Energy vulnerability and low carbon transitions

The low carbon transition envisioned for Europe is set to bring substantial benefits, from an increase in employment across specific sectors developing low carbon technology, to less reliance on fossil fuels and the associated price volatility, reduced levels of air pollution, and opportunities for lower energy costs through measures improving household insulation. However, it is inevitable that some households and industries more vulnerable to the changes that a rapid and large-scale transition brings could lose out, particularly if adequate mitigating measures are not put in place.

Recognising that the impacts of the large-scale structural shift towards a low carbon energy system will be distributed differently across sectors and different regions of the EU is important for three reasons; firstly, there is a moral imperative to ensure that the transition is fair and does not disproportionately impact those less able to make necessary change. Secondly, the transition will need broader stakeholder buy-in and engagement, which will be challenging to achieve if the low carbon transition is perceived as unfair. Finally, the transition provides a huge opportunity to address underlying structural problems across communities and industry, such as under-investment in inefficient buildings and the need for efficiency improvements to industrial processes.

At the EU and Member State level, the distributional impacts of climate and energy policy are not well recognised, nor are the data and tools for effective assessment. Impact assessments seldom undertake rigorous assessments that consider regional differences in household or industry sector impacts, with the process focused on economic efficiency.

The lack of recognition of this issue in part reflects the use of scenario analyses that consider aggregate spatial scales only and work with coarse sector resolution. Furthermore, economics framing focuses assessment on what is cost-effective and cost–optimal. In addition, distributional analyses require disaggregated data, whether that be spatial, sectoral, or by socio-economic groupings. However, these are not reasons for maintaining the status quo.

This research is motivated by the absence of a recognition of distributional impacts but also an acknowledgement that scenario analyses that use a techno-economic framing are widespread and have considerable benefits. This reflects the REEEM approach that has techno-economic pathways at its core around which it builds complimentary, linked analyses. We propose a complimentary approach to exploring the implications of different low carbon pathways for vulnerable regions, known as InVEST, or Indicators of Vulnerability in Energy System Transitions. This seeks to address the question of how we ensure that insights from modelled pathways used in strategy development take account of distributional impacts, and recognises vulnerable households and industries.

Crucially, key concepts that provide policy traction for energy vulnerability are recognised by the Commission, including just transitions and energy poverty, both of which were reflected in the recent Clean Planet for all strategy. Just transitions relates to protection of workers in industries that may be more vulnerable to sustainable development policies. Driven by the trade union movement, the principles of just transitions are captured by guidelines provided by the International Labour Organisation. Energy poverty is a situation where households are unable to adequately meet their energy needs at an affordable cost. It is caused by a combination of inter-related factors including low income, high energy prices, poorly insulated buildings, inefficient technologies and sometimes limited access to clean and affordable energy sources.

The InVEST approach first maps out different subnational regions across Europe that may be more vulnerable to impacts arising from the proposed low carbon energy transitions, based on a set of indicators. The indicator set captures energy vulnerable households, and industry sectors that are energy-intensive, both of which may struggle with increased costs, and sectors that are carbon-exposed, such as the coal sector. Based on the regional picture of vulnerability, the next step is then to consider how different pathways may impact such regions and communities in the future, if such vulnerabilities were to persist. We refer to regional vulnerability indicators as sensitivity metrics, and pathway impacts as exposure metrics, as per the vulnerability framing used in the climate impacts and adaptation field. The basic concept is illustrated in Figure 26.

Concept of combining low carbon scenario metrics with proxy energy vulnerability datasets. Figure 26. Concept of combining low carbon scenario metrics with proxy energy vulnerability datasets.

For households, sensitivity metrics (identifying vulnerable regions) include: • Energy affordability, based on household budget surveys and other surveys focused on living conditions;

• Household income.

For industry, metrics include: • Employment in fossil fuel-based industries;

• Employment in sectors defined as energy-intensive;

• Long term unemployment.

An example of one of the above sensitivity metrics – share of households unable to keep adequately warm - is shown in Figure 27 below.

