The Luxembourg Negative Emissions Tariff (L-NET)

Location

Parliament of Luxembourg, Rue du Marché-aux-Herbes, Ville Haute Luxembourg

Key Concepts

Demand support Performance-based payment

Summary

The Luxembourg Negative Emissions Tariff, or L-NET, is a legislative proposal that aims to drive investment in carbon removal projects both within and outside of Luxembourg using a contract-based direct payment model. The following outlines the legislation’s main policy elements:

1. Direct Payment for Carbon Removal & Storage Services. Eligible suppliers of carbon removal are compensated for completion of carbon removal services on the basis of CO2 tonnes removed and/or durably stored. Payment terms are performance-based, transacted, ex post , upon the verification of removals that have been completed during a defined period of time in compliance with standards set by the ministry having authority.

2. Multi-Year Contracts Supplier participants engage in multi-year (5) delivery contracts with the Ministry having authority, during which they are guaranteed fixed prices (€/CO2 tonnes) for services completed for the duration of that period.

3. Catalytic pricing. Prices, or tariffs, are established by the regulator based on continuous analysis of carbon removals methods and technologies, and market and policy conditions, with the aim of ensuring payment levels remain sufficient to catalyze supply, while avoiding potential windfall profits.

4. Two Tiers for Removal and Storage. The tariff structure is bifurcated into two tiers. All eligible projects must, at a minimum, remove CO2 from the atmosphere. Projects that remove and utilize CO2 in a variety of applications, but do not also result in durable CO2 removal eligible, receive the Tier 1. payment level (Eu/Tonne). Projects that also deliver durable CO2 storage in addition to CO2 removal receive an additional payment (Tier 2) on top of Tier 1 payment.

5. Global project eligibility. Eligible projects can be located either within or outside of Luxembourg. International projects must have at least a 50% ownership stake by an entity domiciled in Luxembourg.

6. Initiative funding. Funding for the initiative will be obtained annually from an existing Climate & Energy Fund. Once funds have been exhausted in any given year, the application window for projects is suspended until the following year.

A summary of the above elements can be found in the following short video overview:

Core elements of the L-NET draw inspiration from the earlier renewable energy feed-in tariff (FIT) model. The FIT was first implemented in Germany in 2000, and was subsequently replicated in different forms by many other states, both within and outside of Europe, during the first two decades of this century. The FIT is widely credited as having helped transform the global renewable energy market by establishing a demand signal sufficiently powerful and secure to both spur massive investment in solar and wind technology, while de-risking finance and lowing the cost of capital for projects and firms. In response to this signal, global manufacturing capacity rapidly expanded (most consequentially in China). This in turn accelerated innovation, learning rate progress, the formation of robust supply chains and production economies of scale, resulting in precipitous and permanent cost reductions, worldwide.

The L-NET borrows key mechanisms from model FIT programmes, while adapting them to reflect the important technical, market, historical and policy objective differences that distinguish the early stage renewable energy sector from today’s nascent carbon removal sector.

Main differences concern:

Relative stage of sector development: innovation and market evolution policy, not a scale up policy.
Technology prescriptiveness
Scope and source support,
Term of programme authorization
Broader strategic interests and policy priorities

Politics Note

The L-NET was introduced as legislation in the Luxembourg Chamber of Deputies (Parliament) in November 2022 by Deputy Sven Clement, a member of the Luxembourg Pirate Party. The bill is currently awaiting review and comment by the Council of State, a formal advisory body of the Chamber that analyzes legislation to assess statutory compliance with existing national and European Union laws. Deputy Clement has prepared modifications to the bill text that will be introduced following initial advisory body review. These changes will adapt the tariff structure from a multi-variable to the two tier design described above.

Replicability & Adaptation Potential

The L-NET has the potential to be widely replicated due to its fundamental design similarities with the earlier feed-in tariff for renewable energy ,which were widely adopted throughout the world, with the the largest concentration of sustained programs in Europe. The FIT is a known quantity in climate policy making and regulation, and while not without its controversies, is widely regarded as having succeeded, overwhelmingly, in many of its core objectives; most notably, driving adoption, cost reduction and investment in solar and wind. Therefore the FIT offers an important and recognizable frame of reference for which to understand, assess and judge the fundamental elements of the L-NET model. Similarities notwithstanding, there are important differences however that set the FIT and L-NET apart, which, in turn, have implications for its political success. First, when the FIT was implemented, solar and wind technology were already well established in the global marketplace, with dominant design parameters already well established. Therefore the FIT, as a strategy, was meant to drive scale and maturation. The scope of impact was rooted in the FIT's open-ended funding source, which was supplied by fees applied to ratepayer electricity bills. And, as an industrial development strategy, the FIT was intended to give Germany (initially) a strong competitive edge in the solar and wind manufacturing sectors. The L-NET, by contrast, is not a scale policy in its current iteration, but rather better understood as a market development and discovery policy.

Takeaways

Direct payment support scheme for durable forms of carbon dioxide removal and storage.
Design elements inspired by feed-in-tariff pioneered by Germany and other European states to scale up and drive down cost for renewable energy.