Table 22: Impact of policies and modelling assumptions on employment to achieve 55% GHG reductions in case of fragmented action at the global scale (deviation from baseline, percent) 85

Table 13: Impact of policies and modelling assumptions on GDP to achieve 55% GHG reductions in case of fragmented action at the global scale (deviation from baseline, percent) 75

Figure 16: Changes in relative welfare by expenditure decile due to changes in relative prices (fragmented action REG, MIX and CPRICE scenarios with 55% level of ambition) 90

Renewable Fuels of Non-Biological Origin: liquid or gaseous fuels which are used in the transport sector other than biofuels or biogas, the energy content of which is derived from renewable sources other than biomass

Under EU legislation adopted in May 2018, EU Member States have to ensure that greenhouse gas emissions from land use, land use change or forestry are offset by at least an equivalent removal of CO₂ from the atmosphere in the period 2021 to 2030.

Hydrogen from GHG neutral sources, mainly through electrolysis using GHG neutral electricity. This includes renewable hydrogen, which is from renewable electricity via electrolysis.

A feedstock for industrial processes and energy carrier that can be produced through a variety of processes from fossil fuels or electricity via electrolysis.

Gross Inland Consumption: the quantity of energy necessary to satisfy inland consumption of the geographical entity under consideration, i.e. the Total Energy Supply, plus the international aviation (see also FEC, PEC).

Final Energy Consumption: all energy supplied to industry, transport, households, services and agriculture, excluding deliveries to the energy transformation sector and the energy industries themselves (see also GIC, PEC)

European Union Transaction Log: central transaction log, run by the European Commission, which checks, records and authorises all transactions between accounts in the Union Registry (see also EU ETS, NIMs)

CO2-eq stands for carbon dioxide-equivalent. This is a measure used to compare quantities of different greenhouse gases in a common unit on the basis of their global warming potential over a given time period.

Combined Heat and Power: a combined heat and power unit is an installation in which energy released from fuel combustion is partly used for generating electrical energy and partly for supplying heat for various purposes.

Carbon Capture and Storage: a set of technologies aimed at capturing, transporting, and storing CO2 emitted from power plants and industrial facilities. The goal of CCS is to prevent CO2 from reaching the atmosphere, by storing it in suitable underground geological formations.

*Ranges depend on the level of ambition in the EU (50% or 55%), the level of ambition in the rest of the world (fragmented action or effort compatible with climate neutrality by 2050), scope extension of carbon pricing and model-specific assumptions on the use of carbon revenue, labour market imperfections or energy intensive industries firm behaviour.

The Impact Assessment confirms that a step up of climate ambition will require a review of many EU policy instruments to deliver it. It has assessed the interaction of a complex set of options in terms of different policy architectures and levels of intensity to which they could be activated. The Impact Assessment clarifies the understanding of the impacts of various options, and sees particularly benefits in deploying a broad mix of policy instruments, including extending carbon pricing and increased energy and transport regulatory policy ambition, and clearly suggests that no single policy instrument would be capable of achieving all the objectives considered in the assessment alone.

The biggest challenge is related to how to considerably step up investments in the clean energy transition. This challenge has become larger with the COVID-19 crisis, stressing the immediate need for a focus on green recovery.

The 55% GHG reduction option would spur a faster clean energy transition by raising the 2030 ambition to around 38.5 % share of renewables and to around 36% improvement in final energy consumption; all accelerating the related modernisation of the EU economy. It would bring clear environmental advantages, not limited to reduced contributions of the EU to climate change. The economic risks of increasing ambition to 55% GHG are limited, while such level of ambition would increase investor certainty on the pathway towards carbon neutrality.

This Impact Assessment has compared the impact of increased climate ambition in the range of 50% to 55% GHG reductions, including the impact of expanding the scope of the GHG target next to aviation also to the maritime sector. It has assessed how this ambition relates to overall energy efficiency and renewable energy levels of ambition. As this section demonstrates, it allows for a multi-criteria assessment of the options to achieve a more balanced pathway towards climate neutrality by 2050. The Impact Assessment confirms that an ambition increase within the range of 50% to 55% GHG reductions is possible, in a responsible manner and deliver sustainable economic growth (see Figure 20 below for a representation of such a pathway achieving 55% GHG reductions).

As the possibilities for increased action in the LULUCF sector are not evenly distributed, any policy needs to set incentives in an efficient manner. Climate legislation could play a role in this respect. Increasing flexibility between the LULUCF sector and ESR or even the ETS could provide for enhanced incentives, and could allow for a corresponding reduction in ambition increase in those sectors. A different target than the current “no debit rule” for the LULUCF can also be established to incentivise Member States to take more action but would require the development of a new methodology to set the appropriate level of ambition per Member State. To ensure action is effectively taken direct incentives for farmers and foresters merit to be explored. Extending the ETS to a significant part of current energy emissions in the ESR and downsizing the ESR correspondingly would result in an ESR with a very large share of agriculture non-CO2 emissions. In such a case, it makes sense to look at both sectors together and, in the scenarios modelled in this Impact Assessment, the combined agriculture and forestry and land use sectors (AFOLU) are projected to achieve net-zero GHG emissions around 2035 in trajectories towards a climate neutral EU by 2050.

Ensuring that the LULUCF sink is maintained and even enhanced by 2050 is crucial to balance any remaining emissions in the economy with carbon dioxide removals and to achieve net zero GHG emissions. This contrasts with an evolving trend of decreasing overall EU forest growth, increasing harvesting in some Member States and damaging impacts of natural hazards (e.g. fires and pests).

The scenario assessment also confirmed that in case of no global action (that is comparable to EU action), free allocation could still contribute to preventing carbon leakage – with lower impacts for energy intensive industrial sectors in case of free allocation than with auctioning. Presently under the ETS up to 43% of total allowances (with an additional 3% buffer) can be used for free allocation to industry sectors using a benchmark approach. If free allocation based on the benchmark approach would breach the maximum amount of 43% of the overall ETS cap plus a 3% buffer, a cross sectoral correction factor would be applied reducing free allocation to industry and increasing the risk of carbon leakage. This assessment looked into how likely it would be that increased ambition in line with 50% and 55% GHG reductions, together with the recently reviewed benchmarking methodology, would trigger such a cross sectoral correction factor. The conclusion is that this would be rather unlikely for a 50% reduction and could occur to a significant extent only with 55% reductions and a rebasing of the cap towards the end of the period 2021-2030. Expansion of ETS scope is likely to reduce further this risk.

The Impact Assessment also looked at the administrative impacts of covering additional sectors such as buildings and/or road transport by an emission trading system, and concludes that this is feasible and that this has both advantages and challenges. One aspect to take into account in this context is that limiting any upstream emissions trading system (with compliance obligations applied at the level of tax warehouses, gas and coal distributors instead of end users) to a subset of sectors would complicate its administration considerably.

Tools to enhance carbon pricing other than the inclusion in the current ETS would have similar benefits and challenges. One particular benefit could be that they would allow for learning by doing, setting up gradually the required regulatory framework and administrative capacity. One particular challenge is that carbon taxation or national emission trading systems would not deliver the overall EU GHG reduction with certainty and thus would require somehow a continuation of the ESR in its present form.

To reduce the risk of excessively high carbon prices with an extension of ETS scope, any expansion of ETS into the buildings and road transport could benefit from a strong complementary regulatory framework that delivers more energy efficiency, renewables and transport decarbonisation. If these policies are not reinforced at the EU level, it could be considered to maintain the scope of sectors covered in the Effort Sharing Regulation even with the extension of the ETS scope to ensure that Member States maintain ambitious policies.

If the scope of the ETS were to be extended to fossil fuel use in both buildings and road transport, the projected necessary emission decrease for this extended ETS scope (-56% in MIX scenario compared to 2005) would be lower than the one reflecting the current scope (-63% in REG scenario). If no such extension of scope is applied, the resulting emission decrease in the sectors covered by the Effort Sharing Regulation (ESR) would be larger with -39% in REG scenario than in the case of extended ETS and a downsized ESR (-34% excluding buildings and road transport to -30% excluding all energy CO2 in the MIX scenario), as the sectors that would be transferred to the ETS reduce comparably more than remaining ESR sectors.

One possible avenue to extend the role of carbon pricing would be to expand the scope of the existing EU Emissions Trading System (ETS) to fossil fuel use in non-ETS sectors, such as buildings, and road and maritime transport. Other avenues could be: a separate EU-wide emissions trading system for new sectors, national emissions trading systems for specific sectors, or carbon taxation.

The scenario assessment confirms that expanding carbon pricing through emissions trading or carbon taxation in an appropriate policy context would provide for harmonised economic incentives to reduce emissions at the same time raising revenue for governments and providing resources for climate action or for addressing social and distributional concerns. If implemented through an emissions trading system, the cap would ensure achievement of the GHG reduction objective.

Consequently, this assessment looks into the type of instruments already present in the current energy efficiency, renewables and transport legislation that could be strengthened or see their scope extended, as well as into the types of instruments that should be deployed to meet the specific challenges. It outlines interactions between different policies. The assessment concludes that regulatory measures of the existing legal framework for energy efficiency, renewables and transport would need to be properly implemented, intensified and work together with actions arising from the new Commission initiatives such as the Strategy for Energy System Integration, the Hydrogen Strategy as well as the upcoming Offshore Renewable Energy Strategy, the Renovation Wave and the Sustainable and Smart Mobility Strategy. Finally, the coherent rollout of all relevant enabling policies, including those that unlock financing at the scale needed, would be critical for an integrated, efficient, resilient and renewables-based energy system ensuring affordable, sustainable and secure energy during the transition towards climate neutrality.

