The Economic Case for Decarbonisation in SE Europe

Lessons from studies for Slovenia, Niš and Skopje

Summary
Developing an economic case for the radical change a community wants to achieve helps us to see and communicate the scale of investment really needed and the economic value of these investments.

We have done initial economic case analysis for the mission of achieving climate-neutrality by 2030 in the cities of Skopje and Niš, and for Slovenia on a national scale. Here we summarise the combined results of these studies to provide some indicative findings on the general economic case for decarbonisation in south-east Europe.

The three assessments were based on similar ‘net zero’ scenarios that would achieve 76–97% greenhouse gas emission reductions in transportation, buildings and heating, electricity and waste sectors by 2030 (43–50% of total community emissions).

The key findings from these economic case assessments are:

• Radical climate action is not a cost — it would be a significant investment with excellent returns. In each place the overall economic case breaks even when considering only direct energy cost savings (30–50% returns). The return on investment is 215%–300% when health benefits are also included.
• The per capita investment required for radical urban decarbonisation in south-east Europe appears to range from €6-9k/citizen. Cities can use this as an indicative guide in the interim, until they can complete economic case analysis for their own specific context.
• 6–10 job-years of employment would be created for each €1 million of capital investment.
• This transition keeps more money in the local region, as less cash flows out to pay for fossil fuels. Climate action is good for both the local economy and energy security.
• This economic case has been focussed on the mission of decarbonisation, but the results show that action could equally be framed as a mission for healthy and energy secure communities, with decarbonisation as the bonus.

Our reflections and insights from this work are:

• The overall positive social value case for decarbonisation, better health and cheaper, local energy is still disconnected from decision making of actors considering specific project business cases in today’s economy. This is a key reason why so much needed action is not happening, and this has to be solved for.
• Health benefits are generally very poorly valued and accounted for when considering community investments, but they are key to the overall value equation for communities.
• The significant potential for job creation from these investments will need systemic skills support, otherwise there will not be sufficient skilled people to fill the jobs and do the needed work.
• Extending this analysis would be beneficial — especially testing other pathway scenarios and including more sectors in more places.
• The scale and speed of investment in climate action needed to achieve the mission is orders of magnitude larger than what most communities are currently managing. But, as the upsides come from better health and cheaper energy services, why should the citizens have to wait? Radical improvements in local capacity, governance, organising and investment models will be needed in order to quickly turn the potentials into reality.

Background

Thriving Communities is a collective initiative working to help communities to create radical enough change to thrive in the 21st century. We focus on working with communities in south-east Europe.

One critical enabler of radical change will be communities investing financial capital at a much greater speed and scale than they have managed before, and in ways that much better distribute the returns.

We help communities to create Transformative Investment models that can make this possible. A key step in this work is developing an economic case for the change a community wants to achieve. This helps us to see and communicate the scale of investment really needed and the economic value of these investments.

So far we have worked with the team from Material Economics to analyse the economic case for a mission to achieve climate-neutrality by 2030 for the cities of Skopje and Niš, along with Slovenia on a national scale. Material Economics have also done similar analysis for a number of other cities across Europe. These studies have been made possible thanks to support from EIT Climate-KIC.

For each study we targeted a net-zero pathway by modelling a scenario covering the following sectors:

• Transportation: electrification of passenger cars, buses, and local freight; reduced passenger transport demand and increased car pooling; mode shifts to public and non-motorised transport; and optimised logistics.
• Buildings and heating: highly energy efficient new buildings; building envelope, lighting and appliance retrofitting; replacement of wood burning and fossil fuels in local heating; replacing fossil fuels in district heating.
• Electricity: utility-scale solar and wind generation, rooftop solar installations and enabling storage and grid infrastructure.
• Waste: increased waste sorting and recycling; increased centralised incineration with energy recovery.

These sectors made up 52–57% of total community greenhouse gas (GHG) emissions across the three cases, as shown in the following graphs (note, these graphs show similar proportions, but they are not to the same scale, the numbers at the top show the total quantity of community GHG emissions).

Combined Results

The ‘net zero’ pathway scenarios modelled for each case resulted in projected emission reductions as follows:

The investment required to achieve these reductions came to the following (total and per capita):

When we did an approximate extrapolation for the city of Maribor from the Slovenia case, we reached a per capita investment requirement of €8.700 (the sectors analysed for the national case are more closely aligned to the change that needs to happen in urban environments, so we assumed that Maribor would need to make a greater than per capita share of these national investments and reap a greater share of the benefits).

