Cyprus' Long-term Low GHG Emission Development Strategy

1.1. Executive summary.....................................................................................................3

1.2. Legal and policy context .............................................................................................4

1.2.1. EU and 2050 Climate Neutrality .........................................................................5

1.3. Public consultation .....................................................................................................8 2. CONTENT ............................................................................................................................9 2.1. Total GHG emission reductions and enhancements of removals by sinks.................9 2.1.1. Projected emission reductions and enhancement of removals by 2050 ...........9

2.1.2. National target for 2030 and beyond .............................................................. 10

2.1.3. Adaptation policies and measures .................................................................. 14

2.2. Renewable energy ................................................................................................... 16

2.3. Energy efficiency...................................................................................................... 18

2.4. Sector-specific related content ............................................................................... 19

2.4.1. Energy system.................................................................................................. 19

2.4.2. Industry ............................................................................................................ 21

2.4.3. Transport ......................................................................................................... 22

2.4.4. Agriculture and land use, land-use change and forestry (LULUCF) ................. 25 3. FINANCING ...................................................................................................................... 28

3.1. Estimates of investment needed ............................................................................. 28

3.2. Policies and measures for related research, development and innovation............ 28 4. IMPACT ASSESSMENT OF THE SOCIO-ECONOMIC ASPECTS ........................................... 29 5. ANNEXES .......................................................................................................................... 30 5.1. Details on modelling (including assumptions) and/or analysis, indicators, etc. ..... 30 |2 1. OVERVIEW AND PROCESS FOR DEVELOPING THE STRATEGY

1.1. Executive summary The Long-Term Low Greenhouse Gas emission (GHG) Development Strategy for 2050 is a Roadmap for the Republic of Cyprus on Climate and Energy, as part of the country's participation in the collective European goal of a successful and sustainable transition to a climate-neutral economy by 2050. The Government's strategic goal is to participate proportionately in the commitment towards a climate-neutral economy at EU level and to contribute to the European Green Deal promoted by the European Commission. With the completion of the elaboration and adoption of the National Energy and Climate Plan (NECP), which analyses the energy and climate goals set by the country as well as the Policy Priorities and the measures for their implementation, the Government Cyprus is also investigating the optimal policies and measures towards the year 2050 for the achievement of specific climate goals in order to determine the framework for the long-term climate strategy of the country for the year 2050. Adopting and participating in the European Commission's strategic long-term vision for a prosperous, modern, competitive and climate-neutral economy by 2050, Cyprus aligns itself with the Climate Neutrality Strategy, planning the implementation of innovative but realistic technology applications, funding and research, while ensuring social justice in the context of a fair transition. It is clear that the long-term strategy is complementary to the NECP, which is the central strategic plan under which specific energy and climate policy measures are implemented. In this context, the long-term strategy presupposes the achievement of the relevant objectives of the NECP. The 2030-2040 decade should be a decade of choosing the appropriate technological solutions for adoption that are mature at the time, but also of continuing successful policies and measures that will contribute to achieving the goals of 2050, with even greater intensity and rate of implementation. New energy technologies or even fuels that will be available on competitive market terms are, in any case, a technical condition for the period after 2030, which will ultimately determine the relative rates of transition to 2050. Just as the objectives of the year 2030 require monitoring of the performance of the specific priorities and policy measures, which have been designed and will be implemented within the framework of the NECP, for the period 2030-2050 there should be continuous monitoring especially of technological developments to develop the appropriate policies and measures that will contribute most effectively in achieving the objectives of the long-term strategy for 2050. The expected benefits of transitioning to a climate-neutral economy by 2050 include: |3 ⮚ Reforming the country’s economy towards clean and modern technologies that strengthen the circular economy, which will utilize a series of advanced solutions and will form new business models. ⮚ Mitigating the effects of climate change and promoting a sustainable economy, by further increasing productivity. ⮚ Enhancing the competitiveness of the economy and industry, through research and innovation, with the aim of creating a digitised, circular economy that ensures high quality jobs and sustainable growth, while creating synergies with other environmental challenges. In this light, supporting the goal of a climate-neutral economy of the European Union by 2050 is a strategic choice of the country to achieve the central environmental goals for the benefit of society and to ensure a sustainable and sustainable future for all. In this context, however, appropriate support policies and instruments should be developed at EU level, with a fair distribution of the efforts and resources, highlighting the specificities at Member State level both in terms of production and economy, so that productive, economic and development benefits are common to all. The 2050 Long-Term Strategy analyses scenarios for the evolution of the energy system and the pattern of consumption in the final sectors, with the ultimate goal of transition to a climate-neutral economy by 2050. These scenarios will be further discussed and elaborated in the future, in order to select the appropriate policy measures and corresponding technologies that will change the operating model of the consumption and production system. With a focus on improving energy efficiency, which should be maximised, expanding and ultimately maximising the use of RES, especially in electricity generation, the emphasis on technologies and fuels, alternative technologies in the energy and industrial sector, as well as by changing the overall consumption patterns in the end-use areas, it will be possible to achieve in the best way the climate targets planned under the Long-Term Strategy for 2050. In view of the Fit for 55 proposals and the renewed national targets, but also the obligations under the governance regulation for the revision of the NECP in 2023, the Long-Term Strategy is foreseen to be reviewed. Therefore, among other things, energy modelling is expected to be reviewed.

1.2. Legal and policy context In accordance with Article 15(3) of the Governance regulation Cyprus’ long-term strategy will contribute to: (a) fulfilling the Union's and the Member States' commitments under the UNFCCC and the Paris Agreement to reduce anthropogenic greenhouse gas emissions and enhance removals by sinks and to promote increased carbon sequestration; (b) fulfilling the objective of the Paris Agreement of holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1,5 °C above pre-industrial levels; |4 (c) achieving long-term greenhouse gas emission reductions and enhancements of removals by sinks in all sectors. This is in accordance with the Union's objective, in the context of necessary reductions according to the Intergovernmental Panel on Climate Change (IPCC) to reduce the Union's greenhouse gas emissions in a cost-effective manner and enhance removals by sinks in pursuit of the temperature goals in the Paris Agreement. This is to achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases within the Union as early as possible and, as appropriate, achieve negative emissions thereafter; (d) a highly energy efficient and highly renewables-based energy system within the Union. In accordance with Article 15(4) of the Governance regulation Cyprus’ long-term strategy covers information on: o total greenhouse gas emission reductions and enhancements of removals by sinks; o expected progress on transition to a low greenhouse gas emission economy including greenhouse gas intensity, CO2 intensity of gross domestic product, and strategies for related research, development and innovation; o information on other national objectives, planning and policies and measures regarding renewable energy and energy efficiency. In accordance with Article 15(6) of the Governance regulation the information included in this long-term strategy document is consistent with the information contained in Cyprus’ integrated national energy and climate plan submitted to the European Commission prior to this document. Detailed information about projection models, assumptions etc. used for the existing measures and additional measures scenarios (WEM and WAM scenarios respectively) is available in the projections report and in summary in Cyprus’ Integrated National Energy and Climate Plan (NECP). Given the recent developments on climate change mitigation issues (review of the 2030 GHG reduction target) additional policies and measures are under consideration and this long-term strategy document is to be seen as an evolving document, which is expected to be updated at least every 5 years.

