Climate transition: Saying yes to ambitious and realistic targets and no to economic decline

Devastating floods in the Greater Region, forest fires in the south of Europe, and record temperatures…. An accumulation of extreme weather events in Europe and around the world has dominated the news this summer. The conclusions of 230 experts from 60 countries that make up the Intergovernmental Panel on Climate Change (IPCC) are therefore not surprising: they show with an unprecedented degree of certainty and precision that the climate is changing more quickly than expected. This sixth assessment report, ‘Climate Change 2021: The Physical Science Basis’, published in August although drafting began in 2017-2018, warns that the critical threshold of 1.5°C (compared to the pre-industrial era) will have already been passed by around 2030. That is, ten years earlier than predicted in 2013. To keep warming below 2°C until 2030 and delay, or at least limit, the increasingly damaging and recurring effects of global warming, scientists are sounding the alarm and calling on the international community to act without delay.

Knowing that this report is supported by a range of evidence and powerful scientific models, there is no doubt that the consensus and conclusions drawn from it must be used as a basis for policy decisions at national and international level. All eyes will therefore be on the UN Climate Change Conference in Glasgow (COP26, November 2021), which aims at ‘uniting the world to tackle climate change’. Climate change has visible effects on all societies; this societal challenge needs to be addressed through concerted policies and coordinated actions by the global community. Innovative initiatives on more regional and local levels are complementary, thanks to their potential ripple effects, and can help to establish ‘best practices’ that can be emulated in the future.

Aligning ambitious climate targets …

Our country and its economic stakeholders did not wait for this latest IPCC report to lay the groundwork for its environmental transition.

Luxembourg set ambitious climate objectives in 2020: a 55% reduction in national greenhouse gas (GHG) emissions compared to 2005 in sectors not subject to the EU Emissions Trading System (EU ETS), and even carbon neutrality by 2050. This is a more ambitious objective than the 50% by 2030 objective imposed on Luxembourg by the European Commission’s ‘Effort Sharing Regulation’.

The national objective for an emission reduction of -55% is broken down into sectoral objectives and trajectories[1]. The different sectors have very heterogeneous emission profiles, as shown by the example of the transport sector, which currently emits more than all the other sectors combined (boosted in Luxembourg by the impact of the sale of petroleum products to non-residents).

Demanding legislation on the energy performance of buildings and the promotion of renewable energy, free public transport to encourage usage by the public, the ambitious policy of deploying recharging stations for electric cars, the opening of a hydrogen recharging station in the very near future, investments by industrial companies in the latest technologies available… these few examples testify to the determination of Luxembourg and its economic stakeholders to commit to the ecological transition.

The Grand Duchy can become a model to follow in its fight against global warming, if the country also continues to favour sustainable development in the future based on the economic, environmental and social triptych. Aiming for a climate or energy transition via economic decline, which would also lead to social decline, is not the way forward. On the contrary, there is a need to combine the reduction of emissions with economic and social prosperity, which is entirely feasible. Indeed, Luxembourg’s robust population growth between 2005 and 2017 (+28%) was accompanied by a 37% increase in GDP and a reduction in emissions of almost 25% in total, equivalent to a reduction of around 39% per capita.

… with the demands of the Luxembourg business model

The Luxembourg business model is resolutely oriented towards openness and the internationalisation of economic activities, based on the attractiveness of its legal, regulatory and fiscal framework and on the competitiveness of its structures, and focused on continuous economic and industrial diversification. This model ultimately depends on the dynamism and performance of the companies that generate the added value and wealth that can then be distributed to the population and used for the proactive policies implemented by the public authorities, including those on the environment. In short, our economy must be dynamic and continue to evolve and diversify, firstly in order to generate more revenue, which is essential to ensure the sustainable financing of green public investments, secondly, to stimulate research and innovation, and thirdly, to train young people well and attract new talent. Without these three components, the climate transition (supported by the digital transition) will take too long, and time is running out for us.

In order to sustainably diversify Luxembourg’s economic activities and strengthen existing companies, favourable framework conditions, economic attractiveness and incentives, and pragmatic and flexible support measures from the State are required. These solutions must be implemented quickly, while ensuring that any distortion of competition with foreign countries is avoided. These solutions must also aim to increase energy efficiency, while maintaining the attractiveness and competitiveness of our companies, especially after the crisis we have just been through. This is all the more important in a country that imports the majority of its resources and energy and must export its goods and services worldwide.

