To expand the implementation of carbon removal solutions, it is essential to establish a regulatory framework for the certification of carbon removals

Simon

<h2>What is it and why is it needed?</h2>
In December 2021, the EU Commission published its <a href="https://climate.ec.europa.eu/eu-action/sustainable-carbon-cycles_en#sustainable-carbon-cycles">Sustainable Carbon Cycles</a>&nbsp;Communication in which it outlined the EU&rsquo;s plan to capture and store carbon dioxide from different sources in order to reach climate neutrality by 2050. Core elements are:
<ul>
<li>Developing an industrial carbon usage registry;</li>
<li>Setting a carbon removal target through technological solutions;</li>
<li>Strengthening carbon farming to sequester CO2 in soils to contribute to the net removal target in the land sector of 310 million tonnes of CO2-eq by 2030.</li>
</ul>
To expand the implementation of carbon removal solutions, it is essential to establish a regulatory framework for the certification of carbon removals. Therefore, the European Commission has released additional information on the proposed voluntary and EU-wide framework at the end of 2022. It is known as the EU Carbon Removal Certification Framework (<a href="https://climate.ec.europa.eu/eu-action/sustainable-carbon-cycles/carbon-removal-certification_en">CRCF</a>) and includes several outstanding issues to be addressed. The CRCF aims to promote carbon removal solutions, encourage carbon farming approaches, and prevent greenwashing by establishing trust through the implementation of standards and certification procedures. Therefore the EU&rsquo;s ability to measure, monitor and verify carbon removals needs to be ensured while stimulating financing options from public and private sources.
Under the proposed framework, carbon removal projects may take a nature-based or technological approach. The certification of carbon storage in long-lasting products or materials is also possible. Figure 1 provides an overview of different carbon removal methods, their concrete implementation, and the final storage medium.
Figure 1. Taxonomy for carbon removal
<img style="display: block; margin-left: auto; margin-right: auto;" src="https://illuminem.b-cdn.net/articlebody/4d5646ca0e097fe23b0a7ab6be7e8fbe5cc2abde.png?" alt="Taxonomy for carbon removal" />
Source: IPCC
Importantly, carbon removal projects under EU certification have to comply with the QU.A.L.ITY criteria and need to:
<ul>
<li>be&nbsp;QUantifiable and&nbsp;QUantified;</li>
<li>Additional to existing climate benefits;</li>
<li>strive for&nbsp;Long-term storage;</li>
<li>contribute to sustainabilITY.</li>
</ul>
Given the frequent criticisms leveled at the methodologies and practices of the voluntary carbon market, establishing a regulatory framework for carbon removal activities is crucial. The criticism relates to the lack of oversight, transparency, trustworthiness, and climate impact (additionality) of the projects and certificates in this market. All of these can create significant problems for entities relying on voluntary carbon credits to offset or neutralise their emissions as part of their climate strategy, as highlighted in a recent <a href="https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe">investigation</a>. A regulated market can restore confidence and ensure that all projects conform to the same rules regarding accounting, monitoring, reporting, and verification.
<h2>How would the EU certification framework work?</h2>
The certification framework will be based on criteria and certification methodologies to be developed by the EU Commission with the support of an&nbsp;<a href="https://climate.ec.europa.eu/eu-action/sustainable-carbon-cycles/expert-group-carbon-removals_en">expert group</a>. The Commission then recognises private or public certification schemes that register carbon removal activities, control audits and certificates, maintain public registries, and also issue carbon removal units. The operators of carbon removal activities, such as farmers, biochar producers or BECCS power plant operators need to be audited against the certification methodologies by accredited private certification bodies. Only after a successful audit and recognition by the certification scheme, would the operator&rsquo;s carbon removal activities be certified by the certification scheme (compare Figure 2).
Figure 2. Working principle of the certification system
<img src="https://illuminem.b-cdn.net/articlebody/d3a28d6394ba7c358130d1328ee155d79c4fa23e.png?" alt="Working principle of the certification system" />
Source: adopted by author from&nbsp;<a href="https://climate.ec.europa.eu/eu-action/sustainable-carbon-cycles/carbon-removal-certification_en">EU Commission</a>
The current proposal allows the EU Commission to adopt secondary regulations, such as delegated acts, to establish the different technical certification methodologies and to harmonise rules for certification and recognition of certification schemes. Given that carbon removal is a new and evolving field, new certification methodologies certainly need to be developed over time.
<h2>Next steps for developing the methodologies</h2>
As mentioned above, the EU Commission has not developed detailed carbon removal methodologies or criteria yet. During the coming months, the external expert group will develop tailored certification methodologies for different carbon removal activities. For reasons of transparency, related documents are being published and the first meeting took place on 7 March 2023, while carbon farming methodologies will be the topic of the next meeting on 21 and 22 June 2023. The timeline for the upcoming meetings of the expert group is depicted in Figure 3.
Figure 3. Upcoming meetings of the expert group on carbon removal
<img src="https://illuminem.b-cdn.net/articlebody/7d663e8a495e06ecca68547b5ef9b0fb45836edb.png?" alt="Upcoming meetings of the expert group on carbon removal" />
Source: <a href="https://climate.ec.europa.eu/eu-action/sustainable-carbon-cycles/expert-group-carbon-removals_en">EU Commission</a>
The Commission&rsquo;s proposal also needs to be adopted by the European Parliament and the Council in a normal legislative procedure. At the end of April 2023, the responsible committee of the European Parliament published its <a href="https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2022/0394(COD)&amp;l=en">first response with proposed changes</a> to the Commission&rsquo;s CRFC. Improving monitoring, liability and transparency mechanisms and focusing on long-term carbon removal are priorities for the Parliament to prevent low-quality removals. The report also calls for allowing permanent carbon storage outside of the EU Member states, if the carbon is captured in the EU and stored under similar rules to the EU. This would open the way to account for geological storage in countries such as Norway or Iceland.
<h2>Our assessment&nbsp;and issues to be solved</h2>
The proposal for the EU CRCF is commendable for being among the first globally to address the need for removals in climate policy and for stringent, transparent regulatory oversight on certification of removal activities. However, several issues still need to be resolved to ensure that the climate effect of the removal activities under the CRCF can become a reality: removal activities through nature-based solutions could be short-lived and thus the climate impact could be reversed quickly. Furthermore, it is unclear how differing risks for reversals depending on the removal solutions will be dealt with and which actor will ultimately be (financially) responsible.
As there is currently a lack of details on the methodologies for the different removal activities and the certification schemes, the EU Commission, together with the expert group, needs to develop tailored rules for different removal activities. In particular, the issues of reversal and liability mechanisms need to be addressed as well. It is essential that these rules are developed in a transparent and collaborative manner with input from stakeholders across the carbon removal industry to ensure that they are effective in promoting long-lasting carbon removal solutions while also providing clear guidelines on liability and risk management. Reach out if you would like to learn more about the proposed regulation and understand how it impacts your business model or offsetting strategy.
This article is also published on <a href="https://carboneer.earth/en/carbon-removal-going-mainstream-the-eu-carbon-removal-certification-framework/" target="_blank" rel="noopener">Carboneer</a>. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

Carbon removal going mainstream? The EU carbon removal certification framework

The German government is currently developing a Carbon Management Strategy for CO2 storage and utilisation. Because, one thing is indisputable: Without the capture, use and storage of CO2 from industrial processes (CCU/S) and the atmosphere, Germany can hardly become climate neutral by 2045. The basis for the Carbon Management Strategy is the new evaluation report on the Carbon Dioxide Storage Act. In this article, we explain the key points and principles of such a strategy.

