COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions

A policy framework for climate and energy in the period from 2020 up to 2030

Contents

1............ Procedural issues and consultation of interested parties. 9

1.1......... Organisation and timing. 9

1.2......... Consultation and expertise. 9

1.2.1...... Consultation. 9

1.2.2...... External expertise and contributions of Commission services. 11

1.3......... Opinion of the Impact Assessment Board (IAB) 12

2............ Problem definition. 13

2.1......... Policy context 13

2.1.1...... State of play and general policy context 13

2.1.2...... 2050 Roadmaps and 2030 Green Paper 14

2.1.3...... International policy context 15

2.2......... Progress made, challenges encountered and lessons learnt from the 2020 framework. 15

2.2.1...... General progress towards meeting 2020 headline targets for climate and energy. 15

2.2.2...... Implementation – climate policy. 16

2.2.3...... Progress on international action on climate change. 17

2.2.4...... Implementation – energy policy. 18

2.2.5...... Interaction between headline targets and instruments. 23

2.3......... Evolution under current policies. 24

2.3.1...... The Reference Scenario. 24

2.3.2...... The EU's medium-to long-term security of energy supplies remains an issue. 26

2.3.3...... Ensuring competitiveness with increasing energy costs. 26

2.3.4...... Risk of delayed investments and high carbon lock in. 30

2.4......... What is the problem the 2030 framework should contribute to address?. 31

2.4.1...... General problems. 31

2.4.2...... Specific problem for this policy initiative. 32

2.4.3...... Current challenges serving as guiding principles. 32

2.4.4...... Stakeholders views regarding the challenges related to targets and instruments and their interactions 33

2.5......... Who is affected. 34

2.6......... The EU's right to act and EU added-value. 34

3............ Scope and Objectives. 35

3.1......... Scope and context of the initiative. 35

3.1.1...... Scope. 35

3.1.2...... Context 35

3.2......... Objectives. 36

3.2.1...... General objectives. 36

3.2.2...... Specific objectives. 36

3.2.3...... Operational objectives. 36

3.3......... Coherence with other policies. 36

4............ Policy options. 37

4.1......... Policy options for headline targets and measures. 37

4.1.1...... Basic policy options for targets and ambition levels. 38

4.1.2...... Scenario analysis to assess policy options for targets and measures. 39

4.1.3...... Interaction with international climate policies. 48

4.2......... Policy options for meeting headline targets. 49

4.2.1...... ETS. 49

4.2.2...... Sectors not covered by the ETS. 49

4.2.3...... Options for meeting a potential RES target 50

4.2.4...... Options for meeting a potential EE target 50

4.3......... Options for other targets or indicators for aspects relating to competitiveness of the energy system and security of energy supplies. 50

5............ Analysis of impacts: 50

5.1......... Options for targets and measures. 50

5.1.1...... Methodology. 50

5.1.2...... Environmental impacts. 54

5.1.3...... Energy system impacts. 66

5.1.4...... Economic impacts. 75

5.1.5...... Social impacts. 88

5.2......... Indicators / aspirational objectives relating to competitiveness of the energy system and security of supply 98

5.3......... EU action in the context of increased international climate action. 99

5.4......... Structural measures in the EU ETS. 103

5.4.1...... Revision of the annual linear reduction factor 105

5.4.2...... Use of international credits. 106

5.4.3...... Improve the functioning of the EU ETS through addressing the market imbalance. 109

5.5......... Carbon leakage measures in a 2030 framework. 110

5.5.1...... Indirect emissions compensation. 113

5.5.2...... The use of auction revenues for proactive low-carbon innovation measures. 113

5.6......... Sectors not included in the ETS or Non ETS: Policy options for the Land Sector 114

5.6.1...... The problem.. 114

5.6.2...... The policy options for 2030. 114

5.6.3...... Comparison of options. 115

5.6.4...... Policy monitoring and evaluation. 115

5.7......... Implementing a potential RES target 116

5.8......... Implementing a potential energy savings / efficiency target 118

5.9......... Differential impacts across member states. 119

5.9.1...... Impacts on Member State level 120

5.9.2...... Meeting the equity challenge. 128

6............ Comparing options / Conclusions. 131

6.1......... Comparing the scenarios. 131

6.1.1...... Environmental impacts. 131

6.1.2...... Energy system impacts. 132

6.1.3...... Economic impacts. 132

6.1.4...... Social impacts. 133

6.1.5...... Distributional impacts. 133

6.2......... General impacts and trade-offs between policy options. 134

6.2.1...... Only a GHG target, or several targets. 134

6.2.2...... The level of the targets. 135

7............ Annexes. 142

7.1......... The EU Reference Scenario. 142

7.2......... Conditions enabling cost-effective decarbonisation and their modelling. 153

7.3......... Decarbonisation scenarios based on Ambitious Energy Efficiency policies. 159

7.4......... State of affairs and main lessons learnt from the 2020 framework. 169

7.4.1...... Summary. 169

7.4.2...... The 20% GHG emission target, dedicated policies and policy interactions. 171

7.4.3...... The 20% renewable energy target and implementing measures. 182

7.4.4...... The energy efficiency target and implementing measures. 192

7.5......... Summary report on the analysis of the debate on the green paper "A 2030 framework for climate and energy policies". 198

7.5.1...... Process and quantitative results of the Public Consultation. 198

7.5.2...... Qualitative assessment of the consultation and main findings. 201

7.5.3...... Which lessons from the 2020 framework and the present state of the EU energy system are most important when designing policies for 2030?. 203

7.5.4...... Targets for 2030. 205

7.5.5...... Instruments. 213

7.5.6...... Competitiveness and security of supply. 220

7.5.7...... Capacity and distributional aspects. 226

7.6......... Existing free allocation procedures in the EU ETS. 229

7.7......... Challenges relates to skills and training. 230

7.8......... Extension of the scope of the EU ETS to other sectors. 232

List of Figures

Figure 1: Average electricity generation costs and prices in the Reference Scenario (Euro'10 per MWh) 29

Figure 2: International fuel prices developments. 94

Figure 3: Average price of electricity in final demand sectors. 95

Figure 4: Example of build-up surplus in ETS based on Reference emissions profile and existing cap 104

Figure 5: Example of possible supply demand pattern ETS based on 40% GHG reduction emissions profiles, ETS cap of 43% by 2030. 106

Figure 6: Rise in average system costs, 2030, compared to Reference, as a % of GDP for the GHG40 scenario, compared to the GDP/capita in 2010. The EU average rise is 0.15%. 123

Figure 7: Health benefits per Member State as % of 2030 GDP compared to Reference (using low value of life year lost estimates), relative to GDP per capita. 127

Figure 8: EU-28 GDP, energy demand and energy intensity (2000 = 100) 145

Figure 9: EU-28: Final energy consumption by sector and share of electricity. 145

Figure 10: EU-28 Fuel shares in primary energy consumption, carbon intensity. 146

Figure 11: EU-28: RES share: total and by sector (RES in gross final energy consumption) 147

Figure 12: Net power generation capacity (with further breakdown of RES capacities in right columns) 148

Figure 13: Non-CO2 GHG emissions by gas in the EU28. 151

Figure 14: LULUCF emissions in the EU28. 152

Figure 15: Upfront subsidies required to install CCS in a new build pulverised coal plant 175

Figure 16: Estimated CO2 transfer factors for Norway and power markets in NEW... 177

Figure 17: Impact of carbon prices on cost of gas-fired generation. 178

Figure 18: Levelised costs of power generation (USD per megawatt hour), first quarter 2013. 183

Figure 19 - Annual CO2 emissions reductions caused by the RES Directive. 185

Figure 20: Comparison of European wholesale power, oil, gas and coal prices. January 2002=100% 186

Figure 21: Renewable surcharges as a proportion of household electricity price, 2011, in %.. 187

Figure 22: EED and Transport White paper annual reduction impact on CO2 emissions. 194

Figure 23: Ignoring energy efficiency potential can lead to higher carbon price. 196

Figure 24: Estimates of direct and avoided costs linked to the implementation of the Energy Efficiency Directive 197

Figure 25: Stakeholders profiles – Based on 557 replies. 200

Figure 26: Stakeholders geographical distribution –Based on 557 replies. 201

List of Tables

Table 1: Composition and drivers of system costs (ratio to GDP of individual cost components and total amount of energy system costs) 28

Table 2: Scenarios to assess main policy options with respect to targets and measures. 41

Table 3: Overview of main assumptions of scenarios assessed. 42

Table 4: ETS and non-ETS emissions. 56

Table 5: Non-CO2 and non-energy related GHG emissions in the EU28 in 2030 (MtCO2eq.) 58

Table 6: Sectoral GHG emission impacts compared to 2005. 60

Table 7: Sectoral GHG emission impacts compared to Reference. 61

Table 8: Biomass demand for energy purposes. 62

Table 9: Land use changes EU28 (million hectares) 63

Table 10: Impact on LULUCF sink. 64

Table 11: Impacts on air pollution and air pollution control costs in 2030 (change compared to the reference) 66

Table 12: Impacts on primary energy consumption in 2030 and 2050. 69

Table 13 Other energy system impacts. 73

Table 14: Energy system costs and sub-components. 78

Table 15: Electricity and carbon prices, energy related costs for energy intensive industries. 81

Table 16: GEM E-3 projections of GDP impact of a 40% GHG reduction compared to the Reference scenario 84

Table 17: E3MG projections of GDP impact of a GHG led scenario resulting in 40% GHG reductions in 2030 compared to the Reference scenario. 84

Table 18: E3ME projections of GDP impact for 2030 compared to Reference of scenarios based on concrete and more ambitious EE policies. 84

Table 19: Impact of a 40% GHG reduction in 2030 on energy-intensive sectors production assuming companies that receive free allocation, do not incorporate the opportunity cost in their prices. 86