Once mapped, the implications of the REEEM low carbon pathways across the different regions were considered. This was done by overlaying scenario metrics of relevance to regional vulnerability mapping. For example, coal production under the low carbon scenarios was compared to the employment levels in regions in different Member States. For households, scenario metrics such as energy costs and investment levels across Member States were compared to regions in those same Member States identified as vulnerable. The complete findings of the analysis can be found in deliverable D4.1b – Focus report on behavioural effects and distributional impacts.

Main insights

Message 21. Specific regions of Europe are more vulnerable to the impacts of low carbon transitions than others

The low carbon transition will have multiple impacts that are likely to affect different regions of the EU, but to differing extents. To explore these distributional impacts, selected indicators of vulnerability across industry and household sectors have been selected, based on sensitivity to energy cost increases or exposure to reducing demand for goods (in industry).

We find that specific regions of Europe are potentially more likely to be sensitive to low carbon transitions. For households vulnerable to change, it is the regions of eastern and southern Europe where issues of affordability and energy adequacy are most prominent. One of the six indicators used to measure this is provided in Figure 27, showing the spatial distribution of households who self-report that they are unable to adequately heat their homes.

Factors giving rise to this vulnerability include insufficiency of heating systems during colder periods of the year (notably in Southern Europe), while in Eastern Europe factors may relate to a range of issues from poor building fabric to inefficient energy systems. Affordability is also a key factor in these regions, where incomes are typically lower than in other EU countries. While there are differences, most of the other metrics used show a similar trend.

Share of a) decile 1, b) decile 10 and c) average households by NUTS1 regions who report that they are unable to adequately heat their homes. Figure 27. Share of a) decile 1, b) decile 10 and c) average households by NUTS1 regions who report that they are unable to adequately heat their homes.

On industry, the selected vulnerability indicators relate to the number of employees in the coal sector, and share of manufacturing employment in energy-intensive sectors. Coal production and generation jobs are highly concentrated, based on regions with large resources, notably Poland and Germany (Figure 28). Śląskie in Poland (situated in the Silesian basin) is by far the region most dependent on coal mining, accounting for over a quarter of the total sector employees across Europe (which total 400,000). These regions need to be considered; previous transitions suggest that coal phase out could lead to detrimental employment and societal impacts if not managed.

There are also specific regions of Europe with higher shares of employees in energy intensive industries, which could be subject to higher energy cost pressures, and in some case, competitive pressures from the globalised nature of the sector. Regions include those located in Eastern Europe, BENELUX, and parts of Scandinavia, where key sectors include primary metals, non-metallic minerals, paper and pulp, and to a lesser extent, chemicals. These sectors account for some 3 million employees.

Distribution of coal sector employees across EU. Figure 28. Distribution of coal sector employees across EU. a) Employees in coal mining (direct & indirect), normalised to 1 by highest region (1 = 114,000 in Śląskie, Poland); and b) Direct employees in coal generation, normalised to 1 by highest region (1 = 2910 in Śląskie, Poland).

There is limited geographical overlap between residential and industry metrics of vulnerability, although some regions do have multiple vulnerabilities. Some coal regions also see higher household energy vulnerability, such as Yugoiztochen (BG), Severozápad (CZ), Śląskie (PL), and Sud-Vest Oltenia (RO). Regions which have both high employment in energy intensive industry sectors and household energy vulnerability include cases in Slovenia, Hungary, Lithuania and Estonia. From a policy perspective, these overlaps are interesting to identify where sensitivities exist across multiple sectors to possible impacts of transitions. Regions in Spain and Italy are also identified due to their relatively lower disposable incomes and higher levels of unemployment; recognising specific issues around capacity to respond to the low carbon transition (as indicated by these indicators) is important for designing policy and targeting resources.