<h1>Carbon Management and CCU/S in Germany</h1>
The German government is currently developing a Carbon Management Strategy for CO2 storage and utilisation. Because, one thing is indisputable: Without the capture, use and storage of CO2 from industrial processes (CCU/S) and the atmosphere, Germany can hardly become climate neutral by 2045. The basis for the Carbon Management Strategy is the new evaluation report on the Carbon Dioxide Storage Act. In this article, we explain the key points and principles of such a strategy.
<h1>The CCU/S nomenclature</h1>
For the purposes of consistent nomenclature, we use the term carbon management below as an umbrella term for carbon management that includes CO2 capture, transport, and use (CCU) or storage (CCS) from fossil as well as biological or atmospheric sources as negative emissions or carbon dioxide removal (BECCS and DACCS). Likewise, dealing with other nature-based solutions to remove and reduce greenhouse gas emissions from the atmosphere is part of carbon management (see Figure 1).
<img src="https://illuminem.b-cdn.net/articlebody/1341085e8ce31fdcc0c6c2fd81ce0520fda520aa.png" alt="Figure 1: Sources and sinks of CO2 emissions of the different components of carbon management (source: carboneer).">
The impact on the climate and the technical and economic details of the different technologies and options are complex and require detailed analysis. 
<h1>Carbon management necessary for climate neutrality</h1>
In early January 2023, <a href="https://www.bmwk.de/Redaktion/EN/Pressemitteilungen/2023/01/20230105-norway-and-germany-intensify-cooperation-on-energy-on-the-path-towards-climate-neutrality.html">German Economics Minister Robert Habeck travelled to Norway</a> to explore further cooperation in the field of energy and climate. Among other things, the topic of CO2 capture, transport and storage is to become an important part of the cooperation with Norway. With tightening climate targets at EU and German level, it is becoming increasingly clear that greenhouse gas or climate neutrality by mid-century will not be achieved without large-scale capture, utilisation and, above all, long-term storage of CO2.
At the same time, the German Federal Ministry of Economics and Climate Protection (BMWK) published the German government&#x27;s <a href="https://www.bmwk.de/Redaktion/EN/Pressemitteilungen/2022/12/20221221-federal-cabinet-adopts-evaluation-report-on-the-carbon-dioxide-storage-act.html">evaluation report</a> on the Carbon Dioxide Storage Act (KSpG) in December 2022. The KSpG came into force in August 2012 and was intended to test the first demonstration projects for the long-term storage of CO2 in the ground in Germany. Acceptance of CO2 storage in Germany has always been very low in the past, especially as the discourse was strongly linked to the use of CO2 capture at coal-fired power plants and the continued operation of coal power plants. However, by the end of the application deadline for approval of new underground CO2 storage facilities (end of 2016), only one demonstration project had been applied for and been built in Germany. Since no new applications can be submitted after the end of 2016, underground CO2 storage is de facto not possible throughout Germany.
<h1>CO2 capture for residual emissions in industry</h1>
In the future, the use of CCS at coal-fired power plants in Germany is not expected to play a role due to the planned phase-out of coal. Capture, utilisation or storage of CO2 will however be needed primarily for a climate-neutral industry. Even after the use of renewable energies or electrification, large quantities of process-related CO2 emissions will still be produced, for example in the lime and cement industries or in the steel industry. Carbon is also the starting point for many other important products in the chemical industry and is therefore also needed as a raw material. The <a href="https://www.langfristszenarien.de/enertile-explorer-de/index.php">long-term scenarios project</a> assumes that around 30 million metric tons of CO2 will have to be captured, transported, reused or disposed of in final storage by industrial plants in Germany even after climate neutrality has been achieved in 2045. Possible locations of capture plants and transport pipelines for CO2 are shown in Figure 2.
<img src="https://illuminem.b-cdn.net/articlebody/7417025523966e9883c60c1c974b8db652e0a967.png" alt="Figure 2: Possible CO2 sinks, sources and transport pipelines in Germany in 2045 (source: Langfristszenarien)">
Here, it is noticeable that clusters of CCU/S sites are located in the core areas of German basic and heavy industry. This clustering is mainly due to economic economies of scale for infrastructures for capture, transport but also the potential reuse of CO2. Accordingly, the focus of the German Carbon Management Strategy will be primarily on the industrial sector and not on capture in coal-fired power generation.
In addition to the capture of CO2 at industrial sources, however, the use of carbon removal solutions, i.e., the physical removal of CO2 emissions from the atmosphere, must also be developed. Carbon removal is the only way to offset the greenhouse gas emissions that will continue to occur in 2045, for example from agriculture. At 45-80 million metric tons of CO2, the negative emissions required are actually at a higher level than CO2 emissions to be captured from industrial processes. We have presented the details <a href="https://carboneer.earth/recruiting-has-begun/">here</a> and <a href="https://carboneer.earth/a-small-gallery/">here</a>.
<h1>Key principles of the German carbon management strategy</h1>
The use of CCU/S in industry will play a role as a decarbonisation option, alongside energy and resource efficiency and the use of green energy sources and electrification of processes. Key findings from the latest climate neutrality studies for Germany (<a href="https://www.agora-energiewende.de/veroeffentlichungen/klimaneutrales-deutschland-2045/">Klimaneutrales Deutschland 2045</a>, <a href="https://www.bcg.com/klimapfade">Klimapfade 2.0</a>, <a href="https://www.dena.de/newsroom/meldungen/dena-leitstudie-aufbruch-klimaneutralitaet/">dena-Leitstudie Aufbruch Klimaneutralität</a>, <a href="https://www.langfristszenarien.de/enertile-explorer-de/index.php">Langfristszenarien</a>) allow the following assessments:
<ul><li>Increase in ambition level of climate targets leads to increased use of CCU/S</li></ul>
<ul><li>CO2 capture in the million metric ton range necessary as early as 2030</li></ul>
<ul><li>Use of CCS mainly in industry and waste sector</li></ul>
<ul><li>Negative emissions from carbon dioxide removal must be scaled up from 2030 at the latest</li></ul>
<ul><li>Permanence of CO2 removal and storage by nature-based methods is uncertain and therefore makes technical solutions necessary as well</li></ul>
<ul><li>Fossil CCU/S and technical carbon dioxide removal can use the same infrastructures and should be considered in an integrated way</li></ul>
<ul><li>Transparent and continuous dialogue needed to ensure societal acceptance for ramp-up of CCU/S</li></ul>
<ul><li>Significant amounts of CO2 capture at global level (6-12 Gt/year depending on scenario) also driven by CCS at fossil power plants</li></ul>
The recently published evaluation report on the KSpG provides the following key recommendations to the German government for revision: Examination and adjustment of regulations of the (cross-border) transport of CO2 and regarding German final storage sites for CO2, the further integration of CCU/S into the European Emissions Trading System (EU ETS), and the development of a clear framework for accounting of negative emissions. The details are to be elaborated in a German Carbon Management Strategy (Figure 3) by the German government, which will be presented during 2023.
<img src="https://illuminem.b-cdn.net/articlebody/6ce10638f8f16739932c58ee43d36bd6476ff4a1.png" alt="Figure 3: Basic pillars for carbon management in Germany (source: German government, adjusted by carboneer).">
<h1>Which issues need to be clarified?</h1>
The German Carbon Management Strategy first aims to spell out a prioritisation of CCU/S applications. Questions must be answered for which industries and which emissions CCU/S measures are most important in order to use available resources in an appropriate manner. This should go hand in hand with the adaptation of the relevant regulatory framework, for example for approval procedures and the development and financing of (transport) infrastructures. Measures and funding programs in special application areas are also to be developed.
Methodologies for monitoring, reporting and verification (MRV) for CCU/S need to be developed. For example, the accounting of CCU/S in the EU ETS and the accounting for the use of CO2 from different sources (fossil, industrial cycle, biogenic, from the atmosphere) in the chemical industry and in the production of synthetic fuels must be clarified.
In particular, the possibility of transboundary CO2 transport will play a major role across the EU. In this regard, the Norwegian government has already made offers to the EU industry for accommodating their CO2 in underground storages in Norway. The design of pipeline and ship capacities as well as questions of EU network regulation and financing are important issues. The synergy effects of CCU/S clusters between industries as sources and sinks of CO2 must be elicited to find the most efficient solutions when planning infrastructures.
For possible CO2 storage facilities to become a reality also on German territory (probably under the seabed rather than under the mainland), social acceptance for CO2 capture and final storage must be built up. This can only happen through clear and transparent communication regarding the necessity of CCU/S for a climate neutral Europe and Germany.
illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

Germany's Carbon Management Strategy is needed to reach net zero by 2045

Much of the climate ambition of the EU hinges on the bloc’s emission trading system (EU ETS). During December 2022, the Council and the European Parliament reached important agreements on the “Fit for 55” proposals. Specifically, new rules for the existing EU ETS, the implementation of a carbon border adjustment mechanism (CBAM) and the introduction of a new EU ETS for emissions from buildings and road transport are in sight. With these revisions implemented the EU would edge closer to its 2030 climate targets, but question marks remain.

Much of the climate ambition of the EU hinges on the bloc’s emission trading system (EU ETS). During December 2022, the Council and the European Parliament reached important agreements on the “Fit for 55” proposals. Specifically, new rules for the existing EU ETS, the implementation of a carbon border adjustment mechanism (CBAM) and the introduction of a new EU ETS for emissions from buildings and road transport are in sight. With these revisions implemented the EU would edge closer to its 2030 climate targets, but question marks remain.
In the <a href="https://illuminem.com/illuminemvoices/734dd766-2bc1-456d-b318-f5a852db265c">first part of this series</a>, we looked at changes to the EU ETS I, free allocations and the new Carbon Border Adjustment Mechanism (CBAM). In this second article we shed light on the new EU ETS II on buildings and road transport and on the utilisation of revenues from auctioning emission allowances by governments.
<h1>The EU ETS II: Pricing CO2-emissions from buildings, road transport and fuels in other sectors</h1>
A separate emission trading system will be introduced for emissions currently not priced across the entire EU. This EU ETS II will include emissions from the building sector as well as from road transport and the usage of fuels in other, as of now not defined, sectors. The EU ETS II will however only become operational from 2027 earliest, while high energy prices later this decade may even postpone the start until 2028. Not all details have been worked out yet, especially as member states are allowed to exempt fuel suppliers from the EU ETS II in case a national carbon price scheme with a price level equivalent or higher than the EU system exists (compare Figure 1 for the EU ETS II implementation timeline).
<img src="https://illuminem.b-cdn.net/articlebody/d06c0a326452c36b7fefa6adfaf8d38616192c60.png" alt="Figure 1: EU ETS II implementation timeline (source: carboneer)">
This leads to another important not entirely finalised aspect: An emission reduction trajectory with a high annual linear reduction factor (LRF) of more than 5% should be in place from 2024 onwards to achieve a total emission reduction of compliant sectors of about 60% by 2030 compared to 2005. However, the EU ETS II will start pricing emissions only in 2027. Furthermore, once prices for allowances under the EU ETS II are higher than 45 EUR/ton over a certain period of time, additional allowances will be released to increase the supply on the market.
Effectively, the EU ETS II in its currently discussed shape and form will be closer to a carbon tax with a maximum price level of 45 EUR/ton at least until 2030. From then onwards no price cap is foreseen as of now. A low price of 45 EUR/ton would be far below the actual CO2-avoidance costs ranging between 100-300 EUR/ton in the building and road transport sectors. Clearly, the price signal in the EU ETS II will not be high enough to incentivise the adoption of low-carbon technologies alone.
With all these higher ambitions and new pricing schemes, one very important question of course remains: Where will the money from EU ETS I, CBAM and EU ETS II go to and what will it be used for?
<h1>Auction income for climate and social measures only</h1>
The allocation of income for the existing Innovation Fund, which supports industrial decarbonisation, will be stocked up from 450 million to 575 million emission allowances (EUA). At an average price of 90 EUR/ton this represents a monetary value of more than 50 billion EUR to be allocated to decarbonisation projects. In addition, earnings of EU member states from auction income must now be entirely used for climate measures. However, the Modernisation Fund for less wealthy member states still allows some investments into fossil infrastructures.
One of the largest concerns of the European Parliament was that the introduction of the EU ETS II will predominantly hurt economically weaker states and citizens. Therefore, the current agreement allocates 50% of the income from the EU ETS II to the newly introduced Social Climate Fund. It should support vulnerable households and small businesses to cope with the price increase of fuels. The fund would start operation already in 2026, one year before the actual pricing scheme commences, and is set up to run until 2032 for now. It is supposed to have a budget of about 65 billion EUR for social climate measures such as renovation in social housing to direct income support. The remaining 50% of the income passes to the EU national states, which must use the money for social climate measures in the building and transport sector as well. An estimated total of 87 billion EUR will thus be allocated to reduce social hardships due to more comprehensive carbon pricing. This sounds like a huge amount of money but is actually being dwarfed by expenditures to alleviate the current fossil energy price crisis: Germany alone will make available up to 200 billion EUR for consumer price breaks if necessary.
<h1>What to make of all the news?</h1>
The EU emission trading space will become more complex with additional sectors and phased-out free allocation, the pricing of imports through CBAM and the new EU ETS II for sectors currently not under a pricing scheme at all. Figure 2 provides an overview of the entire implementation timeline of the most important changes.
<img src="https://illuminem.b-cdn.net/articlebody/848e7c403937e3b0081767d996a14e8d6a72c4af.png" alt="Figure 2: Implementation timeline of most important changes to the European emission trading systems and rules (source: carboneer)">
Players from all sectors must act now to understand the extent to which they are exposed to regulatory and carbon pricing risks and how to prepare themselves. Our seven main take-aways are the following:
<ol><li>If implemented, the increased ambition in the EU ETS I can have the potential to bring the EU towards is 2030 climate targets.</li></ol>
<ol><li>Phasing out free allocations for industries means a much higher exposure to carbon price risks for industrials and “real” incentives to make progress on industrial decarbonisation.</li></ol>
<ol><li>The implementation of CBAM incentivises climate action in non-EU countries while setting the stage for much confusion concerning greenhouse gas measurement, reporting and verification (MRV) along with the need for importers to understand the EU ETS and start hedging.</li></ol>
<ol><li>Until 2026 supply of emission allowances in the EU ETS I will remain adequate while the full-scale implementation of several mechanisms from 2027 onwards will lead to higher prices and lower supply of EUA.</li></ol>
<ol><li>Carbon prices of above 100 EUR/ton in the EU ETS I will be common during this decade, especially if the macro-economic situation normalises.</li></ol>
<ol><li>The implementation of the EU ETS II is less ambitious with a price cap of 45 EUR/ton and will likely not drive decarbonisation in the sectors under question until 2030.</li></ol>
<ol><li>The EU ETS II will however provide a common ground for pricing emissions in other sectors in the EU and bring about 75% of the bloc’s emissions under a pricing scheme.</li></ol>
This article is also published on <a href="https://carboneer.earth/de/biggest-update-to-eu-emission-trading-rules-in-years-part-ii-eu-ets-ii-revenue-distribution-and-take-aways/">Carboneer</a>. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

Biggest update to EU emission trading rules in years, part II: EU ETS II, revenue distribution and take-aways

Much of the climate ambition of the EU hinges on the bloc’s emission trading system (EU ETS). During December 2022, the Council and the European Parliament reached important agreements on the “Fit for 55” proposals. With these revisions implemented the EU would edge closer to its 2030 climate targets, but question marks remain.