To deliver the increased ambition of the energy efficiency, renewables and transport policy framework at the EU level as required for an increased climate target, existing policies will have to be intensified. Furthermore, more targeted or new measures will have to be implemented in specific areas to remove the current barriers and market failures and thus pave the way for the most cost-effective decarbonisation of the energy system.

In the buildings sector, the rate and depth of renovations as well as the deployment of renewable heating and cooling solutions in the baseline is well below what is necessary to reach the higher GHG ambition. Likewise, in the transport sector, decarbonisation meets with several challenges and strengthening of policies will be necessary to address specifically: further reduction of CO2 emissions from vehicles, availability of infrastructure for zero-emission vehicles, increased penetration of renewable and low carbon fuels particularly in aviation and maritime sector and greater use of more sustainable transport modes and multi-modal solutions (supported by investments in the TEN-T core and comprehensive network), digitalisation, smart traffic and mobility management, road pricing and incentives driving behavioural changes. Also the effort in the industrial sector both in terms fuel switch and energy efficiency is not sufficient. Importantly, without starting the demonstration and deployment at scale of renewable and low-carbon technologies already by 2030, the transport and industry sectors will not be able to make the required shifts after 2030 needed to achieve climate neutrality by 2050.

Both the modelling results as well as replies to the public consultation indicate that carbon pricing alone in buildings and transport might not be sufficient to address non-economic and market barriers. Such persistent barriers would prevent decarbonisation efforts that could be economically viable and would result in unnecessary high carbon prices.

Higher GHG ambition, unless driven principally by carbon pricing (as illustrated by the CPRICE scenario), will require increased ambition of the energy-efficiency and renewables policy framework.

While respondents to the public consultation see the ETS Directive as requiring a higher ambition increase than the Effort Sharing Regulation, the responses in the public consultation also emphasised the need for complementary regulatory policies to accompany any carbon pricing policy.

The option that combines both additional regulatory ambition with increased use of carbon pricing (scenario MIX) combines several strong points of the two alternative policy approaches while moderating their respective disadvantages. MIX sees energy system costs increase, both with and without carbon pricing payments and disutility, but each time it is closer to the lower end of the range established by REG and CPRICE. It raises significant auctioning revenues for recycling (€ 55 bn) and thus would allow for more favourable macro-economic results if smart revenue recycling policies would be applied. It increases carbon prices (€44/tCO2) significantly less than CPRICE also making policies to moderate negative impacts more manageable than if one would apply only additional carbon pricing.

The scenario assessment also provides insights in possible impacts of different policy architectures. Keeping the existing regulatory architecture intact (scenario REG) while delivering on the increased climate ambition would require significant intensification of energy efficiency, renewable energy, transport and other policies. Conversely, extending the scope of carbon pricing and emission trading to transport and buildings, and not increasing the ambition of energy and transport policies would also be possible but would see 2030 carbon prices rising sharply to €60/tCO2 (scenario CPRICE) or above (scenario ALLBNK).

The COVID-19 crisis has not significantly altered the investments needed to reach the decarbonisation target, but likely worsened the conditions for such investments to take place, at least without strong policy intervention. A preliminary assessment of the COVID-19 crisis projects 2020 energy CO2 emissions to drop by 11% compared to the no-COVID Baseline, but no comparable reduction can be expected in the investments needed in the coming decade, neither during nor after economic recovery, to achieve the increased climate ambition. In essence, the crisis today does not reduce the amount of structural investments needed. The role of policy intervention that delivers a recovery package focussed on green investments is of key importance.

Changes in relative prices due to higher climate ambition are expected to negatively impact the welfare of lower-income or lower-expenditure households more than that of households at the top of the distribution. Assuming unchanged consumption patterns over time, the negative impact for the lowest deciles amounts to around 2% of income or expenditure for the lowest decile for a scenario that applies both regulatory policies and carbon pricing. This impact can be mitigated and reversed if revenue recycling of carbon pricing is applied with a focus on low income households. Addressing distributional impacts will thus require appropriate policies (e.g. increased transfer payments, subsidies for energy efficiency measures or progressive energy tax rates).

The share of energy expenditures in household income is set to increase from approximately 7% in 2015 to 7.5% - 7.9% in the policy scenarios by 2030 (see Table 28) with the highest impact in the highest ambition scenario applying carbon pricing, though differences remain limited. Scenarios based on carbon pricing increase more fuels prices, while scenarios based on regulatory intervention have a relatively more significant impact on housing prices due to increased investment needs related to the building. These changes will not affect all the European citizens equally: households in the lower income deciles tend to spend more on energy services and might lack the capital needed to invest in energy efficiency.

But differences exist and in some sectors value added and employment will be negatively affected, notably in fossil fuel extraction and, to a lesser extent, in some industrial sectors, particularly if no comparable global action is undertaken. These are sectors with actually relatively highly skilled workforce underlining the need for reskilling.

Overall, macro-economic impacts are limited, confirming that reducing GHG emissions by as much as 50% to 55% by 2030 if done efficiently is not a risk to the EU economy. Economic projections also indicate that the impact of higher climate ambition on GDP is positive if one takes into account that the economy has unused capacity, which is the case under current circumstances where a major potential output gap has opened in the EU economy due to the COVID-19 crisis.

Revenues from carbon pricing are as high as € 75 bn in a scenario chiefly based on carbon pricing and as low as € 16 bn in a scenario based on increased regulatory intervention by 2030. Increased use of carbon pricing poses both opportunities and challenges. Increased revenues of carbon pricing can be recycled in the economy and improve macro-economic outcomes of increased climate ambition. If applied in non-ETS sectors and used to lower some distortionary taxes (such as on labour or income) or support green investments, macro-economic impactsof increased climate ambition are in the range of -0.27% to +0.50% of GDP compared to baseline (assuming no global action). Without revenue recycling the impacts range from -0.38% to +0.19% of GDP (assuming no global action). Similar results are found for employment, with no additional carbon pricing revenue recycling leading to worse employment impacts (range of -0.26% to +0.01%) than additional carbon pricing with recycling (range +0.02% to +0.20%) which can actually increase employment compared to the baseline, confirming the double dividend of greening taxation.

While energy purchase expenditures decline in all scenarios, the energy system costs increase is driven strongly by investments increases. The assessment sees annual investments, including transport, increase in the period 2021-2030 compared to the period 2011-2020 with EUR 312 billion to achieve 50% GHG reduction. For 55% GHG reductions, the annual investments increase by EUR 326 billion in a scenario mainly based on carbon pricing and to EU 377 billion in a scenario based on increased regulatory intervention mainly due to increased investments in demand side sectors (e.g. the residential sector). A scenario that combines regulatory intervention with carbon prices sees an increase by EUR 356 billion. Initial investments will be repaid over time through reduced energy purchase expenditure, but mobilising the necessary scale of finance will be a significant policy challenge.

As shown in Table 28, energy system costs that combine investments and expenditures for energy purchases increase to ca. 11% of GDP (excluding carbon pricing payments and disutilities) for both the 50% and 55% GHG ambition levels. They do not vary significantly between the different options assessed. Excluding carbon pricing payments and disutility costs, scenarios based on carbon pricing see a marginally lower system cost increase than scenarios based on increased regulatory intervention. Including carbon pricing payments and disutility, costs increase in a more pronounced manner and in this case the scenario based on increased regulatory intervention becomes the lowest cost scenario. After 2030, differences in energy system costs excluding carbon pricing payments and disutility costs shrink further between scenarios.

Synergies and risks related to the biodiversity strategy exist. The implementation of the Biodiversity Strategy is coherent with significant GHG reductions in the sector. While biomass needs for the energy system do increase, these are limited up to 2030 but increase afterwards. Producing this increased biomass supply through sustainable forestry, biodiverse rich afforestation and an overall reasonable deployment of sustainable energy crops could reconcile climate and biodiversity objectives.

Regarding environmental impacts, the option to reduce 55% GHG emissions clearly outperforms the option to reduce 50% and not only in terms of GHG savings. It achieves larger co-benefits compared to Baseline on issues such as health, air pollution control costs and reduced environmental degradation. For instance, 55% GHG scenarios see air pollution reduced by 60% compared to 2015. Replies to the public consultation saw lower pollution and related improved health and wellbeing as main tangible benefits linked to increased climate ambition.

The LULUCF sink has decreased in the past 5 years due to natural hazards and a market driven increase in the rate of forest harvest. This underlines risks for the magnitude of the sink while it is of crucial importance to achieve net zero GHG emissions by 2050 as discussed in the in-depth analysis accompanying “Clean Planet for All” Communication. This assessment fully includes the LULUCF sink when appraising the achievement of 50% to 55% GHG ambition. It does so in a conservative manner, i.e. by including the sink at a level corresponding to the no-debit rule under the LULUCF Regulation which requires no backsliding compared to how the sink would evolve under current practices. Options were assessed how the sink would be impacted by increasing bioenergy needs or policies that expand the sink. If increased bioenergy needs are met through expanding the sustainable production of mainly woody energy crops and sustainable forest management, impacts on the projected sink are expected to be limited.

Non-CO2 emissions represent around 20% of the EU GHG emissions and a significant mitigation potential remains there. Options assessed differentiate the contribution of this mitigation option and demonstrate that its increased mobilisation (in MIX-nonCO2 variant) can reduce the need for actions in the energy sector, for instance, impacting RES deployment by almost a percentage point (final energy efficiency performance, however, remaining unaffected). While these emissions are covered under the ESR, targeted sectoral policies play a crucial role. This is shown by the large reductions already in the baseline induced by, for instance, ambitious existing waste legislation and F-gas regulation reducing notably emissions in heating and cooling. This confirms the need of additional action, for instance, in the context of the Methane Strategy.

