Glossary
Glossary
Terminology
Building blocks are the economic sectors, such as energy, transport or industry, and cross-cutting areas, such as finance, innovation, and lifestyles, in which transformation is needed to achieve a climate neutral society by 2050, and across which ECNO tracks progress.
Building block assessment
Acceleration factor
Or the ‘required change in speed’ is the ratio of the required change versus the past change on a given indicator. This results in the example formulation: ‘We need to increase our annual emission reductions to at least 4.9 Mt CO2e per year – or 2.6 times faster than the 1.9 MtCO2e per year achieved in the past’.
Benchmarks
Future reference points against which progress for each indicator is compared. ECNO derives benchmarks from official EU sources, such as directives, regulations, strategies, and action plans, including their related impact assessments. Benchmarks often come in the form of quantified policy goals or targets.
Climate neutrality
Stands for the objective of achieving net zero greenhouse gas (GHG) emissions. This means that emissions are brought down as close to zero as possible, with remaining, difficult to abate emissions balanced by GHG removals within a given country or region.
Enablers
The supporting conditions and underlying changes needed to meet the objectives in a given building block. They are the opposite of barriers or inhibitors.
Historical data
Includes, but is not limited to, statistics from Member States harmonised and provided by Eurostat or the European Environment Agency (EEA) as well as from international organisations such as the OECD, FAO, or World Bank.
Indicators
Track the historical development and status of enablers and objectives based on quantitative data. An assessment of indicator progress compares the trend against the required development to meet a future reference point, where data and relevant benchmarks are available.
Objectives
Describe what needs to be achieved in each building block to reach climate neutrality.
Required change
The change that underlies a pathway that meets the identified benchmark or target. Where benchmarks are missing, the required change indicates a direction and speed of change.
Trend
The development of an indicator over time based on historical data. ECNO’s trendline is a straight, best-fit line that smooths out the variation in historical developments based on all data points, providing a sense of the general progress over time.
Finance
Redirecting financial flows towards clean products and services is essential to put the EU on track to achieve climate neutrality by 2050. This includes both public and private investment flows.
OVERVIEW:
Progress on finance was heading in the wrong direction
Finance is moving in the wrong direction with half of the annual investment needed missing and an increase in fossil fuel subsidies partly due to crisis response risking the transition overall.
The development of financial flows towards transition financing in the EU was heading in the wrong direction in the assessed period, which means there is no change to the progress classification of last year. This is primarily due to the fact that the climate investment gap for the EU to achieve its climate objectives by 2030 was still significant, amounting to EUR 406 billion in 2022 for the energy, buildings and transport sector. This represents half of the investment that would have to be made every year between now and 2030 to achieve these targets. In the meantime, fossil fuel subsidies increased considerably in 2022 due to the energy crisis, reaching EUR 190 billion. Finally, the quality of information about how banking institutions currently finance and plan to finance the transition was very low, with the quality of the contents of banking transition plans and their timeline of publication still having been uncertain.
There are currently no regulations that coordinate an efficient redirection of both public and private financing towards EU climate objectives to close the climate investment gap. However, the EU has implemented several measures, such as carbon taxation through the EU ETS public subsidies, or financial regulation, to redirect financial flows towards a low-carbon economy. The EU’s 8th Environmental Action Programme urged Member States (MS) to phase-out fossil fuel subsidies as soon as possible, but no sanctions are applied to MS if they fail to do so. With the adoption of the Corporate Sustainability Due Diligence Directive (CSRD) in 2023, and the revision of the Capital Requirement Directive (CRD) in 2023, banking transition should become progressively mandatory. The CSRD and CRD, if sufficiently sound and effective, could enable the redirection of private financial flows toward the transition to a low-carbon economy.
Given its significance, the climate investment gap should be better assessed and addressed with urgency, otherwise there is a risk of seeing the Green Deal failing to deliver. It will require comprehensive public policy that involves existing regulation, such as carbon pricing systems, but also public finance schemes and financial regulation to mobilise both public and private investments. An EU long-term climate investment plan could help bridge the gap in climate investment by effectively coordinating public funding and private financing. This is particularly important as the Recovery and Resilience Facility (RFF) is set to end in 2027. To achieve EU climate targets by 2030, it is also essential that MS cease their fossil fuel subsidies as quickly as possible. Finally, although legislative progress has been made in recent years on the obligation for banks to publish transition plans, their publication timeline, and their soundness to effectively enable banks to better finance the transition still need to be clarified.
DEEP DIVE
Chanelling public funds
Amid the energy crisis of 2022, fossil fuel subsidies have risen in nearly all Member States. While most plan to phase out these subsidies, the focus is often limited to the power sector and, to a lesser extent, the buildings sector. Germany and France have committed to exit fossil fuel subsidies but have not set a specific end-date for all. Denmark stands out as the only Member State having set out a comprehensive national plan to concretely phase out fossil fuel subsidies related to electricity generation, coal-fired power plants, and support in fossil heating systems.
BRIEFING
Is European cleantech on track for net zero? A question of finance
NOVEMBER 2023. This briefing examines the current state of EU cleantech from lab to market. The ECNO flagship progress report found that progress in the cross-cutting sector of cleantech has so far been too slow. The briefing's author, ECNO expert Ciarán Humpreys, sheds light on the role of finance in accelerating progress to become in line with the EU's 2050 climate neutrality target.