Much of the climate ambition of the EU hinges on the bloc’s emission trading system (EU ETS). During December 2022, the Council and the European Parliament reached important agreements on the “Fit for 55” proposals. Specifically, new rules for the existing EU ETS, the implementation of a carbon border adjustment mechanism (CBAM) and the introduction of a new EU ETS for emissions from buildings and road transport are in sight. With these revisions implemented the EU would edge closer to its 2030 climate targets, but question marks remain. In this article we unpack some of the most relevant points on changes and updates on the EU ETS I and CBAM.
<h1>EU ETS I: new inclusion, rebasing and strong annual cap reduction</h1>
Currently, the existing EU ETS covers roughly 40% of the EU’s emissions. They stem from the energy sector, industrial installations and aviation. Maritime transport will be the newcomer and large vessels of 5000 gross tonnage and above must gradually surrender emission allowances (EUA) for an increasing share of their emissions: 40% in 2024, 70% in 2025 and 100% in 2026. The inclusion of smaller vessels and non-CO2-emissions such as methane and N2O will likely start from 2026 onwards.
Next to this new inclusion, the overall ambition of emission reductions until 2030 compared to 2005 under the EU ETS increased to 62% (Figure 1). The agreement reached on 18th of December 2022 would thus lead to about 23 million tons less CO2-emissions compared to the EU Commission’s proposal from 2021 and is much more aggressive than the minus 43% that has been the previous reduction target. While the target is politically ambitious, it still falls short of the necessary reductions in the EU to limit global warming to 1.5°C even without taking into account fair share considerations.
To achieve this stronger reduction of 62%, the legislators agreed on a rebasing of emissions: 90 million EUA are taken out of the market in 2024 with another 27 million EUA following in 2026. In addition, the entire emission cap will be reduced by 4.3% annually from 2024 to 2027. From 2028 onwards this linear reduction factor (LRF) will even rise to 4.4%. As expected, the market stability reserve (MSR) will continue to take out 24 % of surplus EUAs.
<img src="https://illuminem.b-cdn.net/articlebody/5f3174ec50c920a19e4d964b62d394ce0805328e.png" alt="Figure 1: Emission reductions targets under the EU ETS I (source: European Union)">
All these reductions will lead to significantly tighter supply of EUAs, drive prices and incentivise more decarbonisation especially in industrial sectors. This brings us to the changes for the industrial sector.
<h1>Fundamental change for the industrial sector</h1>
Most of the industrial sectors under the EU ETS are currently still eligible for free allocation of EUAs. Based on benchmarks on efficient and thus less emission-intensive production, different industrial facilities will still receive free allowances. However, the benchmark system will be overhauled in 2026: the basis for the free allocations will not be a production process, but the product. This facilitates a better comparison between industries. In addition, industrial companies must have energy audits in place and implement related decarbonisation measures. Otherwise, the free allocation volumes of a facility will be reduced by 20%. Similarly, industrial facilities that are among the worst 20% in terms of carbon-intensity in one sector have to design and implement decarbonisation plans, otherwise their free allocations will be cut by 20%.
However, the biggest change will be the phase-out of free allocations for industrial players as such. From 2026 onwards, the number of free allowances handed over to industries will be reduced gradually until 2034 when industries have to procure all of their needed allowances through the auctioning mechanism or on the market. Free allocation will be part of the history books. As becomes clear from Figure 2 below, the phase-out of free allocation for industry starts relatively slowly compared to the phase-out for aviation and picks up speed from the end of the decade. This approach postpones that necessary price signals kick in for industrial polluters while allowing the EU industry to prepare and decarbonise in earnest during the next five years.
<img src="https://illuminem.b-cdn.net/articlebody/dbb2ef288114137e7c5f27f7b33eae1d37fb10a0.png" alt="Figure 2: Share of free EUA allocations over time in aviation and industry (source: carboneer)">
The EU Commission expects that about 75 million more EUAs will be auctioned due to the phase-out of free allocations to industry, increasing the auction income. Half of that income should go into the EU Innovation Fund that supports these very industries with the implementation of decarbonisation projects. The other half will be available for the EU member states to support their exporting industries. Which leads us to the next large update as phasing out free allocations is tightly coupled with the introduction of the carbon border adjustment mechanism (CBAM).
<h1>CBAM: pricing imported emissions</h1>
At the same time and rate as European industries will not receive free allocations of EUA anymore, importers of certain goods into the EU will have to pay for the emissions of their products. This carbon border adjustment mechanism (CBAM) should on the one hand create a level-playing field between EU and non-EU industries for products in the EU (both paying a similar carbon price) and increase climate ambition in non-EU states (climate instruments and carbon pricing abroad can reduce necessary payments for importers).
Initially, CBAM will cover the most emission-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity. The new agreements from 13th of December 2022, however, also feature hydrogen, certain precursors and other downstream products such as screws and bolts as imports under CBAM. In addition, the EU Commission will assess the inclusion of other products that might be at risk of carbon leakages such as organic chemicals and polymers into CBAM from 2030 onwards. Indirect emissions at the production facility also might have to be part of the emissions to be reported and consequently paid for by importing companies. From October 2023 importers in the covered sectors must be ready for their monitoring, reporting and verification (MRV) obligations, which start 3 years ahead of the pricing mechanism. Figure 3 depicts the timeline of the CBAM implementation.
<img src="https://illuminem.b-cdn.net/articlebody/1023a84dea9b425f5666a76cbc08f7627d6166ec.png" alt="Figure 3: CBAM implementation timeline (source: carboneer)">
Two main contentious issues remain for CBAM:
<ul><li>How will reporting and verification methods and schemes really look like and work for imported goods?</li></ul>
<ul><li>How to compensate or support companies that produce in the EU and must purchase EUAs but export to non-EU countries where no or less ambitious carbon pricing rules exist?</li></ul>
Next to those sectors that are already under the EU ETS, a lot of emissions from other activities in the EU are not part of an emission pricing scheme. After much uncertainty about its prospects, it is now clear: a new or second emission trading system (EU EHS II) will be implemented as well. This will be the topic of our second article.
This article is also published by <a href="https://carboneer.earth/biggest-update-to-eu-emission-trading-rules-in-years-part-i-eu-ets-and-cbam/">Carboneer</a>. Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

Biggest update to EU emission trading rules in years, part I: EU ETS and CBAM

Reducing dependence on Russian gas is the order of the day. Thus, import LNG terminals will soon play an important role in Germany. The idea of building import terminals for liquefied natural gas (LNG) on the German coast is already several years old. However, political support for the construction of the planned facilities in Brunsbüttel, Wilhelmshaven and Stade was limited. Moreover, investment decisions by economic actors also dragged on for a long time, were put on hold or planning was very slow.