From a broader perspective, accelerating the energy transition will help to modernise the whole EU economy creating opportunities for clean energy technology leadership and gaining competitive advantage on the world markets thanks to the large domestic market. These effects will happen faster with a more ambitious 2030 GHG target. Finally, bigger savings achieved on the fossil fuel bill thanks to increased climate ambition can be invested in the further modernisation of the EU economy.

This leads to important sectoral policy conclusions. The assessment pointed out, for instance, that scenarios that focus on carbon pricing do not incentivise renovation that much, while they do incentivise fuel switching. Similarly, the carbon price alone will at the levels estimated for this decade - not sufficiently trigger the demonstration and deployment of clean technologies both in the transport (vehicles and fuels) and industry sector (e.g. hydrogen) at scale during this decade to deliver increased GHG reductions after 2030.

The findings for transport and industry are slightly different. These sectors remain more difficult to decarbonise and the key challenge is to ensure that advanced vehicles and fuels and industry sector technologies (e.g. hydrogen) are demonstrated at scale during this decade to deliver increased reductions after 2030.

For all policy scenarios modelled, highest GHG reductions (compared to 2015) in the energy system are achieved in the power (through uptake of renewables) and buildings sectors (through fuel switch alone or combined with renovations).

This Impact Assessment points to a strong role of further electrification of the economy to achieve the increased climate target. Electrification is confirmed as a key avenue for energy system integration and thus cost-effective decarbonisation in line with the Energy System Integration Strategy. New fuels such as hydrogen appear in all scenarios in significant quantities only post-2030 but are crucial in this time-frame to achieve climate neutrality as also mapped out in the Hydrogen Strategy.

In a 2050 perspective, the performance of 55% and 50% GHG scenarios is very similar in terms of RES shares and absolute RES amounts underlining the central role of RES in achieving climate neutrality. In fact, the scenario achieving 50% GHG reductions (MIX-50) has to catch up with 55% GHG scenarios in terms of RES deployment already shortly after 2030 in order to be on the path to climate neutrality. 55% GHG reduction scenarios have thus the advantage of scaling up the RES deployment more progressively. Scenarios that rely more on energy efficiency need slightly lower amounts of decarbonised synthetic fuels by 2050 in order to reach climate neutrality.

As a consequence of the increased energy savings and RES deployment the clean energy transition accelerates and the use of fossil fuels decreases with long-lasting effects until mid-century. Progression by 2030 is more significant for the options with 55% GHG target than with a 50% GHG target. Additional advantages can be measured in savings in the fossil fuel import bills, which are as large as 0.1 to 0.2% of GDP in 2030 across scenarios, with higher benefits linked to increased climate ambition and more pronounced energy savings.

The scenarios with comparable GHG target scope see higher EE and RES ambition for the scenario that focuses on regulatory measures. The scenario which exhibits the highest ambition for RES and EE assumes the widest scope of the GHG target, including next to extra EU aviation also emissions from the maritime sector. This shows that next to the level of GHG ambition and policy architecture, also the scope of the GHG target impacts the necessary ambition of the energy system.

Likewise, a large majority of public consultation replies endorsed the most ambitious options for climate, renewables and energy efficiency. 77% of the respondents to the public consultation expressed the view that the GHG target should be increased to at least 55%, nearly 70% expressed the view that consequently the current renewable energy target should be increased to a share higher than 40% and more than 60% of respondents preferred a target greater than 40% of (primary and final) energy efficiency savings. Though replies of notably business associations were more equally distributed across ambition levels.

By contributing currently over 75% of total GHG emissions in the EU, the energy sector will be at the forefront of the efforts towards an increased climate ambition by 2030. An increase in climate ambition translates into an increased ambition of the energy transition by 2030, well beyond the current energy targets for renewables deployment (RES) and energy efficiency (EE). 50% GHG ambition goes hand in hand with ca. 35% RES share as well as 34.5% final energy savings and 37% primary energy savings. 55% GHG reduction sees ca. 38%-40% renewable energy share by 2030. 2030 final and primary energy savings increase to 36-37% and 39-41% respectively (see Table 28).

These policy options were assessed using sectoral as well as macro-economic modelling tools covering all GHG emitting sectors, assessing combinations of policy options related to ambition as well as policies deployed – in the form of scenarios. Furthermore also qualitative assessments were made, notably regarding elements of the policy architecture. This section summarises the main findings. Key modelling results for 2030 comparing quantitative results for different levels of ambitions and across different policy scenarios are summarised in Table 28 at the end of this section.

This Impact Assessment looked into the impacts of (1) policy options to the increase climate ambition to 50% to 55% greenhouse gas (GHG) reductions by 2030 compared to 1990 in order to achieve a more balanced path to net zero GHG emissions by 2050 as well as (2) policy options related to the climate and energy policy architecture to implement such increased ambition.

Any change to the existing climate and energy monitoring framework that would be required in the context of the policy measures proposed in the 2030 Climate Target Plan will be assessed as part of the specific legislative revisions to be proposed by June 2021. Further background on the assessment of options can be found in annex 9.9.

Furthermore, some specific pieces of legislation contain provisions on monitoring actual developments. In fact, regarding greenhouse gas emissions, monitoring rules are often the first regulation to be put into place since one obviously needs to measure the starting point; this is how historically the regulation of greenhouse gas emissions has developed. This is illustrated most recently by Regulation (EU) 2015/757 on the monitoring, reporting and verification of CO2 emissions from maritime transport.

Data collected in the context of Regulation (EU) 2018/1999 is being made publicly accessible on an e-platform, including to date the final NECPs and long-term strategies. Also Indicators for monitoring progress towards Energy Union objectives are published.

In addition the Governance Regulation sets out that, the Commission has to produce an annual report on progress on the EU contribution under the Paris Agreement and on achieving the ESR and LULUCF Regulation obligations as well as the 2030 targets for climate and energy. At the same time – every autumn – the European Environment Agency also publishes a more detailed report on trends and projections in GHG emissions, renewable energy and energy efficiency.

Under the EU's own internal reporting rules set in the Governance Regulation on the basis of internationally agreed obligations, Member States monitor greenhouse gas emissions on their territories and report on emissions of seven greenhouse gases from all sectors: energy, industrial processes, land use, land use change & forestry (LULUCF), waste, agriculture, etc. as well as on projections, policies & measures to cut such emissions. This includes the necessary elements to track progress of the implementation of EU climate legislation, as well as of the EU’s international commitments under the UNFCCC and Paris Agreement.

As parties to the UNFCCC and the Paris Agreement, the EU and the Member States are required to report to the UN annually on their greenhouse gas emissions ('greenhouse gas inventories') and regularly on their climate policies and measures and progress towards the nationally determined contributions.

Under the Governance Regulation, Member States develop integrated national energy and climate plans. The first plans cover the five dimensions of the Energy Union for the period 2021-2030. Member States will report biennially on the progress made in implementing the plans, including on climate, renewables and energy efficiency. The Commission assesses whether these plans add up to collectively meet EU binding targets and, if need be, propose further measures to ensure plans are fully implemented and targets achieved. The Commission will monitor the progress in the EU as a whole, in particular as part of the annual State of the Energy Union report and biennially assess the progress made. By 2023/24 the Member States will provide draft and final updates of the plans, in line with the 5-yearly ambition cycle of the Paris Agreement.

The Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action has established an integrated energy and climate planning, monitoring and reporting framework, which allows monitoring progress towards the climate and energy targets in line with the transparency requirements of the Paris Agreement.

The Climate Law, as proposed by the Commission in March 2020, will enshrine in EU law the objective of climate neutrality in the EU by 2050. It includes measures to keep track of progress and adjust EU actions accordingly. Progress will be reviewed every five years, in line with the global stock take exercise under the Paris Agreement. The climate law also includes a process to include the 2030 target in the law itself based on this Impact Assessment.

EU climate and energy legislation provides for a comprehensive framework to track progress towards meeting EU targets. While specific pieces of legislation contain the relevant substantive requirements, the overarching framework is provided by the Climate Law and the detailed integrated monitoring and reporting framework is provided by the Regulation on the Governance of the Energy Union and Climate Action.

In all options, the capture of the sink, mainly in forests, by agricultural emissions would mean that other economic options for the use of biomass products (timber, pulp and paper, fabrics, advanced biofuels, etc.) would face new competition. Furthermore, preserving the carbon stock in the sector (increasing the sink through avoiding emissions rather than improved silvicultural management) could be valorised, with potential co-benefits for biological diversity and other ecological functions of standing forests. Such a design needs to be counter-balanced with the risk of significant change in the sourcing of materials for the bio economy, that may drive imports forward and reducing rural economic and social benefits, and thus will also need further consideration.

While the AFOLU bio economy related sectors can potentially move relatively quickly towards a balanced emissions-removals profile at the EU level, putting effective incentives on the ground to enhance the sink - and subsequently compensate other sectors with residual fossil emissions - will have its own challenges to implement. This underlines that the sector could still benefit from a link to the extended ETS, to provide for additional incentives beyond the AFOLU collection of sectors.

National targets would provide for clear incentives to improve the matching of other national policies (primarily CAP implementation and specific associated land mitigation actions) and thus increase the information requirements. This can be important to drive action at the individual level of farmers and foresters themselves. Raising ambition in the sector inevitably relies on engaging and facilitating these actors, directly.

