IEEFA welcomes EU Clean Industrial Deal but warns of LNG lock-in risk and overreliance on CCS

26 February 2025 (IEEFA) | Today, the European Commission has announced the EU Clean Industrial Deal and the Action Plan on Affordable Energy, which aim to bring together climate and competitiveness under one overarching growth strategy.  

This package of legislative measures aims to reduce energy prices, support energy-intensive industries and boost the clean-tech sector. It targets six identified business drivers and promises to cut red tape and promote skills and quality jobs in Europe. 

The Institute for Energy Economics and Financial Analysis (IEEFA) welcomes the EU’s renewed commitment to decarbonisation by targeting cleaner and more efficient industrial growth, centred on clean power through increased electrification, grid flexibility, digitalisation and efficiency. In particular, measures to reduce electricity costs and decouple electricity bills from volatile gas prices are to be commended. However, we warn against continued support for LNG and carbon capture and storage (CCS), which deny market trends and could ultimately cost Europe in competitiveness, jobs and climate leadership. 

Improving gas markets for fair energy prices 

The new EU Affordable Energy Action Plan is a positive step in the direction of better coordination of Member States' energy security. However, investing in overseas LNG projects risks tying the EU to excessive contracted LNG volumes, and could negatively impact efforts to reduce energy prices.   

Additional LNG volumes purchased through demand aggregation mechanisms could struggle to find final buyers in Europe, where demand for the fuel will continue declining through 2030. The EU will also struggle to find overseas buyers to re-export excess LNG volumes arriving at its ports. 

The EU has made good progress in diversifying energy supplies over the last three years. EU gas consumption was flat in 2024, its LNG imports decreased by 16% and gas storage measures have helped to absorb supply shocks.  

But an increase in EU LNG imports since 2022 has contributed to price volatility, high costs and vulnerability to global market fluctuations. The ambition of various Member States to become ‘gas hubs’ has exposed an uncoordinated approach to LNG infrastructure buildout and the use of existing capacity.  

“To maintain a secure and competitive energy market, the EU should prioritise diversifying energy sources and reducing gas demand, alongside improving coordination between Member States for an efficient use of existing gas and LNG infrastructure,” says Ana Maria Jaller-Makarewicz, Lead Energy Analyst, Europe. 

"Following the Japanese model is not a guarantee that the EU will be protected from high energy prices. According to Japan's Ministry of Economy, Trade and Industry, prices of LNG used for thermal power generation and domestic consumption have been increasing since 2021 and surged in 2022 following Russia’s full-scale war against Ukraine." 

State aid measures for carbon capture and storage 

The European Commission has published a framework of state aid measures to facilitate net zero through industrial decarbonisation, renewable energy, and CCS support.   

The framework highlights that through a mixture of mechanisms – including funding for 30% of the direct investment, coupled with tax advantages through accelerated depreciation, loans or guarantees for 30-75% of the remaining costs, with additional EU and national-level support – up to 75% of project costs could be covered. 

While IEEFA welcomes the fact that any supported CCS project needs to evidence the permanent storage or use of the carbon, that no support will be provided for highly polluting fossil fuels such as coal, oil, diesel, and lignite, and that any fossil gas projects must ensure a phase-out or transition to hydrogen, we remain highly sceptical of CCS as a decarbonisation solution.  

A recent analysis by IEEFA of potential European projects highlighted that CCS is technically immature, that it will take a long time and likely won’t work, while costing the taxpayer over €140 billion to support the current project hopper. The scale of the risks presented by CCS is significant. 

“Relying on CCS as a climate solution will force European governments to introduce eye-wateringly high subsidies to prop up a technology that has a history of failure,” says Andrew Reid, Energy Finance Analyst, Europe. 

Decoupling electricity bills from gas price volatility  

To address the issue of expensive electricity caused by the unpredictability of natural gas (and other fossil fuel) prices, the EU Commission proposes to launch, among other measures, a pilot programme for corporate power purchase agreements with the European Investment Bank. This could help solve energy price exposure and provide stable long-term energy costs for industrial consumers, in IEEFA’s view. 

“Investors are more likely to find renewable power assets more attractive when these assets are backed by long-term  power purchase agreements. But they tend to favour large off-takers with strong credit profiles to reduce counterparty risks. In this case,  European Investment Bank guarantees could level the playing field by ensuring affordability for smaller and industrial off-takers, while promoting investment attractiveness of renewable assets,” says Kevin Leung, Sustainable Finance Analyst, Debt Markets, Europe. 

Improving the Carbon Border Adjustment Mechanism 

The EU dominates the global carbon pricing market despite having weak prices that currently limit the incentives for polluters to decarbonise. IEEFA expects the Carbon Border Adjustment Mechanism (CBAM) to have a material impact on major polluters globally, spurring them to lower emissions and leading to the introduction of new carbon pricing structures outside of the EU. 

The Commission has said it will publish a series of reviews related to the CBAM in 2025. 

The first is a simplification of CBAM reporting to reduce the administrative burden on businesses and focus attention on the largest polluters. Commissioner Wopke Hoekstra, in the Financial Times, suggests that 20% of companies in scope for the CBAM are responsible for 95% of emissions. The proposal aims to restrict the CBAM to the biggest importers, sparing most businesses the cost of compliance.  

Other initiatives include extending the CBAM to include EU Emissions Trading System sectors that are out of scope, and the introduction of the Carbon Markets and Carbon Pricing Diplomacy Task Force, which aims to support partner countries develop effective carbon pricing policies and approaches to international carbon markets. 

“Focusing initially on the largest polluters within the CBAM inherently makes sense, while we also welcome the Commission’s continued focus on broadening sector coverage and supporting international market expansion of carbon pricing policies and initiatives,” says Andrew Reid, Energy Finance Analyst, Europe.  

“Europe is the world leader in carbon pricing through the EU Emissions Trading System, a key policy instrument to meet net-zero commitments by making the polluter pay, redistribute the costs of global warming, and fund a fair transition. The CBAM effectively prevents polluters from offshoring emissions. By committing to its expansion, Europe is driving a global movement towards lower-carbon industrial production.”   

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