Our most important findings

By 2050, carbon-free hydrogen or hydrogen-based fuels will supply roughy one fifth of final energy worldwide, with much of the rest supplied by renewable electricity. Everyone agrees that the priority uses for hydrogen are to decarbonise industry, shipping and aviation, and firming a renewable-based power system. Therefore, we should anchor a hydrogen infrastructure around no-regret industrial, port and power system demand.

This is critical for incentivising hydrogen use where carbon pricing alone cannot do the job quickly enough. While policy options are available at a reasonable cost for industry, power and aviation, there is no credible financing strategy for hydrogen use by households. Blending is insufficient to meet EU climate targets and carbon prices high enough to deliver hydrogen heating would be unacceptable for customers.

To stay on track for 1.5C, Europe needs to reduce consumption of natural gas in buildings by 42 percent over the next decade, as per the EU Impact Assessment. Similarly, land-based hydrogen mobility will remain a niche application. Any low-pressure gas distribution grids that survive will be close to ports, where refuelling and storage infrastructure could provide an impetus for the decarbonisation of the maritime and aviation sectors.

To keep industry competitive, the EU should therefore access cheap hydrogen (green and near-zero carbon) from its neighbours via pipelines, reducing transport cost. Imports from a global market will focus on renewable hydrogen-based synthetic fuels.

Haushalte, die mit Erdgas schlecht gedämmte Gebäude heizen, sind außerordentlich belastet – auch bei mittlerem Einkommen. Die Wirtschaft steht ebenfalls zum Teil vor erheblichen Herausforderungen. Eine gezielte und ausreichende staatliche Unterstützung ist daher dringend erforderlich.

Die Steuer sollte so ausgestaltet sein, dass sie mit einem moderaten Steuersatz alle fossilen Energieträger abdeckt und zugleich Anreize für neue Investitionen in Energieunabhängigkeit und Klimaschutz erhält. Damit birgt sie geringere Risiken für Umgehungsstrategien und für zukünftige Investitionen als eine Abschöpfung von Zufallsgewinnen über den Strommarkt.

Eine Preissetzung durch das jeweils teuerste Kraftwerk zeigt die Kosten von zusätzlichem Stromverbrauch bzw. den Wert von Einsparungen korrekt an. Dieses Prinzip ist für die Integration von Erneuerbaren Energien zentral, denn nur so können etwa Wärmepumpen oder Elektroautos effizient und dynamisch auf den Strompreis reagieren.

Zusätzliches Angebot an Wind- und Solarenergie und effizientere Nachfrage sind Voraussetzungen für eine Normalisierung der Energiepreise und für eine ambitionierte Klimapolitik.

This is possible while maintaining today’s level of industrial production and fully ensuring security of supply, without disruptive behavioural changes. The phase-out requires a fast ramping up of energy efficiency and renewable energy, as well as the electrification of applications in the buildings and industry sectors.

The sectoral transition pathways developed in this report show that based on latest technological progress, an EU greenhouse gas reduction target of 90% by 2040 is realistic. It would avoid 3.3 Gt more greenhouse gas emissions than projected in the EU’s 2020 Climate Target Plan.

By prioritising direct electrification and reserving its use for no-regret applications, the EU would need only 116 TWh of renewable hydrogen by 2030, compared to 666 TWh in REPowerEU. This is more cost-effective, more realistic from a security of supply perspective and consistent with the hydrogen sub-targets in the new Renewable Energy Directive. The REPowerEU target should thus be revised.

(1) A new impact assessment is needed for the EU gas and methane package.

(2) Governments should evaluate the impact of the decline in gas demand on gas supply and distribution infrastructure, and when updating their National Energy and Climate Plans.

(3) The sale of new fossil gas-burning equipment in buildings should end quickly.

Speeding up the reduction in fossil gas consumption with investment in buildings and industrial plants, as well as in district heating, renewables and power grid expansion, will add €40 billion per year to the EU-wide public green spending needs in 2022–2027.

Using the existing Recovery and Resilience Facility (RRF) for this purpose would make funds available in the 2022-2027 timeframe and allow – together with the unused RRF loans – to scale up investment quickly.

However, the current EU budget (2021–2027) only allows for marginal adjustments and does not offer sufficient funding for all types of investment needed to deliver the RePowerEU plan.

