ESR reform outcome: A mountain bringing forth a mouse

• Taking in to account all possible flexibilities, the agreed ESR reform only requires the EU28 to achieve 14 Mt CO2 additional reductions per year beyond currently implemented and agreed measures. This represents about 0.5% of 2005 emissions.

• The carbon budget and flexibilities under the ESR would only require Member States to reduce their non-ETS emissions by 26.6% by 2030, compared to the agreed -30% target.

• Even the agreed -30% target fails to put non-ETS on track towards the upper range of the agreed 80 to 95% reduction targets for 2050. The 2030 target under the ESR would have to be tightened to at least -40% to be compatible with the objectives of the Paris Agreement.

Bridging the gap: why we need project-based cooperation between Member States

• The picture is more complex when looking at what the final deal means for the individual Member States. Because targets are highly differentiated, some higher-income member states face a challenge to meet their targets domestically. As shown in the chart below, some member states still face a remaining deficit after reducing emissions up to their cost-effective share of the overall EU target (dark red bars). On the other hand, the targets and lack of dedicated funding mechanism don’t provide sufficient incentives for lower-income member states to make full use of their cost-effective reduction potential. Most lower-income member states are expected to build up an initial surplus with existing policies in place (see dark blue bars), and the targets alone provide no incentive to unlock further cost-effective reductions (see light blue bars).

• The ESR does provide a framework for project-based cooperation, which allows member states to meet compliance with the ESR by implementing reduction projects in other member states. This provides a solution by allowing Member States with more stringent targets to achieve compliance by financing cost-effective reductions in other Member States with less stringent targets (cost-effective reductions which might have otherwise been left unused).

• A first step to pave the way towards more ambition under the ESR would be for Member States to make use of the possibility to engage in joint reduction projects to ensure a cost-effective achievement of the agreed -30% target. This will reduce the need for flexibilities that increase the overall carbon budget (with the EU ETS and LULUCF sectors) and will give Member States more confidence that more ambitious reductions are achievable and affordable, while also bringing forth a significant number of additional co-benefits.

What prospect for project-based transfers?

• Based on current emission projections and policy scenarios, demand could range between 75 million and 644 million AEAs, depending on the use of other flexibilities and emission projections. Demand would be mainly coming from the smaller, higher income Member States.

• Without additional reductions, potential supply in 2021-2030 would only be 96 million AEAs. However, by ensuring the full implementation of agreed sectoral policies[1] and by unlocking further reductions through reduction projects, a supply of up to 614 million AEAs could be generated, primarily in lower-income countries.

[1] One of the main differences between the Member States’ WEM projections and the Commission’s Reference Scenario is that the latter assumes the full implementation of EU sectoral policies that contribute to emission reductions, such as the current Energy Efficiency Directive, the Landfill Directive, the F-gas Regulation, etc. … This would already increase the supply of AEAs to 434 million AEAs.

• Member States who face a challenge in meeting their ESR targets domestically should make use of the possibility for project-based transfers for achieving compliance. This is the only flexibility that guarantees additional reductions in the non-ETS sectors and helps to set these sectors on a cost-effective trajectory towards our long-term objectives under the Paris Agreement. By helping lower income Member States to reduce their emissions, this approach also reduces the need for differentiation in future Effort Sharing discussions;

• Member States with a surplus of AEAs should link the transfer of these AEAs to reduction projects within their borders, or at least use the revenues to support further climate action. This will help them prepare for more stringent reduction targets after 2030, and can bring several co-benefits in terms of job creation, technology transfers, reduced energy poverty, etc. … It could also help them to achieve compliance with other, sectoral EU policies such as the Energy Efficiency Directive, the Energy Performance of Buildings Directive, the Renewable Energy Directive, the F-Gas Regulation, the Landfill Directive, etc. …

• Member States should not make use of the external flexibilities which are provided under the ESR, as these do not guarantee additional reductions and delay the necessary transition in the non-ETS sectors;

• Member States should start discussing the potential for project-based cooperation as soon as possible. The sooner reduction projects are implemented, the more reductions they can achieve and the more AEAs will be freed up in the period 2021-2030. With the negotiations on the ESR concluded and National Climate and Energy Plans currently in development, Member States can already at this stage get a clear view on the potential for additional reductions and the need for flexibilities.

• The current targets under the Effort Sharing Regulation are insufficient in light of the EU’s long-term objectives and will have to be increased. A target of at least 40% reductions (compared to 2005 emissions) is a minimum to put the non-ETS sectors on a linear trajectory towards the upper end of the 80% to 95% reduction target. The invitation for parties to update their Nationally Determined Contributions (NDC’s) by 2020 in response to the ongoing Talanoa Dialogue provides a first opportunity to do so. The Commission should come forth with its updated mid-century strategy as soon as possible and by Spring 2019 the latest.