In a new research report (pdf, 567 kB) we look at the costs of developing and improving new energy sources to achieve the 2030 target and indicate the total costs to society to attract sufficient green investments.
According to the recent Impact Assessment prepared by the Commission, the total cost of reducing GHG emissions by 55% is approximately 420 billion annually in the period 2021-2030, or 2.5% of GDP (2018) at market prices.
This required annual investment in the energy system of about EUR 420 billion euro consists of three components : developing and improving sustainable energy sources; developing new infrastructure; and compensating owners of stranded assets.
The Impact Assessment makes no differentiation between these three components or between member states. To drill down further into this question, our research paper focuses on the first component only and gives an indication of the total cost to society to attract sufficient ‘green’ investments. This component is also known as the Unprofitable Top Margin, or UTM.
To attract investments in carbon-efficient technologies, the UTM of various greener technologies must be covered through a combination of subsidies, regulations, taxes and/or cross-border impact investing. In order to give citizens and national governments an impression of the required effort, we estimated the total UTM for Europe and each member state, which can be used to make policy intervention fit-for-purpose.
In our approach we considered three carbon reduction targets, namely 40%, 55% and 60%. The UTM is calculated by multiplying the amount of CO2 to be reduced between 2018-2030 with the difference between ‘green’ and ‘grey’ production methods.
Our calculations show that for the EU28 the annual UTM is between 0.8 and 2.1 percent of GDP when meeting the Commission target to reduce CO2 emissions by 55%. Although this is a considerable investment in the energy system, the estimated cost (as a share of GDP) is significantly lower than the cost of mitigating the adverse impact of climate change by the end of this century, which the ClimateCost project estimates to be 4% of GDP.
The annual costs to achieve a CO2 reduction of 55% for the EU28 ranges between EUR 125 billion (0.8% of GDP) to EUR 330 billion (2.1% of GDP) annually. We calculate that most of the EU member states will need to invest between 1.0% and 2.5% of their GDP annually in order to meet the 55% reduction, but there are of course differences between them. Generally speaking, larger member states have a higher UTM compared to smaller member states.
Scandinavian and Eastern Balkan member states have a relatively low UTM. On the other side of the spectrum, Cyprus, Greece and Poland have a relatively high UTM and will need to invest more in order to meet the average EU climate ambitions. Differences are caused by many factors, key among them are: investments made in the past, geological differences (such as access, or not, to hydropower), type and size of certain industries and temperature (fluctuation).
To achieve the EU’s 2030 climate target, we advise national governments, supported by their colleagues at the European level, to implement a combination of subsidies, taxes, regulation and cross-border impact investments. Bridging the ‘climate reduction’ gap of each member state should – in our view – be seen as a shared European objective as achieving it provides benefits to all.
Moreover, our results show that the UTM to reduce carbon emissions is – even when we would include cost of infrastructure and compensation for stranded assets – less than the cost of mitigating the adverse impact of climate change by the end of this century. As such, investing in carbon-neutral technologies today is the obvious choice.