This accounting design would frame the reduction actions to within the agriculture non-CO2 sector and available enhancements in the LULUCF sector, unless combined with trading with the ETS. Overall the approach raises the question as to how this can be organised at the EU level, and likely would require national target setting approaches and require a similar detailed analysis taking into account differences in geographic distribution of removals and emissions including (additionally) those of non-CO2 emissions.

With agricultural non-CO2 emissions in 2025 and 2030 still higher than the net LULUCF sink, a target other than the current “no debit rule” for the LULUCF sector would have to be established for the sector as a whole that, together with the extended ETS, meets the overall economy wide target of 50% or 55% and that assures the correct and complete accounting of biomass emissions. Figure 19 indicates that these reported removals and emissions would need to achieve “no debits” around 2035 and to further increase sink (i.e., deliver “net credits”) beyond.

One simplification could be that the accounting framework would more readily become a net sum of the reported values in these sectors, with likely a streamlined set of accounting rules to address specific land issues (permanence, variability, natural disturbances).

This relatively closed accounting configuration could perhaps ease the design of efficient and effective policies in this sector – for example through the CAP – and better align them with implementation actions. The key question is how this merger on its own would achieve a more substantial land sink in the medium to long term.

Note: The AFOLU line is the sum of the non-CO2 Agriculture emissions as in the MIX scenario and the LULUCF sink projected without additional incentives to enhance the LULUCF sink in MIX. AFOLU+ includes additional action to enhance the LULUCF sink (LULUCF+). Climate neutrality will require a LULUCF sink that is at least maintained or enhanced (see also analysis Long Term Strategy, 1.5LIFE and 1.5TECH scenarios)

In the case that the sectors covered by the ESR would be considerably changed, e.g. all energy CO2 emissions would be included in the EU ETS and taken out of the scope of the ESR (option ETS_2.1, see section 6.7), agricultural emissions would become relatively isolated. The non-ETS sectors – including LULUCF – would in effect be an extended form of the IPCC’s combined Agriculture, Forestry and Other Land Use (AFOLU) configuration. Given that biomass related emissions in other sectors are conceptually set to zero, the removal and emissions scope of these combined sectors also corresponds to the biomass biogenic related emissions of the bio economy.

Similarly, an alternative approach that would cancel LULUCF credits without changing the ESR/ETS targets, could lead to an overachievement of the overall 50% or 55% GHG target. The legislation governing the two sectors would thus need to be revised, and reciprocal adaptations of the current LULUCF flexibility under the ESR would be needed.

If instead the increased stringency in the accounting rules in the LULUCF Regulation were to be introduced without reducing the ESR/ETS targets as included in Table 26, this would potentially results in GHG reduction beyond the overall 50% or 55% GHG target.

Increased stringency in the accounting rules in the LULUCF Regulation, that would lead to a higher sink than the No Debit scenario, would permit reduced stringency in the ESR/ETS targets as presented in Table 26, while combined still achieving the overall 50% or 55% GHG target.

Cancellation of LULUCF credits is a less strong incentive than tightening of the accounting rules for additional action in the Member States. Tightening accounting rules, with current full flexibility from the ESR to the LULUCF sector, may still not necessarily increase the sink if Member States would find it less difficult to achieve emission reductions beyond target in the ESR.

This approach is already required to be assessed by the Commission in 2027 (and 2032) for all the sub-sectors in LULUCF, as part of the overall compliance check. Extension of this as a “backstop” clause could already provide a collective EU enhancement of the sink, without specifically addressing each Member State with a new target negotiation.

More practically, and given the predominance of the forest sink, a significant increase in the LULUCF credit threshold could be achieved through a simplification of the FRL setting process. The most common alternative international standard applied is the accounting of the sink against a historical reporting period (so-called ‘net-net’ accounting), such as 2000-2009. Compliance with such an approach would already generate an increase in sink over the current Forest Reference Levels in the LULUCF regulation by around -73 MtCO2-eq per year. Moving to such an accounting benchmark based on performance in base years or periods, instead of basing it on projections, is not subject to technical interpretation and would simplify the current process.

If LULUCF accounting rules would be tightened, it raises the question of how to do so. The single largest sector is forest land. Defining an additional “net credit” effort on top of the current Forest Reference Level (FRL) approach, would duplicate – at least – the process and discussions leading to the FRL setting. Further complications would emerge if this were to be indexed differently from the FRL – for example, indexed with GDP, per capita income, or carbon removal potential. Setting such an approach would thus need further careful analysis taking into account distributional impacts.

Approaches to this end could include the cancellation of a number of LULUCF credits before they can be used for trade between Member States in the LULUCF sector or towards flexibility with the ESR, or to change accounting rules making the no debit rule in the LULUCF Regulation more stringent.

This option would strengthen the requirements for an increase of the level of LULUCF sink to be achieved in the LULUCF regulation itself, rather than create increased demand for LULUCF credits.

This type of flexibility would clearly be a strong driver for moderating overall compliance costs of achieving 55% GHG while still providing improved incentives for the EU sink to be enhanced, with a view to achieving net zero GHG by 2050.

Increasing the LULUCF flexibility by allowing the use of sink credits for ESR/ETS compliance would allow the combined ESR and ETS to deliver fewer GHG reductions. For instance, if targets in the ESR/ETS were to be set following the options as presented in Table 26, and if LULUCF credits would be generated at the level of the LULUCF-MIX and LULUCF+ scenarios, GHG emission reductions excluding LULUCF could be decreased to 51.5% and 50.5% respectively, while still meeting a 55% GHG target including LULUCF.

A further step to improve incentives would be to certify enhanced levels of carbon stored in the LULUCF sink at the level of private land ownership, and allow this to be traded for compliance by Member States in the LULUCF regulation and the ESR flexibility. Methods to avoid double counting and to address the carbon storage reversal risk would be required, as would reporting methods to consolidate the increased sink into Member State reporting of greenhouse gas inventories. This will require further methodological research and the Commission is exploring the development of such a regulatory framework for certification of carbon removals.

Policy design could furthermore improve incentives such that action will be taken where it is most efficient in the LULUCF sector. Relaxing trading restrictions – notably in how LULUCF credits can be used in the ESR sector across Member States – would compensate for the unbalanced distribution of sink potential between Member States and deliver access to more cost-efficient solutions to mitigation.

Possibilities for increased action in the LULUCF sector are not evenly distributed across the Union, and Member States will similarly have different challenges in their ESR targets. Policy design thus needs to decide how increased use of LULUCF credits are distributed across Member States, which will require additional analysis taking into account distributional impacts.

This option would allow for increased flexibility from the LULUCF sector to the ESR, and potentially to the ETS. Assuming that costs and challenges are higher in ESR sectors to achieve the targets, this would result in increased incentives for Member States to take effective action in the LULUCF sector.

Note: *Forest land includes managed forest land, afforested land and deforested land; ** the inclusion of managed wetlands in national LULUCF accounts is currently optional but this should be revised for the period 2026-2030

If targets in the ESR/ETS would be set following options as presented i n section 6.7.1, Table 26, and assuming inclusion of the LULUCF sink in the total GHG target in a conservative manner (see section 6.1.1), and at the same time achieving by 2030 a LULUCF sink as high as estimated in the LULUCF-MIX and LULUCF+ scenario would allow the EU to enhance its overall ambition beyond the 50% or 55% GHG target. For instance the REG, MIX and CPRICE scenario would achieve GHG reductions of 56.5% and 57.5%, respectively, with a sink as in the LULUCF-MIX and LULUCF+ scenarios.

These higher sink scenarios (MIX and notably LULUCF+) would have to rely on other drivers to achieve an improved sink than those of the current climate policy architecture, which for instance does not provide any direct incentives for farmers and foresters to take action on the ground. Other policies such as the CAP strategic plans or the Biodiversity or forthcoming Forest strategy could provide some additional incentives.

Incentives exist in the current LULUCF regulation to improve on this, notably the flexibility of the LULUCF sector to the ESR with maximum of 262 Mt over the period 2021-30. Given that this flexibility to the ESR is fixed per Member State and cannot be traded between Member States, it is unlikely that the full 262 Mt flexibility will be used over the 10 year period. As such the incentive signal provided by the current climate policy architecture to take increased action in the LULUCF sector is limited and rather in-line with the FRL scenario than scenarios achieving a higher sink by 2030.

Section 6.2.3 gave an overview of how the LULUCF sink can develop over the next decade following a set of different scenarios. Table 27 gives an overview how the different LULUCF scenarios as assessed in section 6.2.3 can generate LULUCF credits under the current LULUCF regulation. In the worst case situation, if Member States do not achieve any improvement in the accounted sink and simply meet the No Debit scenario, generating no LULUCF credits, this could result in a deterioration of the sink to 225 MtCO2-eq by 2030, notably with ageing and harvesting in forests negatively impacting the sink profile.

This section assesses the options as presented in section 5.2.2.5. Further detail can also be found in annex 9.9. The current LULUCF legislation creates an incentive for Member States to keep the sink from deteriorating compared to a benchmark of historic land management practices. The key benefit of this approach is that it integrates the very diverse geography of the EU, where each Member State has a specific profile of land use, climate conditions, etc. through a common bottom-up approach, and safeguards the LULUCF sink from deteriorating beyond what existing practice would result in. For instance, the current approach takes account of increasing forest harvesting rates well beyond historical practice.

The Covid-19 crisis has affected industrial production in a major way and it is as yet unclear what the long-term impact will be on industrial production and restructuring. This is not yet taken into account in this assessment.

