My analysis and position on the Luxembourgish climate plan.
The Luxembourgish climate plan targets a reduction of national emissions of 55% by 2030, compared to 2005. In addition, it wants to promote a zero net emissions target on a European level by 2050.
The climate plan is aligned with the European goals. It contains many good and noteworthy initiatives, but I believe that the government has missed the opportunity to make truly ambitious and innovative proposals.
All citizens are invited to send a letter with their comments and suggestions to the Ministry of the Environment, Climate and Development, by 29/03/2020.
The link with the translation of the letter I have sent to the ministry can be found here or at the end of the article. I invite you to use this letter as a template if you want to make your voice count.
A brief overview
The climate plan defines Luxembourg's climate strategy for the period of 2021 to 2030. I welcome the fact that the government has created a long-term vision for Luxembourg in the matter of climate change. By 2030, Luxembourg will reduce its emissions by 55% compared to 2005. This is aligned with EU targets, which aim to define savings of 50-55% compared to 1990.
For the energy mix, this means that by 2030 at least 19.6% of the final energy consumption will come directly from local, renewable sources. In parallel, statistical transfers should raise this number to 25% (without those energies being consumed on national territory). Luxembourg will still be behind key targets at European level for 2030, which aim at 32% renewable energy. In fairness, the starting point of 2020 for Luxembourg with 11.8% had already been below the European average.
Energy: electricity, heat and transport
The energy strategy is in line with the EU principle of “energy efficiency first”. Overall energy consumption will be reduced while a switch to renewable energy will be promoted.
In the electricity sector, Luxembourg plans to produce 2,251 GWh of renewable energy by 2030. This corresponds to quadrupling the 748 GWh of 2020. Solar energy will be the main pillar, with generation increasing from 197 GWh to 1,112 GWh (+ 19% per year). Wind energy will increase from 211 GWh to 674 GWh (+ 12% per year). The other renewable energy sources will also go up, from 341 GWh to 464 GWh (+ 3% per year).
Land availability should not pose a problem for our country, the pressing question is much more how this generation will be integrated into the network and how "grid balancing" should function. I am not an expert in this field and trust that the significant investments into the network that are mentioned in the climate plan will be enough to solve this problem (for example: interconnectors and new power lines towards Germany). However, I miss a focus on flexible systems, such as storage systems or “Demand Response Solutions”, which are not mentioned in the document very often. I would also like to see an estimate that takes into account the costs of a flexible system on the price per megawatt hour for the end consumer.
For the heat sector, the climate plan sees an increase from 1,626 GWh 2020 to 2,551 GWh 2030 for (+ 5% per year). Here biomass and biogas will play a central role and new technologies such as solar thermal or heat pumps will also be integrated. I find it welcoming that more renewable district heating grids will be built. Moreover, existing building's renovation rate will increase and new buildings will be built with energy-efficient principles, led by the government's as leading example. Here it is important that, at least for the refurbishment of existing buildings, necessary technical and financial support will be provided so that barriers are as low as possible.
In the transport sector, the proportion of biofuels will be increased to 10% by 2030 and a switch to electric mobility will be encouraged. While I welcome the move to electric mobility, I am not sure whether we should continue to focus on biofuels. When these fuels come from organic waste, it probably makes sense to revalue them, but I do not welcome crops for biofuels from sources that compete with food production. The main anchor in transport remains electric mobility: by 2030, up to 49% of transport will run electrically and the public transport network will have expanded massively.
I would also further encourage changes in individual mobility patterns that come with a reduction in emissions: (i) increased work from home. For example, if every employee works from home one day a week, we would see fewer cars on the road, thus less traffic, less congestion, and consequently less emissions. (ii) Car-free zones and car-free movements. (iii) Affordable taxi services in the Luxembourg. For (iii) the climate plan does mention "mobility-as-a-service", but no concrete proposals have been made.