1.2.1. EU and 2050 Climate Neutrality1 The EU has been at the forefront of addressing the root causes of climate change and strengthening a concerted global response in the framework of the Paris Agreement (COP21, 2015). The Paris Agreement, ratified by 181 parties, requires strong and swift global action to reduce greenhouse gas emissions, with the objective to hold global temperature increase to well below 2°C and to pursue efforts to limit it to 1.5°C. It also has the goal to achieve a balance between emissions by sources and removals by sinks of greenhouse gases on a global scale in 1 European Commission, 2018; Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank; A Clean Planet for all A European strategic long-term vision for a prosperous, modern, competitive and climate neutral economy; COM(2018) 773 final. |5 the second half of this century. All parties are to present long-term low greenhouse gas emission development strategies by 2020 that deliver on its objectives. The European Council, in June 2017, strongly reaffirmed the commitment of the EU and its Member States to swiftly and fully implement the Paris Agreement, underlining that the Agreement "is a key element for the modernisation of the European industry and economy" and subsequently, in March 2018, invited the European Commission "to present by the first quarter of 2019 a proposal for a Strategy for long-term EU greenhouse gas emissions reduction in accordance with the Paris Agreement, taking into account the national plans". In October 2017 the European Parliament also invited the European Commission "to prepare by COP24 a mid-century zero emissions strategy for the EU". Finally, the Regulation on Governance of the Energy Union agreed by the European Parliament and Council calls on the Commission to present an EU long-term strategy by April 2019. The EU is broadly on track to achieve its 2020 greenhouse gas, renewable energy and energy efficiency targets. However, continued focus is necessary in order to overcome the recent stagnation of energy efficiency improvements and greenhouse gas emission reduction trends. The EU is advancing with its Energy Union Strategy and finalising a modern, advanced and cost-effective regulatory framework to achieve its 2030 greenhouse gas reduction targets and its clean energy transition delivering on the Juncker Commission's objective to put energy efficiency first and become a global leader in renewables. This is an investment in our prosperity and in the sustainability of the European economy. Regulatory stability is an important element for public authorities and private operators alike to achieve full implementation of this framework. Ambitious policies have been agreed at European level, including a reformed EU emissions trading system strengthening the price signal for CO2. For all other sectors, national greenhouse gas emission reduction targets have been set and legislation established to maintain the EU land and forests sink which absorbs more CO2 than it emits. On the side of energy, the targets to improve the EU's energy efficiency by at least 32.5% and to increase renewable energy to at least 32% of the EU's final energy consumption by 2030 are now approved and the proposed legislation to improve the CO2 efficiency of cars, vans and trucks will spur the transition in the transport sector. Combined, these climate and energy policies will deliver on the EU's contribution under the Paris Agreement to reduce emissions by at least 55% by 2030 compared to 1990. The IPCC report confirms that the world needs to limit climate change to 1.5°C to reduce the likelihood of extreme weather events. It also emphasises that emissions need to be reduced with far more urgency than previously anticipated. In order to limit temperature increase to 1.5°C, net-zero CO2 emissions at global level needs to be achieved around 2050 and neutrality for all other greenhouse gases somewhat later in the century. At this point, any remaining greenhouse gas emissions in certain sectors need to be compensated for by absorption in other sectors, with a specific role for the land use sector, agriculture and forests. This provides an opportunity for the EU to step up its action to show leadership and reap the benefits of first mover advantage. This would require the EU to achieve greenhouse gas emissions neutrality by 2050. |6 The European Climate Law The European Climate Law was published in the Official Journal on 9 July 2021 and entered into force on 29 July 2021. The European Climate Law sets a legally binding target of net zero greenhouse gas emissions by 2050. The EU Institutions and the Member States are bound to take the necessary measures at EU and national level to meet the target, taking into account the importance of promoting fairness and solidarity among Member States. The Climate Law includes measures to keep track of progress and adjust our actions accordingly, based on existing systems such as the governance process for Member States’ national energy and climate plans, regular reports by the European Environment Agency, and the latest scientific evidence on climate change and its impacts. Progress will be reviewed every five years, in line with the global stocktake exercise under the Paris Agreement. The Climate Law also addresses the necessary steps to get to the 2050 target: ● Based on a comprehensive impact assessment, the EU has set a new target for 2030 of reducing net greenhouse gas emissions by at least 55% compared to levels in 1990. The new EU 2030 target is included in the Law. ● In July 2021, the Commission adopted a series of proposals to revise all relevant policy instruments to deliver the additional emissions reductions for 2030. ● The Law also includes a process for setting a 2040 climate target. The Climate Law includes: ● a legal objective for the Union to reach climate neutrality by 2050 ● an ambitious 2030 climate target of at least 55% reduction of net emissions of greenhouse gases as compared to 1990, with clarity on the contribution of emission reductions and removals ● recognition of the need to enhance the EU's carbon sink through a more ambitious LULUCF regulation, for which the Commission made a proposal in July 2021 ● a process for setting a 2040 climate target, taking into account an indicative greenhouse gas budget for 2030-2050 to be published by the Commission ● a commitment to negative emissions after 2050 ● the establishment of European Scientific Advisory Board on Climate Change, that will provide independent scientific advice ● stronger provisions on adaptation to climate change ● strong coherence across Union policies with the climate neutrality objective |7 ● a commitment to engage with sectors to prepare sector-specific roadmaps charting the path to climate neutrality in different areas of the economy

1.3. Public consultation In accordance with Article 15(6) of the Governance regulation this long-term strategy document will be made available to the public. Relevant data such as greenhouse gas inventories as well as data from the latest energy and greenhouse gas emission projections are also available to the public2. A draft version of this document was made publicly available for comments through the website of the Department of Environment for a period of 4 weeks twice; once in 2021 and once in 2022. During the same periods, the LTS was discussed with various stakeholders, while the LTS was also presented to the public in three public hearings (March 2021, April 2021 and March 2022). 2 http://www.moa.gov.cy/moa/environment/environmentnew.nsf/All/21395032E3B9BB6CC2257FF0 003813DD?OpenDocument |8 2. CONTENT

2.1. Total GHG emission reductions and enhancements of removals by sinks

2.1.1. Projected emission reductions and enhancement of removals by 2050 Emission reductions have been estimated for different scenarios ranging from the “Business- as-Usual” scenario (BaU) to the “Ambitious” scenario (AMB). The “Ambitious” scenario is one option for future additional policies that could be examined with which carbon neutrality is achieved in 2050. The other three scenarios presented in the plot below are the “existing measures” (WEM), the “planned policies and measures” scenario (NECP, the scenario submitted through the NECP as the planned policies for 2030) and the “additional measures” scenario (WAM). Figure 2.1: Projected emission reductions and enhancement of removals by 2050 with LULUCF, where “NIR2020” are the GHG historical emissions according to the latest GHG inventory report available (May 2020 submission to the UNFCCC secretariat); WEM is the “With existing measures” scenario; NECP is the “Planned Policies and Measures” scenario as submitted through the NECP; WAM is the “Additional Measures” scenario; AMB is the “Ambitious” scenario towards carbon neutrality in 2050 The key results for the scenarios presented are the following: o With the WEM scenario, emissions in 2050 are expected to reduce by 10% compared to 1990 and 46% compared to 2005; o With the NECP scenario, emissions in 2050 are expected to reduce by 28% compared to 1990 and 56% compared to 2005; o With the WAM scenario, emissions in 2050 are expected to reduce by 63% compared to 1990 and 78% compared to 2005; |9 o With the AMB scenario, Cyprus could reach carbon neutrality by 2050. Large contribution towards this is expected by the use of CCS/CCU3 technologies, international and local research and technology, education and LULUCF4 absorptions. At the moment, the scenario under implementation is the NECP scenario, whereas all additional measures contributing to the “Ambitious” scenario are still under examination. It is considered that with the 2023 review of the NECP additional policies and measures could be agreed that could further increase 2030 ambition, towards the revised national target of -32% (WAM scenario). The figure below presents the contribution of the sectors to the “Ambitious” scenario which is considered one option for achieving carbon neutrality in 2050. 12,000 10,000 Energy 8,000 IPPU 6,000 Gg CO2 eq. Agriculture 4,000 Waste 2,000 LULUCF 00 CCS/CCU TOTAL emissions -2,000 TOTAL absoprtions -4,000 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 Figure 2.2: Projected emission reductions and enhancement of removals by 2050 by sector for the “Ambitious” scenario where “IPPU” is the Industrial Processes and Other Product Use sector; “LULUCF” is the Land Use Land Use Cover and Forestry sector and “CCS/CCU” stands for the absorptions that could be achieved with the implementation of the technologies Carbon Capture and Storage/ Carbon Capture and Utilisation An important issue that needs to be addressed more towards the achievement of carbon neutrality is climate change education and awareness. Education is a critical agent in addressing the issue of climate change. Education and awareness can encourage people to change their attitudes and behaviour and help them to make informed decisions.