Table 20: Impact of a 40% GHG reduction in 2030 on energy-intensive sectors production assuming companies that receive free allocation, incorporate the opportunity cost in their prices. 87

Table 21: E3ME projections of employment impacts for 2030 compared to Reference of GHG reduction scenario with additional policies for EE and RES, assuming revenue recycling to consumers and energy efficiency and renewable energy investments. 89

Table 22: E3ME projections of employment impacts for 2030 compared to Reference of GHG reduction scenario with additional policies for EE and RES, assuming revenue recycling to lower labour costs and energy efficiency and renewable energy investments. 89

Table 23: GEM E-3 projections of employment impacts of a 40% GHG reduction compared to Reference 90

Table 24: Jobs associated with investments in the power sector and energy efficiency, 2011-2030 91

Table 25: Difference in Jobs compared to Reference of investments in the power sector and energy efficiency, 2026-2030. 92

Table 26: share of energy costs in household expenditure. 95

Table 27: Impact conditional target on GDP and production of energy-intensive sectors, GEM-E3 model 101

Table 28: Impact international action on GDP and production of energy-intensive sectors, PACE model 103

Table 29: Linear reduction factors from 2021 onwards to 2030 depending on different 40% GHG scenarios 105

Table 30: CER/ERU submissions in phase 2 of the ETS for compliance purposes (MtCO2e) 107

Table 31: Projected Member State total GHG reductions vs 2005. 120

Table 32: Projected Member State GHG reductions in non-ETS sectors vs 2005. 121

Table 33: Projected Member State renewable energy share in final energy consumption. 121

Table 34: Projected system costs and investments increases for the policy scenarios compared to the Reference 123

Table 35: Projected average price of electricity in final demand sectors increases for the policy scenarios compared to the Reference. 124

Table 36: Monetised health benefits in 2030 as a percentage of GDP. 125

Table 37: reduced air pollution control costs by 2030 as a percentage of GDP. 126

Table 38 Reductions in energy purchases in 2030 as a percentage of GDP, compared to the Reference Scenario 127

Table 39: Auctioning revenue projections in options achieving 40% GHG reductions and assuming different coverage of scope of sectors covered by auctioning. 130

Table 40: Overview table with the key results for the IA for the different scenario projections. 138

Table 41: International fossil fuel price developments in Reference. 143

Table 42: Energy system costs in relation to GDP per Member State. 149

Table 43: Reductions in 2030 in the ETS, depending on sectoral coverage. 233

Table 44: 2030 ETS auction revenue, depending on sectoral coverage of ETS and degree of auctioning 233

1. Procedural issues and consultation of interested parties 1.1. Organisation and timing

The preparations of the Impact Assessment (IA) for the 2030 framework for climate and energy policies formally started in April 2013 subsequent to the adoption of the Commission's Green Paper on the matter[1], but the IA builds on the update of the new Reference scenario (hereinafter "EU Reference Scenario 2013" or "Reference") used as the benchmark for the quantitative assessments, which started already in late 2011.

An interservice group (ISG) was established in February 2013 in view of preparing the Green Paper, and this group continued to meet to steer the work on the IA up to its finalisation. The ISG met 4 times for the purposes of preparing this IA; on 30 May 2013, the ISG met to discuss e.g. the work plan and the results of the EU Reference Scenario 2013; on 16 July the ISG met to discuss a first outline of the IA and first outcomes of the consultation launched by the Green Paper, on 23 September the group met to discuss policy options and preliminary results. The final draft IA was submitted to the ISG group on 18 October 2013.

The lead DGs are Climate Action (CLIMA) and Energy (ENER). The following DGs and services were invited to the Steering Group: Agriculture and Rural Development (AGRI), Budget (BUDG), Communication (COMM), Communications Networks, Content and Technology (CNECT), Competition (COMP), Economic and Financial Affairs (ECFIN), Education and Culture (EAC), Employment, Social Affairs and Inclusion (EMPL), Enlargement (ELARG), Enterprise and Industry (ENTR), Environment (ENV), EuropeAid Development & Cooperation (DEVCO), Health and Consumers (SANCO), Home Affairs (HOME), Humanitarian Aid and Civil Protection (ECHO), Internal Market and Services (MARKT), Joint Research Centre (JRC), Justice (JUST), Maritime Affairs and Fisheries (MARE), Mobility and Transport (MOVE), Regional Policy (REGIO), Research and Innovation (RTD), Secretariat-General (SG), Taxation and Customs Union (TAXUD), Trade (TRADE), Bureau of European Policy Advisers (BEPA), Legal Service (SJ) and European External Action Service (EEAS).

1.2. Consultation and expertise 1.2.1. Consultation

As a preparatory step for the development of the 2030 framework for climate and energy policies, the Green Paper was adopted on 27 March 2013[2]. It presents progress made and challenges under the current policy framework and sets out for consultation five key issues that the 2030 framework needs to address, namely: targets; coherence of instruments, competitiveness of the EU economy; security of supply; and acknowledgment of the varying capacity to act of Member States. In addition, the Green Paper consults on the main lessons learnt to date from the 2020 framework for climate and energy policies.

The Green Paper launched a public consultation of all interested parties which lasted until 2 July 2013. The Green Paper included a set of 22 questions on which the Commission sought viewpoints and input. Some 557 contributions from a broad spectrum of stakeholders including from 15 Member States were received. Given the very broad participation, the consultation offered insights into a broad range of stakeholder opinions. All of the Commission's minimum consultation standards were met. The full report presenting results of the public consultation is found in Annex 7.5 to this IA.

In addition to the public consultation itself, a high-level stakeholder conference was organised on the 2030 framework on 19 June 2013, with stakeholders and Member States represented as speakers and with more than 200 participants in the audience. The conference provided useful first-hand accounts on the major issues addressed by the consultation and was a valuable complement to the formal public consultation.

Box 1: Main findings of the public consultation

The public consultation revealed an almost universal support for the development of a common European framework for climate and energy policies.

Many stakeholders expect the EU to provide a 2030 framework to reduce uncertainty among investors, governments and citizens. Member States and stakeholders emphasized the need for climate and energy policy to continue to take into account the three prime objectives of energy policy: competitiveness, security of supply and sustainability.

On targets, there is a broad consensus among the various stakeholders on the need for a new GHG target, whereas there are diverging views on the appropriate ambition level. Stakeholders have mixed views on the need for renewables and energy savings targets.

On instruments, most stakeholders agree that the European Emission Trading Scheme (EU ETS) should remain the central instrument for the transition to a low carbon economy. There are mixed views on the extent to which a reform of the EU ETS is needed. Many stakeholders agree that additional policies and instruments can be utilised to reduce emissions for non-ETS sectors. Many stakeholders focus on the need for harmonization of policies across Europe to create a level playing field and avoid market distortion. The Internal Energy Market's benefits are widely recognised and this is seen as key to ensure competitive prices and security of supply. Higher interconnection capacity between Member States is considered fundamental to meet energy and climate objectives.

There is broad consensus among stakeholders that innovation is essential to ensure the flexibility and the security of the EU energy system and for the further development of cost-effective energy options.

On competitiveness, many stakeholders note that increased attention should be paid to competitiveness due to the economic crisis and changing international circumstances. The increasing cost of some climate and energy policies such as RES support needs to be contained. There is also a general consensus that public support schemes have to be revised to be more in line with changing costs of deploying renewables.

On distribution of efforts, it is widely held that a fair distribution of efforts for the non-ETS sectors is needed; that socio-economic and geographical differences between Member States have to be considered; and that financial instruments can play a key role to help Member States less able to act and to leverage private investment.

Member State Ministers in charge of energy and climate policy had a first exchange on the main issues addressed by the Green Paper at a joint session of the Informal Energy and Environment Councils in Dublin on 23 April 2013. The European Council of 22 May 2013 welcomed the Commission's Green Paper and stated they will return to this issue in March 2014.

The Commission also organised meetings between Member States' Director Generals in charge of energy policy (on 14 March 2013) and of climate policy (on 19 February 2013) to discuss the 2030 Framework prior to the adoption of the Green Paper.

1.2.2. External expertise and contributions of Commission services

In order to ensure a complete and thorough quantitative assessment of future impacts in the EU, the Commission contracted the National Technical University of Athens, IIASA and EuroCare to model EU scenarios. The energy system and CO2 emission modelling is based on the PRIMES model. The non-CO2 GHG emission modelling is based on the GAINS model, with additional input by the Joint Research Centre's Institute for Environment and Sustainability concerning air pollution. LULUCF emission modelling is based on the GLOBIOM-G4M models.

A comprehensive update of the Reference scenario was conducted between November 2011 and June 2013 in close cooperation between DGs ENER, CLIMA and MOVE and in association with the JRC. The macroeconomic assumptions for the EU Reference Scenario 2013 were consulted with and draw on work of DG ECFIN and the Economic Policy Committee. Extensive consultations during four meetings with experts from Member States on assumptions used and draft results took place to ensure appropriateness and quality with regard to Member State-specific results. Moreover, in order to improve transparency and to gain useful third party views on the methodology applied by the Commission, the PRIMES model was peer-reviewed in 2011 by a group of recognised modelling experts which concluded that the model is suitable for the purpose of complex energy system modelling.

Macroeconomic modelling, including impact of mitigation action by third countries, was performed using the GEM-E3 model, a general equilibrium model, maintained and used by the Joint Research Centre's Institute for Prospective Technological Studies (IPTS) and the E3MG model, a macro-econometric model run by Cambridge Econometrics. IPTS also contributed using the POLES model which is a global sectoral simulation model for the development of energy scenarios and global GHG emission pathways until 2050.

An empirical study assessing Carbon Leakage and Competitiveness was undertaken by Ecorys[3].

ICF GHK conducted a study analysing the employment impacts through macroeconomic modelling, using the E3ME model by Cambridge Econometrics, and by bottom up assessment for the power sector.

