Mandatory Quotas
Binding targets set on an industry requiring a specified level of uptake of low or near-zero carbon commodities, thereby increasing demand.
Mandatory Quotas
Quotas can start relatively low and ramp up over time as supply scales up and becomes cheaper giving the industy time to adapt to the new requirements. They can be set as a percentage of total consumption of the commodity (%), or by volume (e.g. MT). These measures have been applied to support the introduction of biofuels and electric vehicles in various jurisdictions. In the long term, these can be increased to effectively ban a commodity. For example, Denmark aims to eliminate all fossil-fuelled domestic flights by 2030. Bans could also be implemented at the point of supply, e.g. other studies explore the impact of phasing out unmitigated coal-based blast furnaces.
At least initially, it can be challenging for all impacted stakeholders to meet such quotas, as the supply of many of the commodities in question is likely to be constrained to a limited number of facilities. Therefore, it is usually crucial that quotas are implemented in conjunction with a flexibility mechanism (e.g. a book and claim mechanism).
For example, for every unit of a low carbon commodity used, tradable certificates would be issued. The regulatory authority would define a compliance window, at the end of which companies would need to surrender enough certificates to correspond to their overall consumption, or pay a fine for non-compliance and/or a buyout. Companies using a surplus of low or near-zero carbon commodities could monetise this by trading certificates with companies that fall short.
Demand creation potential rating by sector
We have developed an indicative rating of the green demand creation potential of each policy by sector, based on the share of demand it can apply to, and its potential impact on an indicative business case. Depending on local/national context, this may be more or less impactful in different sectors.
Based on these criteria, mandatory quotas are deemed as high priority across all sectors, given they can cover a large percentage of the market, send clear demand signals to suppliers, and can effectively help create a differentiated market for green products.
Note: Maritime: these would need to be set on fuel suppliers and/or apply to domestic users only. For international shipping, they would be subject to multilateral measures e.g. implemented by the IMO
Key Attributes: Mandatory Quotas
Carbon leakage risk
International transport and heavy industry are subject to global competition. In transport, risks include tankering¹ for aviation and relocation of trips or stopovers to ports/airports outside of the mandate's reach. For materials, value chains could shift to regions with less stringent regulations. Complementary policies (e.g. subsidies or border controls) may be needed to mitigate these risks.
Technology agnostic
Mandatory quotas typically apply to specific products and fuels that conform to a pre-determined standard - to ensure uptake and intended climate impact is achieved.
Ability to ramp up over time
The mandated percentage or volume of decarbonised commodities can start at a manageable level (while costs are high and supply is limited). They can be gradually increased over time as low and near-zero carbon options scale and production costs are reduced.
Burden of cost
Industry bears the burden of meeting the mandates or paying buyouts/penalties. Proceeds could be re-invested in clean technologies. Industries facing international competition may become less competitive and will need to adapt or receive government support.
Long-term stability
Quotas can be set with a long-term time horizon, increasing the certainty for producers of low and near-zero carbon commodities.
Complexity
Complexities include the need to ensure that quotas are set at a manageable level for industry, while also driving additional demand, as well as implementing suitable enforcement mechanisms and determining complementary policies to support scale up
1: tankering is the practice of carrying extra fuel on airplanes to avoid paying higher prices on arrival
Deep Dives & Case Studies
Decarbonisation levers incentivised by policy
(see lever details in Annex 1)
In addition to the following decarbonization levers, construction industry companies can consider other
levers such as design optimisation, material substitution, digitisation and opting for energy efficiency equipment.
Note: Efficiency of use: efficiency is indirectly incentivised due to SAF blending increasing the overall cost of fuel.