Reducing dependence on Russian gas is the order of the day. Thus, import LNG terminals will soon play an important role in Germany. The idea of building import terminals for liquefied natural gas (LNG) on the German coast is already several years old. However, political support for the construction of the planned facilities in Brunsbüttel, Wilhelmshaven and Stade was limited. Moreover, investment decisions by economic actors also dragged on for a long time, were put on hold or planning was very slow.
Now everything has to happen very quickly at once. For this reason, this article answers to the most important questions:
<ul><li>Which LNG terminals are planned?</li></ul>
<ul><li>When can the terminals go into operation?</li></ul>
<ul><li>How high will the import capacities be?</li></ul>
<ul><li>And what do they mean for climate protection?</li></ul>
<h1>Why is LNG necessary?</h1>
The invasion of Ukraine by Russia made it clear to all actors in Germany: Diversification of gas imports is urgently needed. Moreover, the great dependence on Russian gas can severely impair Germany’s security of supply in the event of a supply stoppage.
Russia stopped gas supplies to Poland and Bulgaria at the end of April. Our <a href="https://blog.energybrainpool.com/en/natural-gas-co-will-the-next-winter-be-cold/">March 2022 analysis</a> examines the German and EU-wide supply situation under different supply scenarios of gas from Russia. Thus, a supply gap can only be closed in the short term by reducing consumption. Mid term, new regasification capacities for liquid natural gas are needed in Europe, especially for Germany. Hence, Europe might become independent of Russian gas supplies.
Germany currently consumes about 90 billion cubic meters of natural gas per year. More than 50 per cent still came from Russia via pipelines in 2020. Moreover, the EU was still heavily dependent on Russian gas in 2021, which accounted for 45 per cent of imports. However, almost 15 per cent of EU imports last year were provided by LNG from the USA or Qatar, for example, as Figure 1 shows. A further 10 billion cubic metres came via the Mediterranean from Algeria (sources: <a href="https://ec.europa.eu/eurostat/statistics-explained/index.php?title=EU_imports_of_energy_products_-_recent_developments#Main_suppliers_of_natural_gas_and_petroleum_oils_to_the_EU">EU Commission</a> and <a href="https://www.reuters.com/article/ukraine-crisis-eu-energy-plan-idTRNIKBN2L51OD">Reuters</a>). 
<img src="https://illuminem.b-cdn.net/articlebody/0b220fc0a438ca9f5d142321f0f06d964615da40.png" alt="Figure 1: Shares of natural gas import countries in Germany and the EU (source: Energy Brainpool, 2022)">
Figure 1: Shares of natural gas import countries in Germany and the EU (source: Energy Brainpool, 2022)
To reduce German dependence, LNG is to come to Germany in the very short term via floating terminals, so-called FSRUs (Floating Storage and Regasification Units). These terminals receive the liquid natural gas cooled to about -163 degrees Celsius from an LNG tanker. Then, the still-liquid natural gas is regasified and brought ashore via a connecting pipeline. There it can be fed into the gas grid. Moreover, plans for the <a href="https://blog.energybrainpool.com/en/lng-market-development-and-trends/">onshore major LNG import terminals</a> will also be reactivated.
<h1>What are the current plans?</h1>
First of all, the onshore LNG import facilities have to be built before imports can start. Under normal conditions, a timeframe of five or more years is realistic for planning, permitting and construction. On the one hand, for the planned LNG import terminals in Brunsbüttel and Stade, commissioning is likely to take place earliest in 2024 or later, even with strong political support. The terminal in Wilhelmshaven, on the other hand, could regasify imported LNG from the US or Qatar and feed it into the German gas grid as early as winter 2023/2024.
<img src="https://illuminem.b-cdn.net/articlebody/720c74a2e55e8647c7960ad58802565e19927eab.png" alt="Figure 2: Location of planned LNG terminals in Germany (source: SP Global, 2022)">
Nevertheless, a number of FSRUs are to be at sea off the German coast sooner. So far, Germany has reserved four special ships on the world market. Moreover, the first liquefied natural gas is to be landed from a floating terminal off Wilhelmshaven as early as the turn of the year 2022/2023. In total, it can replace up to 20 percent of gas imports from Russia. Thus, the first pile driving – which is equivalent to a groundbreaking ceremony, only at sea – already took place on the fifth of May. On top of that, another ship is planned for stationing in Brunsbüttel in early 2023 (source: <a href="https://www.energie-und-management.de/nachrichten/wirtschaft/detail/beginn-der-bauarbeiten-fuer-lng-terminal-in-wilhelmshaven-153436">E&amp;M</a>, <a href="https://www.tagesspiegel.de/wirtschaft/habeck-bei-baubeginn-von-lng-terminals-das-ist-nicht-nur-deutscher-eigennutz/28308880.html">Tagesspiegel</a>).
<h1>What about midterm?</h1>
According to plans of the Federal Government, two more floating terminals are to be rented near Stade, Rostock, Hamburg-Moorburg or Eemshaven in the Netherlands and operated for ten years. Therefore, a total of EUR 2.94 billion is available from the federal government’s budget for the procurement of the four terminals (source: <a href="https://www.bmwk.de/Redaktion/DE/Pressemitteilungen/2022/05/20220501-habeck-legt-zweiten-fortschrittsbericht-energiesicherheit-vor.html">BMWK</a> und <a href="https://www.tagesschau.de/wirtschaft/lng-fluessiggas-lng-terminal-erdgas-gasembargo-101.html">Tagesschau</a>).
In addition, the Federal Government is currently working at full speed on an LNG Acceleration Act (<a href="https://www.duh.de/presse/pressemitteilungen/pressemitteilung/lng-beschleunigungsgesetz-soll-umweltvertraeglichkeitspruefungen-abschaffen-deutsche-umwelthilfe-befue/">BMWK background paper</a>). It is intended to greatly accelerate the construction and operation of both floating and land-based terminals by shortening approval procedures and reducing environmental regulations. The LNG import terminals will only be allowed to be in operation until 2040. What is more, the plant operators can submit a permit application to convert the plants to the use of green hydrogen or other green derivatives by 2035. Then, the terminals can continue to operate after 2040 (source: <a href="https://www.duh.de/presse/pressemitteilungen/pressemitteilung/lng-beschleunigungsgesetz-soll-umweltvertraeglichkeitspruefungen-abschaffen-deutsche-umwelthilfe-befue/">DUH</a>).
<h1>Capacities of already existing terminals in Europe</h1>
LNG import terminals have existed in many European countries for a number of years, 37 in total, 26 of which are located in EU member states. Between 20 and 30 more import terminals are currently being planned. The capacity of the continent’s existing regasification terminals is just under 250 billion cubic meters per year (source: <a href="https://www.chemietechnik.de/energie-utilities/interaktive-karte-lng-terminals-in-europa-802.html">Chemie Technik</a>).
Capacities are particularly high in Spain, with 60 bcm, as the Iberian Peninsula is only very partially connected to the gas network of Central Europe. However, the UK, Turkey and France also have significant LNG import capacities as Figure 3 makes clear. Countries such as Lithuania and Poland each have terminals of only four and five billion cubic meters, respectively, but are able to source much of their gas requirements through them.
<img src="https://illuminem.b-cdn.net/articlebody/a5fc5cbf7154f72c9b031e66888cb8cda97cbf3a.png" alt="Figure 3: Shares of different countries in European LNG import capacities (source: Energy Brainpool, 2022)">
<h1>What capacities should the terminals in Germany have?</h1>
The planned terminals in Germany are expected to have considerable capacity. The four floating LNG terminals are to be gradually expanded to a capacity of 33 billion cubic meters per year by summer 2024. This is based on the BMWK in its second energy security progress report. By winter 2022/2023, it could already be possible to obtain 7.5 billion cubic meters of LNG for the German market.
With the completion of the terminals in Brunsbüttel and Wilhelmshaven, between 45 and 50 billion cubic meters of LNG could be supplied to Germany from 2026. Each has around 8 billion cubic meters of regasification capacity. This would catapult Germany into second or third place among Europe’s largest LNG importers. The potential imports would then also be roughly equivalent to the import of natural gas from Russia in recent years. Dependency on Russian natural gas could be reduced to just 10 percent from as early as 2024 through further energy efficiency and conservation measures (source: <a href="https://www.bmwk.de/Redaktion/DE/Pressemitteilungen/2022/05/20220501-habeck-legt-zweiten-fortschrittsbericht-energiesicherheit-vor.html">BMWK</a>).
<h1>Diversification with a long-term perspective</h1>
However, the chartering of the FSRUs, as well as the construction of the new LNG terminals, also raises questions. New fossil fuel infrastructure is being developed and partly financed by the German government. This could create overcapacity and cement existing energy consumption patterns. Moreover, the triangle of objectives between sustainability, security of supply and economic efficiency is important. Especially, in an extreme situation of a war this has be taken into account .
Therefore, according to the Federal Ministry of Economic Affairs and Climate Protection, infrastructures and land-based terminals in Germany should be planned and built in a way that they are suitable for the import of green hydrogen or other derivatives such as green ammonia (source: <a href="https://www.bmwk.de/Redaktion/DE/Downloads/F/faq-liste-lng-terminal-in-deutschland.html">BMWK</a>). Uniper’s planned terminal in Wilhelmshaven is either to be built with a landing terminal for green ammonia or at least to allow conversion to green imported products (source: <a href="https://www.rechargenews.com/energy-transition/uniper-resumes-plans-for-hydrogen-ready-german-lng-terminal-fortum-ceo/2-1-1179191">Recharge</a>). Similarly, RWE and Gasunie plan to build the Brunsbüttel terminal a special way. Thus, the terminal can be easily converted to green ammonia imports afterwards. Simultaneously, a terminal for green ammonia is already to be built here next to the LNG import terminal. Green hydrogen can then be produced from the green ammonia in a further process step (source: <a href="https://www.rwe.com/en/press/rwe-ag/2022-03-18-import-of-green-enery-rwe-builds-ammonia-terminal-in-brunsbuettel">RWE</a>).
<h1>What does this mean for climate protection?</h1>
Germany will continue to be dependent on energy imports from abroad in the future. For instance, green ammonia or hydrogen will have to be imported from other countries. Especially for the decarbonization of industrial processes and parts of the transport sector. The war in Ukraine has thrown old certainties overboard. The shift away from Russian gas can be reduced in the medium term through LNG import terminals. However, the expansion of these infrastructures must also be designed to achieve medium- and long-term climate targets.
This article is also published by <a href="https://blog.energybrainpool.com/en/rocket-program-for-german-lng-terminals/">Energy BrainBlog</a>. Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

Rocket program for German LNG terminals

The energy systems of the two largest EU countries differ. A comparison of the electricity sectors in particular shows the contrasts. Electricity generation in France is dominated by nuclear power, which accounts for almost 70 percent, while Germany’s electricity mix relies on coal and natural gas as fossil fuels for one-third of the total. Follow us in this article as we explore the differences between the two energy systems.

The energy systems of the two largest EU countries differ. A comparison of the electricity sectors in particular shows the contrasts. Electricity generation in France is dominated by nuclear power, which accounts for almost 70 percent, while Germany’s electricity mix relies on coal and natural gas as fossil fuels for one-third of the total. Follow us in this article as we explore the differences between the two energy systems.
Just by looking at the primary energy consumption of the two countries, the differences between France and Germany become clear. France’s primary energy consumption of about 10000 PJ was for many years about one third lower than that of Germany. However, in addition to the higher economic output, the high shares of coal-fired power generation in Germany also played an important role.
<h1>Primary energy consumption declines in both countries</h1>
Primary energy consumption has been declining in both countries since 2010. Since that time, coal-fired power generation in Germany decreased (especially from 2017), while renewable energy shares grew. Renewable generation also increased in France during this period, but less so than in Germany. For example, primary energy consumption in France declined by 7.8 percent between 2010 and 2019, and by as much as 10 percent in Germany. The Corona pandemic led to an economic slump in both Germany and France, resulting in a drastic drop in energy consumption as shown in Figure 1 (source: <a href="https://ag-energiebilanzen.de/">AGEB</a>, <a href="https://www.iea.org/data-and-statistics/data-tables?country=FRANCE&amp;energy=Balances&amp;year=2020">IEA</a>).
<img src="https://illuminem.b-cdn.net/articlebody/84ab35c199bda31e10c9bedcd790b277fdf12d14.png" alt="Figure 1: Change in primary energy consumption in France (FR) and Germany (DE) since 2010 in PJ (source: Energy Brainpool, 2022)">
While the share of oil in primary energy consumption is relatively similar in France and Germany, the shares for other energy sources lie far apart. In 2019, for example, nuclear energy accounted for 43 percent of French primary energy consumption. In contrast, with only 6 percent in Germany at that time. After 2023, the generation of electricity from nuclear power plants in Germany will decline to zero as the last reactors are shut down. There are also big differences in the share of coal. While hard coal and lignite still accounted for 17 percent of primary energy in Germany in 2019, the share of coal in France was only 3 percent in the same period (source: <a href="https://ag-energiebilanzen.de/">AGEB</a>, <a href="https://www.climate-transparency.org/media/france-country-profile-2020">Climate Transparency</a>). Figure 2 illustrates the shares of different energy sources in primary energy supply in France (inner ring) and Germany (outer ring). 
<img src="https://illuminem.b-cdn.net/articlebody/8b3637521c7cde249db5110fcf32147ae7a7058b.png" alt="Figure 2: Shares of different energy sources in primary energy consumption in France (inner ring) and Germany (outer ring) in 2019, in percent (source: Energy Brainpool, 2022)">
<h1>French emissions 45 percent lower</h1>
The higher shares of fossil fuels in Germany are also reflected in the greenhouse gas emissions balance. While French greenhouse gas emissions were 443 million metric tons CO2– eq. in 2019 (source: <a href="https://www.iea.org/reports/france-2021">IEA</a>), emissions in Germany stood at 800 million metric tons CO2-eq. according to the Federal Environment Agency (source: <a href="https://www.umweltbundesamt.de/daten/umweltindikatoren/indikator-emission-von-treibhausgasen#die-wichtigsten-fakten">UBA</a>). This means that France’s production-related greenhouse gas emissions before the Corona pandemic were almost 45 percent lower than in Germany.
In particular, France’s relatively low-CO2 electricity generation contributes to low climate-damaging emissions. The CO2-intensity of electricity generation in France stood at around 57 CO2/kWh in 2020 (source: <a href="https://www.statista.com/statistics/1190067/carbon-intensity-outlook-of-france/">Statista</a>). In Germany, the electricity mix at the same time had a CO2-intensity of 366g CO2/kWh, which was more than six times higher (source: <a href="https://www.umweltbundesamt.de/sites/default/files/medien/5750/publikationen/2021-05-26_cc-45-2021_strommix_2021.pdf">UBA</a>). The explanation for this high discrepancy lies in the technologies used to generate electricity in the two countries.
<h1>Mix vs. monotony</h1>
German power generation capacity is best described as a colorful mix. With over 120 GW of renewable capacity and more than 70 GW of fossil power plants, Germany had a total capacity of over 220 GW of power plant capacity on the grid in 2020 (source: <a href="https://www.bdew.de/service/daten-und-grafiken/installierte-leistung-und-erzeugung/">BDEW</a>). In France, total capacity was just over 130 GW, with just under 60 GW of renewable capacity installed. At the same time, nuclear power plants account for the majority of French capacity, with over 61 GW of installed capacity (source: <a href="https://www.iea.org/reports/france-2021">IEA</a>). Figure 3 compares the generation capacities in the two countries.
<img src="https://illuminem.b-cdn.net/articlebody/5311d1f60384f427a38f8a3f4b0cdf7fb5be7c2f.png" alt="Figure 3: French (FR) and German (DE) power generation capacities in 2020 in GW, excluding other and oil (source: Energy Brainpool, 2022)">
France and Germany each produced about 525 TWh of electricity in 2020. To understand the low CO2-intensity of French power generation, it is necessary to look at actual power generation and not just installed capacity. Here, it becomes very clear how strongly nuclear power dominates the French electricity sector. Until before 2020, nuclear power usually accounted for over 70 percent of electricity generation in France. In 2020, however, nuclear generation declined to 67 percent, or just over 350 TWh, due to the closure of two plants. Hydropower generation was the second largest source, contributing just under 64 TWh of electricity (source: <a href="https://www.iea.org/reports/france-2021">IEA</a>).
German electricity generation presents a more diverse picture, with generation from fossil sources declining in 2020 compared to previous years due to pandemic-related impacts. The share of renewables in gross electricity generation in Germany reached the 45 percent mark in 2020 (source: <a href="https://www.bdew.de/service/daten-und-grafiken/bruttostromerzeugung-deutschland/">BDEW</a>). Figure 4 shows electricity generation in France and Germany by technology in 2020.
<img src="https://illuminem.b-cdn.net/articlebody/cd7dd118b65a9a3fa1752c127d752bbdc2228ae7.png" alt="Figure 4: Gross electricity generation in 2020 in France (FR) and Germany (DE) in TWh, excluding other and oil (source: Energy Brainpool, 2022)">
<h1>What will the future look like?</h1>
With the new traffic light coalition, the signs in Germany point to a faster implementation of the energy transition (<a href="https://blog.energybrainpool.com/en/new-energy-market-scenario-is-the-coalition-traffic-light-red-yellow-or-green/">see our report on the traffic light coalition</a>). Also, under the impact of the armed conflict in Ukraine, Europe’s energy supply will not remain unchanged. Until now, natural gas was still politically high on the agenda as a bridge to climate neutrality. This has changed significantly after the events at the end of February 2022.
According to a key issues paper dated February 28, 2022, Germany is to achieve its power supply entirely from renewable energies by 2035. To this end, the output of onshore wind energy should double to up to 110 GW by 2030 (source: <a href="https://www.handelsblatt.com/politik/deutschland/energiewende-regierung-will-vollversorgung-mit-oekostrom-bis-2035/28113378.html?ticket=ST-4615224-Gye2o9OkC6Ojb6Re43fe-ap2">Handelsblatt</a>).
With the inclusion of nuclear power plants in the EU taxonomy (<a href="https://blog.energybrainpool.com/en/nuclear-power-and-natural-gas-in-the-eu-taxonomy-what-is-it-about/">here</a> you can finde our detailed article on this topic), CO2-free generation in French nuclear power plants could develop even further. However, the fleet of power plants is aging and the commissioning of new power plants (Flamanville) has been repeatedly postponed while costs have increased (source: <a href="https://www.iwr.de/news/atomkraftwerke-in-frankreich-produzieren-zu-wenig-strom-edf-senkt-prognose-fuer-2022-news37779">IWR</a>).
The long-term outlook for nuclear power in France is uncertain. According to French President Macron, nuclear power is still entitled to a maximum of 40 percent of electricity generation in 2050 (source: <a href="https://www.euractiv.de/section/energie/news/frankreich-auf-dem-weg-zu-einem-flexibleren-stromsystem/">Euractive</a>).
Cooperation between the two countries regarding the transformation of their energy systems will certainly have to intensify in the coming years.

Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

Two different energy systems: France and Germany compared

The new government is not the only one with ambitious plans for 2030. In their scenario framework 2023–2037 for electricity, the German transmission system operators also presented the electricity sector up to 2045 for the first time. In that year, Germany aims to be climate neutral. What assumptions do the grid operators make and what does the scenario mean for the energy industry? We want to explore these questions in this article. 

The new government is not the only one with ambitious plans for 2030. In their scenario framework 2023–2037 for electricity, the German transmission system operators also presented the electricity sector up to 2045 for the first time. In that year, Germany aims to be climate neutral. What assumptions do the grid operators make and what does the scenario mean for the energy industry? We want to explore these questions in this article. 
Every two years, the German transmission system operators (TSOs) must submit an electricity network development plan (NDP) for the next ten to twenty years. The basis for the NDP and thus the necessary expansion and construction measures for the transmission grid of the future is the scenario framework that the TSOs published on 17 January 2022. Besides that the date also marked the start of the <a href="https://www.netzausbau.de/szenariorahmen">public consultation phase by the Federal Network Agency</a>, which lasted until 14 February 2022.
<h1>New scenario framework provides outlook for climate neutrality</h1>
In the course of the stronger focus on climate neutrality in industry, politics and society, the TSOs have not only developed a forecast up to 2037 in their <a href="https://www.netzentwicklungsplan.de/de/netzentwicklungsplaene/netzentwicklungsplan-20372045-2023">latest scenario framework</a>, but also scenarios for the power system in 2045. In that year, Germany is supposed to be climate neutral according to the current climate protection law. And thus, as a country, it has no longer any harmful influences on the climate system. In the further course of the NDP process, the corresponding measures for the grid expansion will be developed. However, here we will primarily focus on the statements of the scenario framework for electricity generation and consumption until 2045.
All in all, the TSOs have developed scenarios with different transformation speeds. Scenario A shows a higher use of (imported) hydrogen. In contrast, Scenarios B and C anticipate a pronounced and faster electrification of energy consumption. For the climate neutrality scenario in 2045, B/C coincide with stronger electrification. Figure 1 shows the classification of the different scenarios according to energy-related metrics.
<img src="https://illuminem.b-cdn.net/articlebody/d3f3c56a501d9b95366a3c0665561acde7c31f66.png" alt="Figure 1: classification of the five different scenarios of the scenario framework for the NDP 2023-2037 (source: TSO)">
As can be seen in Figure 1, the range between the scenarios with respect to certain metrics (such as hydrogen demand, hydrogen import/export saldo and the transmission capacity of cross-border interconnectors) is very wide. The following considerations compare Scenario A (conservative), Scenario C (progressive) for 2037 and Scenario B/C for 2045. Comparison with the current federal government’s goals and estimates for 2030 is also helpful in some cases.
<h1>Electricity demand increases sharply</h1>
The TSOs’ scenario framework makes it very clear that electricity consumption will increase strongly with ambitious climate targets and sector coupling. For example, consumption increases in all sectors due to direct electrification of processes in industry, but also the greater penetration of electric vehicles, heat pumps, and the use of electrolysers to produce hydrogen.
Figure 2 illustrates the increase in gross electricity consumption along with the differences between the scenarios.
<img src="https://illuminem.b-cdn.net/articlebody/c4ca62751db49d0d95e0f3eabfe28d9f4efa21ce.png" alt="Figure 2: development of gross electricity consumption in Germany in TWh by scenario (source: Energy Brainpool)">
Already by 2030, the demand for electricity increases strongly from below 600 TWh today. The German government assumes a corridor of 680 to 750 TWh of electricity demand in 2030, with 715 TWh representing the mean value. The increase weakens by 2037 in Scenario A, which relies more heavily on imported hydrogen. However, the increase is substantial by 2037 in Scenario B, with over 200 TWh in 7 years.
In 2045, the year of climate neutrality, electricity consumption in Germany will have more than doubled compared to 2020. That represents an increase of more than 23 TWh per year or about half of the electricity consumption of Portugal.
<h1>What will happen in the transport sector by 2045?</h1>
One driver of additional electricity consumption is electric mobility, which experiences strong growth in the scenarios. Figure 3 shows the scenario framework’s assumptions for the number of all-electric passenger vehicles by scenario.
<img src="https://illuminem.b-cdn.net/articlebody/5575c30ce90e41e84425c08799b68c6d7b601bba.png" alt="Figure 3: number of all-electric passenger vehicles in Germany (source: Energy Brainpool)">
The targeted increase to 15 million e-vehicles by 2030 is ambitious, but necessary to achieve the climate targets by then. Therefore, the German government also sees the need for a massive increase in the share of electric mileage in the transport sector.
The TSOs’ scenario framework provides further relevant information on the transformation of the transport sector. For example, private cars consume only half of the electricity required in transport from 2037 onwards.
In 2045, the electrification of freight transport even accounts for more than half, with just under 90 TWh of annual consumption. Overall, electricity consumption in this sector rises to over 160 TWh, as Figure 4 shows.
<img src="https://illuminem.b-cdn.net/articlebody/b6854493e20b36f2e971d0b17793cf2fdc7813bb.png" alt="Figure 4: electricity consumption in the transport sector by vehicle type (passenger cars: cars, commercial vehicles: commercial vehicles) excluding buses and plug-in hybrids (source: Energy Brainpool)">
<h1>Heat pumps and electrolysis drive electricity demand</h1>
Electricity consumption is also rising sharply in other sectors because of electrification. In particular, the generation of heat in heat pumps at the household level, but also the use of electricity in district heating, will increase electricity demand. The use of electrolysers to generate hydrogen increases strongly in the TSOs’ scenarios. Figure 5 makes this clear.
<img src="https://illuminem.b-cdn.net/articlebody/5f3730921f29fb81d597a3c54505b94af0343160.png" alt="Figure 5: electricity consumption by electrolysis to produce hydrogen and in the heating sector by heat pumps (HP) and electrode boilers in TWh by scenario (source: Energy Brainpool)">
With almost 85 TWh of electricity consumption in the heat sector and 120 TWh by electrolysis, an additional electricity demand of more than 200 TWh comes from those sectors in 2045. This corresponds to about 35 per cent of today’s electricity consumption in Germany.
<h1>Drastic increase in renewables necessary</h1>
In order for the increased electricity demand from sector coupling and electrification also leading to sharply declining CO2 emissions, the generation capacities of renewable energies must be greatly expanded (Figure 6). The German government and Economics Minister Habeck have already announced their targets for 2030 and are currently developing the appropriate measures to enable the necessary expansion. For more details, please read our <a href="https://blog.energybrainpool.com/en/new-energy-market-scenario-is-the-coalition-traffic-light-red-yellow-or-green/">article on the energy targets of the “traffic light” coalition</a>.
<img src="https://illuminem.b-cdn.net/articlebody/b3b309a00293a496f37e7a02a825a5584de930da.png" alt="Figure 6: required renewable energy generation capacities in Germany in GW by scenario (source: Energy Brainpool)">
Solar energy makes the biggest leap in all scenarios. PV power plants have between 260 and 320 GW of installed capacity in 2037, and nearly 400 GW in 2045. This would require a net addition of 12 to 15 GW per year by 2037 and just under 10 GW from 2037 to 2045. Wind generation capacity would also need to increase sharply.
In Scenario B/C 2045 offshore wind generates 280 TWh while onshore wind and PV each contribute another 375 TWh. Renewables (including small amounts of hydropower, biomass, and biogenic waste) would then account for 91 per cent of electricity generation.
<h1>What matters now</h1>
It will probably not be possible to achieve the annual climate targets until the year 2023, as the addition of renewables has fallen sharply in the past four years (source: <a href="https://www.pv-magazine.de/2022/01/11/habeck-kuendigt-oster-und-sommerpaket-samt-photovoltaik-booster-an/">PV Magazine</a>). The new German government and companies must now set the course to ensure that the German energy system is largely based on renewable energies by 2045 and that Germany is climate neutral. This task can only be achieved by society as a whole.
 Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

The climate-neutral grid in 2045: What do the transmission system operators expect?