One plausible option for financing the additional debt service of €2.9 billion per year in 2028–2058 is to use a share of revenues from carbon pricing, including the proposed ETS for transport and buildings.

Energy efficiency in buildings and industry as well as a fast ramp up of wind and solar PV can permanently reduce fossil gas demand by 1200 terrawatt hours in the next five years, allowing to avoid 80% of today's Russian gas imports and enabling a 100% displacement when combined with alternative supplies such as LNG.

Until 2027, energy efficiency, district heating and a heat pump revolution can save 480 TWh in buildings; efficiency and electrification in low and medium temperature heat processes can provide for 223 TWh savings in industry, and a ramp up of wind & solar PV combined with more system flexibility will contribute 500 TWh in the power sector.

The RePowerEU plan needs to mobilize the reductions identified in this study. Similar to the COVID recovery efforts, the plan must be embedded in a strong political framework overseen by the European Council to ensure its swift and full implementation. Helping Ukraine build back better after the war should be part of the efforts.

The framework also needs to ensure that existing EU funds are re-purposed wherever possible and governments smartly combine price signals and protection for poor households and industry.

Meanwhile, emerging economies with rising steel demand will require at least 170 Mt of new capacity. Meeting these needs with coal-based capacity will create long-term carbon lock-in and lead to stranded assets, endangering jobs and putting any pathway compatible with 1.5°C out of reach.

The project pipeline of green steelmaking capacity that will come online before 2030 is growing rapidly. 40 Mt of direct reduced iron (DRI) capacity is already planned and many operators have announced that they will switch to secondary steel production. Retroactive post-combustion CCS for coal-fired blast furnaces may be a dead-end road.

The best strategy from now on is to avoid reinvestments into blast furnaces by prolonging life-times of old assets by 2-5 years and after 2025, invest into DRI directly. By 2030, the global steel sector would require 390 Mt of DRI capacity and 278 Mt of additional secondary steel capacity. This is feasible – and would save the atmosphere 1.3 GtCO2 per year.

Steel is a globally traded commodity. The sector’s transformation will require international coop-eration. Meeting the asset transition targets would transition some 1.3 million existing jobs in the steel industry from coal-based to future-proof green jobs while creating 240,000 new green jobs in emerging economies.

The international nature of markets for energy-intensive industries means there is a desperate need for coordination of national policies, technology deployment and anti-carbon leakage measures. Thus, the “club” idea should be developed as an open alliance of nations seeking to kick-start green international industrial value chains and advance this agenda.

This way, it can be avoided that climate clubs are used as an argument to escape from obligations under the EU’s CBAM and an international level playing field for green products can be created and scaled up over time.

First, coordinating national policies and harmonizing standards for low carbon basic materials to rapidly scale global demand. Second, setting milestones and ensuring national policy commitments to support the roll-out of key climate neutral technologies. Third, facilitating the emergence of key enabling conditions for ambitious national policies, e.g. by agreeing on common principles for “rules of fair play” in designing carbon leakage policy.

Pitfalls such as getting dissipated by trying to achieve common carbon pricing; using a climate club to punish specific trading partners or as a form of disguised protectionism for industrial sectors, must be avoided.

The CBAM is a necessary tool for the EU to prevent carbon leakage; it is not an instrument to force trading partners to adopt similar policies.

Export markets for goods with high carbon intensity will shrink, impacting the region far beyond the power sector. The CBAM will to some extent also reduce opportunities to export carbon free flexible power generation. There is a tight timeline concerning the numerous re-forms that must take place before 2030.

Such projects will be loss-making in context of the CBAM. Establishing domestic carbon pricing will assist countries in gathering revenues that should be used to fund the transition to clean power systems.

Specific support is needed for establishing the data and technical backbone of carbon pricing systems. In addition, the West-ern Balkan countries should use a larger share of available EU funds for supporting a just transition and socio-economic convergence with the EU.

The EU will need to start phasing in an alternative system to protect EU energy intensive industries before 2030, though not in all sectors. This new system must protect against leakage and also incentivise industry to start decarbonisation during the coming decade.

The proposed “climate club” may have value as a complement to a CBAM, but it is not a credible stand-alone option. Similarly, consumption charges also raise numerous practical and political difficulties that are difficult to resolve, discounting them as a viable alternative to a CBAM.

