This is an extract from a recent report “Net Zero Readiness Report 2023” prepared by KPMG. The Net Zero Readiness Report (NZRR) examines steps taken by 24 countries as well as key economic sectors to reduce the greenhouse gas emissions that cause climate change. It also discusses their preparedness and ability to achieve net zero emissions of these gases by 2050. In this extract, we specifically focus on Netherlands, Germany and Italy.
Netherlands has strong ambitions and national net zero policies, but is seeing significant implementation problems, with EU-driven requirements to cut nitrogen emissions leading to mass protests by farmers and delays to new renewable energy plants, along with a reluctance to subsidise emerging energy technologies. The Netherlands has included net zero emissions objectives in a range of national policies, including those on waste reduction, rural areas, energy and transport. The latest version of its decades-old Delta flooding and water management program includes preparing for extreme weather such as the torrential rainfall experienced in Limburg in 2021 across the country.
In 2019, the government, companies and organisations agreed a climate agreement as part of the country’s regularly updated climate plan. But the Netherlands is experiencing problems implementing some of these policies. A 2019 court ruling on reducing nitrogen emissions, which led to a plan to close around 11,200 livestock farms and significantly reduce the size of 17,600 more, resulted in widespread protests by farmers. A protest party founded to oppose these plans won more seats in March 2023 elections to the Dutch Senate than Prime Minister Mark Rutte’s party.
The nitrogen reduction rules have also blocked or slowed construction work, including some for new low carbon energy production. In July, the outgoing chief executive of the port of Rotterdam said that the need to apply for nitrogen emission permits is hindering construction of green hydrogen and biofuel plants by companies including Shell and Neste at the port.
The government focuses its energy development subsidies on improving existing technologies such as solar, offshore wind and carbon capture and storage, rather than emerging ones including green hydrogen and geothermal. “They are not risk-minded,” says Bob Hoogendoorn, Director of Sustainability, KPMG in the Netherlands. “They are really careful about where they spend their money, but that means you often make stronger what is already strong, making it difficult to develop new ideas.”
For example, the Netherlands has made strong progress on developing solar power production but there are physical and administrative constraints in grid infrastructure. This means that in some areas the grid network operator will not allow new or expanded connections, which particularly affects new onshore wind parks, installation of solar energy and expansion of charging infrastructure for electrical vehicles. As a result, more energy storage capacity and innovation to develop this further will be a key part of the Netherlands’ energy transition.
The country faces issues with its carbon pricing system, which gives some industrial exporters advantages which can work against smaller companies in the food processing sector, although international competition and EU policies are counteracting this. Meanwhile, the implementation of the EU’s Corporate Sustainability Reporting Directive, requiring companies to report on climate change as well as other impacts on the environment and society, is likely to accelerate corporate decarbonization work and should motivate government agencies to do likewise.
The Netherlands also has the potential to develop carbon capture and storage, alternative construction materials and work to save energy. It has made significant progress on saving energy recently due to high energy prices, something which is an essential part of meeting decarbonization targets and making a success of the energy transition.
Germany has committed itself to decarbonize its economy swiftly, and most political parties and industries including automotive are strong supporters of this aim. However, there is debate over the pace. The country needs to find ways to increase clean electricity and housing efficiency.
Germany’s politics provide strong support for its shift towards net zero. The country’s Green party and people across society provide relatively high levels of consent to pursue environmental goals. Germany also hosts well-functioning capital markets and a wealth of technical innovators, giving companies access to the funding and expertise needed to decarbonize their operations.
Key industries including automotive are changing rapidly. Vehicle makers across the EU are required to stop selling cars that emit carbon dioxide by 2035, but the country’s largest manufacturer Volkswagen is moving faster with more than two-thirds of its EUR 180 billion (US$191 billion) 2023–27 investment budget allocated to electrification and digitization. The company expects that a fifth of the vehicles it sells will be all-electric as early as 2025, compared with just 7 percent in 2022.
“There is a large effort to move to electrification of passenger vehicles,” says Goran Mazar, Partner, EMA and German Head of ESG and Automotive, KPMG in Germany. “It is not a question of whether we go for electrification of passenger vehicles, it is about how fast we get there.” Manufacturers are investing in green hydrogen generated with renewable energy as the replacement fuel for commercial vehicles that need more power than batteries can provide.
The automotive sector is also adopting circular economy techniques, which aim to minimise waste such as through repairing, reusing and recycling. Mazar says that a new EU directive on electric vehicle batteries which mandates their recycling should reduce emissions as well as reducing the sector’s dependency on imports of raw materials for batteries, supporting the shift to electric vehicles.