An extension of the scope of the ETS would in principle increase the total amount of allowances (see also section 6.7), and with the current ETS structure (57% auction share and 43% free allocation share with a 3% of the cap free allocation buffer sourced from the auction share), the application of a correction of free allocation is even less likely. In case there would be less free allocation to some sectors, linked to a carbon border adjustment mechanism, there would in principle be less likelihood of a cross sectorial correction factor being applied.

To be noted that these calculations are subject to uncertainties, including the estimated future production levels of industrial sectors, the future benchmarks which will only be decided by end of 2020, general modelling assumptions as well as the methodology of how to update the LRF.

A stylised assessment was made of the likelihood of the application of such a downward correction of free allocation if the cap in the ETS (current scope) was set to achieve by 2030 the projected emissions of the MIX-50, MIX and ALLBNK scenario (see Figure 17). An ETS cap in line with a 50% GHG reductions scenario (MIX-50) would not be expected to require a correction. If the caps are set in line with the higher projected GHG reductions of the 55% (MIX and ALLBNK), then it would still be likely that no correction applies for a cap that only changes the LRF in 2026. Instead with an approach that would rebase the cap for stationary installations in 2026, then a correction may apply in 2030 for a cap in line with MIX, and in 2029 and 2030 for a cap in line with ALLBNK.

Free allocation in the ETS is determined by benchmark values and from 2021 periodically updated production data. There is a limit to the total free allocation, set at 43% of the total cap for stationary sources with a further 3% buffer. If this cap is reduced with increased climate ambition, then there is a higher likelihood that free allocation based on benchmarks will overshoot this available limit. If this occurs, under the current rules of the ETS, a Cross Sectoral Correction Factor would apply for the remaining years in the period 2021-2030, lowering all free allocation to respect this overall limit.

Using macro-economic modelling tools impacts were assessed of increased climate ambition on energy intensive industrial sectors. The results indicate that without increased global action, increasing climate ambition in the EU typically results in a negative impact for the energy intensive sectors. Impacts are significantly limited with free allocation. Sectoral production can be positively impacted if the climate policy and any associated carbon revenues are seen as boosting investment and economic development (see section 6.4.2, Table 16 and annex 9.5.3, Table 49). None of the modelling assumed any additional measures to protect against carbon leakage.

Overall industrial sectors would be reducing less than most other sectors (see section 6.2, Table 6) in the period 2015 – 2030, largely based on existing technologies. There is thus a risk of a significant gap between these short and mid-term reductions and the need for the uptake of new innovative technologies to decarbonise by 2050. Demonstrating them at scale is crucial in the coming decade.

Industrial emissions reductions stagnated between 2013 and 2017, a period with low carbon prices and a large surplus of EU ETS allowances on the market. This trend reversed in 2018 with the introduction of the Market Stability Reserve. The assessment confirms GHG reduction potential remains in the industrial sector, with the MIX-50 reducing CO2 emissions in industry by 21% in 2030 compared to 2015, while for REG, MIX, CPRICE and ALLBNK reductions range from -23% to -26%. Other assessments based on the ETS benchmarking data and a bottom up study confirm this magnitude of reduction potential (see annex 9.4.2.7 for more details)

Based on considerations above, there are a number of arguments in favour of combining elements from both policy mix approaches, which is already the case in several Member States. Economic incentives are important, as e.g., the increase in building and transport emissions following the decrease of oil and stabilisation of gas prices in the second half of the last decade indicates. But so are specific measures targeted to address either specific barriers or addressing cost-effective untapped potentials related to specific alternatives to fossil fuel use. There is no doubt that specific renewables, efficiency and transport policies will continue to be of crucial importance, such as to address the split-incentive dilemma in building renovation, increase coherence of energy infrastructure planning, supportive licensing procedures, consistent of greener certification procedures or ensuring better available information for energy consumers. Also in countries with emissions trading covering buildings and transport sectors, the ETS in these sectors is typically seen as part of a broader policy mix. This is also reflected in stakeholder views. Most stakeholders see carbon pricing in buildings and transport as complementary to other sector specific policies (64%, 1009), while few favour a regulatory only or carbon pricing only approach (14% each). Stakeholders favour for both sectors that the carbon price should be set at EU level (77% for transport, 64% for buildings).

Although Member States have gained extensive experience with setting up an EU ETS between 2008 and 2012, there are also higher administrative costs to set up an ETS where it cannot build on existing taxation rules, as analysed in detail in the previous sections. This also illustrates that the policy details matter greatly, not only in this respect. But also carbon taxation can come at an administrative costs and economic inefficiencies, either through many exemptions and differentiations, as observed in energy taxation, or through different national systems which impact the internal market. And it should not be forgotten that also the Renewable Energy and Energy Efficiency Directive include obligations on companies which lead to administrative costs.

As analysed under option ETS_4 in section 6.7, beyond this economic argument, an ETS with its fixed emission quantity provides also certainty to achieve emission reductions and hence the EU GHG target than a carbon tax and is robust towards rebound effects. However, there is a risk that given the historically rather low elasticity of demand the necessary carbon price increases might be higher than modelled. This could be the case if accompanying policies to address other market barriers are not there or less effective, or national governments feel responsible anymore. The analysis of the option ETS_2.2 and ETS_3 in parallel to an ETS coverage the ESR should be maintained tackle this issue in more detail. Carbon taxation has target uncertainty but the economic advantage that prices are more predictable.

There are some interaction differences which depend on or link with the choice of the carbon pricing instrument, ETS or carbon taxation. The EU is competent to set up an EU ETS and has experience with it, while taxation is largely a Member State prerogative, with the EU only setting minimum tax levels to safeguard the internal market, and also this only if all MS agree. There is an emerging national experience (see discussion of the German example) and extra-EU experiences with emissions trading systems including buildings and/or transport. Electrification, which already in BSL increases from less than 25% now to more than 30% in 2030, expands its coverage and potentially shifting emissions from effort sharing sectors, including buildings and transport, to the existing ETS sectors. The more a sector is using electricity, the stronger the argument to put electricity and fossil fuels used on equal footing in terms of carbon pricing, as is currently the case for industrial combustion, combined heat and power (CHP) and district heating. As the picture is very different for buildings and transport, the details are covered in the sector specific annex 9.8.

Stronger incentives for electrifying demand which put the same price tag on fossil fuel energy use in buildings and transport as in the ETS lead to 2% higher electricity share in final demand than in baseline. A drawback from an environmental perspective is a stronger incentive to use bioenergy, the use of which compared to baseline would increase by 5%, however 1 p.p. less than in REG. A drawback from a social perspective are the higher energy prices for consumers. A policy example where such policy interactions can be illustrated is the ambitious Swedish carbon taxation. Hence sustainability safeguards for bioenergy and redistributive elements as accompanying measures would gain further importance.

Extending carbon pricing by means of trading emissions or carbon taxation to other energy use sectors such as buildings and transports can lead to significant interactions with the described specific policies. The provided financial incentive for low emitting energy uses and financial penalty for high emitting energy uses can positively influence market diffusion of minimum energy performance requirements for buildings, CO2 emission standards for vehicles and eco-design standards e.g. for boilers and water heaters. It can also drive the quicker diffusion of the use of renewable energy in heating and transport and hence help achieving the objectives and obligations under the Renewable Energy Directive. Such effects would strongly depend on the level of the carbon price. As regards buildings renovations, carbon price alone is however expected to have a limited impact on deep renovations. These interactions are reflected in the changes to baseline in the CPRICE scenario, reducing final energy consumption in ESR sectors by 5%, increasing RES H&C shares by 6 p.p. and renewable final energy demand by 12%. ETS or carbon taxation is one instrument to provide the additional economic incentives for energy efficiency and renewable energy investments.

There are clear interactions of the described policy mix with the EU Emissions Trading System, as it lowers the additional carbon price incentive needed to reduce CO2 emissions in the power, industry, electric heating and district heating sectors. The MIX scenario reflects this policy interaction with intensified policies on energy efficiency and renewable energy resulting in significantly lower carbon prices in 2030 of €44/tCO2 instead of €60/tCO2 in 2030. This would be an important feature of limiting the impact on traditional ETS sectors in case of scope expansion in the EU ETS. Interactions with the Effort Sharing Regulation are different in nature. The binding national emission reduction targets under the latter have mainly the function of a safeguard that the intended energy-related emission reductions through the specific policies are achieved, incentivising Member States to effectively implement policies and mitigate distributional effects between Member States, while ensuring that also in the ESR sectors not addressed by renewables and efficiency policies (currently around 40% and in 2030 around 45% of ESR emissions) sufficient emission reduction policies are implemented at the national level. Very strong EU energy efficiency, renewable and transport policies can also lower the need for national emission reductions in other effort sharing sectors.

The success of this policy mix would also depend on exploiting synergies with other relevant policies, essential to deliver on a more integrated energy system as put forward by the Commission in its recent strategy, such as the review of the TEN-E regulation, sustainable product policy, circular economy and biodiversity strategies, etc. As it is composed of a large number of individual policy elements to address specific barriers, the detailed policy interactions and challenges can only be analysed once these policy elements are more clearly specified. An example of such interaction is that the impact of very strong policies targeting only the building envelope would lower the energy demand and reduce the need to also look for renewable solutions to meet the remaining demand, and vice-versa, policies targeting only renewables deployment could limit the incentives to improve energy efficiency, as savings of energy coming primarily from renewable sources might seem less attractive. Limited information and lack of highly skilled workers regarding the availability of options regarding heating requirements could lead to sub-optimal decisions prior to or during a renovation, which could be either non-renewable based or result in over-sized solutions.