It would promote carbon cost pass-through along the value chain, incentivising recycling and the move to lower-carbon materials; it would allow the EU to raise vital funds to finance Carbon Contracts for Difference; and it would help to incentivise cooperative climate action on carbon leakage internationally.

We suggest a two-step approach to this question, including a slightly slower phase-in rate for auctioning prior to 2030, coupled with the prioritisation of decarbonisation support for abatement. This could be followed by a review of the risks to exporters in 2029 based on emerging international action. In a worst-case scenario, a freeze in the phase-down of free allocation to exported production could be considered once CBAM was well established as a policy and risks of retaliation have reduced.

Heavy reliance on fossil gas in fertiliser production makes the industry carbon-intensive and vulnerable to price shocks as seen currently.

Producing fertilisers with renewable energy instead of fossil fuels would help reduce greenhouse gas emissions and increase the sector’s resilience. However, the price gap between fossil and renewable hydrogen is a key challenge for Argentina to scale up green ammonia production.

Argentina could build up its ammonia production capacity using the existing natural gas reserves, while developing its vast renewable hydrogen potential in order to switch to green ammonia as fast as possible. This could create jobs, reinforce food security, and help to the decarbonise industry.

International support and investment can help to overcome economic challenges in the production of green ammonia, guaranteeing a sustainable development of Argentina’s industrial sector. Countries worldwide could benefit from a more diversified fertiliser supply chain.

Industrial production of virgin plastics, steel, aluminium and cement alone accounts for 13 percent of yearly energy consumption and 581 Mt of annual emissions. The EU also imports very large amounts of gas, oil and coal to produce plastics and other energy intensive materials.

With ambitious policies, annual EU industrial emissions could be reduced by up to 10 percent (70 Mt) until 2030 and by 34 percent (239 Mt) until 2050 compared to 2018 levels. Plastics production alone could avoid using fossil fuels equivalent to roughly 2.7 billion cubic metres of gas and 149 million barrels of oil annually by 2030.

Required policy instruments are expanded quotas for recycled content; investment aid for rapid deployment of innovative recycling technologies; as well as labelling and best practice mandates for collection, sorting, recycling and re-use.

Examples are wider bans on single use and non-recyclable plastics, the implementation of deposit-refund schemes for plastic packages, investments into ex-post re-sorting and state of the art recycling practices.

Industrial production of virgin plastics, steel, aluminium and cement alone accounts for 13 percent of yearly energy consumption and 581 Mt of annual emissions. The EU also imports very large amounts of gas, oil and coal to produce plastics and other

energy intensive materials.

With ambitious policies, annual EU industrial emissions could be reduced by up to 10 percent (70 Mt) by 2030 and by 34 percent (239 Mt) by 2050 compared to 2018 levels. Plastics production alone could avoid using fossil fuels equivalent to roughly 2.7 billion cubic metres of gas and 149 million barrels of oil annually by 2030.

Required policy instruments are expanded quotas for recycled content;

investment aid for rapid deployment of innovative recycling technologies; as well as labelling and best practice mandates for collection, sorting, recycling and re-use.

Examples are wider bans on single use and non-recyclable plastics, the implementation of deposit-refund schemes for plastic packages, investments into ex-post re-sorting and state of the art recycling practices.

Klimaschutzverträge nach dem Vorbild der Carbon Contracts for Difference (CCfD) erlauben einen raschen Einstieg in die notwendigen Investitionen und sichern die Mehrkosten einer klimafreundlichen Produktion ab.

Klimaschutzverträge dienen somit auch als Absicherungsinstrument für die anfängliche Auslastung von strategisch wichtigen Infrastrukturen, ohne die Klimaneutralität nicht erreicht werden kann.

Zur Finanzierung kommen eine Kombination aus existierenden Förderinstrumenten mit Garantien durch den Bundeshaushalt oder den Energie- und Klimafonds in Frage.

Über die Reform des EU-Emissionshandels, der Instrumente zum Carbon-Leakage-Schutz sowie den Aufbau von grünen Leitmärkten können Klimaschutzverträge abgelöst und klimafreundliche Produkte als Standard am Markt etabliert werden.

Zudem muss der Einsatz von Zement über Materialeffizienz und Substitution gemindert werden. So wird die Zementproduktion in Deutschland zukunftsfähig.

