Driving change: The decarbonisation of European transport

We are delighted to announce the launch of our latest thought leadership report: Driving change: the Decarbonisation of European Transport. 

Our new study, in association with Acuris Studios, surveyed 100 senior executives of organisations based in Europe that have invested in European decarbonisation projects and/or technologies related to aviation, rail or shipping in the past 24 months.

Decarbonisation is now a primary investment strategy driver for aviation, rail and shipping businesses. And as this study reveals, the pace of investment is accelerating. Over the next two years, more than a third of corporates and two-thirds of investors are looking to allocate EUR1 billion or more to decarbonisation efforts – proportions that are significantly higher compared with the past two years.

Transport is the bedrock of modern economies. It is also a major source of carbon dioxide emissions. To put this in context, nearly a quarter of Europe’s CO2 emissions – more than a billion tonnes a year – are generated by transport, according to European Union research. And transport emissions, unlike those from other sectors, are rising rather than falling.

Our report examines decarbonisation strategies in these three key transportation subsectors. We explore how both corporates and investors plan to cut emissions, their ambitions and investment plans, and the impact of government policy and new technologies. We also examine the steps they are considering as they look to optimise their investments and minimise risks. 

Key findings

• Decarbonisation high on the agenda: 79% of respondents say that decarbonisation is a primary driver of their organisation’s investment strategy
• Capital allocation rises: 34% of corporates and 66% of investors expect to devote at least EUR1 billion to decarbonisation projects and technologies over the next 24 months, versus 20% of corporates and 48% of investors over the past 24 months.
• Investment increases: The majority of respondents across all subsectors anticipate significant increases (between 50% and 200%) in their investment in decarbonisation over the next five years compared to the past five years.
• Ambitious plans: More than half of corporates (across all three subsectors) say that their organisation plans to cut net carbon emissions by at least 40% by 2030 compared with current levels.

We also held a panel discussion and live Q&A with senior representatives from the transport and investment industries on Tuesday 16 November, to assess the findings of this report.

Breathe easy: the drivers and challenges of decarbonisation

“Cut emissions now” is the message from the EU. Our survey reveals that those in the sector are hearing this loud and clear, but there are still obstacles to overcome.

While there is a large – even bewildering – amount of guidance and legislation linked to decarbonisation, all of it is designed with a single purpose: to ensure the EU is climate neutral by 2050. Transportation is one of the biggest sources of CO2 emissions. Unlike other sectors of the economy, it has – so far – largely escaped regulatory measures to curb emissions. But that is about to change. Under its “Fit for 55” climate package, the EU is now targeting an emissions reduction of at least 55% by 2030 compared to 1990 levels.

Achieving the new target will mean a major revision of transport-related legislation. This will include an expansion of the EU’s Emissions Trading System (EU ETS). The proposals are ambitious: these include bringing shipping into the EU ETS for the first time, along with an end to the tax exemption for aviation fuel.

“The call to decarbonise the industry will doubtless come at some significant cost, with a diverse range of approaches to reaching that objective. The way in whichsuch significant capex is financed is clearly a topic in itself and the traditional asset ownership models may require evolution and adaption.”

David Manson, DLA Piper Partner, Manchester

A large majority of respondents from aviation (82%), rail (79%) and shipping (85%) agree that decarbonisation is a primary driver of their organisation’s investment strategy. Aviation – arguably the toughest subsector to decarbonise – stands out as having the highest proportion of respondents saying that they strongly agree that decarbonisation is a primary driver (59%), versus 49% each for rail and shipping.

Respondents are backing up their words with capital. Our survey shows that many have already made significant investments in decarbonisation. To put this in context, 20% of corporates and 48% of investors have allocated EUR1 billion or more to decarbonisation projects and technologies over the past 24 months.

Looking ahead, large-scale investment is set to grow even further: 34% of corporates and 66% of investors are looking to allocate at least EUR1 billion to decarbonisation over the next 24 months. And there is a broad range of investors who see transport as an attractive asset, particularly in a world transformed by COVID-19.

“Private capital funds (infrastructure funds) and institutional investors (pension funds and insurance companies) have been, and are likely to continue to be, the types of investors with appetite for transport assets.”

Jasna Zwitter-Tehovnik, DLA Piper Partner, Vienna

Decarbonisation dilemmas

All long-term investments come with an element of risk. But decarbonisation-related investments in the transport sector present particular challenges. History shows that decarbonisation targets are apt to be revised. What would happen to the value of your investment (and to your competitive position) if the emissions target you are working to is subsequently increased or brought forward – or even shelved?

In the rail industry, for example, while the use of overhead electrification brings benefits beyond simply meeting emissions targets, there are other aspects which may cause more issues. 

“There is potentially more complexity in decarbonising other assets including replacing diesel trains on branch lines and de-carbonising the construction processes for rail systems. Changes in targets here may add unnecessary cost into processes which already take a number of years to complete.”