Statistical transfers describe a mechanism that allows, at EU level, to exchange renewable energy statistics between two member countries. Thus, a country that has achieved its renewable energy targets can transfer this energy to another country, despite no physical flow occurring between both countries.
It is worth noting that the volume of statistical transfers was significantly reduced compared to the previous version of the national climate strategy (down from 4,833GWh to 1,748 GWh for 2030): this means more responsibility for Luxembourg in this matter. Nevertheless, statistical transfers still account for 5.4% of our renewable energy level.
It is critical for me that the money will flow to renewable energy projects a priori (i.e. as funding or as a stimulus for new projects). So far, these funds have flowed to countries such as Lithuania or Estonia a posteriori once these countries have achieved their goals.
For statistical transfers, we should only be transferred the amount of energy that we have financed a priori, and not, as it is currently the case, that we purchase in a “deal” with another state. I emphasize again that the energy should be in economic proportion with the transferred funds and that it should not be double counted.
I also wish that our state would have a stronger communication on the difference between physical electricity flow (39% green) and the mix that is feasible thanks to the "guarantees of origin" (green certificates; 55% green). The certificates are a separate mechanism to the statistical transfer and should allow the customers to signal their preference for green electricity on the market. However, for many power suppliers, it is a cheap mechanism to market “green” electricity so that many consumers think that their electricity is 100% green while this is not the case. This takes customers’ (and therewith: voters) pressure away to increase renewables in the Luxembourgish mix.
There are two different categories of financial support that an energy project needs in order to be realized: (i) the volume of upfront investment (cost of development and construction projects) and (ii) direct financial support of the operational business, for example through guaranteed off take prices. Here (i) is often financed by a private company or investor when (ii) is a financial aid from the government, for example through fixed price tariffs for electricity from renewable plants, with the aim to guarantee a return on investment to the financing entity.
To achieve our goals from the climate plan, an investment volume of 150 - 250 million euros per year is needed and a financial support amount of 180 - 240 million euros per year (with statistical transfers 215 - 280 million euros). Thus, the energy transition, as defined in the climate plan, will cost an estimated 4.8 billion euros between 2021 and 2030. Whether this sum is funded by private companies or the government is yet to be determined. I think at least the financial support will come from the government, i.e. 2.7 billion euros. As mentioned, support schemes are required to guarantee an attractive return for investors on green projects but are often borne by taxpayers.
If the government’s financial support is converted into a price per unit, (for example for electricity for 2025: 146,800,000 euros divided by 1,466 MWh = 100 euros per MWh), and if we look in parallel at the conditions for recent solar tenders (maximum price between 89 [industrial areas] and 145 [on diets or on water] euro per MWh), we can see that those prices are well above market prices (40-50 euros per MWh) and also above the levels of support from our neighboring countries (for example, Germany, Solar: 35 - 71 euros per MWh compared to the maximum of 89 euros per MWh for industrial plants in the UK). Of course, the goal is to promote these energies, but the technologies are now at a stage where lower rates would still guarantee attractive returns.
Regarding statistical transfers, I see that the investment requirement for the cooperation mechanism remains at 0 for the coming years. For me, this means that Luxembourg will not actively participate in the financing of renewable projects abroad and will continue to pay only an amount of money per year to get a “deal”. With a funding requirement of 41 million euros for 2025, 1,374,000 GWh will be bought for slightly less than 30 euros per MWh. We have seen that energy plants in Luxembourg get much higher tariffs per megawatt hour, so I am wondering how serious Luxembourg’s aspirations are.
Also, I do not know if I would still promote biofuels to that extent (670 million euros from 2021 to 2030). In the long term, the mobility will evolve away from cars with combustion engines, so I don't see much sense in supporting these fuel amounts. Because the amount is significant though, I might not have all the information to have an opinion.