In parallel to the preparations of this IA, the Commission's services carried out an extensive analysis on energy prices and costs. This work was led by DG ENER with close involvement of other DGs, in particular DGs ENTR, ECFIN, EUROSTAT, CLIMA, COMP and TAXUD.

DG ECFIN conducted a study on economic aspects of energy and climate policies[4]. The report is composed of three chapters, investigating the evolution of electricity and natural gas markets across the EU, with a particular focus on the unit energy costs and the shale gas impact on the competitiveness of the EU economy, the impact of energy and climate policies on the energy and carbon prices, as well as the impact of renewable developments on trade.

DG ENTR has performed an assessment of the potential impacts of EU action in the context of international climate action on EU industrial sectors using the PACE model of ZEW (Zentrum für Europäische Wirtschaftsforschung).

1.3. Opinion of the Impact Assessment Board (IAB)

The draft IA was submitted to the Impact Assessment Board (IAB) on 24 October and was discussed at the IAB hearing on 20 November 2013, subsequent to which the IAB asked for a revised submission. The IA was resubmitted on 12 December 2013. On 9 January 2014 a positive opinion was received from the IAB.

The board recommended to be clearer about the scope of this initiative, in particular explaining, and concentrating on, the decisions that are to be taken now.

The IA was adapted to address this. The Section on objectives was adapted making clear that the IA is supporting an initiative that will focus on the issue of climate and energy targets in a 2030 perspective, while giving general directions of future policy development without yet proposing the implementation measures that will require further assessments. One exception is the need to improve the functioning of the ETS which is confronted with a large surplus. For this policy initiative a separate Impact Assessment is prepared.

In relation to the current framework, the board asked to more clearly explain what the lessons learnt are (e.g. the contribution to GHG reduction, the coherence between the policy tools, the performance of ETS) and how these have been taken into account. The following important changes were made, but the board still recommended to be clearer on the general assessment of the performance of the key elements of the current framework.

The lessons learned Section (which is supported by an extensive annex) gives clearer insights on the costs related to existing renewable support schemes, the recent guidance given by the Commissions on this issue, the recent developments relating to aviation in the ETS, the role of EU targets in making progress on international action and interaction between targets and instruments. Also in the Section on problem definition a section was added to better recognise the challenges related to interaction of targets and instruments.

The board recommended that more information should be provided regarding the assumptions underlying the baseline scenario (i.e. the so called Reference scenario) and the options and that the report should discuss the extent to which the assumption that all existing policies will be fully implemented is realistic in light of existing experience.

The Section on evolution under current policies was significantly enhanced. A box was added to give a clear overview of the main assumptions and the text was updated to add significant additional information on what are the drivers of increased costs in this Reference scenario. In the Section on problem definition the challenges related to existing policies were revisited. The board still noted that more information could be provided on the extent to which the applied baseline scenario would require additional action. Regarding the baseline the board also noted that the assumptions concerning the use of auctioning in different sectors and the recycling of revenues could be improved, which was further clarified.

The board also asked that the key impacts and the trade-offs are made more clearly (e.g. between policy tools and with competitiveness). To address this the concluding section of the IA as well as the executive summary was extended to include a discussion focussing on the trade-offs between policy options, based on the findings of the extensive analysis of scenarios reflecting these policy options. The board still noted that more specific conclusions should be drawn regarding the most cost-efficient policy scenario and to which extent binding targets are proportionate to incremental costs.

The board also asked to better explain the distributional impacts in Member States. To meet this concern the Section on distributional impacts was enhanced by adding significant detail on the impact of scenarios at Member State level.

Finally, the board asked that the presentation of the report should be substantially improved by focussing on the core issues with stakeholders' views being included in the main report.

This was addressed by ensuring that problem definition, objectives and the concluding Section focussed clearer on the scope of this impact assessment, i.e. to support an initiative that will focus on the issue of climate and energy targets in a 2030 perspective. Given that it also aims to give general directions of future policy development, the main Section on analysing the impacts could not be shortened, even though the assessment of one policy option, i.e. the extension of the scope of the ETS, was moved to an Annex given that option requires more analysis before a general policy direction could be given on this options.

Building on the stakeholder opinions that were already described in detail in Annex 7.5 and the overview that was already included in Section 1.2. A discussion was added in the Section on current challenges on stakeholders opinion on the key aspect of this initiative, e.g. the targets and their interaction in a 2030 perspective. Also in the Section that discusses carbon leakage measures a specific Section was added on stakeholders perspectives.

2. Problem definition 2.1. Policy context 2.1.1. State of play and general policy context

In the last 20 years, the EU has been successful in decoupling GHG emissions from economic growth. While GHG emissions in the EU 28 fell by 17% over the period 1990-2011, the overall economy grew by 45%[5]. This development is to a considerable extent due to a gradual improvement in the carbon intensity of the EU's energy mix, including due to higher shares of renewable energy, and to a decreasing energy intensity of the EU economy, thanks to energy efficiency measures taken across the economy including in industry, and also due to growth in many non-energy intensive sectors, in particular services, as well as to decreases in non-CO2 emissions, in particular in the agriculture and waste sectors.

In parallel to these developments, the EU has made significant progress towards the creation of internal energy markets in electricity and gas[6], though obstacles remain[7]. The EU is also making considerable progress in ensuring the security of energy supplies in the EU, although dependency on one or a limited number of source countries of natural gas in particular is still a concern for many Member States while other supply concerns are also emerging as the energy system is evolving[8]. At the same time, energy affordability for households and the impacts on competitiveness of EU energy prices for industry in an international comparison are of increasing concern for these energy consumers and for policy makers.

The Climate and Energy package adopted in 2009 presented an integrated approach based on climate and energy targets and a set of policies to implement them. Chapter 2 of the Commission's Green Paper on a 2030 framework for climate and energy policies together with Annex 1 of that Green Paper provide a comprehensive overview of the climate and energy objectives and policies applicable in a 2020 perspective (see also Annex 7.4 and Section 2.2 below on lessons learnt). But 2020 is only an intermediate step towards a competitive and secure low carbon economy.

As regards climate change, the long term goal agreed in the context of the UNFCCC is to limit the global average temperature increase to below 2°C compared to pre-industrial levels, which guides the EU's climate action. In line with scientific findings reported by the International Panel on Climate Change (IPCC) in the fourth Assessment Report, the European Council stated in 2009 that the EU's objective, in the context of necessary reductions by developed countries as a group, is to reduce GHG emissions by 80-95% in 2050 compared to 1990. The European Council also endorsed the objective to ensure that global emissions reach a peak by 2020 and are reduced by at least 50% compared to 1990 in order to increase the chances of avoiding climate change.

The European Council has also recently addressed energy in a more holistic way: first in February 2011 when it requested that due consideration be given to fixing intermediary stages towards reaching the 2050 objective and stated for example that "safe, secure, sustainable and affordable energy contributing to European competitiveness remain a priority for Europe"; and again in May 2013 emphasising the importance of the internal energy market and in particular stating that the EU's energy policy "must ensure security of supply for households and companies at affordable and competitive prices and costs, in a safe and sustainable manner", amidst increasing concerns in this regard in many Member States and industry sectors.

2.1.2. 2050 Roadmaps and 2030 Green Paper

In order to provide a long term perspective on climate, energy and transport (a sector which accounts for a significant share of both GHG emissions and energy consumption), the Commission came forward with three initiatives in 2011 based on a consistent analytical framework: the Roadmap for moving to a competitive low carbon economy in 2050, the Energy Roadmap 2050, and the Roadmap to a Single European Transport Area – Towards a competitive and resource efficient transport system (commonly referred to as the Transport White Paper)[9], which presented fundamental aspects of the transition to a low carbon economy, cost-efficient GHG emission reduction milestones for 2030, and "no-regret options" – i.e.: more energy efficiency, higher shares of renewable energy and energy infrastructure development - for the transition towards a competitive, sustainable and secure energy system

In reaction to these initiatives, the European Parliament underlined the necessity of clear climate and energy objectives for 2030, building on the Roadmaps[10]. The Council did not adopt conclusions on the Roadmaps, but Council Presidency conclusions underlined the broad agreement by all but one Member States on the core elements of the Roadmaps. In March 2013, the Commission came forward with a consultative Green Paper on a 2030 framework for climate and energy policies. On 22 May 2013, the European Council welcomed the Commission's Green Paper, recognised that significant investments in new and intelligent energy infrastructure are needed to secure the uninterrupted supply of energy at affordable prices, and that such investments are vital for jobs and sustainable growth and will help enhance competitiveness. The European Council recognised the importance to have a well-functioning carbon market and a predictable climate and energy policy framework post-2020 which is conducive to mobilising private capital and to bringing down costs for energy investment. The European Council invited the Commission to come forward with more concrete proposals in time for the March 2014 European Council. The recently agreed 7th Environmental Action Programme states that the next step for the EU's climate and energy framework beyond 2020 is to provide a clear, legally-binding framework and target(s) to enable investments.

2.1.3. International policy context

While more than 110 countries, accounting for 85% of global emissions and including all major economies, have formally pledged to take action to mitigate climate change in the context of the UNFCCC, no new comprehensive international climate agreement has been achieved that ensures that the global community as such is on track to keep global warming below 2°C. The lack of such an agreement and the insufficient ambition of pledges, including by major economies, have prevented the EU from raising its 2020 GHG reduction target to 30%[11]. At the 2011 Durban UN climate conference, countries however agreed to start negotiations on a new global agreement, applicable to all contracting parties for the period beyond 2020, to be agreed at the UN climate conference in Paris in 2015.

2.2. Progress made, challenges encountered and lessons learnt from the 2020 framework

A detailed and comprehensive analysis of progress made, challenges encountered as well as lessons learnt and interactions between the EU's extensive climate and energy policies underpinning the 2020 targets was carried out. This analysis, supported by the responses to the public consultation, is a fundament of this impact assessment and is presented in detail in Annex 7.4 along with details of relevant evaluations where these are available. As regards energy efficiency, a more detailed assessment of progress made towards the 2020 targets and lessons learnt will be contained in the review that the Commission will carry out in 2014 as required by the Energy Efficiency Directive.