2.1.2. National target for 2030 and beyond In October 2014 the European Council agreed on the 2030 climate and energy framework on objectives regarding greenhouse gas emissions, energy efficiency, renewable energy and interconnections. On greenhouse gas emissions the EU endorses a binding EU target of reducing greenhouse gas emissions by at least 40% by 2030, compared to 1990. The agreement on the 2030 framework, specifically the EU domestic greenhouse gas reduction target of at least 40%, formed the basis of the EU's contribution to the Paris 3 CCS: Carbon Capture and Storage; CCU: Carbon Capture and Utilisation 4 LULUCF: Land Use, Land Use Change and Forestry | 10 Agreement. The EU’s so-called Intended Nationally Determined Contribution (INDC) was formally approved at an Environment Council meeting in March 2015. The 40% reduction target is subdivided into two separate targets for the EU Emission Trade System (ETS) and non-EU ETS sectors elaborated below. In May 2018 the European Council adopted a regulation on the EU effort sharing of greenhouse gas emission reductions in the non-ETS sectors in the period 2021-2030 – the so- called Effort Sharing Regulation (ESR). Under this regulation Cyprus is committed to a 24% reduction of greenhouse gas in non-ETS emissions in the period 2021-2030 by 2030 relative to 2005. Under the Effort Sharing Regulation flexibilities mechanisms ensuring cost-effective reductions include borrowing, banking and transfer of annual emission allowances between years and between member states (cf. Article 5), cancellation of EU ETS Allowances instead – in practice meaning that reductions are made under EU ETS instead of under ESR (cf. Article 6) and use of credits from LULUCF (cf. Article 7). In May 2018 the European Council also adopted a regulation of emissions by sources and removals by sinks in the land sector – the LULUCF regulation, where LULUCF is “Land-Use, Land-Use Change and Forestry”. Credits obtained under this regulation can be used to reach the target for the non-ETS sector in accordance with the ESR up to a certain limit. The limit for Cyprus is 60 kt CO2-equivalent credits from LULUCF during the period 2021-2030. The EU is committed to reducing its ETS emissions by 43% in 2030 from 2005 to achieve the total greenhouse gas emissions reduction of 40% below 1990 levels by 2030.The EU has also set itself the target of increasing the share of renewables in energy use to 32% by 2030. European Green Deal: Commission proposes transformation of EU economy and society to meet climate ambitions On 14 July 2021, the European Commission adopted a package of proposals to make the EU's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Achieving these emission reductions in the next decade is crucial to Europe becoming the world's first climate-neutral continent by 2050 and making the European Green Deal a reality. With those proposals, the Commission is presenting the legislative tools to deliver on the targets agreed in the European Climate Law and fundamentally transform our economy and society for a fair, green and prosperous future. A comprehensive and interconnected set of proposals The proposals will enable the necessary acceleration of greenhouse gas emission reductions in the next decade. They combine: application of emissions trading to new sectors and a tightening of the existing EU Emissions Trading System; increased use of renewable energy; greater energy efficiency; a faster roll-out of low emission transport modes and the infrastructure and fuels to support them; an alignment of taxation policies with the European | 11 Green Deal objectives; measures to prevent carbon leakage; and tools to preserve and grow our natural carbon sinks. ● The EU Emissions Trading System (ETS) puts a price on carbon and lowers the cap on emissions from certain economic sectors every year. It has successfully brought down emissions from power generation and energy-intensive industries by 42.8% in the past 16 years. Today the Commission is proposing to lower the overall emission cap even further and increase its annual rate of reduction. The Commission is also proposing to phase out free emission allowances for aviation and align with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and to include shipping emissions for the first time in the EU ETS. To address the lack of emissions reductions in road transport and buildings, a separate new emissions trading system is set up for fuel distribution for road transport and buildings. The Commission also proposes to increase the size of the Innovation and Modernisation Funds. ● To complement the substantial spending on climate in the EU budget, Member States should spend the entirety of their emissions trading revenues on climate and energy- related projects. A dedicated part of the revenues from the new system for road transport and buildings should address the possible social impact on vulnerable households, microenterprises and transport users. ● The Effort Sharing Regulation assigns strengthened emissions reduction targets to each Member State for buildings, road and domestic maritime transport, agriculture, waste and small industries. Recognising the different starting points and capacities of each Member State, these targets are based on their GDP per capita, with adjustments made to take cost efficiency into account. The proposed reduction target for Cyprus is -32%. ● Member States also share responsibility for removing carbon from the atmosphere, so the Regulation on Land Use, Forestry and Agriculture sets an overall EU target for carbon removals by natural sinks, equivalent to 310 million tons of CO2 emissions by 2030. National targets will require Member States to care for and expand their carbon sinks to meet this target. By 2035, the EU should aim to reach climate neutrality in the land use, forestry and agriculture sectors, including also agricultural non-CO2 emissions, such as those from fertiliser use and livestock. The EU Forest Strategy aims to improve the quality, quantity and resilience of EU forests. It supports foresters and the forest- based bioeconomy while keeping harvesting and biomass use sustainable, preserving biodiversity, and setting out a plan to plant three billion trees across Europe by 2030. ● Energy production and use accounts for 75% of EU emissions, so accelerating the transition to a greener energy system is crucial. The Renewable Energy Directive will set an increased target to produce 40% of our energy from renewable sources by 2030. All Member States will contribute to this goal, and specific targets are proposed for renewable energy use in transport, heating and cooling, buildings and industry. To meet both our climate and environmental goals, sustainability criteria for the use of bioenergy are strengthened and Member States must design any support schemes for bioenergy in a way that respects the cascading principle of uses for woody biomass. ● To reduce overall energy use, cut emissions and tackle energy poverty, the Energy Efficiency Directive will set a more ambitious binding annual target for reducing energy use at EU level. It will guide how national contributions are established and almost double | 12 the annual energy saving obligation for Member States. The public sector will be required to renovate 3% of its buildings each year to drive the renovation wave, create jobs and bring down energy use and costs to the taxpayer. ● A combination of measures is required to tackle rising emissions in road transport to complement emissions trading. Stronger CO2 emissions standards for cars and vans will accelerate the transition to zero-emission mobility by requiring average emissions of new cars to come down by 55% from 2030 and 100% from 2035 compared to 2021 levels. As a result, all new cars registered as of 2035 will be zero-emission. To ensure that drivers are able to charge or fuel their vehicles at a reliable network across Europe, the revised Alternative Fuels Infrastructure Regulation will require Member States to expand charging capacity in line with zero-emission car sales, and to install charging and fuelling points at regular intervals on major highways: every 60 kilometres for electric charging and every 150 kilometres for hydrogen refuelling. ● Aviation and maritime fuels cause significant pollution and also require dedicated action to complement emissions trading. The Alternative Fuels Infrastructure Regulation requires that aircraft and ships have access to clean electricity supply in major ports and airports. The ReFuelEU Aviation Initiative will oblige fuel suppliers to blend increasing levels of sustainable aviation fuels in jet fuel taken on-board at EU airports, including synthetic low carbon fuels, known as e-fuels. Similarly, the FuelEU Maritime Initiative will stimulate the uptake of sustainable maritime fuels and zero-emission technologies by setting a maximum limit on the greenhouse gas content of energy used by ships calling at European ports. ● The tax system for energy products must safeguard and improve the Single Market and support the green transition by setting the right incentives. A revision of the Energy Taxation Directive proposes to align the taxation of energy products with EU energy and climate policies, promoting clean technologies and removing outdated exemptions and reduced rates that currently encourage the use of fossil fuels. The new rules aim at reducing the harmful effects of energy tax competition, helping secure revenues for Member States from green taxes, which are less detrimental to growth than taxes on labour. ● Finally, a new Carbon Border Adjustment Mechanism will put a carbon price on imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to ‘carbon leakage'. This will ensure that European emission reductions contribute to a global emissions decline, instead of pushing carbon-intensive production outside Europe. It also aims to encourage industry outside the EU and our international partners to take steps in the same direction. Achieving climate neutrality Consistency with Cyprus’ long-term low emission strategy is ensured as Cyprus’ targets under the ESR regulation and the LULUCF Regulation are to be seen as steps in 2021-2030 towards the objective to work towards net zero emissions in accordance with the Paris agreement and for a net-zero-emission target in the EU and Cyprus by 2050. The transition to climate neutrality will give rise to significant opportunities, such as potential for economic growth, for new business models and markets, for new jobs and technological | 13 development. Forward-looking research, development and innovation policies will have a key role. Achieving climate neutrality however requires overcoming serious challenges. Cyprus expects the proposed enabling framework by the European Union that benefits all Member States and encompasses adequate instruments, incentives, support and investments to ensure a cost- effective, just, as well as socially balanced and fair transition, taking into account different national circumstances in terms of starting points. The transition will require significant public and private investments. In this context, Cyprus welcomes and supports the announcement by the EIB that it intends to support investment in climate action and environmental sustainability in the period from 2021 to 2030, which will have a significant impact for the post 2030 period. It is underlined that the MFF and RRF will significantly contribute to climate action, since the investments that will occur in 2021-2030 period, will have an impact towards the 2050 decarbonisation targets. All relevant national legislation and policies need to be adapted to conform/comply with, and contribute to, the fulfilment of the climate neutrality objective while respecting a level playing field. It has to be examined whether this requires an adjustment of the existing rules, including on state aid and public procurement. Moreover, the environmental and socio-economic impact of the transition to climate neutrality needs continuous monitoring. The climate neutrality objective needs to be achieved in a way that preserves Cyprus’ competitiveness, including by developing effective measures to tackle carbon leakage. In this context, the European Commission’s proposal for a carbon border adjustment mechanism concerning carbon-intensive sectors is essential for Cyprus.

