries), technical progress (in general and regarding energy efficiency and energy generation technologies in particular) and elasticities of substitution and price elasticities (that govern, for example, the possibility to replace fossil fuel inputs in production and in electricity generation). These uncertainties strongly increase when extending the time horizon of the analysis. In this sense, our estimations for the final periods with high emissions cuts are subject to the highest uncertainties.

We conclude that the successful implementation of the EU Decarbonisation Roadmap probably requires a wise and joint consideration of technology, policy design and sectoral aspects. These three aspects are closely interlinked. For example, technological solutions are necessary to achieve ambitious emissions targets at acceptable costs from a global perspective. An appropriate climate policy design is necessary to transfer the benefits from climate policy to the EU macro level and further to the sectoral level. Sector- or firm-specific strategies in correspondence with macro policies can be helpful for avoiding structural and technological lock-in effects and reducing costs in energy-intensive sectors. However, the avoidance of severe climate change damages requires global action. In this sense, as a feasible option, climate policy could make use of CDM in (smaller) countries that are not part of the climate coalition, while the main emitters were within the climate coalition; and climate policy would make use of international emissions trading as well as emissions trading across all sectors within the EU and elsewhere to avoid the additional costs of the EU Decarbonisation Roadmap to a large extent.

Hübler, Michael and Andreas Löschel (2012), The EU Decarbonisation Roadmap 2050: What Way to Walk?, ZEW Discussion Paper No. 12-055, Mannheim.