Innovation and research: the concept of embodied carbon
I welcome the fact that Luxembourg wants to base its research and innovation strategy on concepts such as "zero carbon", "circularity", "lifestyle changes", "climate solutions" and "green finance". These are all critical pillars for climate change. However, there are no concrete plans how these programs should look like. As a result, Luxembourg runs the risk of losing important time while other countries have already built up so-called “hubs” and attracted clean-tech start-ups.
I also find it a pity that the concept of “embodied emissions” is not mentioned. Embodied emissions are the emissions from the entire production process of a product and which, in my opinion, have to be accounted for when establishing a climate strategy. Thus, the energy consumed in the extraction of raw materials, processing, manufacture, transport and waste would also be integrated in the calculation. You can also talk about the “carbon footprint” of a product. Those emissions often occur in producing countries, i.e. abroad and do not flow into national statistics.
Here, the government would have had the unique momentum to differentiate itself from other countries if they had set similarly ambitious targets for reducing "embodied emissions" than for reducing national emissions in the energy sector. In an innovative climate policy, it is not enough to concentrate exclusively on a carbon figure on a national level. The global climate does not care where emissions are emitted. For an ambitious climate policy, one cannot rely exclusively on reducing national emissions.
What do I mean by that? I will give two examples that speak to people: the textile industry and the construction sector. In the textile industry, a large part of the footprint occurs during the production, which mostly takes place in Asian countries. In Western countries, there are few emissions: logistics, consumption and disposal. Here, the government would have to promote goods which have a reduced footprint against the “conventional” product.
In the building sector, where products such as cement, steel or iron are partially produced in the Luxembourg, see few incentives to be replaced by green materials (either the CO2 price is low [EU ETS or otherwise] or there are no viable alternatives yet). The steel and cement sector is covered by the EU Emissions Trading Scheme (ETS) across Europe, but the prices per ton were (2019 excluded) historically too cheap to provoke a change and will probably remain low after the corona-crisis. As a concrete example for the issue, I point at residential housing: although Luxembourg has a strong program to reduce the energy consumption of these houses to zero ("operational carbon"), there are few initiatives to use sustainable materials to reduce embodied carbon.
I have taken these two sectors as an example, but the reasoning can be extrapolated to other sectors (for example agriculture, electronics, etc.): will there be incentives, for the consumer or the producer / entrepreneur, to buy or use sustainable products? Examples for incentives would be reductions in the purchase price for sustainable products (for example, GOTS or GRS label in fashion) or tariffs on green materials (construction sector), when those are not price competitive. That would be the progressiveness that I wished for and that would make Luxembourg a leader.
In the climate plan, fiscal measures relate almost exclusively to the taxation of combustion cars and to taxes related to diesel and gasoline. In a country that, over the last few decades, has been known to favor niches with a clever tax policy, these measures are in my opinion not profound enough.
Tax measures could make it easier for businesses to step into a more sustainable future. This is especially effective if such measures allow to offer environmentally friendly products and services at the same price. In addition, some examples mentioned in this text could be supported by tax measures (e.g. "green" finance, cleantech start-ups, sustainable construction, research).
Thus, it could be argued that the state should apply the CO2 tax on every end product that comes from “climate-relevant” sectors. Here, the climate plan proposes a CO2 tax mostly for fuels in the range of 20 Euro per ton of CO2, which will be progressively increased. I think this is not bad as such, but the price should be increased progressively to 50-100 euros per ton in the coming years (Horizon 2025 or 2030). It is important to communicate this level early to give businesses an opportunity to innovate. A company usually prefers to invest in an improved product rather than having to pay penalty fees. In my opinion, 100 euros per ton is a good long-term balance, as it is the level at which Direct Air Capture technologies that "suck" CO2 from the air will be competitive (example: Climeworks).
Luxembourg as Start-Up “Hub”
Going a step further, the question becomes: how do we get businesses like Climeworks to Luxembourg and establish Luxembourg as a “hub” for clean-tech startups, as envisaged in the climate plan?