2.1.3. Adaptation policies and measures With regard to climate change adaptation, the Department of Environment of the Ministry of Agriculture, Rural Development and Environment coordinated the efforts to develop and implement the National Adaptation Strategy to Climate Change. For the implementation of the Strategy, a relevant Action Plan has been prepared, the implementation of which implies the implementation of measures which the competent Ministries / Authorities will promote within their budgets. The National Adaptation Strategy (NAS) and Action Plan (NAP) to Climate Change were adopted by the Council of Ministers on 18/5/2017. This Decision: - Calls on all stakeholders involved in the relevant Action Plan to promote the implementation of the envisaged actions, incorporating, where appropriate, relevant provisions in their Budgets. Where necessary, implementing bodies should assess the relevant economic impacts as well as the cost - benefits of implementing the actions, in order to confirm their need for their implementation. - Designates the Department of the Environment to oversee the implementation of the adaptation measures of the National Adaptation Strategy and the relevant Action Plan, which will submit, through the Minister of Agriculture, Rural Development and Environment, an annual report to the Council of Ministers. This Report shall, inter alia, indicate the extent to which the actions have been implemented, the reasons for any divergence, and suggestions for corrective action. | 14 The National Adaptation Strategy provides a holistic framework which intends to help the decision-makers, stakeholders and citizens to respond successfully to climate change risks and assess the potential cross-sectional impacts and the vulnerability to climate change and how it might be reduced by various cost-effective adaptation options. The strategy besides the detailed analysis of observed and potential impacts and their vulnerabilities includes adaptation measures that should be taken immediately, as well as policies for future actions, for different sectors of the economy. The selected sectors of importance in which climate change is significant for Cyprus are the following: Water resources, Agriculture, Coastal zones, Tourism, Biodiversity, Energy, Fisheries and Aquaculture, Soils, Forests, Public Health and Infrastructure. Reviews of NAS and NAP coordinated by the Department of Environment involve all stakeholders, as stated in the aforementioned Council of Ministers’ Decision. It is noted that some of the effects of regional climate change cannot be effectively addressed by the existing measures of the National Adaptation Strategy and Action Plan and therefore require specific study to determine, as far as possible, how to effectively address them. To this end, and in support of the National Adaptation Strategy and Action Plan, the outcome expected to be produced under Cyprus’ Government Initiative for Coordinating Climate Change Actions in the Eastern Mediterranean & Middle East will be utilized. The purpose of this Initiative is to develop a Regional Action Plan to support countries in the Eastern Mediterranean and the Middle East to meet their obligations under the Paris Agreement and to address and / or adapt to the effects of climate change. This Regional Action Plan will be a dynamic high-level strategic planning document and outline regional climate policy (climate change mitigation and adaptation), taking into account the specificities and challenges of the region. As shown in figure below, as clearly stated in the “Clean Planet for all, A European strategic long-term vision for a prosperous, modern, competitive and climate neutral economy“ study, Cyprus is one of the countries in the Mediterranean that will be affected the most (i.e. 16% of the present Mediterranean climate zone may become arid, outdoor labour productivity may decline by around 10-15%, reductions in projected food availability, undermine security and prosperity, damaging economic, food, water and energy systems, and in turn triggering further conflicts and migratory pressures)5. Even though the above aspects are not fully incorporated in the long term strategy scenarios, it is obvious that scaling up electricity from renewables is crucial for the decarbonisation of the Cyprus energy system. Electrification with renewables is seen as a major solution, and the contribution of renewable electricity will be the one of the largest drivers for change Cyprus energy mix transformation. 5 Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic And Social Committee, The Committee Of The Regions And The European Investment Bank. 28.11.2018. A Clean Planet for all - A European strategic long-term vision for a prosperous, modern, competitive and climate neutral economy [COM(2018) 773] | 15 Figure 2.3: Climate Change impacts in Europe3