Germany’s economy is strongly focused on manufacturing compared with many other developed countries. Moving energy-intensive sectors including automotive, steel and chemical production and processing from fossil fuels could mean the country needing three times as much electricity over the next decades as today. The country has increased low-carbon production from a low base to generating nearly half of its electricity, but maintaining this momentum could be challenging. The strongest potential for wind generation in Germany is in the north of the country and off its northern coastline, but demand is mainly in the middle and south, which will require new grid infrastructure.
Germany is unlikely to develop new nuclear power generation as this is not supported by the main political parties in either government or opposition. Decarbonizing residential property faces similar practical issues. The German government’s plans to require all new domestic heating systems to run on at least 65 percent renewable energy, effectively blocking the installation of new gas-fired boilers, ran into significant public opposition leading to exemptions such as for boilers that could be converted to run on hydrogen. More broadly, the current form of an unfinalized EU directive would require 30 percent of residential buildings with the lowest energy efficiency ratings to undergo upgrades by 2030. “That cannot be done by the owners of these properties alone,” says Dr Stefan Otremba, Partner, Risk and Compliance Services, KPMG in Germany, adding that government subsidies or incentives are likely to be needed.
For companies in particular, the pressure to find ways to decarbonize will likely continue to increase. From 2024, the EU’s Corporate Sustainability Reporting Directive will require the largest listed companies to publish much more detailed information on environmental and social issues and this requirement will eventually cover some 15,000 German companies.
These are part of an international movement, with the International Sustainability Standards Board recently publishing its first two standards to aim to coordinate these globally.
Italy has strengths in energy efficiency and it plans to become a hub for green hydrogen, but difficulties gaining authorizations to develop new power generation and renovate homes, particularly older and historic ones, pose challenges.
Italy has made strong progress on energy efficiency, with the International Energy Agency (IEA) noting in a recent report that since 2010 energy demand has decoupled from economic growth and that the country is on track to reach its 2030 national target in this area. The country is also planning to end use of coal to generate electricity by 2025 and may manage this in 2024, its environment minister Gilberto Pichetto Fratin said in June. It increased its use of coal in 2022 to provide alternatives to gas imported from Russia, but the country intends to increase the proportion of electricity generated from renewables from one-third to two-thirds by 2030, he added, although there are no plans to reintroduce nuclear power after the country voted to abandon it in a 1987 referendum.
The government is focused on developing green hydrogen produced from renewable energy, based partly on Italy’s location between northern Africa and central Europe. In June, the German Chancellor Olaf Scholz and Italian Prime Minister Giorgia Meloni agreed to a pipeline that could carry hydrogen as well as natural gas between their two countries, following an announcement in May by the Italian, German and Austrian governments supporting a SoutH2 Corridor hydrogen-ready pipeline system that would stretch 3,300 kilometres between Italy and northern Africa. In June this year, French energy company EDF’s Italian subsidiary Edison opened a renovated natural gas-fired power station near Venice that can run partly on hydrogen, which was presented by the government as a strategic development in the country’s energy transition.
However, some obstacles are slowing the development of new energy generation, while infrastructure aimed at capturing and storing carbon dioxide is limited or still to be developed. “Authorization processes slow down the development of new installations,” says Stefano Giacomelli, Associate Partner, KPMG in Italy. Building a new solar photovoltaic plant requires the involvement of many stakeholders and institutions that can take a long and unpredictable time to complete their work, he says, with plans influenced by the presence of nearby historic sites in a country that has many of them.
Italy has already achieved some progress in decarbonizing buildings. The IEA says that energy consumption is falling for residential and commercial property, with the sector expected to provide 60 percent of overall annual energy savings, encouraged through government policies designed to encourage refitting existing buildings. Giacomelli says that further progress may be challenged by the age of many Italian homes that were built before energy saving regulations were introduced, meaning they require renovation, and this will be harder for those of historic importance. There are also conflicting demands on the government to provide more social housing.
The country’s industrial users will be affected by the withdrawal of almost all free allowances under the EU Emissions Trading Scheme and the transition to the bloc’s Carbon Border Adjustment Mechanism. Riccardo Lucarelli, Assistant Manager — Sustainability & Climate Change Services, KPMG in Italy, says it will be important to ensure that these changes encourage decarbonization in a targeted way, such as through developing green hydrogen and carbon capture and storage.
Access the complete report here