The New Economics of Net Zero: Matching Policy Instruments to Europe’s Decarbonization Challenges

In cooperation with EPICO KlimaInnovation, this whitepaper presents the 2050 Marginal Abatement Cost Curve (MACC) for the EU‑27. A MACC is a chart that ranks different greenhouse gas mitigation measures by how much emissions they can reduce and how much each ton of avoided emissions would cost. The MACC that is at the heart of this project analyzes 128 key mitigation measures across the buildings, energy supply, industry, and transport sectors. In addition to the cross‑sectoral perspective, the whitepaper includes a dedicated industry section. The analysis highlights both the potential and the limits of carbon price signals for driving the overall transformation and identifies where complementary policy instruments – such as subsidies and regulation – are essential to achieve net‑zero emissions by 2050.

This project is timely because the EU – from the European Commission to Member States, as well as local actors and stakeholders – faces the challenge of combining industrial competitiveness, energy resilience and climate ambition.

At this point, a reality check is needed: which mitigation measures will deliver the biggest cuts in emissions for the least cost? How can we close the remaining gap to reach climate neutrality? What is our cost-effective approach to climate action?

Key findings:

1. 200 €/t CO₂ will incentivize 75 % CO₂ mitigation.
   Electrification already pays off where efficiency gains reduce OPEX, as possible with industrial heat pumps. Process route changes in energy-intensive industries (e.g., paper machines with electrode boilers, foundries with inductive electrification, hybrid glass furnaces, ammonia trough electrolysis) can often be incentivized with higher carbon prices (90 to >200 €/t). That being said, in absolute terms costs will rise vis-à-vis the status quo, particularly for many energy-intensive processes.
2. Cheap to abate – expensive to invest: Targeted public support is essential for households to overcome the initial investment hurdle and leverage private capital.
   Electrification is key for abating emissions in the household sector via heat pumps and electric vehicles – with largely negative abatement costs. However, the higher upfront capital expenditure remains a major barrier for many households to embark on electrification. Targeted CAPEX subsidies can help overcome this initial hurdle and accelerate adoption. One effective approach is to redistribute ETS revenues to support these investments. “Frontloading” of future ETS II revenues has already been implemented by the European Investment Bank to a limited extent but should be scaled to ensure households are prepared for increasing ETS prices. Those increasing ETS prices will be felt less acutely the sooner investments are undertaken.
3. Carbon pricing is necessary, but not sufficient to incentivize the hydrogen economy. Therefore, targeted OPEX support will be needed to build a business case for hydrogen measures.
   Hydrogen-based technologies will be necessary for climate neutrality. However, green hydrogen prices can be expected to stabilize around 4 times the natural gas price in 2050. This makes carbon prices of around 200 €/t CO₂ (see Key Message #1) a necessary, but by themselves insufficient condition for achieving cost parity vis-à-vis status quo technologies. Even at 200 €/t CO2, economies-of-scale are not, or only achieved to a limited extent. For the “molecules” sector, the worst-case scenario would be to lose natural gas market shares while also failing to invest in emerging hydrogen opportunities – undermining both its present and future role in the energy system.

Therefore, targeted OPEX support will be needed to build solid business cases for hydrogen and secure the market ramp-up. To ensure timely adoption, business cases must be synchronized with upcoming reinvestment cycles in the capital stock of hydrogen-reliant industries – which are scheduled over the next few years.

Findings for industry:

1. Recycling is the true “no‑regret” option. It is already being used today to save costs and reduce emissions.
   Shifting to secondary production routes delivers CO₂ reductions and reduces operating costs. But the mitigation potential is limited, e.g. by scrap availability in steel or non-ferrous metals. To fully tap into the mitigation potential, EU must step up circular‑economy policies to secure the demand of recycled products.
2. Electrification cuts the first half of emissions in the near term and becomes a no‑brainer once the right carbon price level is in place.
   Electrification already pays off where efficiency gains reduce OPEX, as possible with industrial heat pumps. Process route changes in energy-intensive industries (e.g., paper machines with electrode boilers, foundries with inductive electrification, hybrid glass furnaces, ammonia trough electrolysis) can often be incentivized with higher carbon prices (90 to >200 €/t). That being said, in absolute terms costs will rise vis-à-vis the status quo, particularly for many energy-intensive processes.
   

6. The European Union should rely on robust price signals to direct sustainable biomass to sectors where it delivers the highest climate value.
   Feedstock use in industry and hard-to-electrify energy applications like the provision of high temperature process heat is to be preferred over energy use, where viable alternatives exist. Moreover, we need to close material loops and step up the use of residues and waste streams.
   
   
7. A rapid carbon infrastructure roll-out and legislative clarity for carbon storages are required to unlock industrial mitigation potentials in sectors with unavoidable process emissions.
   At first glance, carbon prices around today’s level (~70 €/t_CO2) appear to be sufficient to incentivize oxyfuel carbon capture technologies according to the MACC. However, the technology has not yet been fully tested in the market. The amine-based capture, which is already commercially viable but energy-intensive and more expensive in terms of investment, would require ~140€/t_CO2 in 2050 to reach cost parity. For carbon capture technologies to be able to scale in time, a rapid infrastructure roll-out and legislative clarity for carbon storages are needed as well as the certainty that the carbon price will increase sharply in the next two decades and stay largely free of political meddling. These abatement costs include capture technologies only. Accounting for infrastructure and storage could double abatement costs. Policymakers must address carbon infrastructure and storage gaps to avoid bottlenecks in the decarbonization.
8. Europe’s primary steel sites are at a critical turning point and require tailored support instruments. Even though they account for 15 % of the abatement potential, they are responsible for 40% of the additional costs.
   The highest abatement costs in primary steel production arise from the switch to OPEX-intensive hydrogen-based direct reduction routes. These measures cannot be delayed: integrated steel plants face a single remaining reinvestment window. Hence, the proposed Industrial Accelerator Act is a crucial step for the transformation of primary steel production. Moreover, Carbon Contracts for Difference could help cover the additional OPEX costs in the beginning but are not a long-term solution. Only the combination of an effective CBAM, a strong EU ETS I, lead markets as well as a European Hydrogen Backbone can render a climate neutral steel industry futureproof. Especially in the steel industry, the use of hydrogen unlocks a huge abatement potential and increases European resilience, but this comes with a price in terms of continued OPEX support for hydrogen. ETS revenues should be used to finance such targeted measures, especially for creating necessary transformation conditions for industry rather than plugging national budget holes.
9. Europe’s basic chemicals sites are at stake and require tailored support instruments. Even though high value chemical production in steam cracker units account for around 1 % of the abatement potential, they are responsible for 15% of the additional costs.
   The highest abatement costs driven by OPEX for biomass and synfuels arise at chemical sites where a switch from steam cracker units with fossil naphtha to electrically heated crackers with biogenic or synthetic naphtha is needed. This does not mean these measures should come last. The plants face a single remaining reinvestment window. Carbon Contracts for Difference could help cover the additional OPEX costs in the beginning but are not a long-term solution. Only an effective CBAM can protect a climate neutral chemical industry. Direct Air Capture for methanol-to-olefins/aromatics may offer substantially lower additional costs than shifting to electrically heated crackers. To secure Europe’s industrial base, technology readiness and infrastructure development must advance rapidly.

More Information

• Cross-sector and cross-country analyses of greenhouse gas abatement costs
• CO₂ abatement costs: A cost-efficient transformation towards climate neutrality is possible
• CO₂-Verminderungskosten für die bayerische Industrie im Trendszenario
• Dynamis – Dynamische und intersektorale Maßnahmenbewertung zur Dekarbonisierung