National climate targets off track

By June 30 2024, EU Member States must submit their final National Energy and Climate Plans (NECPs) to the European Commission. NECPs lay out the measures that countries designed to comply with their national climate targets set by the Effort Sharing Regulation (ESR). The ESR accounts for over 60% of EU emissions, covering GHG emissions in domestic transport, buildings, waste, small industry, and agriculture. If national targets are met, the ESR will reduce emissions in these sectors at EU-level by 40% by 2030 (vs. 2005).

New T&E analysis however reveals that the EU as a whole is 4.5 percentage points off track to achieve that -40% goal. 12 countries are so far off track that, without additional policies, it will be impossible to reach their target. 7 more countries are at diverging levels of risk of being non-compliant, meaning any backtracking of policies - or even a very cold winter pushing higher energy consumption - could make them fall in the red zone.

Typically, countries missing their targets can purchase carbon credits from those that do meet them. But if the widespread level of planned failure - primarily driven by the enormous deficits from Germany and Italy - persists, it would lead to a scarcity of credits. If NECPs are not improved with additional measures, some countries will be left with no credits to buy and at risk of lawsuits. T&E warns of a bidding war for compliance credits between countries in 2030, which could drive up credit prices.

Germany and Italy are on track to accumulate such a substantial deficit (246 MtCO2-eq) that they alone would eat up all the available surplus in the EU (180 MtCO2-eq). That would leave the other 10 ‘not compliant’ countries with no means to comply with the ESR. It would also result in high costs for German and Italian taxpayers. Assuming credits will be traded at the market price of the ETS, which is projected to be €129 in 2030, these countries might need to disburse €16.2 and €15.5 billion respectively to other EU Member States in 2030.

Luckily, there are still six years left for Member States and the Commission to course correct. They should act now to:

• Include new policies into the final NECPs. Rather than transferring billions to their neighbours for their carbon debt, countries should spend resources on new policies that improve the life of their own citizens, such as insulating houses.
• Set up an EU-level gap closing action group where the Commission proposes new EU-level policies for the ESR sectors - such as electrification targets for large corporate car, van and truck fleets - and laggards are given guidance.
• Create an EU-level lending facility, funded with frontloaded ETS2 revenues, allowing Member States to borrow against their future revenues and implement new policies.
• Large underachievers should start negotiating deals with other countries now, ensuring timely roll-out of additional policies both at home and elsewhere in the EU.