Some of the more salient conclusions of this analysis are summarised below.

2.2.1. General progress towards meeting 2020 headline targets for climate and energy

With a 17% reduction in 2011 compared to 1990[12], the EU28 as a whole is on track to meet and even exceed its 2020 GHG target of 20% compared to 1990. The 2020 cap for the sectors covered by the EU Emission Trading System (ETS) is expected to be met. The EU as a whole is also on track to meet the target for the non-ETS sectors. However, 13 Member States need to make additional efforts to meet their respective national 2020 targets under the Effort Sharing Decision, or make use of the flexibility mechanisms foreseen therein[13]. EU and national policies, high fossil fuel prices and reduced energy demand due to the economic crisis have contributed to GHG emission reductions.

As regards renewable energy, its share of gross final energy consumption was 12.7% in 2011 (compared to 8.5% in 2005). On aggregate, the EU 28 has met its interim target for 2011/2012, driven by Member States efforts to make progress towards the national targets in the Renewable Energy Directive. However, as the trajectory grows steeper, more efforts will still be needed from Member States in order to reach it[14] Many Member States need however to make additional efforts to meet their respective 2020 national targets, and recent evolutions such as for instance retroactive changes to support schemes is causing concern as to whether the overall EU target will be met[15].

The 2020 target of saving 20% of the EU's primary energy consumption (compared to projections made in 2007) is not legally binding for Member States, but significant progress has nevertheless been made. After years of growth, primary energy consumption peaked in 2005/2006 (at 1,825 Mtoe) and has been slightly decreasing since 2007 (to reach 1,730 Mtoe in 2011)[16], in part due to impacts from the economic crisis, but also due to improved energy intensity. Nevertheless, the EU is likely to miss its indicative energy savings target of 20% compared to 2007 baseline projections for 2020 under current policies. The EU Reference Scenario 2013 projects energy savings of some 17% in 2020 (see Section 2.3 below).

2.2.2. Implementation – climate policy 2.2.2.1. The EU Emission Trading System (ETS)

Since 2013 the new institutional framework with auctioning and EU-wide harmonised benchmarks for free allocation has been in place and constitutes a significant improvement compared to the previous trading periods that still had national based allocation plans.

The ETS has adapted flexibly to changed economic circumstances and lowered compliance cost for sectors covered by the ETS, in the context of a prolonged economic recession. However, as outlined in the Carbon Market report[17], the economic recession and the accelerated inflow of international credits have created a surplus of around 2 billion allowances since 2008. If unaddressed, this will have a long lasting effect on the ability of the ETS to incentivise low carbon investments. In combination with today's high gas to coal price ratio it can lead to carbon lock-in. Regulatory uncertainty on the way forward has reduced the confidence of market participants and in some cases is already leading to fragmentation of climate policies within the EU. The lower than expected ETS carbon prices and corresponding auctioning revenues are reducing the envisaged related redistribution effects.

Free allocation to energy intensive sectors and low carbon prices have resulted in a very low risk of carbon leakage at present[18]. State aid for electricity intensive industries in line with the related 2012 aid guidelines[19] can be an effective way of preventing indirect impacts but has given rise to concerns by some stakeholders regarding distortions of competition across Member States.

Aviation has been included since 2012 in the EU ETS. The scope also includes incoming and outgoing international flights in the EU. Third countries have been opposing that the EU includes flights of foreign operators in the EU ETS[20]. To provide negotiation time for agreement on a realistic timetable for the development of a global market-based measure (MBM) and on a framework for facilitating the comprehensive application of regional MBMs pending the application of the global MBM, international flights into and out of Europe in 2012 were temporarily exempted from enforcement[21]. In October 2013 the ICAO Assembly agreed to develop by 2016 an MBM addressing international aviation emissions and apply it by 2020. In response to this and to give further momentum to the global discussions, the Commission has proposed amending the EU ETS for the period 2014-2020 so that only the part of a flight that takes place in European regional airspace is covered by the EU ETS. This proposal is now being discussed by Council and Parliament.

2.2.2.2. The Effort Sharing Decision (Non ETS)

Member States' efforts are effectively supported by a series of measures at the EU level, including the regulation of CO2 emissions from passenger cars and vans, the Energy Performance of Buildings Directive, the Energy Efficiency Directive, the Renewable Energy Directive, the F-gas regulation and the eco-design framework setting minimum energy efficiency standards for a range of domestic and industrial appliances. Many Member States have also put in place national measures unrelated to EU initiatives contributing towards their effort sharing targets, such as CO2 and energy taxation, which also impacts energy end-price differentials between Member States and sectors.

Nevertheless, not all Member States are on track to meet their target, so the foreseen flexibilities may be important to ensure compliance. This was also highlighted in several responses to the consultation. However, access to international credits for compliance and possible overachievement at the overall EU level might impact potential prices of emission allocation transfers between Member States and reduce related distribution effects.

2.2.2.3. Fuel Quality Directive

The Fuel Quality Directive (FQD), as amended in 2009[22], introduced an obligation for fuel suppliers to reduce the life cycle greenhouse gas emissions from their supply of fuels used in road (and non-road mobile machinery) by 6% in 2020 from a 2010 baseline.

The methodological challenge is to ensure fuel suppliers can calculate life cycle emissions, incorporating an adequate level of accuracy but balancing the associated administrative burden. The development and evaluation of such a methodology is complex. In this context, an impact assessment considering a number of options has now been finalised but no decision on this has been taken yet.

Other major economies are reviewing proposals for or have adopted similar legislation, e.g. the US state of California. One benefit of such a policy is that it will apply equally to importers and domestic producers of fuels.

2.2.3. Progress on international action on climate change

In early 2007, the EU agreed on two headline targets for 2020 followed by the adoption of the climate and energy package in late 2008. It included a unilateral target to reduce GHG emissions by 20% by 2020 and a conditional of 30% depending on the level of ambition of other countries. As the world's largest economy, the EU was the first to bring proposals for an economy-wide target to the international negotiations. The EU's leadership had a significant impact on other countries, and all other major economies followed with their own pledges in the months ahead of the 2009 Climate Conference in Copenhagen. In the end, more than 90 developed and developing countries, including all major economies, representing more than 80% of global GHG emissions made 2020 pledges. The EU's unilateral target was instrumental in bringing forward these pledges by others. However, not all countries followed the EU's example in proposing a target range, and other countries did not take sufficiently ambitious targets to allow the EU to move to its 30% conditional target.

The pledges under the Copenhagen Accord and Cancun decisions have led to the development and implementation of a variety of national policies and measures, including carbon markets. While the EU ETS remains at present the largest functioning carbon market, others are being implemented and developed. For example, California and New Zealand have implemented carbon markets; Australia adopted its Carbon Pricing Mechanism legislation[23]; China is pushing ahead with the design of its seven emissions trading pilots some of which have already commenced; South Korea is developing its trading scheme.

Major economies have enhanced their fuel economy standards (US, China, Japan, and India is considering new policies) and some countries have undertaken significant reforms of their tax and subsidies to improve their energy security, with GHG emission benefits (Iran, Indonesia, South Africa, India). More than 100 countries have renewable energy policies, and especially fast-growing economies are developing support schemes to promote investments in renewable energy (from Philippines to China to Chile).

But neither the existing pledges nor initiated measures are delivering sufficient reductions by 2020 to be on track to prevent a dangerous 2º C rise of temperature. At the UN Climate conference in Durban, in 2011, all countries recognised the urgent need to act collectively with greater ambition. They agreed to negotiate by 2015 a global climate regime applicable to all for the period after 2020 as well as to enhance mitigation efforts to close the pre-2020 mitigation gap. The climate change conference in Warsaw in November 2013 invited all countries to prepare their contributions well in advance. In order to build sufficient global political momentum, this should allow for a first informal discussion at the UN Secretary General's Climate Summit on 23 September 2014. UN Secretary-General Ban-Ki-moon challenged Leaders to "bring bold pledges to set the world on a low-carbon path". After the first quarter of 2015, all pledged contributions should be discussed in a comprehensive manner in the international negotiations with a view of adopting the new climate agreement at the end of 2015.

2.2.4. Implementation – energy policy 2.2.4.1. Renewable energy policy

Substantial growth in renewable energy has been driven by the EU and Member State binding targets provided in the Renewable Energy Directive and the national support schemes to achieve those targets. Generally speaking, the EU has made satisfactory progress so far towards meeting the 20% target at the aggregate level, but many Member States must make additional efforts to meet their individual targets.

Most renewable energy sources are not yet fully cost-competitive compared to other energy sources. However, in the last five years renewable energy technologies have matured considerably and costs have come down, most notably for solar PV, and to a lesser extent for wind; and some renewable energy technologies for electricity generation are becoming competitive with conventional electricity generation.

The increase of renewable energy sources has contributed to containing and even lowering electricity wholesale prices in many markets by shifting the merit order curve and substituting part of the generation of conventional thermal plants, which have higher marginal cost of production. However, this effect on wholesale prices has hardly been reflected in retail prices or translated into tangible benefits for consumers (especially not for household – those large industrial electricity consumers facing prices related to the wholesale market will have benefited). This is partly due to insufficient competition and partly due to the extra cost for renewables support schemes (typically passed on to final consumers, in some markets only to households) that can outweigh the reducing impact of renewables on wholesale prices on many markets[24]. Other studies suggest that the benefits of more electricity generation from e.g. wind power exceed the costs of supporting it.[25]

An ongoing study by the European Commission indicates that total expenditure on renewable support in the EU was 13.7 bn Euros in 2009, 18.6 bn in 2010, 30.1 bn in 2011 and 34.6 bn in 2012[26]; but trends vary across Member States and some costs are not reflected in the electricity bills but covered by public budgets, in particular in countries with strong elements of price regulation. On the other hand, the avoided costs of imported fuel saved thanks to the use of renewable energy are estimated to amount to around €30 billion in 2010. Given increasing production of renewable energy in the EU and a projected increase in fossil import prices, it is expected that avoided fuel costs will rise in the coming years[27].

