EU28 GHG emissions are projected to continuously decouple from economic growth, as climate and energy policies are in place already in the Reference scenario. In the latter scenario, the EU28 sees an important decrease of GHG emissions compared with 2015 levels, the highest among all regions (Table S.6 of the Supplemental Material). Given the already ambitious decarbonization efforts in the Reference scenario, the EU28 NDC in 2030 is achieved with a 9% reduction of GHG emissions from Reference. While all emitting sectors and gases contribute to the emission abatement efforts, CO2 emission reductions are dominant, with energy supply contributing by 36% and transport by 18% of total reductions in 2030. We find that the industrial sectors only contribute by 8% to total emission reductions, indicating that marginal abatement costs in the power, transport, and buildings sectors are generally cheaper and that deeper emission reductions will require more measures by the industrial sector.
By the middle of the century, EU28 GHG emissions fall by 34% compared with 2015 levels in both the PRIMES and GEM-E3 Reference scenarios (see Fig. S.1 in the Supplemental Material) as a result of the existing policies and technological advancements. The emission trajectory of the EU-WB2°C scenario in 2050 shows a reduction of GHG emissions by 61% below Reference levels and 74% below 2015 emissions, reaching 1176 Mt CO2eq. Already in the Reference scenario, the CO2 emissions of the energy supply sector in 2050 fall to 16% of total GHG from 29% in 2015. In the EU-WB2°C, these emissions fall to 8% of total, as the energy supply sector is almost fully decarbonized by 2050 falling to just below 100 Mt CO2eq. The major contributing sector in the 2050 emission reductions is transport, contributing with 33% of the total reductions (Fig. 1). Nevertheless, transport CO2 emissions continue to hold the same share in total 2050 emissions as in the Reference (30% of total), in particular due to the emissions from freight and air transport activities that are difficult to abate. The largest share (38%) of the remaining 2050 GHG emissions in the EU-WB2°C is attributed to non-CO2 emissions, for which abatement is more costly or more related to behavioral changes (e.g., dietary shifts). Overall, we find that emission reductions consistent with a cost-optimal trajectory towards the 2 °C stabilization (see Section 2.2 and Van Soest et al. 2017; Duscha et al. 2018) are achievable with the existing technologies and do not require negative emission technologies like power supply with BECCS (Biomass with CCS), in contrast with the findings of Rodriguez et al. (2016).
Regarding the global GEM-E3 scenarios, we note that in the Reference scenario, only EU28 and Japan register GHG emission levels in 2050 below 2015 levels (see Table S.6 in Supplemental Material). The level of ambition of the EU28 Reference scenario is notably much higher than of the rest of the regions, making the EU28 economic system more carbon-efficient and thus enabling a less abrupt transition under the action of the WB2°C_Global scenario. In particular, in the global mitigation scenario, GHG emission reductions from Reference in 2050 are equal to 48%, noticeably lower than the reductions seen in other regions, as the system is already becoming decarbonized in the Reference scenario. Similarly, the achievement of the EU28 NDC implies less effort when compared with the GEM-E3 Reference scenario, in contrast to other regions such as Australia, Canada, and the USA (see Table S.6 in Supplemental Material). However, in the global NDC scenario in 2050, the EU28 achieves the highest reductions from Reference as all other regions maintain their NDC ambition levels. We note that the relative ambition of emission reductions across regions is a key driver of macroeconomic impacts, as will be discussed in Section 3.3.
The EU28 energy system undergoes a drastic transformation in order to achieve the rapid emission reductions described in the section above. The main indicators of the decarbonization process are presented in Fig. 2 for both the Reference and EU-WB2°C scenarios. The efforts required to move from the Reference projections towards a decarbonized system are more striking in 2050 than in 2030.
We find that energy efficiency (Fig. 2a) is key in the decarbonization process, as the energy intensity of GDP in 2050 in the EU-WB2°C scenario is projected 60% lower than that of 2015. Dedicated measures, such as the renovation of commercial and residential buildings, the eco-design regulation, the introduction of best available techniques in industry, and the emission standards for cars, aim towards increasing energy savings in combination with the increasing use of more efficient energy carriers like electricity. As a result of dedicated measures, we find that around 40% of the savings in the total final energy consumption come from the residential sector and 35% by the transport sector. Final energy demand of the buildings sector is reduced by 44% in 2050 when compared with Reference levels (Fig. 3d).
High penetration of renewable energy is also pivotal. The share of renewables in primary energy supply in 2050 reaches 50% in the EU-WB2°C scenario up by 22 percentage points from Reference (Fig. 2b). This is to the detriment of oil and gas, while in both Reference and EU-WB2°C scenarios, coal use in 2050 is dropping substantially from 2015 levels (Fig. 3c). Renewable energy penetration is most prominent in the power sector, especially by the deployment of wind and solar power technologies, and is also notable in the transport sector and to a less degree the buildings sectors. We find a limited growth in biomass-fueled power generation, as the use of biomass feedstock sector in biofuel production is more cost-effective. The role of advanced biofuels for the decarbonization of transport is key, particularly in the case of aviation and freight.