The economic slump caused by Corona seems to have had little impact on energy consumption in 2021, at least in China. Thus, electricity consumption increased to almost 8400 TWh. At the same time, the shares of renewable energies also increased even if the addition could not reach the peak values of 2020.

The economic slump caused by Corona seems to have had little impact on energy consumption in 2021, at least in China. Thus, electricity consumption increased to almost 8400 TWh. At the same time, the shares of renewable energies also increased even if the addition could not reach the peak values of 2020.
Electricity generation in the world&#x27;s most populous country rose to a new record high of 8377 TWh in 2021. Compared to the previous year, generation increased by about 750 TWh. This is about 1.3 times of Germany&#x27;s total electricity generation last year and once again highlights the sheer size and relevance of China to all global energy and climate objectives. The first preliminary energy figures from China for 2021 can be viewed at the <a href="https://chinaenergyportal.org/en/2021-electricity-other-energy-statistics-preliminary/">China Energy Portal</a>.
<h1>Record increase in power generation</h1>
Despite a sharp increase in electricity consumption, renewables in China managed to grow by one percentage point. As a result, renewables reached 28 per cent of China&#x27;s electricity generation last year. Generation from thermal power plants (90 per cent coal) declined by one percentage point to 67 per cent. Figure 1 shows the breakdown between the main energy sources.
<img src="https://illuminem.b-cdn.net/articlebody/aa83d242a247afd2ae7ab89a803973b89719f45c.png" alt="Figure 1: Shares of different generation technologies in the Chinese electricity mix in 2021 (source: Energy Brainpool)
">
However, thermal power plants provided the bulk of the additional electricity generation of 750 TWh last year. Generation from coal and gas-fired power plants increased by 9 per cent year-on-year, or nearly 470 TWh. Renewables, on the other hand, contributed only about one-third of the total growth in electricity generation, 240 TWh. The growth in renewables was primarily enabled by wind power, while generation from hydropower decreased compared with the previous year due to climatic conditions.
Generation from nuclear power plants also made a jump, increasing by about 41 TWh compared to 2020 to a total of over 400 TWh. The year-to-year change in generation from different technologies between 2020 and 2021 is shown in Figure 2.
<img src="https://illuminem.b-cdn.net/articlebody/07e8d6b4a7159e2dda929239744b2f754e062b59.png" alt="Figure 2: Change in electricity generation of different technologies compared to the previous year in TWh (source: Energy Brainpool)
">
 In percentage terms, year-on-year growth was highest for wind power, with a 40 per cent increase, followed by a 25 per cent increase in solar generation compared to 2020.
In total, the main renewable energy sources in China generated over 2300 TWh of electricity last year. Figure 3 illustrates the trend in renewable electricity generation from 2010 to 2021, with PV plants alone generating nearly 330 TWh of electricity in China, while wind energy came in at over 650 TWh. By comparison, total electricity generation in Germany was about 580 TWh in 2021.
<img src="https://illuminem.b-cdn.net/articlebody/06877c142792e0a335a4e6138944edb274c3fa01.png" alt="Figure 3: Electricity generation from renewable energies in China over time in TWh (Source: Energy Brainpool)
">
<h1>Renewable expansion weaker than in previous year</h1>
The large increase in wind power generation in 2021 was made possible primarily because a record 72 GW of wind power was installed in 2020. <a href="https://blog.energybrainpool.com/en/chinas-energy-system-in-2020-record-expansion-of-renewables-despite-corona-pandemic/">Here</a> we go into detail about the changes in China&#x27;s power system in 2020.
Such high capacity growth was not possible for wind energy in 2021, but PV capacity grew by 53 GW last year. This is a bit less than the total installed solar capacity in Germany which stands at about 60 GW. Hydropower was also expanded comparatively strongly in 2021, increasing by 21 GW. However, the capacity of thermal conventional power plants also increased by around 50 GW. The annual increases in renewable energy capacity can be seen in Figure 4.
<img src="https://illuminem.b-cdn.net/articlebody/1832ec0f148939f5ea1e9a6da0c1f9b4ba73cbc0.png" alt="Figure 4: Annual addition of renewable generation capacity in China in GW (source: Energy Brainpool)">
The addition of offshore wind power stood out particularly in China in 2021. Last year the capacity grew from less than 10 GW to 26.4 GW, an increase of almost 17 GW. This required the installation of 30 large offshore turbines every week (source: <a href="https://www.carbonbrief.org/china-briefing-27-january-2022-surge-in-offshore-wind-xis-new-speech-ieas-report">Carbon Brief</a>). Half of all offshore wind turbines installed worldwide are now off the coast of China as of the end of 2021 (source: <a href="https://www.forbes.com/sites/davidrvetter/2022/01/26/china-built-more-offshore-wind-in-2021-than-every-other-country-built-in-5-years/?sh=73bebbb84634">Forbes</a>). The strong additions in 2021 were driven by the drop in the feed-in tariff for offshore wind turbines from 850 yuan/MWh ($134/MWh) as of January 1, 2022, to the low tariff also received by coal-fired power plants (source: <a href="https://cleanenergynews.ihsmarkit.com/research-analysis/china-continues-strong-renewables-policy-support-after-record-.html">IHS Markit</a>).
China continued to account for a large share of the world&#x27;s installed renewable energy in 2021. China&#x27;s hydro, wind, and solar generation capacity exceeded the 1000 GW threshold last year. Thus, China should easily meet its target of 1200 GW of renewable capacity by 2030. It could also be exceeded by 300 GW with today&#x27;s expansion figures. The development since 2010 is shown in Figure 5.
<img src="https://illuminem.b-cdn.net/articlebody/8f9efc792f2afb8548d1048e847a6d2fdfae297e.png" alt="Figure 5: Installed renewable energy capacity in China in GW per year (Source: Energy Brainpool)
">
In 2021, as in 2020, the largest share of renewable capacity additions in China took place in the last quarter. With a total of 31 GW of newly installed capacity in wind and 28 GW in PV, China added 50 to 60 per cent of the total annual additions in the fourth quarter of 2021. In addition to the drop in offshore wind feed-in tariffs to the new year, the end of a feed-in tariff for residential PV on December 31, 2021 (source: <a href="https://cleanenergynews.ihsmarkit.com/research-analysis/china-continues-strong-renewables-policy-support-after-record-.html">IHS Markit</a>) was also key to the installation run in the last three months of the year (see Figure 6).
<img src="https://illuminem.b-cdn.net/articlebody/740928230da4378072aa9f61374ecd537f056d61.png" alt="Figure 6: Wind and PV additions in GW by quarter in 2021(source: Energy Brainpool).">
The Chinese Emissions Trading System and &quot;Dual Carbon“
After the emission trading system in China started in July 2021, more than 1 billion yuan or 165 mil USD of pollution rights have been turned over by the end of 2021. So far, there is still no cap on the allowances issued (source: <a href="https://www.reuters.com/business/cop/china-says-trading-volumes-national-emissions-trade-scheme-exceed-157-mln-2021-11-12/">Reuters</a>).
Therefore, there were hardly any spectacular price movements in the course of the last year. The price ranged between 41 and 61 yuan/ton or 6 and 9 USD/ton and is thus about one tenth of the price in the European emissions trading system (source: <a href="https://www.energymonitor.ai/policy/carbon-markets/carbon-trading-the-chinese-way">Energymonitor</a>). By 2025, in addition to the electricity sector affected so far, plants from other industries such as steel and cement production are also to be covered by the Chinese emissions trading system.
In 2021, the Chinese government has also increasingly communicated its &quot;dual carbon&quot; target internationally. Firstly, CO2 emissions are to peak in 2030, and secondly, the country is to achieve climate neutrality in 2060. Figure 7 shows the development of CO2 emissions from China&#x27;s energy sector (data: <a href="https://ourworldindata.org/co2/country/china">OurWorldinData</a>).
<img src="https://illuminem.b-cdn.net/articlebody/71c7901f8baf1269ee97ea48d0b4531917754853.png" alt="Figure 7: China's energy-related CO2 emissions over time in Gt (blue line) and the annual per centage change (red and green bars) (source: Energy Brainpool).
">
Against this backdrop, however, the country&#x27;s energy transformation needs to be significantly strengthened. The first target in 2030 is probably still the easier one.
However, China was not spared from the energy price crisis and scarcity of fossil raw materials in 2021, and some factories and areas of the country had to go without power for a time due to planned load shedding. Whether the situation last fall will also have an impact on China&#x27;s short- and medium-term energy and climate policy beyond 2022 is yet to be seen. However, there is no doubt that the developments in the Asian country will have a major impact on global energy markets.

Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

China’s electricity system in 2021: More new generation than all of Germany

The potential inclusion of nuclear power and natural gas in the EU taxonomy has again ripped open the rifts in European energy and climate policy. What exactly does the EU taxonomy regulate and what conditions are attached to classifying the two technologies as sustainable? 