Key considerations
- Blending levels: several countries have imposed binding quotas on the aviation sector to consume a share of SAF that increases over time. Given SAF is currently two to five times more expensive than conventional jet fuel, blending levels have typically been set to start at or below 10% and to ramp up over time. Quotas for SAF should ensure that sufficient lead times are given to allow scale up of SAF pipelines. It may take four to seven years, or more, for SAF plants to reach operations following final investment decisions. They should also be matched against a technically feasible ramp up of supply to ensure achievability, taking into consideration feedstock availability (by different SAF types), maturity of the value chain, and supporting infrastructure.
- Support for nascent technology: due to limits in the overall supply of sustainable biogenic feedstocks, more nascent SAF production (e.g. e-SAF) pathways are expected to be necessary in the long term. To ensure these options are also supported, policies may include sub quotas to enable nascent technologies to scale up.
- An enforcement body will be needed to ensure compliance, with penalties/buyouts set at a high enough level to make SAF adoption the more attractive option. Setting these at appropriate levels may be difficult due to a lack of market data (e.g. for emerging technologies such as e-SAF). Revenues from financial enforcement can be used to support scaling low-carbon solutions.
- Risk of carbon leakage: SAF mandates will increase the cost of aviation. Because aviation is exposed to international competition, this may result in market distortions that could result in carbon leakage (e.g. tankering practices). Measures can be put in place to mitigate such risks (e.g. financial support for users of SAF).
- Complementary policies: carbon taxes and reduced subsidies for fossil-derived fuels can complement quotas for SAF. Measures focussed on increasing the supply of SAF (for example, prioritising production of SAF over renewable diesel, offering low-cost loans and supply-side subsidies) and demand side subsidies can all support the effective delivery of mandates.
- SAF mandates may be particularly well suited to countries that have access to significant potential supplies of sustainable biogenic feedstocks (and/or clean hydrogen), and countries with a significant demand for aviation fuel - where increasing the use of SAF can contribute to energy security goals.
Sources: S&P Global, WEF Clean Skies for Tomorrow, MPP Making Net Zero Aviation Possible.
Case study: ReFuel EU Aviation
Examples of key enabling initiatives/ detailed studies
Decarbonisation levers incentivised by policy
1: Chemicals- Efficiency of use: optimal application of chemical products to reduce overall associated emissions
2: Maritime & Aviation - Efficiency of use: improving fuel efficiency by optimising routes, speed and other operational practices
3: Maritime - SZEF: SZEF means ‘scalable zero emission shipping fuel’ and includes zero/near-zero emissions methanol and ammonia
Key considerations
- Ramp up over time: clean hydrogen quotas should increase in over time, depending on a country's climate goals and considering the availability of supply. They could include sub-mandates by sector. The cost of hydrogen is expected to decrease over time as production scales, so a gradual ramp up can balance the impact of costs further down the value chain. The exact levels should be signposted well in advance to ensure sufficient lead times are given to allow scale up of low carbon hydrogen supply. For example, it may take four to seven years or longer for decarbonised hydrogen plants to reach operations following FID.
- Sectoral coverage: there are important sectoral differences in the changes needed to adopt green products (e.g. sectors that use grey hydrogen today such as refining and fertilisers, versus sectors that will transition to using clean hydrogen, such as steel and shipping), as well as the impact on consumers. For example, farmers often have tight margins and fertilisers can make up a large share of their operating cost. As such, it may be difficult for them to manage the premium associated with green fertilisers, made from green ammonia. Furthermore, the knock-on costs of using green fertilisers could impact downstream sectors, e.g. competitiveness in the food industry. Additional support mechanisms to support end users may therefore be needed in parallel.
- Enforcement: an enforcement body may be needed to ensure compliance, with penalties/buyouts set at a high enough level to make clean hydrogen adoption the most attractive option. Given the nascency of the hydrogen market, with relatively little real-world pricing data, it may be difficult to set these accurately. Revenues from financial enforcement can be used to support scaling low carbon solutions.
- Imports: hydrogen derivatives such as ammonia are traded internationally today. Therefore, imports should be covered under quotas to create a level playing field and avoid carbon leakage. At present there are a limited number of ammonia terminals worldwide so monitoring imports at some stages of the value chain effectively may be feasible (this would however be much more challenging for end products like food).