Robert Smith, DLA Piper Partner, Leeds

The longevity of transport assets amplifies these risks. Aircraft have a lifespan of around 20 years, while ships typically last from 25 to 30 years. Meanwhile, a train built today could still be in service in 2061.

In short, transport assets have a lifespan that typically extends far beyond the range of current policy horizons. Managing this situation is complex, given that an investment decision made today is likely to lock in a predetermined level of emissions for decades.

Getting investment decisions wrong is an area of real concern for respondents. Indeed, our survey shows that a surprisingly high proportion says that their businesses have already suffered due to poor decarbonisation investments. Half of aviation respondents and a third of rail and shipping respondents say their organisation suffered financially from a decarbonisation-related investment that later proved to be ill-judged.

Significantly, a majority of executives say that mistakes made by their organisation were avoidable. Sixty percent of the respondents that suffered financially believe that with better preparation, the error could have been avoided.

“We could have used external help in answering some of the critical questions. These were related to the decarbonisation strategy and the scientific findings. We should have involved more experts.”

Head of Finance of a Spain-based aviation corporate

Sector Watch

Aviation, rail and shipping respondents are united in their ambition to decarbonise their industries. But the way in which each sector is looking to deliver decarbonisation is different. One reason for this is that each subsector faces radically different technical challenges. Another is that regulatory requirements differ between subsectors.

A key factor here is the proposed expansion of the EU’s Emissions Trading System (EU ETS). This will expose aviation and shipping to carbon pricing for the first time. By contrast, rail (a low emitter) will remain outside the EU ETS.

The prospect of tighter regulation is having an impact on investment plans – particularly those of aviation and shipping corporates, who expect to substantially increase their investment in decarbonisation projects in the next five years.

Regulatory pressures are not the only investment driver. There are market forces in play as well – notably carbon prices. These have risen sharply in the past year. To put this in context, the EU ETS carbon price reached EUR60/ tonne for the first time in August 2021 – a near doubling since January – while the UK Emissions Trading Scheme carbon price climbed to its highest ever level (GBP64.75/ tonne) in September 2021.

Critically, our survey reveals that most respondents are sensitive to a carbon price that is considerably lower than this. Indeed, a majority of respondents (across all three sectors) say they require a minimum price of EUR50/ tonne or less to impact on their investment strategies. This threshold has now been decisively exceeded – suggesting that for more than 75% of respondents (were they to be within the EU ETS), it would now be cheaper to invest in decarbonisation than to purchase emissions allowances.

“Aviation is a highly regulated sector and change does not always happen quickly. The proposed technical advancements necessary for decarbonisation (sustainable aviation fuel, electrification, modernisation of airspace management) will require significant regulatory development. Accordingly, a roadmap must build in adequate time for ongoing engagement with key regulators around the world.”

Tony Payne, DLA Piper Partner, London

Conclusion: For a cleaner future

“Smaller companies do not have the internal expertise to guide their efforts. There is a vague idea about the climate and energy framework and most of the objectives are not widely understood.”

Head of Finance of a German-based corporate 

Decarbonisation is now a primary investment strategy driver for aviation, rail and shipping businesses. And as this study reveals, the pace of investment is accelerating. Over the next two years, more than a third of corporates and two-thirds of investors are looking to allocate EUR1 billion or more to decarbonisation efforts – proportions that are significantly higher compared with the past two years.

The benefits of decarbonisation – lower emissions, regulatory compliance and potentially lower operating costs – are clear. But there are risks too. Tighter regulatory deadlines mean that both corporates and investors are under pressure to make investment decisions more quickly. There are also questions around the maturity of the technology and how easily it can be deployed. Overarching all of this are concerns about the complexity of the regulatory environment.

Read the report to learn steps that both corporates and investors can take to optimise their investments and minimise risk.

“We have a target year for decarbonising different processes within the organisation – we have to meet these targets to achieve our 2050 goals.”

CEO of a Denmark-based corporate

Webinar

We recently organised a live webinar for clients, to assess the findings of the research. Our partners, Tony Payne and Robert Smith, were joined by senior figures from Arup, APM Terminals, the FT, Manchester Airports Group (MAG), the DfT and NetJets Europe. The speakers and their different perspectives provided a stimulating and thought-provoking discussion of the issues, offering real substance and valuable insights into this crucial and timely topic.

Discussion points included:

• Should investors/corporates hold back on major decarbonisation investments until new rules are finalised?
• What are the main mistakes corporates and investors make with decarbonisation investments – and how can these be avoided?
• Which decarbonisation technologies/trends are generating the most interest?
• Are there enough incentives to encourage investment into decarbonisation in the transport industry?
• What should the roadmap to net zero by 2050 look like, to avoid a stampede to the finish and to provide a timetable for action?
• How do you decarbonise the logistics chain without offsetting carbon emissions?
• How important is government policy in driving decisions made by the private sector and by investors to prepare for net zero?

The full findings of the research are available in our report, which can be accessed below, as well as a recording of the webinar.

We hope you enjoy the Report.