2.2. Renewable energy The estimated share of renewable energy in final energy consumption by 2050 ranges from 32% (BaU scenario) to 95% (Ambitious scenario). The share of renewable energy depends on the implementation rate of the policies and measures described in the NECP as well as the status of the implementation of electricity interconnection with neighbouring countries (Figure 2.4). Based on the adopted Policies and Measures under implementation (NECP scenario), it is clear that there is a potential to increase the share of RES to 23% by 2030, which increases to 51% in 2050. 100% 90% 80% 70% 60% AMB RES share 50% PPM-interconnector 40% NECP 30% WEM 20% 10% 0% 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Figure 2.4: Estimated share of renewable energy in final energy consumption by 2050 where WEM is the “With existing measures” scenario; PPM-interconnector is the “Planned Policies and Measures” scenario with the effect of the interconnector; NECP is the “Planned Policies and Measures” scenario as submitted through the NECP; AMB is the “Ambitious” scenario towards carbon neutrality in 2050 However, it is also clear, from Figure 2.4 and Table 2.1, that the electricity interconnector plays a crucial role in the development of the share of Renewable Energy in an increasingly electrified economy. The electricity interconnector overcomes the Electricity System’s | 16 technical barriers that hinder the growth of Renewable Energy, while it provides additional opportunities for Export of Electricity, taking advantage of the in-abundance Renewable Energy Potential, especially Solar (Table 2.1). In addition, it will help increase the consumption of electricity from renewable sources since it will facilitate the import of renewable energy produced from wind and solar power plants in the connected countries. Table 2.1: RE share in final energy demand across all sectors – Ambitious Scenario projections (assuming electricity interconnections) 2035 2040 2045 2050 All sectors 49% 73% 84% 94% The incorporation of the EuroAsia Electricity interconnector has a drastic effect on the energy balance of Cyprus in the period up to 2050 since the rate of RES penetration is steeper in that scenario. However, in the post-2030 period, the possibility of electricity trade enables additional investments in solar photovoltaics, raising the renewable energy share in electricity to 50% by 2030. Deployment of solar photovoltaics aims at exporting electricity, profiting from an assumed electricity price differential between the Cypriot, Greek and Israeli systems. The volume of net electricity exports in 2030 corresponds to a high level of share on RES installations. Moreover, for larger utility-scale RES projects, steps are already taken to prepare for the opening of the new Electricity Market Trading and Settlement Rules, where all Electricity Sources, Conventional and Renewable are expected to compete on equal footing. The transition to a highly decentralised power generation system, based on renewable energy sources, will require a more intelligent, smart and flexible system, which will be based on consumer participation, increased interconnectedness, greater involvement of energy storage systems of different sizes and technologies, in the coupling of energy sectors and in the demand-side response and digital management. Also, this energy transition will affect a more extensive set of national policies to achieve a socially and transparent energy and climate transition and a cost-effective way for the economy and society as a whole. The WAM scenario considers that the contribution of renewable energy sources including biomass could contribute even more than the NECP scenario through: the update of the national spatial planning of RES and the respective SEA every ten years and the timely implementation of the EuroAsia Interconnector project. EuroAsia Interconnector EuroAsia Interconnector is a project of paramount importance for Cyprus, as it will end the energy isolation of the island and will connect its electricity network to the EU continental network. This will allow energy imports / exports and trading, ensuring security of supply and rendering the wholesale electricity prices lower and more competitive. Additionally, it will create a highway for the transmission of significant amounts of electricity generated using natural gas from the fields in the Eastern Mediterranean and it will increase the capacity of integrating renewable energy. The project aims to enhance energy and resource efficiency, | 17 supporting the development and deployment of innovative clean technologies and the use of renewable energy sources. Concerning the implementation stages, most of the necessary studies have already been completed (i.e. the Cost Benefit Analysis, the Business Plan & the Financing scheme and the Cross-Border Cost Allocation Proposal (CBCA)). In Cyprus, the licensing procedure has reached a very mature stage, it has achieved considerable progress and most permits required have been obtained. Due to the implementation of the link Crete-Attica as a national project, the CBCA decision has been revised by the NRAs of Cyprus and Greece in April 2021. The project will be developed at a voltage level of 500kV which is compatible with the Crete Attica link. It is expected to start commissioning early in 2026.

2.3. Energy efficiency The final and primary energy consumption trajectory under the planned policies and measures scenario (without electricity interconnector) is illustrated in Table 2.2 below. Table 2.2: Final and primary energy consumption trajectory under the planned policies and measures scenario (without electricity interconnector) [ktoe] Year 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Final 1916 1922 1922 1931 1938 1948 1947 1950 1952 1953 1955 Primary 2503 2406 2417 2359 2369 2387 2394 2409 2413 2411 2409 Year 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 Final 1960 1962 1964 1966 1969 1969 1968 1966 1964 1966 1973 Primary 2387 2358 2362 2369 2372 2367 2331 2239 2242 2231 2229 Year 2043 2044 2045 2046 2047 2048 2049 2050 Final 1979 1984 1987 1990 1993 1996 1998 1996 Primary 2238 2231 2212 2207 2202 2197 2192 2175 However, if the planned policies and measures scenario with the electricity interconnector is implemented instead, the primary and final energy consumption will reach 2346 ktoe and 1991 ktoe respectively in 2050. Similarly, if the ambitious scenario is implemented instead, this includes the electricity interconnector and more energy efficiency measures, such as green tax reform. In this case final energy consumption will be further decreased, compared to the other two scenarios. In the planned policies and measures scenario with electricity interconnector and in the ambitious scenario, there is an increase in the projected primary energy consumption for 2050, compared to the planned policies and measures scenario (without electricity interconnector). This is because the electricity interconnector enables the export of electrical energy to other countries and thus, the primary energy in these scenarios is increased (the energy will not be used solely to cover national energy needs). The WAM scenario considers that additional energy efficiency measures will be examined to achieve additional energy savings. | 18 Figure 2.4: Trajectory of the primary energy consumption until 2050 Figure 2.5: Trajectory of the final energy consumption until 2050

2.4. Sector-specific related content

2.4.1. Energy system In addition to the policies and measures presented in the NECP the following are under examination for the achievement of decarbonisation in 2050: • Introduction of carbon tax • Further increase RES after 2030 in all energy • CCS activities to all ETS installations from 2040 – electricity, cement, ceramics • Further increase EE after 2030 in all energy except electricity | 19 • Reduction of emissions from implementation of support scheme for agriculture, industry and commercial sectors

2.4.1.1. Possible future emissions trajectories With further promotion of renewables (which is possible only if the national grid is interconnected), further savings from implementation of energy efficiency measures and utilisation of CCS/CCU technologies, the energy sector (excluding transport) could decarbonise further (Figure 2.6). 6000 5000 4000 [Gg CO2 eq.] AMB 3000 PPM-interconnector NECP 2000 WEM 1000 0 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 Figure 2.6: Estimated GHG emissions from the energy sector (excluding transport) by 2050 where WEM is the “With existing measures” scenario; PPM-interconnector is the “Planned Policies and Measures” scenario with the effect of the interconnector; NECP is the “Planned Policies and Measures” scenario as submitted through the NECP; AMB is the “Ambitious” scenario towards carbon neutrality in 2050

2.4.1.2. General description of main drivers for energy efficiency, demand-side flexibility and energy consumption and their evolution from 2021 and beyond A mixture of policies and measures will be implemented from 2021 and beyond in all sectors of the economy, aiming to reach both indicative and obligatory national energy efficiency targets for 2030. As described in paragraph 3.2.1.1 of the NECP, these will include, inter alia, regulatory and financing measures for households, services and industrial sector, measures in the public buildings, action plan for reducing energy consumption in transport sector as well as cross-cutting measures such as energy and CO2 taxes, energy efficiency obligation schemes, as well as informative and capacity building measures. In general, these policies and measures will continue to be the main drivers for energy efficiency up to 2050. For the post 2020 period more policies and measures will be examined. Some policies and measures are about to be examined to remove regulatory and non-regulatory barriers that impede the uptake of energy performance contracting and other energy efficiency service models, as described in paragraph 3.2.1.3 of the NECP. Additional policies and measures and further actions to remove specific regulatory and non-regulatory barriers that impede the | 20 uptake of energy efficiency investments will also be examined as described in paragraph 3.2.1.4 of the NECP. Also, the green tax reform will be further considered as described in paragraph 5.1.5 of the NECP. The specific measures to be introduced from 2021 and beyond related to the above-mentioned will be included in the next update of the NECP.

2.4.2. Industry Cyprus Industrial base is mainly operating in light industrial activities. Industry contributes 7.9% to GDP while at the same time employs about 9% of the total employment. The majority of manufacturing units are small and medium-sized enterprises (SMEs), which occupy less than 10 employees. Main growth sectors are, among others, the ICT sector, the pharmaceuticals and food and drink sectors. The Competitiveness of the industrial sector still has a lot of potential and is rather low. This is mainly due to low productivity, high production costs and increased supply chain costs resulting from the small size of the market, the insularity of the economy and its geographic and energy "isolation" and its limited resources and low capacity for innovation. At this point Cyprus proceeded with the design and implementation of a new Industrial Policy aiming to develop more high-value-added and innovative products and services that will contribute to the competitiveness of the Cyprus economy over all. At the same time Cyprus is aiming to increase productivity by strengthening the industrial ecosystem and promote the investment in digitalisation, sustainability, innovation and circular economy.