Short to medium term cost-efficiency of renewables development has been affected by the choice of some Member States to support a wide range of technologies (although such an approach could reduce costs in the longer term as has been observed in the case of solar PV) and by national support schemes which in many Member States have not been flexible enough to adjust to changing circumstances (such as technology costs and level of development). On the other hand, changes to established support schemes can increase investor uncertainty, in particular if applied retroactively, and have contributed to the reduced investment levels experienced in 2012 and 2013. In addition, diverging Member State support schemes with exclusive focus on national production exclude benefits of further integration of the internal energy market. As regards biofuels, some national schemes raise questions of compatibility with EU rules and some of them have been subject to complaints at the WTO.

With the exception of Sweden and Norway, none of the cooperation mechanisms provided for in the Renewable Energy Directive have been made use of, and national support schemes are as regards electricity restricted to national production. This presents a further challenge to cost-efficient deployment across the EU and works against market integration. At the same time, higher shares of variable renewable energy in the electricity mix raise new concerns about grid adequacy and stability if grids are not adapted as necessary, and underline the need for further flexibility through market integration, grid interconnection, demand response, back-up capacity, etc. It is clear that a "system view" must be addressed to fully integrate renewables in the energy market in a cost-effective manner.

In order to assist Member States in addressing these challenges, the Commission issued Guidance[28] on support schemes and cooperation mechanisms in November 2013, which if fully adhered to is expected to have a significantly positive impact on cost-efficiency, flexibility, market integration, and further sustainable development of renewable energy in the EU.

The merit order effect and priority access to the grid causing lower wholesale prices can affect revenues of conventional power plants, especially in Member States with rapid deployment of variable renewables. In some Member States, this raises the question of how to ensure adequate investment signals and generation adequacy. National capacity mechanisms are being considered by some Member States as a solution, but risk fragmenting the internal market[29].

Growth of renewables in the EU has contributed to a globalisation of the renewable energy sector. Many new markets have emerged across the globe, in some cases even bigger than the European market, but at the same time the European renewables industry has been faced with stronger competition. This has on the one hand contributed to lower technology costs in the EU and a continued strong export position of EU firms in particular in the wind sector, but has also resulted in difficult competitive positions and lower market shares for many EU companies in particular in the solar sector[30].

2.2.4.2. Renewable sub-target for transport

The share of renewables in transport reached 4.7% in 2010 compared to only 1.2% in 2005, to be compared with the 10% target in the Renewable Energy Directive. Member States support biofuels via mandatory blending obligations in transport fuels, tax exemptions or other support schemes. Progress towards meeting the renewables target for transport can contribute to lowering fuel import costs and in a context of increasing dependence on imports of fossil fuels, can improve security of supply[31]. On the other hand, from a strict GHG reductions perspective, current costs and support levels for 1st generation biofuels in the transport sector in some cases imply an abatement cost significantly higher than those of other transport options or in other sectors of the economy[32]. The Renewable Energy Directive requires the Commission to monitor a range of issues surrounding biofuels and bioliquids, including their impact on sustainability (see also Annex 7.4).

Since the adoption of the Renewable Energy Directive, the scientific evidence base regarding the GHG emission impacts associated with indirect land use change (ILUC) has grown. In response to the ILUC issue, the Commission proposed to limit the amount of food-based (1st generation) biofuels that can contribute to the relevant targets (including the 10 % renewables target for transport) and has indicated that first generation biofuels with high estimated indirect land-use change emissions should not continue to receive public support after 2020[33]. However, as projections indicate that Europe will need considerable amounts of biofuels towards 2050, the Commission's proposal includes increased incentives for advanced biofuels that do not need land for their production, such as biofuels made from residues, algae and wastes (see also Annex 7.4). In order for the transport sector to decarbonise in a cost-effective and sustainable manner, technology developments of relatively small quantities of advanced renewable fuels going beyond R&D are necessary, in line with the Commission's proposal for limiting emissions from indirect land-use change.

2.2.4.3. Solid and gaseous biomass

The Commission is currently analysing the sustainability issues associated with increased use of solid and gaseous biomass for electricity, heating and cooling in the EU, with the view to consider whether additional EU action is needed and appropriate. While imports of wood pellets will increase up to 2030, most of the biomass for heating and power production being planned to be sourced domestically[34] and therefore it is subject to national and EU environmental and forest policies and regulations. According to existing scientific understanding, most of the biomass supply chains currently used in the EU provide significant carbon emission reductions compared to fossil fuels. Only a limited number of biomass feedstocks may have uncertain or potentially negative climate benefits. However, the comparisons depend partly on the methodological assumptions made in the relevant studies. The Commission is currently reviewing the scientific basis and possible safeguards and will take this into account in the above mentioned analysis.

2.2.4.4. Energy efficiency policy

As regards energy efficiency, the Energy Efficiency Directive (EED) requires the Commission to carry out in 2014 a detailed review of the 2020 approach. Some tentative conclusions can already be drawn today.

Despite the 20% energy savings target not being legally binding on Member States, it has provided significant momentum to the efforts to reduce energy consumption and intensity, and facilitated agreement on strong measures, in particular the EED.

Moreover, energy efficiency standards for a wide range of appliances and equipment have been agreed at the EU level and will lead to important energy savings. The estimated impact of the adopted ecodesign and labelling measures in terms of energy savings represents around 90 Mtoe in 2020. EU Regulations relating to CO2 and cars and CO2 and vans have led to an accelerated improvement of fuel efficiency of new cars and vans. CO2 emissions of new cars were reduced from 172 g per kilometre in 2000 to 136 g per kilometre in 2011.

The revised Energy Performance of Buildings Directive (EPBD) will ensure Member States apply minimum energy performance requirements for new buildings, but delays in implementation are a risk, which could seriously impact the extent to which the EU takes full advantage of the cost-effective savings potential in the buildings sector (equivalent to 65 Mtoe by 2020). The proper and timely implementation of the EPBD could contribute significantly to improvements in the standard of living of European citizens.

The Energy Efficiency Directive complements these regulations and directives. It is too soon to assess its functioning as it has not yet been transposed by Member States, but a first assessment will be made in the abovementioned 2014 review.

With regard to overall progress in the EU in terms of energy savings, the economic crisis has fully demonstrated the strong correlation between energy consumption and economic activity, especially in industry. This has led to concerns that an absolute savings target is not flexible enough to reflect the underlying dynamics of the EU economy (see also further details in Annex 7.4).

2.2.4.5. Energy prices and international developments in energy markets

While the gradual completion of the internal energy market has helped to keep EU wholesale electricity and gas prices in check, end-user prices for many business and households have increased significantly in both nominal and real terms over the last decade. The EU Reference Scenario 2013 suggests that this trend will continue also in the absence of new policies for a variety of reasons (see Section 2.3 and Annex 7.1) below.

Developments in international markets and exploitation of unconventional hydrocarbons has led to an increasing divergence of prices, most notably for natural gas in the EU compared to the USA where shale gas is now an increasingly important energy source and is considered by industrial stakeholders to be positively contributing to the US economy's competitive position. A the beginning of 2012, industry gas prices were some four times lower in the USA than in Europe, but the price differential has decreased over 2013 primarily due to due to higher US prices. Natural gas prices in the US may further increase as the cheapest shale gas basins are depleted. Shale gas can also impact electricity prices through lower costs of input fuels.

In comparison, average end-user electricity prices for EU industry are about twice that in the US[35] and substantially higher than those in many other OECD economies (notable is the exception of Japan where prices are higher than the EU average) and many major developing economies. Between 2005 and 2012, European industry experienced electricity price increases of 38% on average in real terms whereas the corresponding figure was -4% for the US and +16% for Japan[36]. However, the energy intensity of industry is substantially lower in the EU than in the US. Moreover, EU industries improved their energy intensity by 19% between 2001 and 2011 while over the same period the US industry improved it by only 9%[37].

This trend is driven by many factors other than the EU's climate and energy policies (for such impacts, see Annex 7.1). According to empirical estimates, fossil fuel prices still remain key drivers of electricity and natural gas end-user prices. Member State decisions on network tariffs, levies and taxes also have a significant impact on end user prices. These factors must be taken into account when designing new policies at EU and Member State level.

However, market opening and competition appear to have significant downward effects on prices for both households and industrial consumers. In the natural gas market, high import dependence and low diversification of imports, together with market failures can significantly contribute to increasing end-user prices. Taxes, tariffs and levies can also have an important impact. In the electricity market, support to less mature renewables technologies can result in higher electricity prices for both industry and household segments. Furthermore, in some Member States, the burden has not been evenly shared across consumer segments, with exemptions for some industries and a correspondingly higher burden on households [38].

A dedicated study on EU energy prices and costs, including an international comparison, has been undertaken in parallel to the preparations of the 2030 framework; responding to a request from the European Council on 22 May 2013.

2.2.5. Interaction between headline targets and instruments

As foreseen already when the 2020 package was prepared and adopted, there is clearly an interaction between the headline targets.

First, measures to promote energy efficiency and renewable energy generally contribute to reductions in GHG emissions. The cost of reducing GHG emissions through such measures can be substantially different than the marginal cost of reducing emissions required to reach the cap in the ETS sector (reflected by the ETS price) but at the same time delivering additional benefits beyond GHG reductions, for instance in terms of synergies with resource efficiency. Such measures can also address innovation-related market failures for the energy transition. Specific efficiency measures addressing non-price barriers such as split incentives, high private discount rates, limited access to finance or imperfect information can be considered complementary to carbon pricing. Specific measures to promote renewable electricity or lower electricity consumption can be expected to lower the ETS carbon price. This has been confirmed by recent econometric analysis[39].