In enger Zusammenarbeit mit europäischen Partnern müssen dafür der nationale und europäische Rechtsrahmen für die CO2-Speicherung aufgebaut werden.

Durch den Einsatz von nachhaltiger Biomasse und biogenen Reststoffen in der CCS-basierten Zementproduktion (BECCS) können darüber hinaus kostengünstige CO2-Senkeneffekte erzielt werden.

Klimaschutzverträge sind kurzfristig zentral, um Investitionen abzusichern, höhere Kosten können jedoch mithilfe einer EU-EHS-Reform, eines Grenzausgleichsmechanismus (CBAM) und dem Aufbau von grünen Leitmärkten für CO2-armen Zement kompensiert werden.

By compensating for the initially higher costs of climate-friendly production, carbon contracts anticipate the effects of evolving carbon pricing and enable the industry to implement its green investment plans.

Carbon contracts support this transformation. If appropriately coordinated with other policy measures, the need for financial support is limited to less than 9 billion euros, and green steel can be cost-competitive by 2035.

Running them initially on natural gas will enable a rapid reduction in CO2 emissions and provides a back-up for the use of increasing volumes of renewable hydrogen.

Alongside the rapid implementation of carbon contracts, the EU ETS must be reformed and green lead markets developed so that climate-friendly steel can establish itself as the industry standard.

In Kombination mit dem Ausbau der Sekundärstahlroute eröffnet sich ein Pfad zum Aufbau einer ressourceneffizienten, klimaneutralen und unabhängigen Stahlproduktion in Deutschland.

Parallel müssen das EU-Emissionshandelssystem reformiert und grüne Leitmärkte aufgebaut werden, damit klimafreundlicher Stahl am Markt honoriert wird und sich als Standard durchsetzen kann.

Durch eine intelligente Kombination von Politikinstrumenten auf nationaler und europäischer Ebene kann grüner Stahl bereits 2035 wettbewerbsfähig sein.

Der anfängliche Betrieb der Anlagen mit Erdgas bleibt trotz hoher Preise sinnvoll, um einen raschen Ausbau der Wasserstoffwirtschaft abzusichern.

Dazu kommt der Ausbau der Stahl-Sekundärroute als wesentlicher Baustein für eine klimaneutrale Stahlproduktion. So wird die Stahlbranche in Deutschland zukunftsfähig.

Über den Betrieb mit Erdgas wird ein Großteil der CO₂-Emissionen schnell zu moderaten Kosten reduziert, bis Erdgas durch ein steigendes Angebot an erneuerbarem Wasserstoff ersetzt wird.

Ziel ist es auch, parallel grüne Leitmärkte aufzubauen, die den Mehrwert von klimaneutralem Stahl honorieren und ihn als Standard am Markt etablieren.

Dafür benötigen sie einen eigenen dauerhaften Refinanzierungsmechanismus, damit die Branche Investitionssicherheit erhält.

Industrial companies understand: The EU objective of climate neutrality by 2050 has clear implications for industrial reinvestment in the 2020s. Carbon-intensive technologies have lifetimes of up to 70 years. Reinvestments into long-lived assets will not be made unless there is an investment framework to deploy climate-neutral technologies.

The CO2 abatement potential of key low-carbon technologies in the steel, chemicals, and cement sectors alone amounts to 145 Mt of CO2 by 2030, exceeding the required emission reductions from industry under the EU ETS. Their deployment will represent a breakthrough in Europe’s industrial sector and ensure it a leading global role.

Key low-carbon technologies are available, but their abatement costs are still in the range of 100 to 170 €/t of CO2. The EU should adopt policy instruments to cover the gap between these abatement costs and the EU ETS price as soon as possible.

By refining existing carbon leakage protection instruments it will be possible to protect existing plants until they can be replaced. At the same time, decisive support for investments in breakthrough technologies is needed. This should come in the form of carbon contracts-for-difference, planning and financing for clean-energy installations and infrastructure, and standards to create markets for climate-neutral and circular products.

The CO2 abatement potential of key low-carbon technologies in the steel, chemicals and cement sectors amounts to 145 Mt of CO2 by 2030. The European Council of 10-11 December 2020 thus explicitly tasked the Commission to “propose measures that enable energy intensive industries to develop and deploy new climate neutral technologies while maintaining their industrial competi-tiveness”.

