Elina Morhunova examines the current status of decarbonisation in Europe and sees a complicated path for both industry and governance.

What is Decarbonisation? Well, simply put, it is the reduction of carbon dioxide emissions through the use of low carbon power sources, thus achieving a lower output of greenhouse gasses into the atmosphere. It’s what everyone desires but there are still problems trying to get there.

The Paris agreement of 2016 sets out the guidelines for targets to be reached but is it achievable? Meeting net-zero global climate and development targets is not a given and as the world of supply and demand changes, a self-reliant energy model appears to be difficult to obtain.

In July this year, the European Commission published a new strategy for a climate-neutral Europe, in which they project to reach the decarbonisation goal gradually  up to 2050. The goal of a net-zero carbon reality by that date – with possibly 2.5 billion people to serve – seems to be beyond reach.

Realising the value of decarbonisation depends on addressing barriers to investment and fuel adoption through government policy. Policymakers might have to assign value to the desired outcomes, and costs to unwanted ones. What that means is trying implement carbon pricing is one of the easiest and most efficient means to facilitate decarbonisation and the adoption of industrial efficiency measures. Implementation will require clearly valuing the social and environmental costs associated with greenhouse gases emissions though.

Green goals and hurdles

Over the next thirty years, it looks reasonable to assume that Europe’s ability to act as a sink for surplus liquefied natural gas will reduce because hydrogen, and other strategies to decarbonise gas use, such as increased bio methane production, imply reduced European natural gas consumption. Overall, Europe is probably seen as a natural gas market in decline with the timing and extent of which is one of the major uncertainties hovering over the industry.

As the share of intermittent renewable generation grows, so does the need for balancing national energy grids, introducing more flexibility to maintain reliable supply, increasing the value of capacity, while decreasing that of energy. This is often not reflected in the way that generators are remunerated and it is critical for the growing value of capacity to be recognised to provide sufficient incentives for the needed investments in capacity. Otherwise, a systems would fall on capacity putting reliability at risk.

Measures that enable access to technologies or facilitate financing in light of government or industry support might be effective in reducing upfront barriers. This means that Europe can continue to import methane as feedstock for locally-produced hydrogen while keeping open the diplomatic channels with its neighbours in the process.

As part of the European Green Deal, the EU is expanding the Emissions Trading Scheme to include emissions from areas other than power generation and heavy industry, which are more difficult to measure and control. Given the fact that fuel is being subject to heavy taxation in most EU countries, there might be some implications for trade, as such moves will add costs to many business areas, placing them at a disadvantage to the ones outside the EU that have no carbon price.

Underlying Economics

It’s important to keep in mind that debate over emissions is not only important in terms of climate change, but also with regards to the business world. The cost structure for renewable electricity and natural gas is quite differentiated, as renewable energy requires upfront capital costs, while gas technologies involve a combination of capital and operating costs. At the same time, the low capital intensity of gas technologies and lower integration costs are advantages, given the competing capital demand. Substantial investments in renewable gas such as hydrogen and carbon capture, usage & storage (CCUS) technologies will be essential to advance entirely new value chains for the supply of low carbon gas and develop the significant potential of natural gas which will enable reduction of emissions from energy systems. Of the total investment required through 2050 to maximise the sustainable development impacts of natural gas, and help meet the Paris Agreement climate goals, roughly half would need to be in low-carbon gas technologies.

In addition to the broad infrastructure that allows the gas supply process in new regions, targeted support is required to facilitate the introduction of new gas technologies for specific forms of consumption. While the use of natural gas can reduce operating costs over time, additional capital costs can prevent adoption from the outset. To overcome this barrier, measures such as low interest and extra-budgetary funding can help minimise any initial financial burden.

Support needed

Global hydrogen flows would pave the way for new trade routes, including the imports from North Africa, the North Sea, primarily Norway and the UK, and potentially Ukraine and Greece. However, the present stance reflects the fact that a number of states retain large, struggling, mining industries. For example, Ukrainian energy grid’s main problem is the lack of balancing capacity whereas hard and brown coal produce nearly 80% of Polish power, which made the industry a third rail of politics.

Reaching to implement a more functional change is pricey. German hydrogen strategy earmarked up to twenty billion in federal funds just to kickstart the economy, on top of an estimated seventy five billion to decarbonise industry. Central European Union states as well as Ukraine simply lack that kind of cash, which means that companies must devise the pipeline of innovative investment projects to be at the Brussels table.

Hydrogen holds great promise, with its zero-carbon combustion profile, and parts of the value chains are already established, but low-carbon technologies – including electrolysis, gas reforming with CCUS, and methane cracking – must be further developed and deployed at scale to achieve full potential emissions goals.

Elina Morhunova
Ukrainian-born and global-minded, Elina Morhunova is a European & International Business Lawyer and Business Developer who dedicates a great part of her work to report on the world’s business and legal, political and economic affairs for the global business community.

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