However, the impact of the achievement of the renewables target was taken into account in the design of the climate and energy package, with 2020 carbon prices at that time being projected lower due to the achievement of an ambitious RES target, but still projected to be well above current price levels. This lower than expected ETS price and the current surplus of allowances is largely driven by other factors such as the impacts on demand from the economic crisis and the increasing inflow of international credits in the system.

Second, measures to reduce GHG emissions (both at EU and national level) can in principle incentivise both renewables development and energy savings in and outside the ETS sectors. This said, ETS prices would have to be at significantly higher levels than those experienced over the last few years in order to have a substantial impact. In addition, the ETS price alone is not sufficient to provide incentives for developing innovative low carbon solutions and related infrastructures that are needed for the energy transition. Indications are that national measure such as energy and CO2 taxation have had a more tangible impact on energy consumption than the ETS to date.

Third, energy savings help to ensure progress towards higher shares of renewables, as lower energy consumption means a lower denominator in the ratio between consumption of renewables and gross final energy consumption and therefore a higher renewables share even without more renewables consumption. Reversely, non-thermal renewable energy typically has much lower transformation losses than conventional energy sources, lowering the primary energy consumption for any given final energy consumption. Higher shares of renewable energy can therefore help to make progress towards the energy savings target, as the target relates to primary energy consumption.

A more detailed analysis of these interactions - as well as the lessons learnt from other aspects of the 2020 framework – can be found in Annex 7.4.

2.3. Evolution under current policies 2.3.1. The Reference Scenario

The EU Reference Scenario 2013 explores the consequences of current trends, including full implementation of policies adopted by late spring 2012. The Reference scenario has been developed through modelling with PRIMES, GAINS and other related models and benefited from the comments of Member States experts.

Key assumptions for the new EU Reference Scenario (see Annex 7.1 for details)

· GDP and population growth projections until 2050 are considered as given and mirror the joint work of DG ECFIN and the Economic Policy Committee. Recovering from the crisis (reflected by only 0.9% pa GDP growth in 2005-2010), EU 28 GDP is expected to rise 1.5% pa from 2010 to 2020, 1.6% in 2020-30 and 1.4% pa thereafter through 2050.

· Fossil fuel import prices are projected with a dedicated world energy system modelling exercise. They are all projected to increase by 50% or more in the period 2010-2030, most notably in the period 2010-2020. The oil price is projected to reach 121 $/barrel in 2030 and 143 $ in 2050 in constant 2010 prices. Gas prices are projected to rise strongly in the short term but decouple from oil prices somewhat after 2030. This price pattern reflects the fact that in 2010 prices were relatively low due the economic crisis. Moreover, the price projections assume no comprehensive global climate action that would contain price increases.

· Technology costs assumptions are based on extensive literature review and have additionally been checked by the Commission Services, notably the Joint Research Centre. They are dealt with in great detail (e.g. over 100 different technologies and their vintages for power generation). Technology costs and performance are assumed to improve over time, the pace depending on the maturity of individual technologies.

Key policies included in the reference scenario

· EU ETS Directive with the annual linear reduction factor of 1.74% continuing also post-2020.

· The Renewable Energy Directive (Directive 2009/28/EC): achievement of the legally binding national 2020 targets and the transport sub-targets, taking account of National Renewables Action Plans. RES subsidies are assumed to decline after 2020 – according to the information provided by the Member States while generic policies facilitating RES penetration are assumed to continue.

· Implementation of the Energy Efficiency Directive (Directive 2001/27/EU): The implementation of the Directive is modelled in significant detail (including notably the Energy Savings Obligation but also the presence of Energy Service Companies, public procurement provisions and other elements) but rather in conservative manner (since for the energy savings obligations there are several alternative measures possible), leading overall to energy savings of -17% in 2020 compared to the relevant baseline.

· GHG Effort Sharing Decision (Decision No 406/2009/EC) including achievement of the legally binding 2020 targets for non-ETS emissions at aggregated EU level, assuming use of transfer provisions between Member States.

· CO2 standards for cars and vans regulations (Regulation No 443/2009 and No 510/2011). CO2 standards for cars are assumed to be 95gCO2/km as of 2020 and for vans 147gCO2/km in line with current legislation. Standards are assumed constant after 2020.

· Fuel Quality Directive (Directive 2009/30/EC)

· Eco-design Framework Directive (Directive 2009/125/EC) and related Commission Regulations

· Energy Performance of Buildings Directive (Directive 2010/31/EU),

· the Grid expansion according to the latest 10 Year Development Plan from ENTSO-E

· Implementation of the F-Gas regulation (Regulation No. 2006/842/EC) and Landfill Directive (Directive 99/31/EC)

· Member States' specific plans on nuclear bans, phase-outs or expansions.

· Relevant national policies.

See Annex 7.1 for a comprehensive overview of these policies and assumptions.

The resulting projections show a decline in total GHG emissions[40] of 24% in 2020, 32 % in 2030 and 44 % in 2050 relative to 1990. The share of renewable energy would increase to respectively 21%, 24% and 29% in 2020, 2030 and 2050. Energy savings would continue to marginally increase up to 2035 but would then marginally reverse afterwards.

The EU would fall short of the milestone for 2030 of 40% domestic GHG emission reductions, despite a strong decoupling of energy consumption from economic growth and a major restructuring of the energy system towards renewable energy and maintaining a significant nuclear contribution, resulting in a reduction of energy related CO2 emissions by 31% compared to 1990.

With full implementation of current policies, the surplus in the ETS is projected to further increase to over 2.5 billion allowances by 2020. Between 2020 and 2050 the surplus in the ETS only gradually decrease due to longer term effects of present energy policies and the ETS price effects from the continuation of the linear factor of 1.74% per year after 2020. Consequently, ETS emissions are projected to fall by 36% compared to 2005, whereas according to the Low Carbon Economy Roadmap a cost-effective contribution of the ETS to the overall -40% GHG milestone would be around -45% compared to 2005 (ranging from -43% to -48%). Non-ETS emissions are projected to decrease by 20% between 2005 and 2030, mainly thanks to the continued impact of energy efficiency policies. This would be less than the cost effective reduction of around 30% (ranging from -24 to -36%) required to reach the overall -40% GHG milestone.

Analysis for the Low carbon economy roadmap also indicated that delaying efforts to reduce emissions post 2030 increases costs over time[41]. This indicates the need for additional policies addressing notably the period until 2030.

2.3.2. The EU's medium-to long-term security of energy supplies remains an issue

In 2011, energy import dependence stood at 54%, with imports to an important extent coming from geopolitically instable regions. Thanks to strong renewables penetration, which counteracts the substantial decline of indigenous fossil fuel production, import dependence increases more slowly than projected in earlier analyses undertaken before the adoption of the climate/energy package. However, import dependence might still rise, reaching 55% in 2030 and 57% in 2050, despite the slight decline of total net energy imports, which decrease by 4% from 957 Mtoe 2010 to 921 Mtoe in 2030 not least due to expected significant increases in energy efficiency, translating to a downward trend in overall energy consumption. In the long term (2050), energy imports return to current levels. Energy imports continue to be dominated by oil and gas, for which geopolitical stability and diversification issues are most flagrant. Oil imports decline by only 7% by 2030 and gas imports, for which many Member States are dependent on a very limited number of supply countries and routes ( with corresponding impacts on pricing), continue rising (5% between 2010 and 2030). Strongly declining net solid imports and rising biomass imports largely neutralise each other.

In spite of some increase in biomass imports, it is notably the penetration of RES that helps contain external energy dependence. RES also contribute to reducing the external energy bill of the EU. The Reference scenario also demonstrates the positive impact of energy savings / efficiency on containing import dependence for fossil fuels and the external energy bill. But fossil fuel import prices[42] are assumed to continue to increase from 2010 to 2030 for oil from 80 $ per boe to 121 $ (60€ to 93€), for gas from 38 € per boe to 65 € and for coal from 16€ per boe to 24€. Consequently the EU would be facing increasing outflows of expenditure for purchasing fossil fuels. The external fossil fuel bill of the EU would be rising in constant prices by around 50% from 2010 to 2030 and exceeds 2010 levels by around 80% in 2050, reaching around 500 billion € and 600 billion € (in 2010 prices) in 2030 and 2050, respectively. This, together with significant uncertainties associated with the potential of unconventional fossil fuel resources in the EU, suggests that present policies will lead to an EU economy more prone to experiences of high and volatile international energy prices in the future. This is of particular concern to energy intensive industries, which are currently confronted with competition from the US which benefits from much lower gas prices than the EU. Increase and diversification of supply routes can increase competitive pricing of fossil fuels, in particular for gas.

2.3.3. Ensuring competitiveness with increasing energy costs

Total energy system costs increase with 34.6% in the period 2010-2020, to reach around € 2112 billion in 2020. After 2020 the growth slows down, growing with only 10.7% up to 2030 reaching € 2338 billion. Compared to GDP, energy system costs amounted to 12.8% in 2010, and are projected to reach a peak in 2020 at 14.8%, falling thereafter to 14.0% in 2030 and to below 2010 levels (12.3%) by 2050 (see cost decomposition in Table 1).

Energy system costs used here is a wide metric capturing all costs related to investments for energy using equipment or investment helping to reduce energy consumption (direct energy efficiency investment) as well as fuel costs for the production, distribution and consumptions of energy economy wide including costs for energy imports. They represent therefore are relatively large ratio to GDP in the modelling[43].

A primary reason energy system costs increase is that a growing EU GDP, increasing by 35% over the period 2010-2030, demands ever more of useful energy services and this is met through increased energy consumption to the extent that it is not moderated/avoided through improved energy efficiency. Therefore and because of greater affordability with rising GDP, energy system costs need to be compared with GDP, resulting in a much more limited cost impact expressed per unit of GDP.