The strengthening of existing renewable, energy efficiency and transport policies builds on intensifying and reinforcing existing interactions between specific policies on energy efficiency and specific policies fostering renewable energy, in line with the Energy Efficiency First principle. To succeed it is of utmost importance to exploit synergies and seek consistency of the reviews of the Renewable Energy Directive, the Energy Efficiency Directive, the Energy Performance of Buildings Directive and the EU Ecodesign and Energy Labelling Framework. The REG scenario reflects this reinforcement with, in 2030, a 0.7 to 1.1 percentage points (p.p.) further final energy consumption reduction than in the other scenarios, as well as a 0.3 to 1.2 p.p. higher renewables share compared to the other scenarios. This synergetic effect comes with a drop of the total amount of direct renewable final energy consumed compared to baseline (BSL, of -3%) and the other two scenarios, which increase 1-2% compared to BSL. This is also partly due to the higher rate of electricity use in final energy consumption compared to baseline (but similar as in MIX and CPRICE) which contributes to both renewables and energy efficiency. The absolute amount of electricity used in final energy is 2% lower than in baseline and 1-2% lower than in the scenarios with carbon pricing.

Policy interactions are already manifold between existing climate and energy policies. A particular focus of this section is on the building and transport sectors, as they are covered by the horizontal legislation on GHG emissions (Effort Sharing Regulation), on renewables (Renewable Energy Directive), energy efficiency (Energy Efficiency Directive, Energy Performance of Buildings Directive) and fuel infrastructure (Alternative Fuels Infrastructure Directive), but currently, except for aviation, not by the horizontal EU carbon pricing instrument, the EU Emissions Trading System. In addition, several pieces of sector specific EU legislation apply. The policy scenarios clearly show that ambitious policies are needed to achieve the overall climate ambition increase. The focus of this section is mainly on new policy interactions between intensified renewable energy and energy efficiency and transport policies and possible new EU carbon pricing policies through coverage by emissions trading or mandated carbon taxation in two sectors: buildings/residential and services heating and road transport.

The core scenarios analysed in section 6.2 to 6.5 represent in a stylised way interactions between climate and energy policy architectures, representing a more energy and transport policy driven policy mix to achieve the overall ambition (REG), a more carbon price driven policy mix (CPRICE) and a policy mix combining stronger carbon pricing with intensified energy and transport policies (MIX) with a variant intensifying non-CO2 policies (MIX-nonCO2). Following the more detailed analysis of options to strengthen the climate policy architecture (section 6.7) and to intensify renewables and energy efficiency policies (section 6.6) the aim of this section is to analyse the interaction of these policy options, illustrated for a GHG emission reduction of -55%.

To the extent that the sectors are included into a national emissions trading system (option ETS_4), it is likely that precise coverage and regulation in the different Member States would differ leading to a heterogeneous design. However, the national systems could be more tailor-made in function of the existing situation in a Member State.

If all fossil fuels emissions were included into an emissions trading system, it would not be necessary to differentiate between individual sectors. Still, the challenges coming from the combination of an upstream and downstream model (i.e. replacing the EU ETS with a new EU-wide-all-fossil-fuels upstream emissions trading system) and the risk of double counting would exist and need to be addressed. While a shift to a full upstream model may be seen to solve MRV issues, it would mean an overhaul of the ETS, which has proven to work well.

Adopting an upstream approach when extending emissions trading to the two sectors as foreseen in options ETS_2 and ETS_3 would lead to a hybrid system whereby some entities currently already covered under the EU ETS would continue to be regulated downstream. Any risk of double counting (e.g. upstream coverage of fuel being supplied to installations already covered by the EU ETS) or risk of loopholes (e.g. larger non-ETS gas consumers that do not purchase their gas from the distributors but have instead a direct connection to the gas TSO network) would need to be assessed appropriately.

The above shows that with an extension of emissions trading to the two sectors as foreseen in options ETS_2 and ETS_3, the number of regulated entities would more than double compared to the current number of regulated entities under the EU ETS. However, it can be expected that the monitoring and reporting rules that would be adopted for the upstream regulated entities would be not more complex than in the current EU ETS system. In the new sectors, only sales of largely standardised fuels for combustion purposes would be monitored. The calculation of emissions could continue to rely on emission factors, as in the current system.

An assessment against these elements shows that the regional distributors for gas, tax warehouses for oil and distributors for coal could qualify for being upstream regulatory points. While there are more than 2,300 regional distributors for gas, the cost of identifying supply streams to buildings and filling stations is expected to be moderate. With respect to oil, the number of regulated entities would be high (there are approximately 7,000 tax warehouses) but the administrative costs for these entities would be moderate since they are already heavily regulated and an administrative quantity metering system for monitoring and reporting already exists for the purpose of excise duty. With respect to coal there would be a relatively high number of regulated entities (there are about 3,000 coal distributors). In comparison to the markets for oil and gas, the administrative impacts would be significantly higher since there would be many smaller regulated entities which have hardly been regulated up to now and which would need to establish reliable monitoring and reporting systems. Adequate measures would need to be put in place to mitigate this risk.

Because of the large number of small emitters (many of which are private persons) in the buildings and road transport sectors, a downstream approach such as in the current ETS whereby the emitters themselves are regulated does not seem feasible when extending emissions trading to the two sectors. An upstream approach whereby not the emitters themselves but entities further up the supply chain are regulated, can remedy the challenges associated with the large number of small emitters in the two sectors. It must thereby be ensured that the chosen point of regulation is technically feasible (volumes can be monitored and reported, and end use known), that incentives to reduce emissions can be passed on to consumers, and that the administrative costs are proportional to the reduction effect.

Looking at the setting in place of the system, the option whereby the existing ETS is extended (option ETS_2) has the advantage that the use of the existing infrastructure may be more obvious. With regard to the costs associated with operating the system, options ETS_2 and ETS_3 would trigger recurring administrative costs and burden for regulated entities and public authorities. The cost of monitoring, reporting and verification in the current EU ETS has been estimated to represent about 70% of the total transaction costs and average MRV costs per entity have been estimated at around 22,000 €/year and 0.07 €/tCO2. Furthermore, administrative costs include fees for the use of the registry which differ in the Member States.

Different competent authority structures in the EU ETS framework are encountered across Member States. In most Member States more than one competent authority is responsible for all activities of the ETS. For this reasons and due to possible coordination of monitoring and reporting with already existing requirements for the purpose of excise duty, it is not possible to give quantitative figures on the administrative costs incurred by regulators in the various Member States.

An extension will require a new monitoring, reporting and verification system for the additional sectors. An extension to new sectors will trigger costs related to the setting in place and the operating of such a system, both for the regulated entities and public authorities, including in terms of IT infrastructure and human resources. Regulated entities’ participation in the system would imply obtaining a permit, a registry account, putting in place a monitoring, reporting and verification system, obtaining and surrendering allowances. Public authorities would need to ensure the running of the system and compliance by regulated entities with its requirements.

Presently inventories of ESR emissions are based on the economy wide GHG reporting by the EU and its Member States to the UNFCCC from which the verified ETS emissions data are subtracted for each Member State. If emissions trading is extended to new sectors (options ETS_2 and ETS_3), it must be possible to measure and monitor emissions with high certainty and at reasonable cost and be able to attribute it to individual entities. The results of the public consultation show that administrative complexity and implementation of robust monitoring, reporting and verification systems are among the largest challenges identified by stakeholders in relation to an extension to new sectors.

The ESR has a relevant distributional impact on different Member States, mostly determined by the extent of gaps between emissions and targets. The scenarios indicate that additional emission reductions compared to the baseline under the current ESR scope (option ETS_1) are roughly equally distributed between higher income and lower income Member States.

The impacts of a uniform carbon price for these sectors under options ETS_2 and ETS_3 are expected to vary across Member States, depending also on the way ETS auctioning revenues are distributed. Options ETS_2 and ETS_3 with ETS coverage of new sectors while maintaining them in the ESR could lead to additional distributional impacts between Member States depending on whether the national ESR targets would be significantly less or more stringent than ETS induced reductions.

The results of the public consultation show that the social acceptability is often perceived by stakeholders as the largest challenge in relation to an extension of emissions trading to buildings and transport. The general social and distributional impacts of an increased ETS and ESR ambition and various scenarios are assessed in sections 6.4 and 6.5. Many of the policy aspects depend on the details of policy proposals, thus only a few policy related considerations can be provided at this stage.

As discussed in section 6.4.2 auctioning puts a price on an externality, and allows recycling revenues. If used to reduce distorting taxes it decreases the overall economic impacts and can even spur growth. It can also be used to invest in precisely the low-carbon investment needed to decarbonise. This is line with the outcome of the consultation, where the largest share of respondents perceived that the revenue from carbon pricing should be used to finance green technologies and low-emission mobility infrastructure.

Auctioning is the default method for allocating allowances in the EU ETS, because it is the most economically efficient and simplest system and avoids windfall profits. Free allocation of allowances is only continued as a safeguard for sectors at a significant risk of carbon leakage. However, both the buildings and road transport sectors have relatively small or non-existing competitive pressure from outside the EU.

The cost efficiency of the ETS at achieving additional emissions abatement might be limited by the current heterogeneity of the national fuel tax landscape.

Figure 18 shows the sensitivity analysis for the effect of different carbon prices on fuel prices both in road transport and buildings in 2030.

Notably in the building sector, the introduction of the carbon pricing will have a material impact on end user prices. While this would exactly provide for the economic incentive to reduce emissions, it can also affect lower income households (see also section 6.5.2).

