Strengthening the European Union’s low-carbon ambitions would revitalise investment in the green economy and deliver health and environmental benefits, according to the European Commission.
The EU’s executive body has published a working paper that analyses the costs and benefits of increasing the EU’s greenhouse gas emissions target. It says that although a more ambitious target would be more costly, it would trigger the innovation, growth and job creation that the original 2020 climate and energy package was designed to achieve.
The 2020 climate and energy package set a target to cut greenhouse gas emissions by 20 per cent over 1990 levels. Although the EU is not far from achieving this – emissions in 2010 were 14 per cent below 1990 levels – the Commission recognises that the reduction is mainly due to the economic recession rather than policy instruments such as the Emissions Trading System (ETS).
Effect of the recession
In fact, the recession has highlighted the poor design of the ETS by exacerbating an overallocation of emissions allowances and leading to a large buffer of allowances on the market. Carbon prices have plummeted, falling to €6.5 per tonne of carbon dioxide in January 2012, compromising investment and innovation in low-carbon technology.
The working paper suggests that the 2020 greenhouse gas emissions target could be strengthened to 30 per cent, a move the Commission believes would revitalise the low-carbon economy and consolidate the region’s pathway to the low-carbon targets set out in the 2050 roadmap.
The timing of the publication of the working paper is good. The European Parliament is already discussing ways to reform the ETS and debating the proposed Energy Efficiency Directive (EED). If it fails to deliver a strengthened ETS and an effective EED with binding targets, any discussion about climate ambitions might as well be forgotten.
“We need to correct and recalibrate the ETS to provide a clear investment signal and put Europe on a long-term decarbonisation path,” said Sam van den Plas, climate and energy policy officer at WWF.
WWF says emissions allowances should be taken out of the market to provide a short-term fix for the low carbon price. A recent WWF position paper states that the withholding of allowances “must deliver a full recalibration … taking into account the effects of the past overallocation, the inflow of offsets and the economic downturn”.
On the right trajectory
WWF also wants an adjustment to the annual cap on ETS allowances. The current annual linear reduction is set at 1.74 per cent, but changing this to 2.5 per cent would set the EU on a trajectory towards a 90 per cent reduction in emissions by 2050 – in line with the 2050 roadmap.
Both of these amendments have been proposed in parliament, but it is not clear how much political support they will attract. Kash Burchett, Europe analyst at IHS Energy, says the markets do not hold out much hope for carbon prices. “We don’t know what degree of intervention to expect ,” Burchett says. “There is a growing expectation that something will happen because it is being pushed by the Danish presidency … people are not expecting a massive upswing in the carbon price.”
Burchett says reforms must go deeper if Europe is to meet its long-term climate targets. “There are many subsidies in place supporting coal production and in several jurisdictions the merit order favours coal,” he says. The result is that natural gas is being squeezed out by renewables and, in some places, coal, although natural gas is useful as a low-carbon fuel and can provide a flexible back-up for intermittent renewables. “Conflicting subsidy regimes are in place and adding new targets won’t help,” Burchett says.
The European Parliament’s Environment Committee has already voted in favour of withholding emissions allowances. Further votes are expected by the industry committee and MEPs in March. The outcome of the debate in Brussels will reveal Europe’s political appetite for ambitious climate targets, but governments will be reluctant to support legislation if it means a rise in energy prices.
Cost of change
The Commission’s analysis reveals that achieving a 30 per cent reduction in greenhouse gas emissions by 2020 would cost an extra £60 billion, and would require investments of £15 billion more every year between 2016 and 2020 compared with the 20 per cent target.
But it also shows that achieving the 30 per cent target by 2020 would save an average of £17 billion in fuel costs each year between 2016 and 2020 compared with the 20 per cent target, reduce air pollution costs by £2.3 billion and produce EU-wide health benefits worth £2.9-6.7 billion a year. National revenues from carbon emissions allowance auctions would also be higher because the carbon price would be raised.
Nevertheless, even Europe’s richer nations are struggling under the weight of debt, and energy companies are increasingly looking outside Europe for investment opportunities because of the financial, regulatory and operational risks in Europe. The appetite for investment is questionable.
“The problem is that we are facing multiple crises and budgetary constraints, but there is still a clear climate crisis,” says van den Plas, who believes the revenues generated by auctioning carbon allowances in a Europe with ambitious climate targets will help trigger an “investment cycle”. “We can reduce dependence on fossil fuels, reduce the cost of air pollution and gain other benefits. We are convinced that the notion of tackling multiple crises at the same time is possible.”
This article first appeared in Utility Week’s print edition of 2 March 2012.
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