Moreover, rising energy system costs are also due to the need to replace ageing infrastructure and equipment to meet demand. Due to energy and climate policies implemented in the Reference as well as increasing fossil fuel prices, these investments are directed more and more towards efficient or carbon low technologies, which increase upfront investment costs but reduce fuel costs. The overall impact on costs of this combined set of drivers is estimated by the modelling of the Reference Scenario.

Overall this leads to increased investments both on the demand side (e.g. building insulation, replacing equipment with more efficient appliances) and on the supply side (refurbishment and new investments in power generation and transmission). Costs related to investments in the power sector, energy and transport equipment and direct efficiency investment such as thermal insulation explain around 60% of the total energy system cost increases until 2020.

High investments made in efficient production and demand technologies result in a slight decrease in final energy use in the EU in the period 2010-2030, in the context of an expanding economy, with at the same time a reduction of gross energy consumption by 9%.

Increasing fuel costs is the other important contributor to increasing system costs in Reference, mainly due to increasing prices for fossil fuels themselves. While investments in energy efficiency, renewables and to a small extent nuclear reduce fossil fuel quantities consumed in the period 2010-2020 by 11%, increasing fossil fuel prices (coal, oil and gas import prices in euro) are assumed to increase with respectively 41%, 48% and 62% from the crisis level of 2010 in the decade up to 2020) cause total costs for fossil fuels themselves by around 20%. This translates into notably higher fuel and electricity prices for end consumers and contributes significantly to increased system costs[44].

If the price of fossil fuels themselves would have been assumed not to increase after 2010 while keeping investments and fuel consumption as in Reference, than system costs as a % of GDP would only increase to 13.6% by 2020 and reduce back to 12.9% by 2030, or almost back to 2010 levels of 12.8%.

Fuel cost savings become more visible in later years, with the share of fuel costs, including those incurred in the electricity sector falling from 57% in 2010 to 45% in 2030 and 40% in 2050.

ETS auction payments are already included in electricity and fuel purchase costs. They are deducted for the calculation of total system costs as the corresponding revenues raised and recycled back to the economy is not an extra cost from a societal perspective. Additional climate mitigation costs not related to energy only occur after 2030, reflecting mainly investments in applying CCS to industrial processes which become economic with the rising carbon prices in the reference.

Overall, there is a shift in the cost of energy from operational costs, notably fuel costs, to capital costs. Investment are triggered through a combination of the need to replace ageing equipment and to install more efficient equipment due to the impact of higher energy prices as well as the implementation of agreed legislation.

In assessing economic impacts it is important to note that higher capital expenditure creates income and employment in the EU for suppliers of low carbon and energy efficient technologies provided that the industrial leadership that the EU has enjoyed so far on such technologies is maintained, rather than using financial resources for paying for energy imports.

Table 1: Composition and drivers of system costs (ratio to GDP of individual cost components and total amount of energy system costs)

Composition of system costs || 2010 || 2020 || 2030 || 2050 || % of total system costs || % of total cost increase

2010 || 2030 || 2010-2020 || 2010-2030

Electricity costs || 3,6% || 4,1% || 3,8% || 3,3% || 28% || 27% || 27% || 25%

Of which fuel costs || 1.1% || 1.1% || 0.9% || 0.7% || 8% || 6.5% || 4% || 3%

Of which other costs || 2.5% || 3.1% || 2.9% || 2.6% || 20% || 20.5% || 23% || 22%

Fuel purchases (other than electricity) || 6,2% || 6,4% || 5,4% || 4,4% || 48% || 39% || 28% || 19%

Energy equipment (except for electricity) || 2,4% || 2,8% || 3,2% || 3,1% || 19% || 22% || 19% || 29%

Transport equipment (energy related part, incremental) || 0,6% || 1,2% || 1,7% || 1,7% || 5% || 12% || 17% || 27%

Direct efficiency investment cost (incremental) || 0,0% || 0,4% || 0,3% || 0,1% || 0% || 2% || 10% || 6%

Deducted ETS auction revenues || 0,0% || -0,1% || -0,3% || -0,4% || 0% || -2% || -2% || -6%

Non-energy related mitigation costs || 0,0% || 0,0% || 0,0% || 0,1% || 0% || 0% || 0% || 0%

Total (as % GDP) || 12,8% || 14,8% || 14,0% || 12,3% || 100% || 100% || 100% || 100%

Total (bn €) || 1569 || 2112 || 2338 || 2700 ||

Source: PRIMES

Average electricity prices[45] are projected to increase by 31 percent in real terms between 2010 and 2030 in the Reference Scenario, from 131 to 172 €/Mwh (assuming in the modelling that all incurred costs are fully recovered via prices). The entire price increase is projected to happen up to 2020, while prices thereafter remain relatively stable up to 2050. The three largest components of average electricity prices are and are projected to remain capital costs, fuel costs and grid and other supply costs. The various components of electricity generation costs and prices up to 2050 are presented in Figure 1 below.

Figure 1: Average electricity generation costs and prices in the Reference Scenario (Euro'10 per MWh)

Source: PRIMES 2013

Generally speaking, the projected price increase is due to three factors: the projected price increase of fossil fuels, strong investment requirements to modernise energy infrastructure (generation as well as transmission and distribution), and current energy and climate policies on EU and Member State[46] level. For each of the categories there are several drivers.

EU fossil fuel prices are projected to increase strongly. Despite this, the fuel cost increase is contained in the short term only contributing with 12% of the price increase up to 2020 due to a decrease in fossil fuel consumption by 16% in the power sector. After 2020 fuel costs decrease due to renewables, energy efficiency and fuel switching.

Capital costs for power generation are projected to increase notably by 2020 in large part because of replacement of obsolete plants and significant renewables penetration with lower load factors. Also costs for additional back up capacity and after 2030 CCS investment increase. In total, capital costs associated with increased investments contribute 27% of the price increase up to 2020, but reduce to 19% of the price increase by 2030, further decreasing afterwards.

Grid and other supply costs are projected to increase also, in the short term for example due to the investment envisaged in the ENTSO-E ten year plan, and in the longer term for investment for off-shore wind power plant connections and grid extensions needed for cost-effective deployment of renewables and more decentralised supply, notably from renewables and CHP. The projected grid cost increase is also partly due to the need for smarter infrastructure to enable e.g. demand response. Grid and other supply costs represent 18% of the projected price increase by 2020 and 28% by 2030.

Renewables support via feed-in tariffs or similar measures is projected to peak in 2020 contributing to 21% of the projected cost increases until then, and thereafter gradually phase out in the longer run, except for very innovative technologies such as wave and tidal energy (this cost component is referred to RES recovery in the graph above).

Increasing carbon prices contribute gradually to increasing electricity prices up to 2040 after which the impact decreases slightly. With allowances prices at €11 and still largely freely allocated in 2010 they increase to € 35 with full auctioning in the power sector in 2030, contributing to 9% of the price increase up to 2020, and 20% by 2030.

The remainder of the price increase (some 10%) is due to fixed operation and maintenance costs as well as taxes. While taxes are projected to remain a significant part of future electricity prices, there relative share is expected to stay roughly the same up to 2030.

To the extent that these price increases are not fully compensated by fuel savings (e.g. from energy efficiency investment) and income increases, the resulting energy costs cause concerns with regard to the affordability of energy of vulnerable households and industries exposed to international competition. However electricity prices for industry increase less than for other sectors: 22% between 2010 and 2020. After 2020 prices for industry decrease significantly, so that total industrial electricity price increase 2010 to 2030 is limited to 10%.

2.3.4. Risk of delayed investments and high carbon lock in

Long investment cycles in particular in the energy, industrial and buildings sectors mean that most infrastructure and other capacity investments undertaken in the near term will still be in place in 2030 and beyond. As pointed out by stakeholders (such as the power sector), investors need a stable policy framework which corresponds to this time horizon. The EU's energy system needs significant investments to ensure its medium to long term viability and sustainability. This shift towards increased investments already starts in the projection in the EU Reference Scenario 2013, but the low-carbon economy and energy roadmaps indicated the need for an even larger shift.

Current policies do not ensure that these additional investments take place, and with projected ETS carbon prices of 10 €/tCO2 in 2020 and 14€/tCO2 in 2025, the large surplus in the ETS and no continuation of non-ETS targets, there may be even a significant risk that the investments required under current trends and policies do not occur if renewables or energy efficiency policies are not fully implemented and lead to a lock-in of high-carbon technologies and infrastructures increasing costs to achieve the longer term milestones of the low carbon roadmap[47].

In the projections of the EU Reference Scenario 2013, such risks are to some extent mitigated by the expected later increases in the ETS carbon price from 35 € in 2030 to 100 € in 2050, which would for example be high enough to trigger significant Carbon Capture and Storage (CCS) investment from 2040 onwards. While the CCS share in power generation reaches only 0.5% in 2030, it rises to 3.4% in 2040 and 6.9% in 2050. However, it is unclear to which extent investment decisions in practice take into account such a long time perspective with current low carbon prices and such a large surplus of allowances.

For more information regarding the EU Reference Scenario 2013, see Annex 7.1.

2.4. What is the problem the 2030 framework should contribute to address? 2.4.1. General problems

The medium to long term challenges in the area of climate and energy are complex and numerous. In consideration of the general objectives of EU action in these areas and the responses to the public consultation launched by the Green Paper (see Section 1.2 and Annex 7.5 for details), the main general problems the 2030 framework should contribute to addressing can be summarised as follows:

(1) The EU's present policies are not sufficient to reach the EU's long term climate objective in the context of necessary reductions by developed countries as a group to reduce GHG emissions by 80-95% in 2050 compared to 1990. In the context of international climate negotiations, the EU will need to come forward with a position, including its own ambition level ahead of 2015. This challenge is therefore interlinked with international climate change mitigation efforts.