While the Commission has addressed some aspects (e.g. hydrogen strategy, ETS and carbon leak-age reform), key elements are still missing, such as policies to create lead markets for low carbon basic materials or incentives for material-efficient and circular construction and manufacturing.

To this end, key elements of the “Fit for 55 package” must be connected to crucial initiatives for industrial decarbonization such as the Circular Economy Action Plan, Sustainable Products Initia-tives, mandatory use of the LEVEL(s) framework or Green Public Procurement opportunities.

The updated strategy should: a) present a compelling and concrete narrative for how energy-intensive industry can transform by 2030 and 2050; b) set concrete and ambitious 2030 mile-stones for that industrial transformation; and c) include a legislative roadmap with specific instru-ments for delivering the milestones to kickstart the transition.

Industrial companies understand: The EU objective of climate neutrality by 2050 has clear implications for industrial reinvestment in the 2020s. Carbon-intensive technologies have lifetimes of up to 70 years. Reinvestments into long-lived assets will not be made unless there is an investment framework to deploy climate-neutral technologies.

The CO2 abatement potential of key low-carbon technologies in the steel, chemicals, and cement sectors alone amounts to 145 Mt of CO2 by 2030, exceeding the required emission reductions from industry under the EU ETS. Their deployment will represent a breakthrough in Europe’s industrial sector and ensure it a leading global role.

Key low-carbon technologies are available, but their abatement costs are still in the range of 100 to 170 €/t of CO2. The EU should adopt policy instruments to cover the gap between these abatement costs and the EU ETS price as soon as possible.

By refining existing carbon leakage protection instruments it will be possible to protect existing plants until they can be replaced. At the same time, decisive support for investments in breakthrough technologies is needed. This should come in the form of carbon contracts-for-difference, planning and financing for clean-energy installations and infrastructure, and standards to create markets for climate-neutral and circular products.

Based on existing policies, there is no credible business case to make investments that are compatible with climate neutrality by 2050. As a result, the EU faces a serious risk either of plant closures and job losses or the lock-in of CO2-intensive technologies.

Many “breakthrough” technologies will require carbon prices on the order of 100 to 170 €/tCO2 if they are to be competitive. To make these technologies economically viable, supplementary policies such as carbon contracts-for-difference will be needed..

The package should include carbon contracts for difference; planning and financing tools for clean-hydrogen infrastructure in industrial clusters; free ETS certificates and protection against carbon leakage; and standards to create markets for climate-neutral and circular products.

Member states can accelerate economic recovery in the short term by supporting investments in industrial decarbonisation. With comprehensive clean-industry legislation, the EU can drive investment in lowcarbon transformation and create economic resilience in the medium term.

Breakthrough innovations are thus needed to enable the climate-neutral production of steel, chemicals and cement. Gradual efficiency improvements remain important, but they are no longer sufficient.

Green hydrogen will play a central role in achieving carbon neutrality in the steel and chemical industries. Particularly in the chemicals industry, the closing of material loops will be a core strategy. In the cement industry, new binders and carbon capture and storage (CCS) will be key technologies.

With the right mix of policy instruments, the German government can ensure reliable conditions for investment while also incentivising behaviour at various levels of the supply chain: upstream, midstream and downstream. By contrast, continued investment into conventional technologies risks stranded assets, as new industrial plants have lifespans well beyond 2050.

By ushering in climate-neutral industry at home, Germany could help to demonstrate the viability of a climate-neutral industry and thereby help to foster a global market for low-carbon technologies worth billions.

Es bestehen jedoch Risiken mit Blick auf das Grundgesetz, das Europarecht und gegebenenfalls das WTO-Recht.

Direkte Förderinstrumente können deshalb voraussichtlich einfacher umgesetzt werden. Es bestehen jedoch Herausforderungen in Bezug auf die Vereinbarkeit mit dem Europarecht, ins-besondere dem Beihilfenrecht und der Warenverkehrsfreiheit. Das allgemeine Diskriminie-rungsverbot erweist sich als wesentliche verfassungsrechtliche Grenze.