Here, too, I give two examples from the fashion sector: the first example is Amsterdam, which over the past few years has become a "hub" for sustainable fashion, with accelerators such as Fashion for Good or as headquarters for sustainable brands. The second example is Sweden, which has established a research center (RI.SE) that has been working for years on a solution for textile recycling. In the textile industry, there is currently no way to recycle clothing to materials that are 100% integrated into the textile value chain. Out of this research center, 3 “start-ups” were born, of which some are already running on small production capacities.
In concrete terms, I miss a roadmap how those goals can be achieved.Luxembourg wants to promote low carbon cement or low carbon steel initiatives at EU level, but I wonder how Luxembourgish players are incentivized for change. Luxembourg regroups companies within Luxinnovation’s clusters, but we are running years behind in innovation. Luxembourg as a small country has a huge advantage over its neighboring European countries because of its flexible set-up and with many players present in the financial sector (and therefore access to funding for start-ups).
Luxembourg is the second largest fund-place in the world. Through the Green Finance pillar, we can take on an internationally important role, which is why I would have liked to see bigger steps to position the country as a leader. Each investment fund located in Luxembourg should submit a report on “climate-relevant” sectors to the CSSF, which will enable to find out in which how “green” the investments are that are located in Luxembourg. For the financial sector to make a positive contribution to climate protection, it is essential that Luxembourg reinforces its position by introducing an obligation to provide information on climate-relevant sectors.
Of course, the fund sector is a big business for our country, so the government will have to consider whether it wants to reward companies that invest pro climate or to penalize those who invest anti climate – I miss those initiatives in the climate plan. 20% “green finance” by 2025 is a worthwhile goal, but it lacks concrete ideas and leaves room for compromise.
Financial institutions that sell products to retail Investors should be obliged to offer sustainable investment options. For banks, for example, this can be done through green savings account or sustainable investment funds. Pension funds, life insurance and savings accounts should be, by default, invested in green or sustainable products.
Climate neutrality by 2050
In my opinion, this horizon is too late. If we continue to emit CO2 in today's rhythm, humanity will have warmed the planet by 1.5°C in by 2028, thus reaching the limit of the Paris Climate Agreement. Emissions should therefore be zero by 2028 to limit warming to 1.5°C. A utopian goal, considering that globally, only 20% of energy comes from renewable sources and that the entire world economic system depends largely on fossil energy.
Setting the goal of climate neutrality by 2050 is therefore by no means ambitious. After 2028, negative emission technologies will be used to “suck the CO2 out of the air” that we emitted too much. This is technically possible, but we will live with the bet that (perhaps one day) technology will save us. In addition, many critical ecosystems will have suffered irreversible damages that cannot be reversed with technology.
What I also miss in the climate plan is that few initiatives touch the education sector. Primary and secondary school classes should have climate change on their agenda and specific study programs should be proposed at Uni.lu to prepare for relevant occupations. There is indeed a master in finance and economics with a "track" in "sustainable finance", but that is not enough.
A final remark on the economic situation with the coronavirus
At present, the coronavirus is the magnet for the entire public interest. Of course, it is the highest priority at this time. After the virus, however, there will be a period of relief, in which the economy will be re-accelerated. That would be a time in which Luxembourg could fully bet on “green” when it will base the economic relaunch package on green measures.
I expressly welcome the initiatives as elaborated in the climate plan, through which the Luxembourg government seeks to uphold its commitment to the Paris Agreement at a national level. The national energy and climate plan contains many measures that I am very aligned with.
However, I find it a pity that the government has missed the opportunity to make truly ambitious and innovative proposals. This is why I believe, as listed in this article, that the climate plan should be reinforced by concrete principles and measures. I sent these principles and measures as recommendations to the government, which has left time until the 29/03/2020 for the public to submit opinions.
I hereby invite you to make your voice count. Please do not hesitate to use my letter as template to submit your own views and opinions.
Thank you very much for your support.
Special thanks to Christophe Nicolay for his continuous support for this project.