In option ETS_4, the variant with national carbon taxation has the economic advantage over emissions trading that prices are more predictable (subject to political interventions). However, emissions trading enables emission reductions to take place where least costly. In the few countries that have an effective carbon taxation for buildings and transport, carbon tax levels are often higher than current EU ETS prices.

Option ETS_3 creates an EU level carbon pricing instrument to facilitate the cost-efficient achievement of the ESR reductions, while acknowledging that there are externalities less amenable to be addressed by prices, for which targeted national policies (and/or some targeted intensification of EU wide energy efficiency and renewables policies) could be also economically useful.

In option ETS_2.2 the economic rationale for keeping the sectors newly covered in the EU ETS also in the scope of the ESR is to limit the carbon price impact risks for the industry sector by continuing to make sure that important non-price-sensitive abatement potentials would be addressed by the Member States. To be efficient, Member States would need to take into account the development of the EU ETS price and its impact on their domestic emissions in these sectors when specifying their policies.

In principle it is difficult to argue for double EU regulation from an economic perspective, as for the same emissions two different parties would be obligated to reduce them, leading to potential inefficiencies. However, there is ample evidence that at least the short term price sensitivity in the buildings and transport sector is relatively low, hence prices either cannot overcome all barriers or might need to be very high to achieve the outcome, a risk which modelling and the resulting carbon price of €60/tCO2 in CPRICE can only reflect to a certain extent.

Covering building emissions fully by the current ETS (options ETS_2.1 and ETS_2.2) would provide a level playing field in terms of carbon pricing of domestic fossil-fuelled heating systems with district heating and electric heating already now covered by the ETS. Similarly, covering road transport emissions fully by the current ETS would provide a level playing field in terms of carbon pricing of fossil-fuelled road transport and rail with electric vehicles and electrified rail.

By contrast, options ETS_3 and ETS_4 could lead to different carbon prices for the buildings and road transport sectors, the current EU ETS sectors, or across Member States, and could therefore possibly be more adapted to diverse abatement potentials and ability to pay of different sectors and Member States. This needs to be weighed against the problems, which the different national prices or different prices in different sectors, may create for the level playing field in the single market, in particular but not only in road transport.

An extension of the EU ETS to new sectors such as in option ETS_2 would not only represent a significant expansion in the availability of abatement options across the EU, but also across sectors compared to the current situation. It would create a more integrated carbon market with a single carbon price, which could hence drive emission reductions where they are overall most cost-efficient. It would ensure the maximum cost-efficiency and not distort the single market.

The general economic impacts of an increased ETS and ESR ambition and various scenarios are assessed in section 6.4. Options with an emissions trading system at the EU level (options ETS_2 and 3) can assist in first incentivising the cheapest reductions across Member States, improving cost-efficiency in the sectors covered and delivering increased environmental certainty at the emission reductions to be achieved. This is not the case with a variant of option ETS_4 with a national carbon tax, or where national trading system do not add up to the required overall ambition level.

Setting explicit minimum carbon price levels for these sectors by a revision of the EU energy taxation could mitigate internal market challenges by ensuring the same minimum carbon prices across all EU Member States, but in itself is no guarantee for delivery of the required emission reduction.

In option ETS_4, the current ETS/ESR architecture continues, and related architectural impacts described under option ETS_1 also apply. However, it is complemented by an additional carbon price incentive to reduce emissions, in principle created by a national system. An obligation to set up national trading systems would prioritise the certainty of the environmental impacts and counter rebound effects from cost reductions. National carbon taxation would have less certainty to achieve the targeted emission reductions. If collectively the national caps are set at a level below the EU ambition for the sectors covered by these national systems, option ETS_4 will not achieve the required EU wide GHG reduction.

Maintaining ESR coverage in a transitional manner for some sectors newly covered by emissions trading, as in options ETS_2.2 and ETS_3, can lead to a situation where sectors in the ESR that are also in the ETS, reduce more than needed in the ESR as a whole, allowing sectors not covered by the ETS in the ESR to do less than what would be cost-efficient. This risk would be reduced in case the scope expansion covers a large part of ESR emissions or if ESR targets are set higher. This risk could also be limited by specific ambitious EU measures in these sectors, such as the F-gas regulation and EU circular economy and waste legislation, or a further greening of the CAP.

The main variant of option ETS_3, which puts the buildings and road transport sector at least transitionally in a separate ETS, leads to two ETS systems of roughly similar size in 2030, each close to 35% of total emissions. One of the reasons for separate systems would be to first ensure their robustness, with expected early challenges associated including with a lack of a robust and verified emissions data reference for the cap setting in the new ETS.

Option ETS_2.1 has some significant implications for the ESR. It would require a smaller numerical increase of Member State targets than in the current ESR scope, with emissions having to decrease by 34 to 36% instead of 39 to 40%. However, the ESR would lose around 55% of the current emission scope and the share of emissions covered by the ESR would decrease in 2030 from 66 to 67% in option ETS_1 to 32 to 33%. This would leave agriculture as the main remaining sector (CO2 and non-CO2 together around half of the remaining ESR scope), followed by industry with around 20% and waste and energy with both around 10% of the remaining ESR emissions. The major reduction in ESR scope could also lead to significant changes in Member State specific cost-efficiency gaps to achieve national targets based on fairness (GDP per capita) compared to the 2016 ESR impact assessment. The increased role of agriculture would also invite to revisit the role of the LULUCF flexibility, which has been designed to compensate for the comparatively lower technical mitigation potential of agriculture. See also section 6.10 on LULUCF for some further context and broader implications.

A strong point of options ETS_2 and ETS_3 is that the ETS has strong enforcement. It thus scores high on certainty to deliver the environmental outcome. The enforcement mechanisms in case of non-compliance with the obligations through the financial penalties under the EU ETS apply directly to the emitting entity. In the ESR the compliance obligation is on each Member State, through additional emission factors and standard infringement procedures.

The carbon pricing scenarios show clearly that building emissions are expected to respond significantly stronger to carbon prices than transport emissions, with additional reductions between 2015 and 2030 compared to the baseline of 14 to 15 p.p. for residential and 9 to 12 p.p. for services, compared to 3 p.p. for road transport. One reason is that in the transport sector, there are currently already often high explicit or implicit carbon prices through national carbon or energy taxation, unlike in the buildings sector, and therefore the additional incentive is smaller. For motor fuels, the EU27 unweighted average of implicit carbon prices of current MS nominal energy and carbon tax rates reported in the Taxes in Europe database amounts to around EUR 240 for petrol and around EUR 160 for diesel.

ETS emissions in the main variants of ETS_2 and ETS_3, that include the building and road transport sectors into the ETS or create (at least temporarily) a separate trading system for these sectors, reduce by 55 to 56% compared to 2005, which is less than in option ETS_1 without buildings and the road transport sector in the ETS. Of stakeholders which have a view on this question, 30% prefer that sectors covered by the ETS remain in the ESR (18% of all stakeholders), while 15% prefer to exclude them from the ESR (9% of all stakeholders).

If additional sectors were to be covered by the ETS as in options ETS_2, ETS_3 and to a certain extent ETS_4, this would increase the likelihood of achieving the emission reductions in these sectors, and hence the EU’s GHG target for 2030. With the resulting carbon prices, firms and households would have an additional economic incentive to reduce their emissions in the sectors newly covered by an ETS, and this incentive would rise, even countering possible rebound effects from efficiency improvements and resulting cost reductions. It would also help in diffusing decarbonisation technologies more quickly. With buildings and road transport CO2 emissions included in the ETS, around three quarters of the current total emissions (around two thirds in 2030) would be covered by an EU wide cap. This compares to around one third in 2030 in the current architecture. 55% of stakeholders favoured EU wide uniform carbon prices through ETS inclusion in the road transport sector, and 32% in the building sector, with another 32% preferring the option that carbon prices in this sector would differ from current ETS.

Contrary to this balanced approach, some Member States and 4% of all stakeholders have indicated that they want a focus on higher emission reductions in the ETS sectors instead of tightening further current ESR targets for increasing ambition. The realisation of some of the reduction potentials, e.g. in existing buildings and agriculture, is seen as more uncertain due to specific barriers. In the modelling results, the ETS sectors are already expected to reduce more (see Table 26). And a 5 p.p. additional ambition in the ETS sectors alone would imply at current ETS scope, a further increase of the ETS target to 70% and in turn a high linear reduction factor.

Ensuring achievement of this emission reduction in the current policy architecture would imply translating this ambition level into more ambitious national 2030 targets, requiring a step up on average of 10 to 11 percentage points (p.p.) compared to the -29% EU27 aggregate resulting from the current ESR targets. 22% of all stakeholders (corresponding to around 40% of those with a view) support to increase ESR ambition in line with its cost-effective contribution. The large increase in emission reductions required points also to the need to consider additional EU level measures to facilitate achieving those. This would also require a change of the target trajectories. Based on the current ESR framework with its two five-yearly compliance cycles, this could be implemented for the second cycle in 2026-2030.

The BSL scenario as well as the EU-NECP variant achieves a 2030 emission reduction of 32%. In line with the current ESR architecture and scope (option ETS_1), the REG policy scenario sees emissions reduced mainly through increased EE, RES, transport and some non-CO2 policies, resulting for -55% GHG in an ESR reduction of 39% compared to 2005. This is achieved by significant additional reductions notably in the buildings sector, and to a lesser extent in the transport, non-CO2 and non-ETS industry sectors.

