Race to Zero Emissions - How the EU and US are claiming the pole position

Repost - Article originally published by Jakob Medick and David Wortmann, DWR eco.

Embracing the economic opportunity of a net-zero economy

On June 15 2021, US president Joe Biden and EU President Ursula von der Leyen have pledged for closer cooperation in tackling the common challenge of climate change by working towards a Transatlantic Green Technology Alliance. The US and the EU recently have stepped up their climate ambitions by presenting their newly adopted climate targets for 2030 of -50% vs 2005 and -55% vs 1990 respectively. More than ever before, both powerhouses are considering the green transition as an imperative but also as a driver for economic innovation and long-term stability. Along those lines, developing and scaling strategies to combating climate change is a no-regret option. This is why the EU, as the first continent has committed to Net Zero Emission by 2050 and the US are looking to adopt a similar pledge for carbon neutrality by mid-century which still remains to be adopted by US congress. 

As a consequence of the COVID19 crisis, the EU and US both have recognized the need to become more independent from the import of critical raw materials as a means to limit risk exposure to future external shocks. That being said, political decision-makers are encouraging domestic sourcing of raw materials in order to maintain competitiveness of key industries such as the automotive sector, the steel or chemical industry and make them more future-proof and resilient. Upstream production shall be facilitated for capturing all parts of critical value chains on home turf and limit exposure to disruptions along the supply chain. While the US can rely on higher capacities for domestic raw material production, the EU aims to offset its limited resource potential by strengthening its circular economy. Looking to build up future-proof industries, the development of a battery value chain has been identified as key strategic endeavor for both, the EU as well as the US. Aside from the battery cell industry, the EU has also defined hydrogen as another ?Important Project of Common European Interest“ (IPCEI) and is devoting over 400 billion € to claim technology leadership. 

It seems, however, that the cleantech sector in general will receive a major boost with heavy investments > 1 trillion €/$ each coming from the European Green Deal and the US counterpart comprising the American Jobs Plan and the Clean Future Act. Moreover, both climate plans are expected to serve as job engine, creating 30 million "clean" and future-oriented jobs in Europe and 19 million in the US respectively. 

But what set of policies will bring the EU and the US on track with a carbon-neutral economy and which mix of technologies will enable this transition? We have detailed the most recent proposals and identified the sector-specific objectives and associated policy measures in a comparative analysis. (see attached) Here are some of the key takeaways.

Same objective, different starting point

The EU's energy transition is already at a more advanced stage with an EU-wide grid penetration of renewables reaching 38% and current EV adoption rates of around 15% of total car sales. With the exception of some States such as California or Texas (about 30% renewables) the US energy transition is still at an early stage (country-wide share of renewables is only at 17%, current EV adoption rates at 2-3%). While the EU has managed to cut overall emission by 24% below 1990 levels, US emission have slightly increased within that time span. 

However, for both there is still a long road ahead for reaching net zero emission and/or 100% renewables. The crafted roadmaps entail a set of policies and technological solutions that may differ in its composition and scale but will eventually lead to the same desired outcome. 