Message 22. The ability of households to respond to changes is likely to vary significantly within regions, not only between regions

This analysis highlights that it is not only the distributional impacts between regions that are important but also those within regions. This is highlighted in Figure 27, which shows that for the metric in question, vulnerability is much higher for income decile 1 (lowest) compared to decile 10 (highest). Taking the example of Greece, decile 10 has an average share of households unable to keep warm at 5%, while the decile 1 has a share of 55%, a very large difference. This pattern is replicated across other Member States – and across the most of the household vulnerability metrics. This within-regional variation arises from differences in local economies, incomes, and other factors (local energy systems, building stock, access to services etc.).

While not investigated in this research, the same is probably true of different industries, which are often highly heterogeneous within a region, with some more prepared for shifting to low carbon production than others. The lack of data at the EU level means that this is challenging to determine.

Message 23. The REEEM pathways highlight that energy vulnerable regions may also incur higher energy costs but also the prospects of large investment required to deliver the transition.

There are no significant differences between pathways so the CL pathway is used here as representative of all three pathways.

Regions in the red boxed areas of Figure 29 highlight that those most vulnerable (primarily in countries in eastern and southern Europe) also incur the higher investment levels. This increased investment highlights the opportunity that the transition brings to resolving some of the underlying structural problems inherent in driving household energy vulnerability (poor building stock, insufficient heating provision). It is likely that some of these regions see higher investment due to the need for improved efficiency and associated infrastructure. Policy therefore needs to manage the short-term risks of increasing cost, which could impact negatively on affordability, while incentivising and supporting the large-scale investment that is necessary.

Change in investment level in 2030/50 (indexed relative to 2015, vertical axis) under the CL pathway versus current household vulnerability (horizontal axis) as measured by consensual indicators, AdWarmth and SevArrears. Red boxes highlight those regions who are both vulnerable to impacts and see high levels of investment. Figure 29. Change in investment level in 2030/50 (indexed relative to 2015, vertical axis) under the CL pathway versus current household vulnerability (horizontal axis) as measured by consensual indicators, AdWarmth and SevArrears. Red boxes highlight those regions who are both vulnerable to impacts and see high levels of investment.

The REEEM pathways do not indicate an increase in energy cost specifically for regions with high employment dependency on energy intensive industries. However, the general trend of the pathways is to show increasing energy costs and the need for large investments to be made in these industries if they are to remain competitive in a low carbon world, and ensuring that Europe retains its heavy industrial base. Unlike the coal sector, the vulnerability of employment in these regions can be reduced through investment, but which will need to be incentivised through policies, including measures that recognise and reward the low carbon provenance of goods.

Message 24. For coal dependent regions, all pathways show rapid decline in both coal production and generation. Just Transition planning is therefore vital for the affected regions.

The pathways see a post-2030 decline that is rapid, with very low or zero output by 2050, meaning that effective planning focused on new opportunity for workers needs to be put in place over the next decade. Unlike other industries, there appear to be no real prospects for keeping these extractive industries in business. While the PA shows some increase in CCS application for coal, it is questionable whether such a prospect is realistic in a net-zero emission world.

Message 25. Recognition that regions differ significantly in terms of vulnerability and capacity to respond, both between and within regions, should be mainstreamed into the policy process.

A range of policy insights and recommendations emerge from this research. Crucially, recognising vulnerability and the potential for distributional impacts across Europe is a first step to then shaping policy to mitigate negative impacts whilst reinforcing and maximising the positive ones. This means mainstreaming this type of analysis into the impact assessment process; the ESPON developed Territorial Impact Assessment (TIA) approach would be an excellent starting point.

In addition to adopting a TIA-type approach, the EU could also play a key role in facilitating the gathering of necessary data to better understand regional differences, and the specific factors that make certain regions more or less resilient to change. An excellent1 initiative on energy poverty has been the establishment of an observatory. Such an initiative could be replicated to further explore industry sector vulnerability, the data needed to measure this, and measures to ensure Just Transitions.

With an enhanced understanding of distributional impacts, an informed policy response can be developed, building on current policy to ensure the necessary support for vulnerable regions. This will be relevant for EU policy but also for Member States policy, including that focused and implemented at the regional level.