The installations covered by the ETS today are emitting less than the total cap. This gap between the cap and the actual emissions was estimated at around 250 million allowances in 2019 due to the large reduction of emissions. In the BSL scenario, this difference is projected to continue early on in the next decade. Accordingly, a large surplus of allowances is likely to remain in the system thereby potentially preventing it from delivering the necessary investment signal to reduce GHG emissions in a cost-efficient manner. This may only be addressed if the Market Stability Reserve is strengthened as part of its first review in 2021. Conversely, an update of the cap based on rebasing, rather than only updating the LRF will reduce faster any generation of an excess of allowances.

Regarding scope, for policy purposes, the definition of the cap and LRF setting requires a robust and verified emissions data reference point. For the current ETS scope, the ETS Monitoring, Reporting and Verification (MRV) system ensures the data robustness for the covered sectors, and for a possible scope extension a comparable system is required. This impact and the consistency with the overall framework will have to be further assessed in the subsequent policy review.

If for stationary installations not only the LRF gets reviewed at some point (in Figure 17 in 2026), but also its starting level (referred to in the below stylised example as ‘rebasing’) then the overall quantity of allowances over the period could further decrease. In Figure 17 the rebasing uses as the starting point 2025 emissions levels as projected in the different scenarios. With rebasing, the LRF needs to change less.

A revised linear reduction factor is dependent not only on the 2030 ETS ambition but also on other elements including its starting year, the baseline level from which the LRF is applied and the scope. The Figure 17 gives a stylised representation of how the ETS stationary cap could evolve taking into account the projected scenario results. ALLBNK would result in the tightest cap for stationary installations because this scenario requires overall the largest reductions of domestic sectors. MIX of course results in a more stringent cap than MIX-50.

Reaching a 2030 cap in line with the emission projections under option ETS_1 for GHG reductions economy-wide would require a change of the ETS linear reduction factor, an update overall recognised as needed by stakeholders.

In policy option ETS_1 (the current ETS scope), the BSL scenario would achieve a 2030 emission reduction of -54% compared to 2005 while the policy scenario REG would achieve emission reductions of -63% by 2030 compared to 2005, increasing to -67% in ALLBNK.

The results of the public consultation show that, when asked to prioritise the three key pieces of climate legislation (ETS, ESR and LULUCF), a majority of stakeholders believe that all the three pieces of legislation require an increase in the climate ambition. The ETS has the highest percentage of all stakeholders perceiving the legislation requires a substantially increased climate ambition, but at the same time it also had more stakeholders noting that it did not require additional ambition. Organised stakeholders rated the need for substantial increases in ESR reductions highest.

Note: The policy options analysed in this section are best reflected by those scenario results, which are not in italics. Policy option ETS_1 with the current ETS and ESR sectors is best reflected by the scenario keeping the EU ETS scope unchanged (REG). Options with additional sectors covered by emissions trading (options ETS_2.1 and ETS_2.2) are best reflected with scenarios further expanding carbon pricing (MIX-50, MIX, MIX-nonCO2, CPRICE and ALLBNK). Scenario results presented, which are not directly applicable, are presented in italics (e.g. BSL results for different sector scopes). Options ETS_3 and ETS_4 are not directly reflected by the scenarios, however can be approximated by the results of the MIX scenario.

The ETS sectors, even with a changed scope, are projected to reduce emissions more compared to 2005 than the ESR sectors, driven by the greater scale of cost-efficient emission reduction opportunities of the power sector, while industry reduces less. From the current ESR sectors, also buildings show a similar level of mitigation potential as ETS sectors with an increased energy efficiency already in the baseline and stepping up of fuel switching in the policy scenarios. In contrast, transport reduces less, with road transport only reducing a bit more than 25% over this period. For the current ESR sectors, the reductions would be -39 to ‑40% for -55% GHG. See annex 9.5.2.1 for more detail on the type of cost-efficient reductions achieved per sector under the different scenarios.

The existing 2030 climate and energy legislation features a target of -43% reduction in GHG emissions from the ETS sector compared with 2005, and -30% reduction in the ESR sectors to achieve at least -40% domestic GHG reduction compared with 1990. The increase in climate ambition to -50 to -55% below 1990 would lead to significantly higher GHG emission reductions than legislated both in the ETS and ESR sectors. Table 26 below provides an overview of the emission reductions achieved for the current and different changes in sectoral scope of ETS and ESR based on the modelled scenarios.

This section takes an increased ambition as a starting point and summarises the impacts on the current key cross-sectoral climate policy instruments, the EU Emissions Trading System (ETS) and the Effort Sharing Regulation (ESR). The analysis focuses on a GHG ambition level of ‑55%. Starting from analysing policy impacts in the current scope of the two policy instruments, it then assesses different options to increase the role of carbon pricing notably by extending the scope of emissions trading. More detailed analysis is provided in annex 9.7.

A general conclusion on the future policy mix, is that both economic incentives and specific targeted regulatory measures are needed, the latter addressing market failures and barriers preventing energy efficiency and renewables investments (see annex 9.8).

The social impacts of the increased ambition are first and foremost visible in terms of the heating bill and costs of renovations. To maximise the cost-effectiveness of policies, the worst performing building segments should be targeted as they are the ones maximizing effects on efficiency at a lower marginal cost. Such an effect could be achieved with measures targeting specific profiles of buildings owners and users as well as specific obstacles and barriers for their renovations. Conversely, a blanket economic disincentive alone (e.g. through a carbon price or via taxation) could be less effective in case of buildings owners with low income or in presence of split incentives. This example speaks also in favour of targeted measures to address specific market failures, designed in a way to maximise effects on emissions reduction, overall systems costs and addressing distributional effects.

While impact of the higher GHG ambition on relative welfare across income groups even without redistribution measures seems limited, targeted measures to protect low-income or vulnerable consumers should be intensified. Energy policies can help better protect vulnerable consumers who most often inhabit buildings with low energy performance and that would benefit most from deep renovations. Likewise, renewable policies, including those aiming to incentivise self-consumption, could also contribute to address energy poverty.

In the previous sections it becomes apparent that the rising cost of energy required to decarbonise the system has some impact on the share of income which the European households spend on energy. In all scenarios, households spend a higher share of their income on (energy-related) equipment and a smaller share on fuel expenditure (see section 6.5.2). The key benefit of more ambitious EE and RES policies is in better shielding of consumers from the impact of increasing energy prices both in the buildings sector (residential and services). Importantly, this effect amplifies over time.

Alongside the increase in system costs, significant additional (to BSL) savings in terms of fossil fuel import bills (0.1-0.2% of GDP in 2030) are also projected for all scenarios. These savings are similar across various pathways, though they are slightly higher with energy and transport policies most intensified, i.e. in scenario REG.

Clearly, taking into account considerable investment needs across all scenarios, an optimal allocation of investments in the energy system where they make most economic sense is of importance. This is reflected in modelling where investments are optimised with availability of RES resources and EE potentials, which contributes to reducing energy system costs. In policy terms, this underpins the importance of EU initiatives whose aim is to optimise the functioning of the energy system in line with the recently adopted Strategy for Energy System Integration and the Hydrogen Strategy.

In general, the variation of energy system costs for the increased GHG ambition is limited. Looking at the energy system costs excluding carbon allowances payments and excluding disutilities in the 2021-30 perspective: CPRICE appears as the scenario with lowest costs, with MIX being very close to CPRICE, and REG being more expensive. The situation actually reverses when carbon pricing payments and disutilities are included, where the REG scenario presents the lowest cost. In the 2031-50 perspective, the differences in system costs including carbon pricing payments and disutility costs become more amplified, with REG being significantly lower than other scenarios because of the long-term benefits of energy efficiency measures of this scenario.

High intensification of energy and transport policies in REG requires significantly higher investments (mainly linked to increased renovations as well as heating equipment change in residential and services sectors) than other options achieving the same GHG ambition, but the upfront capital costs are later compensated by the energy purchases expenditure reductions. CPRICE scenario is constructed differently and - as a result of relying principally on the carbon price and not on policies - has lower upfront capital costs (notably linked to renovations) but higher energy purchases costs throughout the projection period. Impacts on investments (annualised) and energy purchase lead to differences in energy system costs of the scenarios.

Across all sectors, the modelling results point to positive environmental impacts of further electrification of the economy - a key avenue for energy system integration and thus cost-effective decarbonisation - in particular in road transport and low to medium temperature heating and cooling, driven by moderate and high intensification of renewable and energy efficiency policies.

Finally, for transport, a combination of vehicle/vessels/aircraft efficiency improvements, fuel mix changes, greater use of more sustainable transport modes and multi-modal solutions, digitalisation, smart traffic and mobility management, road pricing and incentives driving behavioural changes in REG could have further positive impacts on reduction of transport externalities. In addition significant impact is made by more stringent CO2 standards for vehicles and the fuel mandates. The decarbonisation of transport in the MIX scenario would require ensuring synergies between the strengthened legislative framework and carbon pricing incentives in road transport.

As regards industry, slightly contrasted finding can be shown on overall energy demand and on the fuel mix switch. CPRICE achieves higher GHG reduction in this sector thanks to carbon price while reductions are smaller in REG and MIX. Nevertheless, these scenarios assume only a generic incentive to increase efficiency therefore a more specific analysis would be needed to assess the policy elements indicated in the strengthened policy framework for industry. This applies in particular to better implementation of energy audits, which have proven to identify well the potential for energy savings, but are not always followed-up by necessary actions as well as potential for waste heat reuse.

In the services sector, further analysis (in addition to scenarios modelled) will be needed regarding the ICT sector. Given the increasing demand for ICT services and data, the electricity demand for data handling is expected to grow. Further analysis is needed to see how further reducti