OBJECTIVES
Objectives describe what needs to be achieved in each building block to reach climate neutrality.
Objective
Financing climate change mitigation
Almost all sectors of the EU economy suffered from climate investment gaps of varying widths. For instance, 2022 investments in wind power represented only 17% of total annual investment needs. Conversely, investments in solar panels already represented 78% of total annual investment needs. There is no EU-wide aggregated data available on EU financial flows that contribute to significant GHG emissions. However, it seems likely that the EU is not on track of phasing out climate-hostile investments.
Climate Investment Gap
Progress towards the objective of financing climate change mitigation was too slow. Despite an increase in climate investments in recent years, the EU still faced a substantial investment gap of EUR 406 billion in 2022.
The climate investment gap corresponds to the difference between real-economy climate investments that are currently made in the EU and the investments that are needed to reach EU climate targets.
Climate-hostile financial flows
There is currently no EU-wide aggregated data available on EU financial flows that contribute to significant GHG emissions. However, it seems very likely that the EU is not on track in the phasing out of climate-hostile investments.
All financial flows that contribute to significant GHG emissions.
ENABLERS
Enablers are the supporting conditions and underlying changes needed to meet the objectives in a given building block. They are the opposite of barriers or inhibitors.
Enabler 1
Channelling public funds away from fossil fuels and towards climate neutrality
EU climate investment subsidies represent the sum of public subsidies from the EU, its MS, and their local authorities, going towards climate investments. Some partial data exist, for example on subsidies granted to renewable energies. They amounted to EUR 87 billion in 2022, and were well below the level of fossil fuel subsidies for the first time since 2015. Subsidies for renewable energies had increased by 7.3% in 2020. They have remained relatively stable since then. Fossil fuel subsidies have almost tripled between 2021 and 2022. This growth in fossil fuel subsidies is mainly due to the energy crisis generated by the Ukraine war, which led EU MS to adopt more than 230 temporary subsidy measures to protect households and companies from the rise of energy prices.
Public climate subsidies
For now, there is no EU-wide aggregated data on public climate subsidies.
The sum of public subsidies from the EU, its Member States, and their local authorities, going towards climate investments.
Fossil-fuel subsidies
This indicator shows past development in EU Member States fossil-fuel subsidies in comparison to the EU target of phasing-out these type of subsidies by 2025. The data show an annual increase of EUR 21.1 billion between 2017 and 2022. The indicator is therefore going in the wrong direction.
Subsidies that are given by all the Member States and the EU to fossil fuel spendings and investments.
Enabler 2
Modifying market prices through public intervention
The share of EU GHG emissions covered by a carbon market price or tax was stable in 2022 and was overall assessed as on track. However, the share of EU and Member States (MS) revenues from environmental taxation were still going in the wrong direction in 2022. This decline over the years can be explained by the fact that many MS found it difficult to increase the cost of necessary goods, such as food and energy, by increasing environmental taxes while the country was experiencing social and economic difficulties.
Share of GHG emissions covered by a carbon tax
This indicator shows past development in the share of EU GHG emissions that are covered by a carbon price scheme.
The data show a decrease from 47.7 % of EU GHG emissions coverage to 43.5 % between 2017 and 2020, followed by an increase to a coverage of 53.8 % in 2021. This increase in 2021 is mainly due to the launch by Germany of its National ETS for heating and transport fuels. No expert consensus currently exists but increasing the share puts the EU on track to incentivise emission reductions.
Share of EU GHG emissions covered by a carbon pricing or taxation scheme, i.e., the EU ETS and national schemes.
EU and Member States revenues from environmental taxation
This indicator shows past development in the revenues from environmental taxation. The share of environment taxes revenues in total taxes revenues stands at 5.4 % in comparison to the EU target of reaching 10 % share in total taxes revenues in 2020.
The data show an annual decrease of 3.4 % between 2017 and 2022, while it should almost double as soon as possible. The indicator is therefore going in the wrong direction.
Revenues generated by environmental taxation in the EU and Member States including energy taxes, transport taxes and pollution and resource taxes.
Enabler 3
Shifting private finance towards climate-friendly financing
Analysing only what exists in the banks’ portfolios does not allow for an assessment of the potential of the financial system to align with the Paris Agreement. What matters is how they plan to finance the decarbonisation of an economy that is still very carbon intensive. There is an urgent need for more transparency on how financial institutions are planning to better finance the transition.
Share of banks with a sound transition plan
For now, there is no EU-wide aggregated data on the share of banks that have a sound transition plan. The publication of banking transition plan should become mandatory from 2025 with the implementation of the CSRD and CSDDD at the EU level.
The indicator shows how many banks of total banks have a transition plan. The share is weighted by the size of the bank’s balance sheet.
Share of new banking loans aligned with the Paris agreement
For now, there is no EU-wide aggregated data on the percentage of new banking loans that are aligned with the Paris Climate Agreement.
Share of new loans issues each year that are aligned with the Paris Agreement (including both mitigation and adaptation objectives).