(2) The EU's medium-to long-term security of energy supplies remain an issue due to a persisting energy import dependence on sometimes politically instable regions and reliance on fossil fuel usage which in the long term will be incompatible with the EU's climate objectives unless CCS would bring a solution to this dimension. Gradual depletion of the EU's conventional fossil fuel resources together with expectation of continued high and volatile fossil fuel import prices puts pressure on parts of EU industry.

(3) The EU's energy system needs significant investments in energy infrastructure and electricity generation to ensure its medium to long term viability and sustainability Long investment cycles mean that infrastructure funded in the near term will still be in place several decades from now. There are also other non-economic barriers and market failures e.g. with regard to renewables and energy efficiency. Authorities, regulators, energy system operators, investors and manufacturers of innovative low carbon technology therefore need urgently a clear and coherent climate and energy policy framework that creates predictability and reduced regulatory risk.

(4) Current policies aiming at achieving a more sustainable economy and energy system, which may reduce costs and avoid damages in the longer run, are expected to contribute to short to medium term cost increases, which give rise to concerns about the affordability of energy of households and the competitiveness of EU energy prices in an international context. Future policies must limit these concerns as much as possible. Moreover, different policies underpinning the energy and climate targets for 2020 need to be mutually supportive and limit as much as possible inefficiencies.

The abovementioned challenges are intrinsically interlinked with each other and with challenges at the international level, not the least in relation to international climate change mitigation efforts, increasing international competition for energy resources on global markets as global energy consumption increases, and energy price developments in some other major economies that impacts the competitiveness of in particular the EU's energy intensive industry sectors.

2.4.2. Specific problem for this policy initiative

As current projections (see Section 2.3) suggest that the EU is not on track to meet these challenges on the basis of already agreed policies and expected market developments, it is clear that policy initiatives are needed to ensure that the EU is on track towards meeting the fundamental objectives of EU climate and energy policies in the medium to long run. The unsatisfactory projected developments under the reference scenario are – generally speaking – due to a combination of two factors:

· There are no sufficiently clear EU climate and energy objectives for the period post 2020, and no comprehensive regulatory framework in place to ensure that the transformation towards a competitive, secure and sustainably energy system and economy is on par with long term objectives.

· In absence of such objectives and regulatory framework, the energy markets and investment decisions made on a commercial basis are under current projections not expected to lead to the necessary transition.

In this context, it should also be recalled that the reference scenario itself assumes that all policies already agreed to at the EU and national level will be respected and adhered to, which still will require continued additional efforts. For example, some Member States are not on track to meet their obligations under the Effort Sharing Decision, but EU-wide the non ETS target is expected to be overachieved. On renewable energy, so far the EU has made satisfactory progress towards the renewable target, but many Member States must make additional efforts to meet their RES target. It is yet to be seen how Member States implement the Energy Efficiency Directive.

The 2050 Roadmaps illustrate the key options and pathways towards a competitive, secure and sustainable energy system and economy in a 2050 perspective, but are in themselves not setting the adequate objectives and policies for the period after 2020. More concrete objectives are needed to steer policy and investment over the next decades. In this context, the Low Carbon Economy Roadmap presents a 40% GHG reduction milestone in 2030, and the Energy Roadmap 2050 states that "the next step is to define the 2030 policy framework, reasonably foreseeable and the focus of most current investors".

Therefore, the problem this specific initiative aims to address is the lack of objectives or definite policy framework in place to steer climate and energy policies in a 2030 perspective.

2.4.3. Current challenges serving as guiding principles

As explained in Section 3 below, the purpose of the policy initiative underpinned by this Impact analysis is primarily to propose target(s) and objectives for climate and energy policies in a 2030 perspectives, and to provide the general direction of policy development to meet these objectives. Already at this stage, but also when preparing future specific proposals for implementation (outside the scope of this policy initiative), the following principles should be respected, building on concerns and challenges under the current policy framework:

· Climate and energy objectives are met in a cost-effective way through policies that take into account the affordability of energy, competitiveness and the importance of the internal market in energy.

· Policies are complementary and are internally coherent with each other

· Policies deliver a strong investment signal without compromising the competitiveness of business and flexibility for Member States.

· Climate action is encouraged internationally and able to adapt to changing circumstances.

· Concerns about the risk of future carbon leakage are addressed in case EU efforts are not matched by third country efforts.

· The different capacities and circumstances of Member States and consumer groups are taken into account, without distorting competition or market integration.

· The EU's medium- to long-term security of energy supplies is addressed.

Striking the balance between these principles will remain challenging due to the multiple interactions. Examples include:

· Both renewables policies and energy efficiency policies can have a tangible impact on security of energy supplies and competitiveness due to reduced exposure to volatile and sometimes unreliable fossil fuel supply. At the same time, such policies can have a reducing impact on the price signal in the ETS, and pose challenges in terms of ensuring coherence with climate policies.

· Meeting climate policies in a cost effective way may have less positive impacts on security of supply (at least import dependency) due to e.g. abatement cost advantages of fuel switching compared to domestic options for low-carbon energy sources.

· Meeting energy objectives (such as for renewables) in a cost effective way on the aggregate EU level may lead to disproportionate impacts on the relatively poorer Member States. At the same time, internal market rules as well as subsidiarity need to be respected and taken into account in policy design.

A preliminary assessment of the means of addressing these and other challenges is made in Section 5, on the basis of which more detailed assessments will be carried out when preparing future legislative proposals.

2.4.4. Stakeholders views regarding the challenges related to targets and instruments and their interactions

Stakeholders across the board typically have expressed strong support for the development of a common European energy policy, and are against national policies that fragment the market. The EU ETS and EU legislation on the Internal Energy Market are seen as two central aspects for future EU climate and energy policies. There is a broad agreement among stakeholders and Member States that the EU should agree on a 2030 target for GHG emissions, while there are diverging views on what the appropriate ambition level should be and how to relate to international developments in the climate change area.

Regarding interaction of targets and instruments, general business organizations, energy intensive companies and utilities typically argue that what they consider "overlapping" targets for energy efficiency, RES and GHG distort the effectiveness of the policies and leading to increased costs, with a preference towards a single GHG target approach. NGOs and many sectoral industry federations, such as technology providers, energy efficiency and renewables industries instead typically argue that a three-target approach is preferable as they complement each other and ensure broader progress in the energy sector. Renewable energy companies are for a Renewables target while recognising that the functioning RES support schemes needs to be improved. Member Stats typically recognise the important role of both renewables and energy efficiency, but there are different views on whether the necessary progress in a 2030 perspective would necessitate dedicated targets.

2.5. Who is affected

Climate and energy policies affect everyone, citizens and companies alike. Whereas the impacts on the energy sector itself, energy intensive sectors and major GHG emitting sectors currently not covered by the ETS such as agriculture and transport[48] are obvious, the 2050 Roadmaps (supported by the quantitative analysis in later Sections of this IA) suggest that total investment needs actually are highest in end use sectors such as transport and housing, often related to the need for more energy efficient technologies. Therefore this transition of the energy system towards a low carbon economy will affect all Europeans and all sectors of the economy.

Member States, including regions and local communities, will also be affected. In addition, there is a third country dimension, in particular vis-à-vis energy supply countries and the relation with international climate negotiations.

2.6. The EU's right to act and EU added-value

Climate change is a trans-boundary problem. Coordination of climate action both at global and European level is therefore necessary and EU action is justified on grounds of subsidiarity. Articles 191 to 193 of the TFEU confirm and further specify EU competencies in the area of climate change. Many of the policy options have an important internal market dimension and many of the required investments and infrastructures have an important European dimension. The objectives can therefore be better achieved by an EU framework for action.

As regards energy, Member States are increasingly interdependent on each other in ensuring secure, sustainable and competitive access to energy. Moreover, the cost of the transition of the energy system will be lower if Member States cooperate in meeting jointly established targets. For these reasons, the energy challenges of the future are clearly on an EU (if not global) scale, and could therefore not be addressed effectively and efficiently through Member State measures alone. Article 194 TFEU specifies the EU's right to act in the energy domain.

However, the role of Member State action within this framework will remain crucial and the responsibility for continued progress up to 2030 is shared, as was demonstrated in the climate and energy package for 2020. All future EU action in this regard will respect both Art. 192 and 194 of the TFEU. The importance of the principle of subsidiarity becomes especially important when specific policies to meet the overall objectives for 2030 are formulated. Such policies must strike the balance between the need to fully acknowledge differences between Member States (including regional and local aspects) on the one hand, and the need to ensure a level playing-field, cost-efficiency and undistorted competition and markets on the EU level, on another hand.

The proportionality of the proposed framework is ensured by striking the balance between objectives of competitiveness, security of supply and sustainability. The proportionality of the initiative should also consider the long term benefits of the proposed course of action up to 2030 (including the prospects of contributing to energy security, global climate change mitigation and sustainable growth), and not only be based on short to medium term impacts. This said, it is expected that the policy initiative will take into account the significant efforts needed already under already agreed policies, the economic reality in the EU, and potential adverse impacts on specific industries and consumer groups.

3. Scope and Objectives 3.1. Scope and context of the initiative 3.1.1. Scope

The policy initiative underpinned by this Impact Assessment is only the first step to a comprehensive and detailed solution to energy and climate challenges in a 2030 perspective. As such, the policy initiative focuses on the broad objectives of the 2030 Framework and some key implementation aspects; in particular the issue of climate and energy targets in a 2030 perspective and how they interact. It is also expected to propose the general direction of policy development in specific areas; such as internal energy market, supply diversification, the ETS cap, including approach to issues such as the existing large surplus or carbon leakage, and the role of agriculture and transport in the transition towards a more competitive, secure and sustainable energy system and EU economy.

On this basis, the policy options evaluated