Net-zero Spain: Europe’s decarbonization hub

| Report

In a world that is accelerating efforts to combat climate change and in the midst of increasing economic and geopolitical uncertainties, Spain could play a starring role. The country’s rich natural resources, developed infrastructure, and deep technical capabilities mean it is ideally situated to lead a green transition. Our analysis has identified five key characteristics for this transition (exhibit): It is urgent, given the potential physical risks associated with rising temperatures. It is possible, as suggested by our net-zero scenario, and significant in its scale and scope. Furthermore, it will be tech-driven, because the development and deployment of new low-carbon technologies will be the critical enablers of the transition. And it will be rich in opportunities because Spain can leverage its natural endowments and technical capabilities to lead Europe in the transition and create substantial socioeconomic impact along the way.

Five characteristics describe Spain's net-zero transition.

The urgency for Spain to redouble its efforts is not trivial. In a scenario in which global temperatures reach 2°C above pre-industrial levels, some parts of the country’s southern region would see more than 45 days a year in which the daily maximum temperature exceeds 37°C. Several areas would face the possibility of more than six months of drought each year, leading to a potential 25 percent decline in water availability in critical basins. Moreover, there would be damaging impacts on yields in four critical crops—grapes, olives, tomatoes, and wheat—which together make up 40 percent of Spain’s gross agricultural production value. The tourism sector would also be severely affected, with scorching temperatures deterring tourists from visiting during the summer season.1Climate risk and response: Physical hazards and socioeconomic impacts,” McKinsey Global Institute, January 16, 2020 (based on Representative Concentration Pathway 8.5).

As a member of the European Union, Spain is committed to meeting the targets of the trading bloc’s climate agenda. The European Union has set an objective to reduce GHG emissions by 55 percent by 2030 compared to 1990 levels, with demanding timetables for individual industries. The proposals reflect the objectives of the European Climate Law and affect areas including renewable energy, energy efficiency, and the EU Emissions Trading System (ETS). Russia’s invasion of Ukraine and the ensuing impact on energy prices have prompted Europe to double down on these proposals, as announced in the REPowerEU plan. The Spanish regulatory agenda builds on many Spanish and EU initiatives, for example through the country’s Integrated National Energy and Climate Plan (INECP),2 which sets an ambitious target of a 31 percent decline in emissions between 2019 and 2030. This will help Spain catch up with the rest of the European Union, which has reduced its net emissions by approximately 28 percent since 1990, while Spain’s net emissions have grown by 9 percent in the same period.

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Although Spain’s emissions have been declining over the past 15 years, since 2013 the rate of decline has lowered to approximately 2 MtCO2e per year.3 This rate needs to be four times as fast if Spain is to reach its 2030 decarbonization goals, and five times as fast after that to reach net zero by 2050. On that basis, this paper considers two scenarios. The first is based on current policies, while a second posits a faster green transition. The latter, the net-zero scenario, proposes an ambitious pathway that is focused on accelerating Spain’s abatement efforts. It would mean reducing emissions by 46 percent by 2030 (from 2019)—equivalent to reducing about 130 MtCO2e—and achieving net-zero emissions by 2045 and net-negative emissions by 2050. This compares to a 33 percent reduction by 2030 and 85 percent by 2050 under the “current policies” scenario.

Under the net-zero scenario, Spain would be transformed into a regional leader and clean energy hub. However, achieving that goal will require significant capital investment. The net-zero scenario will require capital expenditures of €2.5 trillion for green technologies and processes by 2050. This equates to €85 billion per year on average, or around 6.2 percent of Spain’s GDP. The key target areas for spending will be transport, power, and buildings. The investment in this scenario would support 1.1 million jobs per year on average over the 30-year period.

The most exciting innovations will be in three areas: electrification, green hydrogen, and biofuels. Spain has a history in renewable energy leadership. With more than 28 GW, it has Europe’s second highest wind generation installed capacity after Germany. Paired with enviable solar resources, it can produce renewable energy at a lower cost than other European economies and continue the rapid rate of decarbonization shown by its power sector over the past 15 years. This, in turn, means it could become one of the most competitive producers of green hydrogen, which is required for deep decarbonization in sectors that are hard to electrify or to abate. Biofuels would also be a key technology for Spain’s decarbonization journey, serving as a transition technology across multiple use cases.

Some sectors are harder to abate than others, and some are more urgent due to their high emissions intensity. Spain’s transport and industry sectors collectively account for more than 55 percent of the country’s emissions and are therefore key areas of focus to reach net-zero emissions.4 The stock of passenger cars, vans, and motorcycles would be 100 percent decarbonized by 2050. Domestic aviation, in turn, would see lower levels of abatement amid increased use of biofuels (60 percent of market penetration by 2050) and synfuel planes (20 percent market share by 2050).5 Barring the use of bridging technologies such as carbon capture and storage, the industrial sector—from cement and steel production to oil refining and chemicals—would likely only see partial decarbonization. Ethylene, for example, would only accelerate its decarbonization from the 2040s, when emerging technologies such as electric cracking reach industrial scale. Cement, for instance, would be able to reduce its emissions only partially by 2050 without carbon capture and storage.

Regulation alone will not be sufficient to advance the change agenda in Spain. Instead, Spanish society needs to act collaboratively. And the next decade will be critical: more than €700 billion would have to be invested in green technologies by 2030 to accelerate the pace of decarbonization in line with our net-zero scenario.

We posit nine key elements that would produce an orderly and productive transition, including technological innovation, scaled supply chains and supporting infrastructure, and natural resources. We also envision three economic and social adjustments for the transition: initiating effective capital allocation and financing structures, managing demand shifts and unit cost increases, and addressing socioeconomic impacts.

Finally, making progress will require enabling mechanisms including standards and market protocols, collaboration between the public and private sectors, and support from consumers. Through these combined efforts, Spain can overcome barriers to decarbonization, transition faster than its peers, and become a leading player in Europe’s green transition.

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