• Climate: both have committed to net zero emissions by 2050 and specified interim targets for 2030 with similar ambition levels. Also, a methane reduction strategy aiming to fix existing leakage issues in upstream segments of the highly potent greenhouse gas is reflected in both climate roadmaps.
• Energy: looking at the bare figures, the US has put out a more ambitious target of 100% net zero electricity by 2035. However this includes nuclear energy, which is not part of the EU target. Both, the EU and the US have developed an offshore wind strategy as key enabler of a system with high shares of renewables.
• Industry: both plans show commitment to strengthen domestic value chains and onshore manufacturing of goods and materials while aiming to maintain competitiveness of key industries (auto, metallurgical, chemical) during the transition process. In many of these industries significant investments in low-carbon technologies are to be made for a climate-compatible pathway. While the US is also supporting Carbon-Capture and Storage (CCS) technologies to bring down emissions in heavy industry, the EU is focusing on the scale-up of green hydrogen as a silver bullet for deep decarbonization.
• Mobility: it seems a common understanding that electrification of passenger vehicles is the most cost-efficient decarbonization option for individual transport. It therefore attracts massive public funds with the overarching objective to manage the full value chain domestically. Considering a potential shortage of battery resources, battery recycling is promoted in both markets. In terms of numeric targets, the EU pursues a more ambitious trajectory for rolling out charging infrastructure and electrify ground transport. Further areas of action that enjoy high political priority in both of the roadmaps are: facilitate shift from road to rail, support and decarbonize public transit and support the development and uptake of low-carbon technologies in shipping and aviation
• Heating & Buildings: known as the sleeping giant of emission reduction, the EU and US both seem to have recognized the significant emission reduction potential that is hidden in the building sector. Key mitigation levers that find support in both climate plans are: enhancing energy efficiency of new and existing buildings, reduce the carbon footprint of construction materials and improve the overall energy performance by updating existing building codes.
• Hydrogen: the EU is positioning as a frontrunner with regard to rolling out a hydrogen economy. In this context it has adopted a Hydrogen Strategy that includes a 40 GW electrolyzer target for 2030 which is underpinned with OPEX and CAPEX based support schemes, the build-out of an EU-wide hydrogen pipeline backbone and the targeted off-take of low-carbon hydrogen in industry and heavy transport. The US in contrast, is yet lacking a coherent framework while focusing on demonstration projects only. Market launch and first commercial projects appear more distant than in the EU.

We are in this together - Pooling resources and leveraging competencies for a common goal

The transition to a green, zero emission economy is not a winner-takes-it-all game, the EU and US will have to complement each other while both sides will earn a competitive edge in certain market segments. Given the higher shares of intermittent renewable energy sources in the grid, the EU is facing a higher market pull for technologies that enable a system integration of renewables without risking the security of supply. This causes higher innovative pressure for developing solutions in order to accommodate renewables into the system (storage, demand response, Power-to-X, Virtual Power Plants, Smart Metering and Smart Grids) while creating a coherent regulatory framework that ensures a sector-coupled and flexible energy system across Member States.

EU political decision-makers and businesses have recognized the need to set the stage for deep decarbonization and have adjusted the regulatory setup accordingly: electricity, heating and transport sectors shall not be regulated separately anymore but are subject to a more integrated assessment. In this context the EU has launched a Strategy for Energy System Integration and an umbrella Hydrogen Strategy in 2020. Also infrastructure planning is designed for a more interconnected system between transport, heating and electricity in order to account for the increasing role of electrons vs molecules in the future. Meanwhile, market participants are fueling this development by exploring solutions that enable sector coupling.

Many of these innovative applications will see first business cases in the EU and might serve as blueprint for other markets such the US to master later stage of the energy transition on the way to system based on 100% renewables. On the other hand, historically the US is equipped with a higher innovation potential due to high success rates of digital tech companies and a more vibrant VC/investor landscape.

US-based investors usually have a different mindset with a stronger trial-and-error mentality which is backed by a regulatory framework that stimulates venture capital activity and allows innovations to scale at a much higher rate. Even though the EU produces many early stage cleantech startups, it lacks growth capital that can lift technologies that have been tested and validated (proof of concept) in the EU "lab" to an international mass market. In 2020, VC funding in the EU added up to around 55 bn $ comparing to a record-high US funding of 130 bn $. 

With an increasing awareness for cleantech innovation in both markets, the US might help to solve this missing piece of the EU decarbonization puzzle going forward and vice versa. On both sides of the Atlantic, there is a lot of room for mutual learning. Only with combined forces it will be possible to leverage potentials and master the massive undertaking of a green economic transition. 

If you are interested in gaining further insights about regulatory developments in the EU and German cleantech space, would like to shape the policy setup of existing and new markets across Europe and have a better understanding of the European market mechanisms for growing your business, please visit our website or contact me via Linkedin.