The potential inclusion of nuclear power and natural gas in the EU taxonomy has again ripped open the rifts in the European energy and climate policy. What exactly does the EU taxonomy regulate and what conditions are attached to classifying the two technologies as sustainable? In this article, we put the discussions surrounding the EU taxonomy in context.
<h1>The EU taxonomy briefly explained</h1>
As the core of the EU sustainable finance action plan, the EU taxonomy aims to do one thing above all: channel financial flows into more sustainable activities. Specifically, sustainable finance <a href="https://ec.europa.eu/commission/presscorner/detail/de/IP_18_1404">means linking financial issues</a> and the specific needs of the European economy for the benefit of the planet and our society. As a uniform classification system, the EU taxonomy aims to define under which conditions economic activities can be declared sustainable.
Especially for large investors, banks and insurance companies, and increasingly for other companies as well, public reporting requirements apply to their activities regarding sustainability. The idea behind this: The EU taxonomy creates incentives for a sustainable transformation of the economy.
<h2>Six environmental objectives in the focus of EU taxonomy</h2>
For several years, stakeholders from various working groups and institutions at the EU level have been developing the EU taxonomy. These include, for example, the <a href="https://ec.europa.eu/info/departments/joint-research-centre_de">EU Joint Research Center</a>, the <a href="https://ec.europa.eu/info/publications/sustainable-finance-technical-expert-group_en">Technical Expert Group</a> and the <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance/platform-sustainable-finance_en">Sustainable Finance Platform</a>. In general, activities must be aligned with the EU’s six environmental goals to be included in the taxonomy. These goals are:
<ul><li>climate change mitigation,</li></ul>
<ul><li>adaptation to climate change,</li></ul>
<ul><li>sustainable use and protection of water and marine resources,</li></ul>
<ul><li>transition to a circular economy,</li></ul>
<ul><li>pollution prevention and control; and</li></ul>
<ul><li>protection and restoration of biodiversity and ecosystems.</li></ul>
Thus, the inclusion of a technology in the EU taxonomy is a way for funders and companies to be able to declare financing or economic activity in the relevant area as sustainable. This may be associated with better private financing conditions.
Firstly, however, the taxonomy has a signal and orientation effect. In no way does the taxonomy imply general governmental or EU-wide financing or subsidies of the technologies included.
<h1>What is the deal with the inclusion of nuclear power and natural gas?</h1>
On December 31, 2021, the EU Commission sent a draft regulation to the governments of the member states. In this draft, the Commission also included nuclear power and natural gas, which have long been controversial technologies. A version of the proposals can be found <a href="https://www.euractiv.com/wp-content/uploads/sites/2/2022/01/draft-CDA-31-12-2021.pdf">here</a>.
France, for example, has specifically advocated the inclusion of nuclear power, partly so that the French energy company EDF can invest in its power plants. Meanwhile, at the German level (depending on party affiliation), the inclusion of gas-fired power plants is preferred.
However, the “Ampelkoalition” (coalition formed by the German parties SPD, FDP and Green Party) disagrees on this. Likewise, Federal Minister of Economy and Environment Habeck rejects the current proposal. Many see the inclusion of the two forms of energy as a compromise between France and Germany.
<h2>Taxonomy and the power generation structure at EU level</h2>
In order to understand the discussion around the taxonomy in terms of the energy industry, we will now have a look at the power generation structure at the EU level. <a href="https://www.energy-charts.info/charts/energy_pie/chart.htm?l=de&amp;c=EU&amp;year=2021&amp;interval=year">Figure 1</a> shows the European electricity mix for 2021.
<img src="https://illuminem.b-cdn.net/articlebody/abb9f7b924ad2a8e280b120b1517403b7009db3b.png" alt="Figure 1: EU electricity generation in 2021 by technology in percent (source: Energy Brainpool, data: Energy-Charts).">
Nuclear power and natural gas have been the two technologies with the highest electricity generation at EU level for the past five years. In 2021, for example, nearly 27 percent of the EU’s electricity came from nuclear power plants and 17 percent from natural gas.
Above all, these existing dependencies of electricity generation on nuclear power and natural gas in the EU countries lead to its classification as a sustainable technology. In addition, the political balance of power contributes to this.
It is therefore not surprising that at the EU level, the technologies currently still generating the most electricity are favored in the respective countries. The inclusion of nuclear power and natural gas in the EU taxonomy would be subject to conditions.
<h2>The regulations on nuclear power</h2>
At the European level, it is important to note that many countries were already relying on nuclear power to mitigate greenhouse gases before the taxonomy. For example, expansion is planned or envisaged not only in France, but also in Romania, Bulgaria, the Netherlands, Poland and Estonia.
<a href="https://ec.europa.eu/info/news/25-eu-electricity-production-nuclear-sources-2022-jan-11_en">Figure 2</a> shows the share of electricity generation from nuclear power in the 13 EU countries with nuclear power plants in 2020. Clearly visible is the high share of over 30 percent in many EU member states.
<img src="https://illuminem.b-cdn.net/articlebody/2caa2fac3772020f1693a7bbbb242c329bb25576.png" alt="Figure 2: share of electricity generation from nuclear power plants in the 13 EU countries with nuclear energy use in 2020 (source: Energy Brainpool, data: EU Commission).">
According to the EU Commission’s draft, nuclear power plants should only be sustainable if they:
<ul><li>meet the latest technical standards,</li></ul>
<ul><li>have received a construction permit by 2045,</li></ul>
<ul><li>possess a fund for the final disposal of radioactive materials, and</li></ul>
<ul><li>dispose of a dismantling fund.</li></ul>
The funds must have sufficient financial resources. The above conditions for classification should also apply to nuclear power plants whose operating lives are extended. Furthermore, the political level must approve continued operation until 2040.
Only nuclear power plants whose operating lives are extended after 2025 must also have a <a href="https://app.montelnews.com/News/Story.aspx?id=1290641&amp;highlightCsv=taxonomie">detailed plan for final disposal</a>.
<h1>What applies to gas-fired power plants?</h1>
Around 17 percent of European electricity is generated from natural gas. Here, too, the differences between countries are large. Gas-fired power plants account for a particularly high share of electricity generation in Belgium, Greece, Ireland, Italy, Latvia, Lithuania, Portugal and the Netherlands – i. e. primarily in countries that do not have a high level of generation from nuclear power.
<a href="https://energyandcleanair.org/europe-gas-crisis-vs-clean-energy">Figure 3</a> makes this clear. It shows the share of electricity from gas-fired power plants in the 13 countries with the highest shares in 2020. Generation from gas-fired power plants could also increase in Germany after the phase-out of nuclear power and with an accelerated coal phase-out.
<img src="https://illuminem.b-cdn.net/articlebody/5ec4894ee39c1032d1c7859832d039223ebb7b86.png" alt="Figure 3: share of electricity generation from natural gas in the 13 EU countries with the highest share of natural gas in 2020 (source: Energy Brainpool, data: CREA).">
In general, gas-fired power plants must have greenhouse gas emissions less 100 g CO2/kWh. This limit would probably only be achievable with CO2 capture and storage.
<h2>Exemptions for gas-fired power plants with planning permission until 2030</h2>
For gas-fired power plants that receive a building permit by December 31, 2030, less restrictive regulations apply in order to be classified as sustainable. Here, there are still two options for gas-fired power plants:
Under the first path, direct greenhouse gas emissions must be below 270 g CO2/kWh for power generation. Highly efficient cogeneration plants can fulfill this condition. For normal gas and steam power plants, the value is generally between 300 and 350 g CO2/kWh.
The second option is that power plants must not emit more than an average of 550 kg CO2/kW per year over 20 years. This would mean that power plants would have to reduce the number of hours they operate per year. In addition, they would only be allowed to produce electricity during high-load phases or when generation from renewables is low. Regardless of the two options above, new gas-fired power plants that receive a permit by the end of December 2030 must demonstrate that the
<ul><li>electricity generated cannot yet be efficiently produced by renewables,</li></ul>
<ul><li>gas-fired power plant replaces an existing plant with higher emissions and the emissions reduction per kWh is at least 55 per cent,</li></ul>
<ul><li>plant is capable of co-firing low-CO2 and renewable fuels and the share of these fuels is at least 30 percent from 2026, at least 55 percent from 2030, and as much as 100 percent from 2036, and</li></ul>
<ul><li>a coal phase-out is planned in the country concerned and laid down in an official plan.</li></ul>
<h1>What are the next steps?</h1>
Environmental associations and individual countries have already strongly criticized the new regulations. Austria even wants to file a lawsuit against the inclusion of the two energy sources in the EU taxonomy. Energy industry players <a href="https://app.montelnews.com/News/Story.aspx?id=1291861&amp;highlightCsv=">doubt</a> that enough low-CO2 or renewable fuels will be available for the gas-fired power plants. However, major investors and donors, through the IIGCC (Institutional Investors Group on Climate Change), <a href="https://www.euractiv.com/section/energy-environment/news/investors-worth-e50-trillion-call-on-eu-to-exclude-gas-from-green-finance-taxonomy/">have also attacked</a> the inclusion of gas in the taxonomy in an open letter to the EU.
On a political level, the EU Commission wanted to consult the draft with the member states first by 12th of January 2022. MEPs have extended this deadline until 21st of January 2022. After that, the Commission will present the final proposal. The Council of Member States or the EU Parliament can still veto the proposal within four months before it becomes binding for all EU countries.
<h2>Conditions for a veto</h2>
For a veto, however, at least 20 EU states representing at least 65 percent of the total EU population or at least 353 MEPs in the EU Parliament must vote against the draft. At the country level, there will not be enough opposition due to the existing and continued dependence on the two energy sources (see figures 2 and 3).
On the other hand, there is greater opposition in the Parliament to the inclusion of nuclear power and natural gas. Nevertheless, given the balance of power, a veto is the most unlikely outcome. So whether the EU taxonomy will also classify nuclear power and natural gas as sustainable activities in the future has not yet been decided. However, even then, the use of the two technologies would come with some conditions.
It also remains to be seen whether the taxonomy classification will stimulate private-sector investment. Due to the high construction costs and time delays of nuclear power plants and the currently high gas prices, renewable energies could be cheaper and more profitable compared to the two alternatives.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

Nuclear power and natural gas in the EU taxonomy: What is it about?

The updated German climate law requires negative emissions technologies (NETs) and carbon removal from the atmosphere. Here we want to answer the question, which of the solutions could be used in Germany and what their potential might be. The main take-away: Nature-based and technological carbon removal solutions will both be necessary at the Megatonne scale.