Already in the Reference, carbon prices and dedicated renewable energy targets lead to a penetration of renewables (including large hydro) equal to 45% in power supply production in 2030 and 50% in the scenario while by 2050, renewables dominate the EU28 power mix, reaching 67% in the EU-WB2°C scenario (Fig. 3a). Nuclear power supply holds a share close to 20% in both scenarios both in 2030 and 2050, driven mostly by the retrofitting of old plants rather than the construction of new ones. The development of CCS technology in 2050 is marked but limited, mainly due to acceptability issues and other licensing issues for storage sites. The carbon intensity of the EU28 power system falls by 74% from 2005 levels in 2050 in the Reference scenario and is almost decarbonized in the EU-WB2°C scenario (Fig. 2d).
The penetration of renewables is also driven by the decarbonization effort in the transport sector, as the use of biofuels in the total final energy demand rises from 6% in 2030 to 38% in 2050 in the decarbonization scenario (Fig. 3b). The introduction of advanced biofuels is the main option to reduce emissions in the non-electrifiable modes of road freight, aviation, and maritime transport. Nevertheless, the main driver for GHG reductions in transport is the regulation of the test cycle emissions performance of light-duty vehicles (LDVs). As manufacturers have to respect stricter regulation, they promote more efficient vehicles and increase the availability of low emissions vehicles in their portfolios. An additional key driver in 2050 is the electrification of transport which quadruples from Reference levels to 16% of total transport final energy demand, thus providing a clean alternative to fossil fuels as the power sector would have been largely decarbonized.
Overall, the electrification of final energy demand is another crucial element of the transformation process, going to 24% and 35% in 2030 and 2050 respectively in the EU-WB2°C scenario (Fig. 2c). Electricity demand grows towards 2050 (Fig. 3a), particularly due to the electrification of the transport sector and also due to the increased use of electricity for heat production in the buildings sector. In 2050, in the EU-WB2°C scenario, electricity serves more than half of the final energy demand of the buildings sector (Fig. 3d).
Moving to a low-carbon system involves a drastic transformation of production processes and consumption preferences. This transition is capital-intensive and can thus carry a cost for all economic agents. The carbon and energy efficiency of the system is improved through the adoption of new technologies and practices that are resource-intensive and potentially more expensive than the conventional ones, especially in the short to medium term. In addition, unabated emissions are subjected to high carbon taxes, creating an extra economic burden to consumers, while earlier investments in fossil fuel sectors result in stranded assets that occupy a share of the finite resources of the economy. Global economic activity can be adversely affected due to the resource requirements of climate mitigation policies (IPCC 2014). Yet, on a regional level, changes in key macroeconomic indicators can be either positive or negative depending on potential competitiveness gains, impacts on interregional trade, and new investment dynamics. We highlight that this assessment of macroeconomic impacts is only partial as accounting for the costs corresponding to the avoided climate damages and the significant co-benefits for air pollution, noise, and other externalities which could largely over-compensate the small direct economic costs.
In 2030, in the EU-WB2°C scenario, a global implementation of NDCs is achieved. Due to the high asymmetry of emission reduction targets across regions (Table S.6 in Supplemental Material), the EU28 registers competitiveness losses. Reductions in exports lead to a GDP loss of 0.15% of Reference levels (Fig. 4a and Table S.12 in Supplemental Material). We find that it is not the energy-intensive sectors that become less competitive—on the contrary, the exports of these sectors slightly increase—but rather the rest of manufacturing goods and service sectors (Fig. 5a and Table S.9 in Supplemental Material). European energy-intensive industries can further improve their exporting capacity as they are more resilient to emission reduction policies than their competitors by being less carbon-intensive already in the Reference scenario. In terms of sectoral production, losses from the sectors of manufacturing goods and services are not counterbalanced by the increasing production of electric vehicles and other clean energy technologies.
In 2030, in the WB2°C_Global global climate action scenario, GDP falls by 0.17% below Reference levels, similar to the EU-WB2°C scenario. Exports in 2030 fall, as in the EU-WB2°C scenario, but in this case, not only due to a deterioration of the EU28 competitiveness but also due to a reduction in global demand for goods and services. However, as imports drop as well, there is a counterbalancing effect in the overall trade balance. Thus, the main driver of lower activity levels is the reductions in private consumption (Fig. 4a), which are, however, a result of changes in relative competitiveness. For example, a decline in the exports of the biggest employing sector, the services (Fig. 5 and Table S.9, S.10 in Supplemental Material), results in lower income and thus lower levels of overall consumption. Overall, despite the higher production levels in certain sectors, such as electric cars, other clean energy technologies, and energy-intensive goods, the reduced external demand for certain, labor-intensive, EU goods and services drives GDP to lower levels. In Fig. 5, we show the changes in EU28 exports for aggregate sectors, and the respective share of this change in total EU28 exports. Our findings confirm that competitiveness impacts are central to climate policy assessment, as is discussed in policy debates on environmental regulation and in a large part of academic literature (e.g., see Dechezlepretre and Sato 2017).