2.4.2.1. Expected emission reductions Possible emission reductions that could be achieved from the sector of Industrial Product and other Product Use (IPPU) are presented in Figure 2.7. 1600 1400 1200 1000 [Gg CO2 eq.] AMB 800 PPM-interconnector 600 NECP WEM 400 200 0 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 Figure 2.7: Estimated GHG emissions from the sector of Industrial Product and other Product Use (IPPU) by 2050 where WEM is the “With existing measures” scenario; PPM-interconnector is the “Planned Policies and Measures” scenario with the effect of the interconnector; NECP is the “Planned Policies and Measures” scenario as submitted through the NECP; AMB is the “Ambitious” scenario towards carbon neutrality in 2050 | 21

2.4.2.2. General overview of the policies, existing plans and measures for decarbonisation In addition to the policies and measures presented in the NECP the following are under examination for the achievement of decarbonisation in 2050: • Introduction of carbon tax • CCS activities to all ETS installations from 2040 (20% in 2040-2049, 70% in 2050) – electricity, cement, ceramics • 2015 EU F-Gas Reg. [EU HFC phase down steps] from 2020: 2018-2020 to 93%; 2021-2023 to 45%; 2024-2026 to 31%; 2027-2029 to 24%; 2030-2035 to 21% compared to 2015; AMB 5% by 2050 compared to 2015

2.4.3. Transport

2.4.3.1. Expected emissions and energy sources by transport type Cyprus has no domestic shipping, aviation and rail services available and these are not expected to be developed until 2050. This section therefore presents information only on road transport. The projections for the transport sector foresees penetration of alternative fuels and technologies (Figure 2.8). Regarding the passenger car fleet, the number of diesel vehicles are expected to reduce over time, and these are replaced by gasoline, gasoline hybrid and battery electric vehicles. It is worth highlighting that a significant penetration of new electric vehicles appears in the fleet in the late 2030’s, which brings full electrification of private passenger transport in 2050. | 22 Figure 2.8: Estimated energy consumption by fuel for the transport sector where NECP is the “Planned Policies and Measures” scenario as submitted through the NECP The projected shift in the road transport fleet results in an equivalent change in the fuel consumption in the transport sector for all scenarios. Electrification of the transport sector is regarded as a key step in the decarbonisation and diversification of fuel supply of this sector. A degree of electrification occurs in the projected scenarios by fully-electric vehicles. Therefore, electricity demand in the transport sector increases proportionally, reaching 3 PJ in 2050 with the most conservative scenario (existing measures) and 7.5 PJ in 2050 with the most ambitious scenario (AMB). If the electricity demand in the transport sector increases further, it could pose challenges to the grid, but could also offer opportunities. On the one hand, electricity demand rises; this will not happen uniformly as charging will primarily occur at specific hours of the day. It can be expected that the overall load profile will be affected as a consequence. This is something that perhaps is not captured adequately by the current version of the model and may need to be amended in the future. The assumed charging profile can have a significant impact on the results and with increasing penetration of BEVs in the system, more information could become available to assist such an analysis. Smart charging of vehicles and potential use of vehicle-to-grid systems, in which vehicle batteries can be used as additional supporting infrastructure by the grid operator, can offer demand response services that in turn can add flexibility and have an enabling effect for intermittent renewable energy technologies, subject to wider regulatory and market developments such as the introduction of Time-of-Use or dynamic pricing retail contracts. It has to be noted that changes in the transport sector are subject to the social behaviour of individuals, which is not a trivial matter to address in optimization models. The willingness of consumers to change their behaviour is a factor that may limit the transition of the transport sector to alternative fuels and technologies. It is important to highlight the drastic reduction in overall energy demand of the transport sector through the promotion of sustainable transport modes. It is estimated that additional cumulative investments in public transport for this scenario amount to 800-900 million EUR2016 to develop a tram line in Nicosia and increase the bus fleet, and an additional 500 million EUR2016 for creating the necessary infrastructure for sustainable transport until 2030. These levels of investment are very large compared to what’s foreseen in other sectors, but they also lead to lower private investments in passenger vehicles. It is noted that the | 23 materialisation of these projections will necessitate infrastructure investments that will need to be partly financed by EU funds, and an equivalent level of public acceptance and adoption of these modes of transport to make such investments successful. Given the aforementioned changes foreseen until 2050, the expected impact on the emissions is presented in Figure 2.9. The expected emissions from the road transport sector are expected to range from 0.4 to 1.4 Mt CO2 eq. depending on the policies and measures implemented. 2500 2000 [Gg CO2 eq.] 1500 AMB PPM-interconnector 1000 NECP WEM 500 0 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 Figure 2.9: Estimated GHG emissions from the transport sector by 2050 where WEM is the “With existing measures” scenario; PPM-interconnector is the “Planned Policies and Measures” scenario with the effect of the interconnector; NECP is the “Planned Policies and Measures” scenario as submitted through the NECP; AMB is the “Ambitious” scenario towards carbon neutrality in 2050. Electricity emissions and CO2 from biofuels are excluded

2.4.3.2. Decarbonisation options Decarbonising transport is an enormous challenge and there will be a need to deploy a mix of clean technologies to accelerate the transition to a sustainable system. The forecast for the transport sector foresees penetration of alternative fuels and technologies such as LPG and electric. Electrification of the transport sector is regarded as a key step in the decarbonisation and diversification of fuel supply of this sector. Moreover, a drastic reduction in overall energy demand of the transport sector could be achieved through the promotion of sustainable transport modes. In addition to the policies and measures presented in the NECP the following are under examination for the achievement of decarbonisation in 2050: • Introduction of carbon tax • Further increase EE after 2030 • Further increase RES after 2030 • Fully electrified private transport by 2050; increasing trend starting from 2035 | 24

2.4.4. Agriculture and land use, land-use change and forestry (LULUCF) Agriculture The Common Agricultural Policy (CAP) promotes sustainable food production, sustainable farm management and environmentally and climate-friendly practices and methods. The measures that are implemented aim at preventing desertification, improving water management, reducing the intensity of natural resources, optimising the use of agricultural land, reducing the use of fertilisers and improving animal waste management, where special emphasis is given to the promotion of anaerobic digestion for the treatment of animal waste. In addition, the Rural Development Programme promotes forestry, which also increases the absorption from the LULUCF sector. Currently, the contribution of measures other than anaerobic digestion to the country’s overall emissions/absorption balance cannot and have not been estimated. Anaerobic digestion technology may help to address two congressional concerns that have some measure of interdependence: development of clean energy sources and reduction of greenhouse gas emissions. Anaerobic digestion, as a way of converting biomass to energy, has been practised for hundreds of years. It is a technology that helps to reduce waste, generate energy and cut down on carbon emissions. The general performance of anaerobic digesters and the diversity of wastes which they can treat have been increasing steadily as a result of new reactor design, operating conditions, or the use of specialised microbial consortia, during the last decades. In Cyprus there are currently operating more than 10 anaerobic digesters, of which the majority is at large animal farms. All available studies show that there is a great potential in Cyprus to further promote anaerobic digestion for the treatment of waste with high organic content. Even though anaerobic digestion is not clearly stated in the European or national legislation, the technology is preferred by large animal farms to comply with the terms stated on the wastewater and air emissions permits. The technology is strongly promoted by the Department of Environment, especially for the large installations that fall under the Industrial Emissions directive. Relevant national legislation that encourages the promotion of anaerobic digestion is (a) the Control of Water Pollution (Waste Water Disposal) Regulations 2003, Κ.Δ.Π. 772/2003; (b) the Control of Water Pollution (Sensitive Areas for urban waste water discharges) Κ.Δ.Π. 111/2004. It is a voluntary measure which is expected to increase. Therefore it is considered important to further promote the use of anaerobic digestion for the treatment of animal waste. LULUCF The Department of Forests is implementing a plan to increase forest tree production from its nurseries for planting in now non-forested lands. The campaign is titled “I plant for Climate” and is directed towards public or private organisations such as municipalities, churches, schools, NGOS and firms who wish to forest public or privately owned lands and who will agree to be responsible to provide the funds and care (i.e. water) of these areas for a minimum of three years. The Department of Forests, after evaluating the applications, will be providing | 25 the trees for free, taking into account the area of the plot and the specificities of the location, i.e. elevation. The plants supplied will be selected from a specific list of mostly indigenous, non-invasive species that are suited to the climatic conditions of Cyprus such as: Pinus brutia, Cupressus semperivines, Quercus spp., Juniperus spp., Tamarix spp., Laurus nobilis, Ceratonia silique, Myrtus nobilis, Nerium oleander and Rosmarinus officinalis. The scheme starts from around 70,000 trees in 2020 and is planned to reach 300,000 trees planted per year in 2030. Additionally, extensive tree planting of up to 650,000 trees along the urban road network and up to 350,000 trees along the interurban road network is an ambitious measure currently studied by the Ministry of transport. The cost of this action is estimated at €85 million and includes the planting cost and infrastructure changes required along the urban network, but it does not include the maintenance and watering costs. The positive impacts for this measure include C02 absorption, aesthetic upgrading, shading, lowering temperatures and better conditions for cycling and walking that could have a significant impact in the use of sustainable modes of transport. It is noted that the effects of this measure are long term, due to the amount of years required for a tree to reach a significant size and for the benefits mentioned above to be effective. These are the existing and examined policies for increasing absorption of CO2 from land. However, the general target is to achieve absorptions reaching 1100 Gg in 2050. Additional policies and measures will be examined, including proper LULUCF planning and implementation and LULUCF action plan which will lay down specific activities to increase absorption from the LULUCF sector.