Die Einführung eines CO2-Preises auf Endprodukte würde die Implementierung eines Systems zur produktbezogenen Berechnung des CO2-Fußabdrucks erfordern, was mit erheblichen recht-lichen und praktischen Umsetzungshürden verbunden ist. Bei der Umsetzung eines CO2-Mindestpreises im EU-ETS mit einem Grenzausgleichsregime wäre besonders auf die Erfüllung der WTO-Verpflichtungen zu achten. Die Erfüllung dieser Vorgaben erscheint sehr herausfordernd.

Der Gestaltungsspielraum ist in diesem Bereich, aufgrund von europäischen Harmonisierungen, auf nationaler Ebene erheblich eingeschränkt.

Zur klimaneutralen Herstellung von Stahl, Chemie und Zement sind daher Sprunginnovationen erforderlich. Graduelle Effizienzverbesserungen sind weiter wichtig, reichen aber nicht mehr aus.

Dabei spielt grüner Wasserstoff eine zentrale Rolle, sowohl in der Stahl- als auch in der Chemieindustrie. Vor allem in der Chemieindustrie stellt außerdem das Schließen von Stoffkreisläufen (Circular Economy) eine zentrale Strategie dar. In der Zementindustrie sind neue Bindemittel und Carbon Capture and Storage Schlüsseltechnologien.

Ein optimaler Instrumenten-Mix gibt der Industrie Investitionssicherheit und setzt auf den verschiedenen wirtschaftlich-technischen Ebenen an: upstream, midstream und downstream. Bei Investitionen in konventionelle Technologien drohen hingegen Stranded Assets, weil alle ab heute noch neu installierten Industrieanlagen eine Lebensdauer bis weit über das Jahr 2050 hinaus hätten.

Die klimaneutrale Industrie muss als Vorzeigeprojekt konzipiert werden. Daraus ergeben sich – auf Basis eines starken Heimatmarkts – globale Marktpotenziale in Milliardenhöhe.

Die technischen Lösungen für (weitgehend) treibhausgasneutrale Produktionsverfahren in den Sektoren Stahl, Chemie und Zement sind bekannt und es existieren Forschungs-, Pilot- und Demonstrationsprojekte. Worum es jetzt geht, sind die Markteinführung und großskalige An-wendung dieser Technologien.

Hierzu zählen die Direktreduktion mit Wasserstoff (Stahl), chemisches Recycling (Chemie) und CCS mit dem Oxyfuel-Verfahren (Zement). Sie sind in der Technologieentwicklung weit fortge-schritten und somit – bei Aufbau der benötigten Infrastruktur – schnell skalierbar.

Die CO2-Vermeidungskosten der meisten Technologien hängen stark von den Stromkosten ab und liegen 2030 deutlich über dem heutigen CO2-Preisniveau im EU-ETS (Emissionshandelssys-tem). Unternehmen brauchen deshalb zu Beginn der 2020er Jahre zusätzlich ein verlässliches Markteinführungsinstrument, um Richtung 2030 in die neuen Schlüsseltechnologien investieren zu können.

Wenn deutsche Unternehmen heute die neuen Verfahren entwickeln, entstehen auf den wach-senden Märkten für klimaneutrale Produktionsprozesse erhebliche Marktchancen für den deut-schen Anlagenbau.

Since 2011, spot prices have been decreasing in Europe, except for in the UK, Belgium and the Netherlands. While spot prices in Germany were higher than in the US during 2010-2012, in 2013 they fell below the New York ISO prices, and converged with those of other US regions. In many other European markets, the gap with US prices remains significant.

(1) Wholesale prices don’t necessarilyaccurately reflect the “energy component” of prices paid by end users, due to differences in purchasing strategies, longtermcontracts and potential price regulation; (2) Several additional components must be taken into account as well (gridtariffs, renewable levies and other taxes), from which industrial actors may receive partial or full exemptions.

...caution must be exercised when attempting to directly compare industrial end-use pricesbetween countries and sectors. Against the backdrop of decreasing wholesale prices and increasing exemptionsfor energy-intensive consumers in Germany, several EU member states have argued that domestic regulations inGermany create market distortions that unduly favour German firms. Because firms in different regions and sectorsvary considerably in the extent to which they pay wholesale market prices and/or receive tax exemptions and levyreductions, comparing prices between sectors and countries is a difficult task. The heterogeneity of the situation is notfully and transparently captured by European statistics.