Many Luxembourg companies are trailblazers – they propose and implement solutions for the future

Companies have understood their role in sustainable development and the energy and environmental transition. The construction sector, which is building increasingly energy-efficient buildings, the industrial sector, which is investing in cleaner and more efficient technologies, and the transport sector, which is gradually ‘greening’ its fleets, are but a few examples. Many multinational companies and SMEs in the Grand Duchy are trailblazers and ‘first movers’ in the implementation of technological solutions promoting the reduction of emissions and the efficient use of energy.

The know-how and expertise of Luxembourg companies in the efficient use of resources will be highlighted at the Dubai World Expo (from 1 October 2021 to 31 March 2022), whose theme, ‘Connecting minds, creating the future’, is largely dedicated to sustainable development and the circular economy.

The Chamber of Commerce has also set up an economic programme for interested Luxembourg companies that want to promote their goods and services to an international audience and expand their markets around the world[2]. Interest from companies has been tremendous.

The same applies to the working group dedicated to sustainable development that the Chamber of Commerce has just set up to guide, advise and support its members throughout their journey towards, among other things, carbon neutrality. In a bottom-up approach, it aims to define sustainable development commitments and bring together all existing know-how and initiatives into a viable and pragmatic action plan to enable businesses to put their money where their mouth is. The action plan is being developed in close cooperation with leading companies in the transport, industry and finance sectors, as well as with trade associations and other partner organisations.

In addition to the international promotion of Luxembourg success stories, the awareness raising of companies and identifying new precursory and innovative solutions, SMEs must be supported through a stimulating framework, including specific, pragmatic and targeted measures to help them succeed in their energy and environmental transition.

Accelerating the climate transition via a stimulating framework for SMEs

A successful climate transition requires a favourable framework for SMEs and an ambitious incentives package to encourage them to innovate and make substantial investments, while being able to grow and remain profitable.

Switching from an emitting technology to low-carbon technology alone will not contribute to increasing productivity; this type of major investment for companies must be economically attractive, so as not to compromise their viability. While the change in technology does not necessarily or automatically imply an increase in productivity, factors such as the lack of visibility on the price of carbon make the calculation of a return on investment a real headache.

Adding legal or regulatory constraints to this increases the risk of not meeting our objectives, or of displacing the emissions and with them the economic activities that cause these emissions, which would be of no benefit from an environmental point of view on a global level.

The procedures for technology changes can be an administrative burden and the related authorisation procedures are often complex and lengthy to finalise.

In order not to delay the investments needed to reduce GHG emissions, policy makers must therefore accelerate the process of simplifying the relevant administrative procedures for companies (especially for SMEs), all while digitalising them. The same goes for investment authorisations in low-carbon technologies. To go further still, the introduction of additional tax relief, for example in the form of a super deduction for low-carbon investments, could also be considered, as is the case in France, in Italy and in the United Kingdom.

We also should not forget that today we do not necessarily know the technologies that will prevail tomorrow, which may be more efficient than the mature technology of today. In order to reduce the investment risks incurred by companies, quickly introducing a financing and risk management (‘de-risking’) instrument for projects related to the energy transition, as announced in the NECP, would be welcome. Furthermore, legislation and regulations should be flexible and follow the principle of technological neutrality. Research, development and innovation in green technologies must be facilitated and supported, while ensuring easy access to adequate financing, in particular for SMEs.

In conclusion, it is important that Luxembourg aim to be a leader in terms of climate transition and innovation in green technologies. The transition towards a climate neutral economic model should not, by any means, be carried out at the expense of Luxembourg’s growth and economic diversification, but, on the contrary, stimulate and energise it, through a framework for businesses and an ongoing dialogue between policy makers and economic stakeholders.

[1] The sectoral targets are divided into five sectors, thus covering all sectors, namely (1) the energy and manufacturing industry, and construction, (2) transport, (3) residential and tertiary buildings, (4) agriculture and forestry, and (5) waste and wastewater treatment.

[2] See the Expo 2020 Dubai economic programme here: .

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