When we did a similar exercise for Sarajevo, we took the average investment needed in Niš and Skopje, which is €6.300 per capita.

This is clearly not an exact science, but indicatively we can see that the per capita investment required for radical decarbonisation in key urban sectors in south-east Europe ranges from about €5k in Skopje to around €9k in Slovenia. We suggest a range of €6-9k per capita is a reasonable assumption for other cities in SE Europe to use as an indicative guide until they can complete this analysis for their own specific context.

The figures below show the total economic case for Niš, Skopje and Slovenia. We can see that in each place the overall economic case already breaks even when only considering direct energy cost savings (30–50% returns). The return on investment is then much greater when health benefits are included (215%–300%). Radical climate action is not a cost — it would be a significant investment with excellent returns and healthier communities.

There are also other important projected economic benefits that the economic case analysis shows up, including:

1. For each €1 million of investment 6–10 job-years of employment would created. Ranging from an estimated 7.300 job-years for decarbonising Niš to 105.000 job-years for decarbonising Slovenia.
2. The transition away from fossil fuels achieved in this process means that in all cases the economic outflows to international markets is reduced, and more money is kept in the local regional economy. This good for both the local economy and energy security.

Challenges Getting from Theory to Action

The Niš, Skopje and Slovenia economic case analyses help to show a clearly positive overall economic case for decarbonising communities in SE Europe. However, real action is obviously still not aligned with these pathways. Some further parts of the economic case analysis help to show us why.

When we arrange the analysis by action-areas into the an abatement cost curve, we see that many actions have clearly positive economics (they are below the line in the graph), even with only energy savings considered. However, many are marginal or slightly negative. Adding health benefits moves most actions into the economic side, but the reality is that these social benefits are still not monetised in today’s economy. This is shown below for the example of Slovenia.

However, a mission-led approach demands that we find ways to get all of these things done. We can’t just do the easier things and ignore the more economically marginal things.

The graph above (also for Slovenia) then shows how the total costs and benefits do not accrue evenly across different actors in the community. This makes the problem worse again. Some actors would have to pay more than they gain directly in the current system. So we can’t be surprised that action isn’t taken. We need to recalibrate this disconnect between social value and who is expected to act and invest.

Reflections

The economic case analysis we have done so far shows an enormous opportunity for decarbonisation in SE Europe. The following are some of our key reflections and insights from this work.

• This economic case has been focussed on the mission of decarbonisation, but the results show that it could equally be framed as a mission for healthy and energy secure communities, with decarbonisation as the bonus.
• The overall positive social value case for decarbonisation, better health and cheaper energy is still disconnected from the decision making of specific actors considering specific project business cases in today’s economy. This is a key reason why so much needed action is not happening, and won’t happen without doing things differently. The disconnect in the current economy between who should act/invest and where the benefits of climate action accrue has to be solved for, otherwise communities will keep missing out on the potential benefits.
• Health benefits are generally very poorly valued and accounted for when considering community investments, but they are key to the overall value equation for communities. Our work has already highlighted this, but more work is needed to better quantify health and wellbeing benefits, and then connect these benefits into investment decision making.
• Investment in climate action brings significant potential for job creation. This will demand systemic skills development and careers support, otherwise there is a high risk that there will not be sufficient skilled people to fill the jobs and do the needed work (with flow on impacts on costs and implementation speed). This is a opportunity to help younger people into climate-friendly work, as well as for the just-transition of communities where work is still dependent on high-carbon industries.
• Extending this analysis would be beneficial — especially testing other pathway scenarios, including more sectors, focussing on more places, and analysing other community missions (for example holistic neighbourhood transformation, regenerative food production and bioeconomies).
• The scale and speed of climate action needed to achieve the mission is orders of magnitude larger than what most communities are managing. Yes, much hard work will be needed to make it happen. But, as the upsides come from better health and cheaper energy services, why should citizens have to wait for this? Radical improvements in local capacity, governance, organising and investment models will be needed to quickly turn the potentials into reality.

For more information please contact: Tim Taylor: tim@korimako.org