The updated German climate law requires negative emissions technologies (NETs) and carbon removal from the atmosphere (read all about that in our <a href="https://illuminem.com/energyvoices/9693c287-ddc3-4fba-8744-03ff4768fe46">previous article</a>). Here we want to answer the question, which of the solutions could be used in Germany and what their potential might be. The main take-away: Nature-based and technological carbon removal solutions will both be necessary at the Megatonne scale.
<h1>New studies confirm need for carbon removal</h1>
Two new reports that model pathways of how Germany can achieve climate neutrality by 2045 have been published in October 2021. The <a href="https://www.dena.de/newsroom/meldungen/dena-leitstudie-aufbruch-klimaneutralitaet/">dena-Leitstudie</a> “Towards Climate Neutrality” by the German Energy Agency and the <a href="https://ariadneprojekt.de/publikation/deutschland-auf-dem-weg-zur-klimaneutralitat-2045-szenarienreport/">Ariadne report</a> as part of the Kopernikus Project funded by the German Ministry of Education and Research both make clear that substantial amounts of negative emissions are required to balance certain land use, agricultural or industrial emissions. Figure 1 extends our findings about how much annual negative emissions will be needed in Germany in 2045 including the data from the latest studies.
<img src="https://illuminem.b-cdn.net/articlebody/8f23c68f067af16bb85d4fbabce77d66e2017a1f.png" alt="Figure 1: Required annual negative emissions in Mt CO2-eq in 2045 in Germany (source: cr.hub)">
Generally, the latest numbers are similar to those from earlier studies. However the various studies still disagree on how much carbon Germany needs to remove from the atmosphere by a large margin. The resulting figures range between 40 and 100 Mt CO2-eq. The average between all studies points at annual carbon removal needs of a bit over 74 Mt CO2-eq at the point where Germany wants to be climate neutral.
Not only the scientific community alone is stressing the need of negative emissions, but increasingly industry groups and associations take the issue seriously. In a recent open letter to the new federal government a range of large corporations under the <a href="https://www.stiftung2grad.de/en/__trashed-2__trashed-7241">Stiftung 2 Grad</a> stressed the need for developing a political framework for actively managing the carbon cycle and start developing solutions for capturing CO2 from industrial facilities and storing it underground (CCS).
<h1>Which negative emissions technologies are needed?</h1>
Broadly we can differentiate between nature-based carbon removal solutions and technological ones. The predominant nature-based solutions is re-, and afforestation, but also the renaturation of peatlands, the enhanced sequestration of carbon in soils through different agricultural practices or growing kelp in the sea fall into that category.
On the technological side, the main focus currently lies on DACCS (direct air capture and storage). Of course also hybrid solutions exist, such as BECCS (bioenergy with carbon capture and storage) or the production biochar which uses biomass and utilizes a technical process to sequester or bind the carbon in a non-reactive form.
We explain and compare a range of those NETs <a href="https://cr-hub.org/en/why-cr/">here</a>. Figure 2 shows which of the various NETs are being foreseen to help Germany to achieve climate neutrality by 2045 based on selected studies. The answer to the question which NETs and carbon removal solutions are needed is simple: all of them!
<img src="https://illuminem.b-cdn.net/articlebody/df9ab2a902256c9ebe6ff885a0411e226b5fbfbf.png" alt="Figure 2: Comparison of annual carbon removal capacity in MtCO2-eq of different NETs in recent reports for Germany in 2045 (source: cr.hub)">
The different nature-based solutions are summarized into the land use, land use change and forestry (LULUCF) category in Figure 2, which takes up the largest share of necessary carbon removal in most studies and in many cases is not split up into more detailed removal pathways and sinks in the studies.
In addition, most studies foresee the need for substantial technical removals via BECCS and DACCS. Especially in case the nature-based solutions would not be able to deliver the large CO2-capturing capacities, technological solutions are required.
More exotic carbon removal solutions such as enhanced weathering do not feature prominently. The usage of carbon dioxide from the atmosphere as feedstock for green naphtha or methanol production and in long-lived plastic products goes into the 10 MtCO2-eq range. It is worth noting that the different studies do not necessarily agree on the potential or capacity of the different NETs. This is also due to the fact that not all studies consider the entire range of possible NETs or focus on specific technologies or sinks.
And just as a reminder: In 2018 the LULUCF sector in Germany only delivered 18 MtCO2-eq of negative emissions (source: <a href="https://www.dena.de/newsroom/meldungen/dena-leitstudie-aufbruch-klimaneutralitaet/">dena</a>). That means within the next 23 years a doubling to tripling of the annual carbon removal capacity through forests, swamp renaturation and soil carbon sequestration needs to be achieved. Otherwise the reliance on technological solutions that are as of now not scaled-up will be even higher.
<h1>Negative emission potential in Germany</h1>
As seen above, a silver bullet or one NET to take out the excess carbon to make Germany truly climate neutral by 2045 does not exist. Much more, all solutions and technologies will be needed. To give a better overview of how such a carbon removal portfolio on the country level can look like, we used the numbers from the Ariadne project report and compared the potentials across the different NETs. Figure 3 shows the shares of different NETs in Germany in 2045 according to the report of the Ariadne project with a total potential of almost 110 MtCO2-eq.
<img src="https://illuminem.b-cdn.net/articlebody/ad37b6fe48a1dcd85d46fe3281853927089781e6.png" alt="Figure 3: Potential share of different NETs in Germany by 2045 according to the Ariadne project, light green wedge represent LULUCF (source: cr.hub)">
The light green wedge taking 46 per cent of the total carbon removal potential represents the LULUCF sector, which can then further be split into re-and afforestation, soil carbon sequestration and carbon storage through changed agricultural practices such as agroforestry. Technological solutions such as BECCS and DACCS make up 37 per cent of the entire carbon removal potential, whereas biochar and enhanced weathering add up 17 per cent in total.
<h1>The way forward</h1>
The most recent results from climate and energy system modeling from a variety of different research groups are clear: Carbon removal from the atmosphere will be important for Germany to reach its climate targets. In 2045 the capacity to remove 10 per cent of the greenhouse gas emissions Germany emitted in 2020 from the atmosphere has to be in place.
That is not an easy feat, especially considering that carbon removal from the LULUCF sector today only has the capacity of providing a fifth to a quarter of the required negative emission capacity. In addition, climate change might impede the carbon storage capacity of nature-based solutions further during the coming decades. If natural carbon sinks cannot deliver, then technical or hybrid carbon removal solutions such as BECCS, DACCS or biochar become more relevant.
The most recent studies under consideration in this article arrive at different carbon removal capacity and needs for different NETs, as figure 2 demonstrates. Starting a structured conversation about how the recent reports arrive at their negative emission capacity for different technologies would be important. In that way science can develop an understanding about assumptions and the potential for an integral negative emissions modeling framework.
At the political level, devising a framework for active carbon management alongside capacity building measures and restarting a public dialogue on carbon removal and CO2-storage as necessary and important parts towards climate neutrality are the most important steps. Furthermore, a process on revising current regulations on CO2-storage and -transport, possibly across borders in a European context has to start. German climate targets should accommodate the differences between genuine emission reduction and carbon removal (as already being started in the <a href="https://www.gov.uk/government/publications/greenhouse-gas-removal-methods-technology-assessment-report">UK</a> and Sweden).
The take-away for the private sector: A new industry is forming and it needs to be scaled rapidly. Forward-looking companies and industries can be on the forefront of that development if they seize the opportunity. This holds for technology providers, project developers and emitting industries that can provide and utilise NETs. However, also companies with climate targets can demonstrate more credible climate action by neutralizing part of their difficult-to-abate emissions via negative emissions or carbon removal credits instead using less permanent and less credible offsetting projects.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

What is the potential for negative emission technologies in Germany?

Energy crunch in Europe? Energy prices have been breaking one record after another for several weeks. Where does the extreme rise in electricity, coal and gas prices come from? Is the price rally a short-term outlier or a sign of higher energy prices also in the future? In this article, we explain main global and regional causes of the current price developments on the energy markets.

Energy crunch in Europe? Energy prices have been breaking one record after another for several weeks. Where does the extreme rise in electricity, coal and gas prices come from? Is the price rally a short-term outlier or a sign of higher energy prices also in the future? In this article, we explain main global and regional causes of the current price developments on the energy markets.
“Energy suppliers file for bankruptcy” or: “Shortage of fuel in the UK” – headlines like these are spreading for a few weeks now. Recently, prices for electricity, gas and coal have increased to their highest levels since the start of the liberalised energy market, or at least within the last 15 years.
<h4>A price rally without equal</h4>
The price for the delivery of electricity in the German market area for the year 2022 reached over 150 EUR/MWh at the beginning of October. Gas front month prices on the Dutch TTF trading point were up to EUR 120/MWh on 5 October 2021, and coal prices for November delivery also climbed to over 260 USD/tonne.
It seems like a new record is set on a daily basis, and that we encounter prices that only a few months ago belonged to the realm of fantasy. Figure 1 shows the percentage price movement for electricity, gas, coal and CO2 since the beginning of 2021 (source: <a href="https://app.montelnews.com/">Montel</a>). Starting on 6 October 2021, there was a short-lived price collapse in the energy market, highlighting the challenging uncertainties and risks due to high price volatility.
<img src="https://illuminem.b-cdn.net/articlebody/8996dc6685f75e43fa52e2e9c63146def50c89d4.png" alt="Figure 1: Percentage price development of the German electricity front year (candle sticks), CO2 allowances with delivery December 2022 (red line), gas front year at the TTF (green line) and coal front year (yellow line) from the beginning of 2021 to 11 October 2021 (source: Montel)

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<h1>Rising prices for energy commodities</h1>
Since the beginning of September, there has only been one path for energy commodities: upwards. It is clearly visible in Figure 1 that CO2 certificates (red line) held the role as the main price driver for electricity up to July 2021. However, the record prices at which electricity is traded on the energy exchanges today are mainly due to the unprecedented rise in prices for gas (green line) and coal (yellow line). It is therefore hardly surprising that electricity prices are also at their highest level in a long-term comparison (see Figure 2). The price peak reached before the global financial crisis in 2008 has now been far exceeded. Electricity prices for base-load delivery in 2022 were almost twice as high as 13 years ago at the beginning of October 2021.
<img src="https://illuminem.b-cdn.net/articlebody/08a0c68bd3c5c475f01c9fb406d7680ea233658f.png" alt="Figure 2: Front-year prices for the supply of base-load electricity for Germany, as of 5 October 2021 (source: Energy Brainpool)">
<h1>What factors led to the current price situation?</h1>
From a global perspective, various events led to the currently elevated energy prices in Europe. A low feed-in from renewable energies in 2021, the high CO2 prices in the European emissions trading system due to increased climate protection efforts, or the discussions about the Nord Stream 2 gas pipeline are hardly responsible as individual and simple reasons for the current price situation. Rather, we can speak of a perfect storm, i.e. the coincidence of various factors, some of which are interdependent and some of which are independent of each other, which ultimately cause these extreme prices. Several of those factors are briefly explained below.
<h2>Main global and regional causes of the current price developments</h2>
The feed-in from wind energy, in particular in Germany, has been strongly below average so far in 2021. Together with an increase in demand since the Coronavirus pandemic, conventional power plants had to generate more electricity. This increased the demand for gas and coal, and drove up the prices of both commodities.
In addition, the EU Commission published its “Fit for 55 Package” in July 2021 to implement increased climate ambitions. Already in the run-up to the publication of the proposals to adjust the European emissions trading system, the prices for CO2 certificates rose. Market participants already anticipated the potential future shortage of emission allowances in the prices since the beginning of the year. The higher CO2 prices were added to the electricity generation costs of the fossil power plants and thus also led to higher electricity prices.
On the fuel side, there were frequent supply restrictions for hard coal which is traded on the world market in the course of 2021 due to strikes and natural disasters in important producing countries, such as Colombia and South Africa. At the same time, global electricity consumption also increased again in 2021 compared to 2020. The reason for this was not only a resurgent economy but also the demand for electricity for cooling systems due to the very hot summer in Asia. A limited supply situation thus met with higher demand for coal and boosted prices.
In the case of gas prices, higher demand also met with moderate supply. A long heating season in Europe lasting until May was followed by heavy air conditioning use in Asia throughout the summer of 2021, driving global demand for gas. Therefore, compared to previous years, filling up the European gas storages for winter demand only started towards June. The low storage level can also be seen in Figure 3, which shows the gas storage level of German facilities at the beginning of each month from 2016 to 2021.
<img src="https://illuminem.b-cdn.net/articlebody/258d741ef09eb07c9fc5cd4d45193e85009407a2.png" alt="Figure 3: Level of German gas storage facilities at the beginning of the month 2016 – 2021 in TWh (source: Energy Brainpool)">
Furthermore, liquefied natural gas (LNG) deliveries went to the Asian region over the summer, as customers showed a greater willingness to pay. Likewise, higher imports of LNG were recorded by South America, where low hydropower generation had to be compensated by gas-fired power plants due to droughts and low water levels (source: <a href="https://timera-energy.com/europes-great-gas-power-price-surge/">Timera</a>). The geopolitical debate surrounding the new Nord Stream 2 gas pipeline and Russia as a gas supplier also came to a head: Gazprom did not make any capacity bookings beyond existing contracts on gas pipelines via Ukraine and Poland despite the high prices in Europe.
<h2>Where do we go from here?</h2>
As of the beginning of October, gas prices are the biggest driver of electricity prices. If the upcoming winter turns out to be mild and gas storage levels continue to approach the long-term average, gas prices – and hence electricity prices – can be expected to decline or at least stabilise. Nevertheless, high prices seem to be set for this winter. Not until spring 2022 does the price forward curve of the front products for the base load supply of electricity point downwards again (see Figure 4). On the market side, a normalisation of prices can thus be expected from the middle of next year.
<img src="https://illuminem.b-cdn.net/articlebody/57f93c437f7b0f3fd480229981742362e60c3dae.png" alt="Figure 4: Price-forward curve for base load power Germany on the EEX in EUR/MWh from end of September 2021 (source: Energy Brainpool)">
In any case, the high price phase will force energy suppliers to rethink their procurement and sales strategies and possibly change them. A consideration of the geopolitical context as well as strategies for hedging price risks are indispensable in this volatile phase and will become increasingly important as gas and energy markets continue to grow together globally.
However, this market development also offers operators of EEG plants new opportunities for additional revenues. Alternatives to the market value-based remuneration model are supplementary fixed price regulations within the market premium model as well as the short-term switch to other direct marketing.
​This article also appeared on <a href="https://blog.energybrainpool.com/en/price-rally-across-the-energy-markets/">Energy Brain Blog</a>. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

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Simon Göß

Simon Göß

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