- Complementary policies: these may be needed to support underpinning hydrogen/derivative transportation infrastructure, support downstream users and reduce carbon leakage risks.
- National context: such mandates may be particularly well suited to countries that have access to significant existing demand for grey hydrogen - that can be required to switch over to decarbonised hydrogen. Otherwise, policies could focus on applying mandates for imported downstream products. For countries with strong hydrogen production potential, but low existing demand, measures to build domestic hydrogen demand could be adopted in parallel with the added benefit of improving energy security or a dependence on imports (e.g. India is seeking to displace all ammonia-based fertiliser imports by 2034-5).
Sources: India National Green Hydrogen Mission, European Union Renewable Energy Directive
Source: Figure adapted from McKinsey & Co and Energy Transitions Commission for MPP: Net-zero steel in construction: The way forward
Case study: Renewable Energy Directive (RED) III
Decarbonisation levers incentivised by policy
1: Steel & Aluminium - Efficiency of use: Refers to the optimal use of the material to reduce the overall embodied emissions of a product
2: Aluminium - Low/near-zero carbon primary production: Adopting production technologies with a lower carbon footprint (e.g. using clean power for aluminium smelting, inert anodes and/or mechanical vapor recompression (MVR))
Key considerations
- Novel instrument: though these have not yet been implemented in these sectors, quotas for the use of low/near-zero emission materials could work in a similar way to blending mandates set for biofuels and quotas for zero emission vehicles. This would involve requiring that a percentage of material(e.g. steel, cement or aluminium)
used by companies within a jurisdiction, and/or a specific sector, conforms to a given low carbon or near-zero standard. Sub-mandates could be used to support specific technologies. Ideally, a book and claim system would support this, i.e. for every unit of compliant material used, tradable certificates would be issued. The overseeing regulator would define a compliance window, at the end of which companies would need to surrender a corresponding number of certificates to their overall material consumption, or pay a fine and/or buyout. This would allow companies that produce a surplus of low carbon or near-zero carbon materials to monetise this by trading certificates with companies that fall short, creating a valuable revenue stream for early plants.
- Ramp up over time: quotas should increase over time, depending on the country’s climate goals. As supply scales up, the cost of low and near-zero solutions across these sectors is expected to reduce over time - and as this happens the shares mandated can be increased.
- Stage of the value chain: whether quotas could be applied to end-use industries, suppliers or intermediate players, or a combination of these actors, would need to be considered.It may be easier to apply quotas to a market segment that is more concentrated, for ease of enforcement. Furthermore, quotas place a burden on industry players to absorb the green premium, so the feasibility should also be assessed based on the buyers’ ability to pay.
- Risk of carbon leakage: to mitigate the risk of carbon leakage, importers of the relevant commodities into the jurisdiction would also need to ensure they are certified low/zero emissions.Where downstream products containing the commodities are imported, further measures covering embodied content may be necessary. For widely traded commodities/products, especially complex end products, this may be challenging to implement.
- Substitution: such quotas would increase the overall costs of the relevant commodities. This may drive increased material substitution in end products. Depending on the materials substituted and specific end products, these could either drive lower or higher overall emissions.
- End-user markets: quotas could be applied to specific end-user markets, tailored to lower risks of carbon leakage or inappropriate substitutions. For example, in the automotive sector, there would be very limited substitution options for metals (though a green steel quota could increase the share of aluminium used in a vehicle).
- Scale of jurisdiction: the more facilities that are within scope of the regulation, the easier it would be to establish a functional market for trading certificates and hence to share the cost across multiple producers. Therefore, such a measure is particularly well suited to large jurisdictions.
Sources: Colombia Centre for Energy Policy, Centre for European Policy Studies (CEPS)
Examples of key enabling initiatives/ detailed studies