2.4.4.1. Expected emissions Expected emissions from the sector of agriculture are expected to stabilise but not decrease during the coming decades due to the population of the animals (Figure 2.10). 800 600 400 200 Agri-AMB [Gg CO2 eq.] 0 Agri-NECP -200 Agri-WEM -400 LULUCF-AMB -600 LULUCF-NECP -800 -1000 -1200 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 Figure 2.10: Estimated GHG emissions from the sectors of Agriculture (Agri-) and LULUCF (LULUCF-) by 2050 where WEM is the “With existing measures” scenario; PPM-interconnector is the “Planned Policies and | 26 Measures” scenario with the effect of the interconnector; NECP is the “Planned Policies and Measures” scenario as submitted through the NECP; AMB is the “Ambitious” scenario towards carbon neutrality in 2050

2.4.4.2. Emission reduction options envisaged In addition to the policies and measures presented in the NECP the following are under examination for the achievement of decarbonisation in 2050: • Further increase of AD from 2020 (2020-2030 AD annual increase 0.75%, 2031-2040 AD annual increase 1%, 2041-2050 AD annual increase 1.5% in cattle, pigs and poultry) • Introduction of AD to sheep, goats, mules and asses, horses from 2031 • Annual decrease of N-fertilisers application by 1% from 2019 • Annual increase of compost and sewage sludge application on soil of 1% from 2019 • Increase absorption by 0.5% annually from 2030 from LULUCF | 27 3. FINANCING

3.1. Estimates of investment needed The cost for the implementation of the measures included in the strategy has been assessed only until 2030, during the preparation of the NECP. Details on the methodology are available in chapter 5 of the NECP. The total estimated investments in all sectors are 13.7 Billion Euros for the entire decade 2021- 2030, or about 70% of the country’s GDP in 2018, for the implementation for the existing and planned measures presented in the NECP. Although aggregate investment levels are similar in both scenarios (with existing and with planned measures), there are considerable differences in the kind of investments foreseen in each scenario. The long-term strategy is consistent with the planned measures scenario, which includes significant additional investments in renewable power generation, for promoting public transport, cycling and walking, and for energy renovations in buildings and industry. Although substantial amounts are required for such investments, the total amount over the decade 2021-2030 is counterbalanced by a strong decline in the expenditures for new cars because of the significant shift towards public and non-motorised transport, and a drop in investments in the power sector due to reduced energy needs thanks to energy efficiency measures. Additional investment needs to achieve climate neutrality by 2050 have not yet been assessed. Evidently these will involve significant amounts to be devoted to further decarbonisation of the power system, especially after 2040 when most thermal power plants will have been decommissioned and will have to be replaced by renewable sources and electricity storage infrastructure. Additional investments for zero-carbon fuels and engines to be used in road freight transport, shipping and aviation will also be important.

3.2. Policies and measures for related research, development and innovation Policies and measures for related research, development and innovation are described in paragraph 2.5, 3.5 and 4.6 of NECP. | 28 4. IMPACT ASSESSMENT OF THE SOCIO-ECONOMIC ASPECTS A comprehensive socio-economic impact assessment of the pathway of Cyprus to climate neutrality does not exist. However, it is possible to provide a preliminary assessment based on knowledge of current market conditions and the policy environment in the country. As regards social impacts related to changes in the cost of living of low-income households, the Impact Assessment study of the Cyprus NECP has shown negligible effects form implementation of planned policies and measures up to 2030, given the introduction of a neutral green tax reform that will provide for compensatory measures for households and businesses affected. As regards the longer term, which was not studied in detail, it is reasonable to assume that the cost of the transition to net zero emissions by 2050 can be modest to low and – if properly managed – will not affect disproportionately the most vulnerable parts of the population. More broadly, and judging by the fact that trade unions and political stakeholders have not expressed serious concerns up to now, it can be stated that the transition to a climate-neutral economy by 2050 can be sufficiently smooth and inclusive, thus avoiding the creation of adverse social effects in the population. It has to be reminded that Cyprus is a service-based economy without many heavy, energy-intensive industries in Cyprus, and without plants using coal. Economic activities that may experience a gradual decline in employment are a) the operation of thermal power plants and b) the import of fuels and motor vehicles. In power plants, job losses may be modest because the closure of thermal power plants is scheduled to take place in an orderly manner up to 2050, in line with the national NECP, so that some of the personnel of these plants may retire in the meantime; for other power plant employees, some re-training may be necessary so that they obtain skills in renewable energy and smart electricity grids. In the fuel and motor vehicle import sectors, employment impacts will depend on the pace at which electric cars will enter the market and on whether public transport will replace car mobility. People employed in sectors such as fuel stations and maintenance of vehicles may need to be employed in other similar activities that are expected to grow, such as operation and maintenance of public transport systems and electric vehicles. The need for alignment of enterprises with the objectives of a climate-neutral economy can create business opportunities in manufacturing and in the provision of consulting services. Construction is also expected to benefit from energy renovations and infrastructure investments in sustainable mobility and smart electricity grids. Overall, and as long as adequate re-training of parts of the labour force is foreseen, the transition to climate neutrality can yield positive (though modest) employment impacts. | 29 5. ANNEXES

