Three target approach
The Brussels energy debate has become obsessed with targetology. Where political divisions used to form over particular technology choices, they are now defined by how many targets should appear in the EU 2030 energy and climate package.
Unsurprisingly this debate is generating more heat than light. Discussions over the arcana of target design have replaced the real debate we need on the right direction for European energy policy over the next 15 years.
This debate would start from a very different place. Namely what are the big changes since the last EU energy package, and how should European policy change to help deliver affordable, reliable and decarbonised energy systems.
The energy landscape has changed fundamentally. Though US shale gas dominates the headlines, the real change for the European consumer has been an increase in oil and gas prices to levels unanticipated in the 2020 package. These prices will be sustained, or even increase, as demand rises in emerging economies. Although efficiency measures have stabilised the quantity of fossil energy imports, price rises have driven import costs up by €200 billion each year. This has had a devastating economic impact on the economic recovery and living standards. Even in Germany over 13% of households are now fuel poor.
So the foundation of any future European policy must be to increase the efficiency of energy use. There is no point building expensive clean energy plants if the energy is just wasted through poor demand infrastructure. Implementation of economically viable efficiency measures could save net costs of €240 billion a year by 2030, boosting EU competitiveness and growth.
But experience from best in class EU countries like Denmark shows that delivering these benefits requires strong policy and market reforms. The failure of the 2020 energy efficiency goal shows that voluntary commitments will not drive these hard choices.
A cost-effective European energy policy for 2030 must focus on “demand side first” and be driven by an ambitious and mandatory energy efficiency target, backed by measures to help countries implement and finance their policies.
Electricity markets have seen fundamental shifts as the penetration of renewables has increased. Nuclear power has been rejected, or scaled back, by several major European countries. Despite generous EU subsidies carbon capture and storage (CCS) has made little progress towards commercialisation. Meanwhile the costs of renewable energy equipment have fallen dramatically as China entered the global supply chain.
As a result of these shifts, all recent studies of cost-effective EU decarbonisation pathways show a “no-regrets” pathway with a steady build out of renewables to 2030. Alternative decarbonisation scenarios relying on higher gas use – driven by rising carbon prices – can show some short term cost savings but involve risks of very high carbon prices to maintain decarbonisation if CCS is delayed further or demand is high.
An 2030 EU renewables target would give the foresight and certainty to investors needed to deliver this the energy we need. While there are legitimate arguments over the best level and allocation of an EU renewables target, it is the lightest touch policy to keep on a low risk and cost-effective pathway.
However, this is not enough. Reliably delivering this growth in renewable generation requires complementary goals and mechanisms to build stronger and smarter grid infrastructure, and reforms to drive market integration and creation of demand side markets. All these reforms will result in lower costs and greater security, but even just building out a more optimal grid system would save consumers nearly €500 billion to 2030.
A framework for delivering investment in an efficiency and renewables provides a firm basis from which Europe can fix a forward carbon target. Clever European climate diplomacy has secured the opportunity to agree a comprehensive and binding global climate change agreement at Paris in 2015. But success is far from assured and Europe needs a 2030 carbon target which will set the bar for ambition, helps build agreement and is consistent with a cost effective path to a 2C future. The current Commission proposal of 40% GHG reductions meets none of these criteria. In fact the 40% target could be met solely through cost-effective energy efficiency, removing any incentive for clean investment in other parts of the economy. A 40% target would result in a slowing of current rates of EU decarbonisation not an acceleration. To maintain investment incentives the EU should set a 2030 target of 55% reductions from 1990 levels, and reform the Emissions Trading System so it can set the carbon price needed to deliver the additional reductions to reach this goal.
A 2030 energy and climate package is about driving a fundamental transition in EU infrastructure and markets. It must be built on a base of ambitious energy efficiency and continued build-out of diverse renewable energy sources; underpinned by reforms to deliver strong, smart European infrastructure and efficient, integrated markets. Emissions Trading Reform can then drive the additional GHG reductions to put the EU onto a cost-effective transition to a zero-carbon energy economy by mid-century. Showing its serious intent to deliver a low carbon economy is Europe’s best diplomatic lever to increase the ambition of other major countries in 2015. Only a credible and comprehensive 2015 agreement can set the conditions for controlling climate risk to levels which preserve the security and prosperity of Europeans. A strong 2015 agreement will also create a fair playing field, and strong export opportunities, for European businesses. If delivering all these benefits involves implementing a few targets – it seems a price well worth paying.
Nick Mabey E3G
Single carbon target
Saving a ton of carbon through the Renewable Energy Target (RET) can cost upwards of €500, research produced independently by the OECD and Policy Exchange shows. Saving a ton of carbon in the EU ETS right now costs less than a fiver. Because emissions from the electricity sector (where the RET is mostly being met) are already capped by the EU ETS, the environmental benefit of the former saving is no greater than the latter. Only the price is.
The RET is probably the most misguided of many recent energy policy blunders. While having no environmental benefit of its own, it undermines the main driver of European carbon policy, the EU ETS. It drives down the visible carbon price, while at the same time forcing energy users to pay a vastly higher, hidden price.
Renewable energy targets accompanying a cap-and-trade system are either cost-ineffective, because they force more expensive abatement than the marginal EU ETS price, or redundant, because they force abatement at the same cost or lower than the marginal EU ETS price. But, while they will not reduce emissions, they will get renewable energy projects built. Clearly that alone is what some politicians want, but when it has no environmental effect, there is no good reason to support it. Mandating deployment by a fixed date drives costs up, not down, as countries scramble to outbid each other for limited capacity, skills and equipment.
By making decarbonisation more expensive, the RET makes it less appealing for the rest of the world to replicate Europe’s efforts to tackle climate change. It uses up the public’s willingness to pay more, while providing little in return in terms of reduced emissions. By raising the cost of electricity, it also deters electrification of other sectors such as heat and transport.
Energy efficiency policies should be less economically damaging, as efficiency measures are often (though by no means always) the cheapest abatement options. Still, taking decisions about energy efficiency out of the EU ETS removes the ability of the system to generate information about the relative costs of efficiency and other abatement options, which is one of the main advantages of a market-based system.
There are valid arguments about support for currently immature technologies which will be needed to address climate change. But setting arbitrary targets which force you to subsidise the mass roll-out of known, but immature technology is a bad way to support innovation. Arguments on security of supply and green jobs, while politically attractive, are less convincing.
Europe needs one target to address the environmental problem – greenhouse gas emissions – and which provides a strong, long-term signal. Climate change is an extraordinarily difficult problem to solve. Addressing it requires big investments, some of which have to be made today, in a time of economic hardship. Climate change policy, therefore, cannot afford to be profligate. There isn’t an infinite amount of money sitting around. We have to spend our money as cost-effectively as possible. The current approach is like being given £1,000 to feed as many people as possible and starting by ordering caviar. Squandering money on hugely expensive renewable energy projects is an unaffordable and wasteful luxury. The debacle of the renewable energy target must not be repeated.
Simon Moore is senior research fellow in the Environment and Energy unit at Policy Exchange
Twitter: @Smoore1984