Europe's
Energy Transition:
A Common Challenge

In spite of its efforts to cut greenhouse gas emissions (in the past 30 years, there has been a 25% decline), the European Union (EU) is still far from reaching the target of carbon neutrality by 2050. Without appropriate action, severe climate impacts will be worse in the decades ahead.

In this report, Institut Montaigne analyses the means and tools for accelerating and completing the European Green Deal. Our policy recommendations are the result of interviews with various stakeholders (academics, policy makers, industry leaders, representatives of civil society) who advocate for a unified European strategy for energy transition, integrating the divergent interests of member states and supporting the effects of this transformation over time.

This report, chaired by Christian Gollier, Managing Director of the Toulouse School of Economics (TSE), aims at contributing to a substantial acceleration of the energy transition, as is needed for the EU to meet its climate goals.

European recovery plans

In July 2021, the EU Council approved the national recovery and resilience plans (RRPs) of 12 countries including the ones of Germany, Italy, Spain and France. The financial windfall represented by the European recovery plans makes it clearly possible to accelerate the energy transition. But this windfall does not guarantee its success. We need to ensure the cost-benefit optimization of investments to reduce CO2 emissions while guaranteeing the EU's energy security. In other words, the economic impact of this transformation must be overseen.

The European energy transition offers the opportunity to create new centers of economic and technological competitiveness and new sectors of excellence, in particular in the field of:

• renewable energies;
• hydrogen and electric batteries;
• sectors that create value and "green" jobs.

The energy transition represents many opportunities for the EU: economic, social and geopolitical.

Shifting the paradigm

CO2 emissions in Europe must be reduced significantly to meet the Paris Agreement goals. This implies, within the next 30 years, a radical transformation of energy production, transformation and consumption systems as well as a drastic cut in the use of hydrocarbons in Europe.

Moreover, this decarbonization strategy relies on a deep change in skills and behaviors, as well as the development of significant technological innovation and investment in R&D in order to decarbonize applications and sectors for which no suitable solutions exist yet.

Fostering consensus

Despite significant progress, there is divergence between the EU member states in the field of energy policies. The main disagreement concerns the social aspects of this energy transition. Due to the heterogeneity of socio-economic situations within the EU, the fight against climate change is prioritized differently by each member state, making it difficult to reach consensus on the measures to be adopted.

A more integrated vision of Europe’s energy transition is needed to optimize investments in the transformation of European energy systems. The creation of an independent European Energy Transition Agency (EETA), with extended competences, would meet this need. The Agency could become the architect of an integrated European vision, monitoring the transformation of energy systems, in particular through systematic scientific studies: impact reports on energy costs, energy security and the social impact of these transformations.

An incomplete European carbon market

Carbon pricing is currently monitored through the European Union CO2 Emissions Trading Scheme - EU ETS. Created in 2005, it regulates CO2 emissions from over 11,000 large European energy and industrial installations, responsible for 40% of EU emissions. While the EU ETS has worked well since its implementation from a technical standpoint, the ETS market only covers 40% of emissions, energy and industrial installations. It fails to account for sectors such as transport and the residential sector. As the rest of the sectors are not taxed at the European level, half of the member states have introduced carbon taxes with different perimeters and prices. This lack of harmonization prevents a significant impact on emission reductions at the European level.

Additionally, the ETS market only takes into account emissions on European soil and does not take into account the emissions resulting from imports. By failing to set a CO2 price on imports, it undermines market equity and competition between European and non-European products.

Strengthening the European carbon pricing policy

In the current context of economic downturn caused by the Covid-19 health crisis, volatile oil prices and political uncertainty regarding the support for green policies integrated within this recovery, this transition to a "climate neutral Europe" requires a growing and strengthened carbon pricing trajectory, adapted to the goals that need to be achieved.

Europe’s energy transition will involve a reduction in emissions of around 3.5 billion tons of CO2 per year. It is clear that this transformation must lead to profound changes in behaviors across entire sectors of society, with the goal of a massive and rapid reduction in the consumption of carbon-based goods. Carbon pricing can effectively orchestrate this large-scale societal change underlying Europe’s energy transition.

Must involve consumers

In the absence of carbon pricing commensurate with our responsibilities to future generations, many are calling for a sense of individual and institutional responsibility on the part of emitters and their clients. While it is certain that global warming has deep systemic causes over which individual behavior has little control, acting on an individual level can still help reduce greenhouse gas emissions.

Estimates suggest that individual behavior has the potential to reduce an individual’s carbon footprint by up to 25%. Combined with a logic of collective demand, individual responsibility is therefore part of the solution to the climate challenge. For this, the carbon impact of consumer products must be made explicit and become a purchasing criterion for consumers.

By providing reliable and simple information

Exact information about the carbon impact of consumer products remains abstract or approximate. Integrating the carbon criterion into purchasing decisions requires access to reliable and simple information regarding the carbon impact of particular production or consumer goods. Yet, no satisfactory system exists to compare the carbon impact of particular production or consumer goods. Such systems have many shortcomings: multiple and non-comparable methodologies, unclear taxonomy, lack of official benchmarks, non-certified information, etc.

Albeit a few exceptions, the carbon impact is rarely integrated into consumer decision making. Only a few sectors, mainly energy and transport, have information about their carbon emissions. There is a genuine technical challenge of providing a unified methodology and a certified carbon accounting system at the European level, which would allow for true carbon traceability of production and consumer goods. At large, carbon traceability is a prerequisite for establishing true carbon adjustment at borders.