5.1. Details on modelling (including assumptions) and/or analysis, indicators, etc. Modelling was performed from previously conducted work and Technical assistance received from SRSS using OSeMOSYS model of the Cyprus energy system6. It should be highlighted that since this modelling activity aims at indicating the effectiveness of existing and planned policies and measures (PaMs), the objective was no longer the identification of a cost-optimal solution for a suite of renewable energy and emission targets. As such, all hard constraints defined previously in regards to specific targets for 2030 were removed from the model, unless backed-up by specific policies. Therefore, no related constraint is left in the model for the horizon 2031-2050. The modelling performed was based on a wide range of technologies, complemented by assumptions regarding the evolution of the investment, operation, maintenance and decommissioning of these technologies. Various technologies were considered, beside those that are already available. Cost assumptions were drawn from recent historical trends, EU databases and other international databases, while specific studies of these sectors or technologies were taken into account. However, consideration was not given to technologies that are promising but have not yet been proven in the context of the real economy and the emergence of disruptive technologies between now and 2050, that are completely unknown today, cannot be disregarded (like Hydrogen and Carbon Capture and Storage). As a way to test the robustness of the RES and emissions trajectories to these uncertainties, some sensitivity analyses were performed for the most critical factors for the evolution of national emissions, revealing the impact of variations in some of the assumptions (for example, natural gas prices, technology costs, different scenarios on demand based on social aspects, etc) on the final modelling results. 6 Constantinos Taliotis et al., “Cost-Optimal Scenario Analysis for the Cypriot Energy System - Conducted under the European Commission Grant VC/2015/0004” (Stockholm: KTH-dESA, 2017), https://kth.box.com/s/xwzmo2a1epf4ltmwqodk4eeypopsnzjb. | 30 Figure 5.1: Energy system Models, Timescale and Technology Energy Storage Assumptions: In the OSeMOSYS model used for Cyprus NECP the Battery Storage was selected based on a number of interlinked benefits: (1) Battery storage was used to reduce the curtailment of RES in case this was economically viable. i.e. the model chose storage technologies, if the energy stored could participate in the market and receive enough compensation from it, so that investments were deemed to be economically viable (from the entire system point of view). (2) The batteries were used in the same manner as RES, assisting conventional plants in reducing start-up and shut-down costs (Storage technologies were also capable of providing spinning reserve that was defined as a function of the level of electrical charge on a ratio of 1:1.) (3) In UCED scenarios, the storage was used to provide additional services to the grid (without taking into account the financial benefits). It was used as a forced investment to cover the energy not served from the intermittency of RES. The results were used in the Long term Planning. (4) Storage options and conventional thermal plants were allowed to contribute 100% of their rated capacity to the capacity reserve margin, while RET without storage was allocated a lower capacity credit since their availability is intermittent (0% for wind & 20% for PV). (Recent assumptions allow up to 50% for PV, but the scenario was not tested yet) | 31 (5) Thermal Storage for CSP projects was not separated from the CSP plant, but it was assumed as an integrated system (or Hybrid System). This can be further improved in the future development of the model, but it was not expected to improve the results since the LCOE cost of CSP plant (without storage) is higher than PVs (without Storage). The above methodology followed seems to be slightly different from the method described in the “previous” PRIMES manual: “Large-scale storage is endogenous in the model (hydro-based pumped storage, air compression, and hydrogen-base storage): depending on economics, storage simultaneously smooth load and accommodates transfer of RES energy from times when RES availability exceeds load to times when RES is insufficiently available”. For behind the meter storage (which can be applied today to prosumers having net-billing support scheme, and later to the market participants – active consumers), it was assumed that: to avoid curtailment of RES production, every additional kWh produced from a RES System (that will not be self-consumed) has to come with storage (if it makes economic sense). Despite the level of curtailment, renewable energy technologies are deemed cost-effective due to their decreasing investment cost. The behind the meter storage was not able to take advantage of the time-of-use-tariffs since the market is not functional yet in Cyprus. However, based on a previous study performed by SRSS, the intra-day price difference until 2030 is not expected to exceed the LCOE price of the battery storage. From 2032 onwards the considerable investments in solar technologies and storage technologies substitute the variable costs as the main driver for the cost of electricity. Discount Rates Due to the different modelling approach followed in this study, it was important to implement technology-specific discount rates (Table 5.2). The data used in the analysis were drawn from the discount rates employed by the PRIMES model for the EU Reference Scenario 2016 (European Union, 2016)7. Table 5.2: Technology specific discount rates Discount Rates in Energy Supply Sectors Assumptions for EU Reference Scenario 2016 Discount Rate Regulated monopolies and grids 7.5% Companies in competitive energy supply markets 8.5% RES investment under feed-in-tariff 7.5% Investment under contract for differences 7.5% RES investment under feed-in premium, RES obligation, quota systems with 8.5% certificates RES investment in competitive markets 8.5% 7 European Union, 2016. EU Reference Scenario 2016: Energy, transport and GHG emissions - trends to 2050. Publications Office of the European Union, Luxembourg. | 32 Risk premium specific to immature or less accepted technologies 1-3% Risk premium specific to investment surrounded by high regulatory or None political uncertainty Country-specific risk premiums None Discount Rates of Firms in Energy Demand Sectors Assumptions for EU Reference Scenario 2016 Discount Rate Energy intensive industries 7.5% Non energy intensive industries 9% Services sectors 11% Public transport (conventional) 7.5% Public transport (advanced technologies, e.g. high speed rail) 8.5% Business transport sectors (aviation, heavy goods vehicles, maritime) 9.5% Country risks None Discount Rates of Individuals in Energy Demand Sectors Assumptions for EU Reference Scenario 2016 Standard Modified Discount Rate Discount Rate due to EE policies Private cars and powered two wheelers 11% 11% Households for renovation of houses and for 14.75% 12% heating equipment Households for choice of appliances 13.5% 9.5% Table 5.3: Existing thermal generation capacity Facility Technology Fuel Rated Capacity Retirement date* Type (MW) Vasilikos Combined Diesel (or gas if 440 31/12/2035 – 220 Power Plant Cycle Gas available) MW Turbine 31/12/2038 – 220 MW Steam Turbine HFO (or gas if 390 31/12/2032 – 260 available) MW 31/12/2037 – 130 MW Gas Turbine Diesel 38 31/12/2035 Dhekelia Steam Turbine HFO 360 TBD* Power Plant Internal HFO 102 31/12/2035 – 51 MW Combustion 31/12/2036 – 51 MW Engine Moni Power Gas Turbine Diesel 150 31/12/2031 Plant Total 1,480 *Based on the expected outlook provided by EAC. Table 5.4: Technoeconomic assumptions for RE technologies for generation | 33 Investment Cost Variable O&M Fixed Cost Capacit Lifetim (EUR2016/kW) cost O&M cost y Factor e (EUR2016/MWh (EUR2016/kW) (years) ) 2030 2040 2050 Utility-scale PV 886 611 9 18.5% 20 Wind 1,330 1,26 53 16% 25 6 Biomass-biogas 2,438 2,41 62 48.5% 30 5 Rooftop PV 1,241 1,01 12 18.5% 20 6 EOS 50 MW 106 39.3% 30 CSP with 8 hours storage CSP with 6 3,724 3,43 3.1 58.2 50.8% 25 hours storage 0 Table 5.5: Average Heating (HDD) and Cooling Degree Days (CDD) in Nicosia, 1984-2010 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec HDD 293.4 261.5 212.1 90.7 15.2 0.2 0.0 0.0 0.0 15.1 118.7 246.1 CDD 0.0 0.0 0.1 4.4 45.4 142.6 237.1 232.4 126.9 35.1 0.5 0.0 Figure 5.2: Assumed share of annual cooling demand for each hour within each month. Costs Due to the considerable investments in the electricity supply sector, the average cost of gross electricity generation increases gradually during the modelling period. Undeniably, this is a function of the assumed fuel price and technology costs adopted in the model. Figure 5.3 provides a breakdown of the different system cost components; these are all undiscounted8. As illustrated, a reduction in cost is achieved when the system shifts fully towards gas-fired generation in 2021. It can be noticed that variable costs (i.e. fuel costs) are the main driver of 8 Undiscounted costs are reported to avoid giving the wrongful impression that costs are expected to decrease dramatically with time. Taking into account that the discount rate adopted is 8.5% for most technologies in the electricity sector, if the cost were to be discounted to the first year, then the values after the first few years would be distorted (i.e. reduced) substantially. | 34 the electricity cost till 2031. From 2032 onwards, the considerable investments in solar PV and storage technologies (Figure 5.4) substitute these variable costs as the main driver for the cost of electricity. The rate at which these investments occur is considerably high in the period 2030-2040 and raises the question of adequate funding to finance all this infrastructure. 900 800 Million EUR2016 700 600 500 400 300 200 100 - 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Fixed Cost Variable Cost Annualized Investment Cost Figure 5.3: Average cost of electricity and breakdown of system cost components – Existing PaMs scenario. 300 250 Million EUR2016 200 150 100 50 0 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Solar PV Rooftop PV Pumped Hydro Li-Ion batteries Figure 5.4: Annualized investment costs in solar PV and storage technologies in the period 2020-2050 – Existing PaMs scenario. 800 700 Million EUR2016 600 500 400 300 200 100 - 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Fixed Cost Variable Cost Annualized Investment Cost Figure 5.5: Average cost of electricity and breakdown of system cost components – Planned PaMs scenario. | 35