The electrification of global and EU road transport has important macroeconomic impacts, also for the EU. This is due to the assumption in our Reference scenario that the EU holds a high share of production in the global market of electric vehicles. Hence, in the policy scenarios, EU can reap some benefits from the expansion of the global and domestic EV market. We find that the macroeconomic impacts are directed by several effects, including the differences in the value chain of the emerging market. The additional demand for new car stock spurs economic activity but as the production process of electric vehicles differs significantly from that of conventional cars (UBS 2017; ING 2017; IEA 2017), the sectors that benefit from such a transition vary. This is captured by the GEM-E3 model analysis through the representation of a separate representative firm with distinct production processes for the two different types of passenger cars. In particular, when compared with conventional cars, electric cars feature a different demand for intermediate goods and require less intermediate input of services (Fries et al. 2017). In Table S.13, in the Supplementary Material, we provide the assumptions for the production process in the GEM-E3 model. This lower intermediate demand for services partially explains the reduction in global demand for services in the global policy scenario.
Despite the considerably higher global mitigation efforts in 2050 in the WB2°C_Global scenario, where global GHG emissions fall by 72% from Reference, the EU28 registers economic gains. A driving force of this positive impact is the lower emission reductions from Reference levels of the EU28 compared with other GEM-E3 regions, as shown in Table S.6. Due to the very low EU28 energy and GHG intensities, among the lowest globally, that are the result of EU28 climate mitigation policy region already in the Reference scenario, the EU28 effort is lower than that of the rest of the regions. Once a global carbon tax is introduced, the EU28 economy is well equipped, and, although GHG reductions from 2015 levels are among the highest globally (Table S.6), the reductions from Reference levels are less demanding. This is in sharp contrast with the highly fragmented EU-WB2°C scenario, where EU28 achieves the highest emission reductions compared with the Reference and thus shows a negative impact on GDP. An additional driver of positive economic impacts is the learning-by-doing effect which leads to reductions in the purchase cost of electric vehicles and other emerging clean energy technologies. Thus, penetration of clean technologies can be more prominent (see Table S.18) and the overall energy system transformation can be less costly.
In 2050, in the WB2°C_Global scenario, estimations show an increase in private consumption and an improved net trade balance, thus leading to an overall increase of GDP (Fig. 4b). On a sectoral level, the transition towards a low-carbon economy and the respective diversification of sectoral production is prominent. Domestic production of low-carbon technologies increases substantially and almost compensates the reduced demand for conventional equipment and fuels. Domestic production is not only directed to the domestic market but also for exports, particularly for electric vehicles, as the EU holds a market share already in the Reference scenario. Combined with an improved competitiveness of European energy-intensive goods, the total domestic production increases. In addition, the increasing demand for domestically produced energy carriers like electricity substitutes imported fossil fuels and brings positive effects to the economy. Total exports of goods and services are estimated to fall as global economic activity is depressed, but the sharp drop in fossil fuel imports has a beneficial effect to the overall trade balance of EU28, which is found to improve by 0.1% of GDP. By conducting a sensitivity analysis, we can confirm that the EU28 trade balance is positively affected under the WB2°C_Global scenario in 2050 even with varying assumptions on the Armington elasticity of substitution (see Table S.14 and Table S.15 in Supplemental Material).
We note that the macroeconomic impacts of climate policies are greatly affected by the type of recycling of carbon tax revenues, if such a tax is foreseen. Recycling carbon tax revenues is in line with current practices found existing emission trading or carbon tax schemes (Carl and Fedor 2016). In our simulations, this revenue is considerable as it reaches almost 2% of EU28 GDP (see in Table S.8 of the Supplemental Material the level of the respective carbon prices). In GEM-E3 simulations, carbon tax revenues are recycled so that the government budget is only impacted by direct and indirect macroeconomic effects of the examined policies. For the simulations described in this paper, we have used a recycling scheme that reduces the level of indirect taxation of all goods and services, both domestic and imported. This mechanism creates a counterbalancing force to the increasing costs of production. If other recycling schemes are enabled, like for example a reduction of social security contributions, the macroeconomic results may differ substantially and can even register an increase in total employment levels, as seen in Fragkos et al. (2017).