Time to reassess the EU’s environment and climate change policies

EU leaders are meeting today in Brussels to discuss the EU’s 2030 energy, environment and climate change framework which will likely involve some new targets for emissions reduction. You can find our full thoughts on the original Commission proposal here – but broadly we think that the more flexible structure is a good approach and that dropping the binding renewables target is the right approach.

To that effect Open Europe today published a new comprehensive analysis of the EU’s 2020 framework. The highlights that some of the key assumptions that drove the policy have proven to be incorrect:

1. A global deal – Without this the net benefits of the EU’s approach fall from over €200bn to between -€11.4bn and -€20.6bn.
2. Emissions targets will lead to lower emissions – while the UK’s domestic carbon emissions have stabilised or even fallen slightly, its overall consumption of carbon has risen (save for a drop during the financial crisis).
3. UK’s targets are achievable – Recent simulations for the European Commission suggest the UK will fall 4% short of its target of 15% of energy from renewable sources by 2020.

4. Technological developments will cut cost of renewables – renewable energy remains, for the large part, reliant on subsidies and unable to compete with fossil fuels on the open market.

5. UK’s energy security will increase – far from increasing, the UK’s energy future looks more uncertain than ever, with talk of blackouts now commonplace in the media. The renewables target is exacerbating the coming energy crunch. Given the intermittent and unpredictable nature of many renewable sources close to 50% of the UK’s generation capacity will need to be from renewables. The only real option is offshore wind. However, given the size of fields needed they will need to continually move into deeper, rougher water. The available data suggest a clear correlation between deeper water and higher costs.

Therefore, while the likely removal of the renewables and other binding targets from 2020 to 2030 is welcome, we believe it will not be sufficient. In particular we highlight that the current policies are having a significant impact on bills. Open Europe estimates that, in 2013, the average household’s dual gas and electricity bill was increased by £59 (5%) due to EU regulations or UK implementation of EU defined targets. By 2020, EU-related regulations or targets will increase annual household bills by £149 (11%).

The impact on medium sized businesses is particularly troubling as shown in the graph below. Open Europe estimates that in 2013 the average medium sized business bill was increased by 9% (£130,000) due to EU regulations or UK implementation of EU defined targets.  By 2020, EU-related regulations or targets will increase medium sized firms’ bills by 23% (£350,000). With these figures there are some caveats: DECC claims that there are sufficient offsetting policies which will reduce these costs, however, it’s not clear why these cannot exit in any case (i.e. why bills could not be even lower on net) and that even if these policies were changed, the costs may not evaporate entirely.

Lastly, in terms of the overall picture these policies have proven to be costly but with limited benefit, while many countries, including the UK, look off track. Therefore, we recommend an urgent reassessment of the current policy along with the 2030 framework. After all, if there is a move away from a binding renewables target after 2020, logically it seems strange for governments and businesses in the UK to make huge investments just to meet the current target which will soon be obsolete.

A crucial part of EU reform will creating more flexible policies which can adjust to changing circumstance, which involve continuous, rigorous economic assessment and where mistakes can be undone. This seems as good a place to start as any.

The Balance of Competence Review: some interesting stuff but this is becoming a painful process for Downing Street

With little fanfare, the Government has today published the second round of Balance of EU Competences reports – now making it 14 reports published in total. We won't accuse the Government of seeking to bury the latest batch of reports in the week of the worst UK floods for decades or a major announcement on an independent Scotland’s inability to use Sterling. Rather, it probably wanted to get them out before parliamentary recess.

However, the reports are a mixed bag with the most controversial one - free movement of workers - still missing. While the individual reports contain tales of dissatisfaction with the status quo and EU over interference within policy areas, the reports remain largely descriptive. None of the reports draws any deep conclusions on the broader balance of power between Westminster and Brussels, which they clearly didn't set out to do.

Some of the other reports are far better than others. The Trade and Investment report is genuinely interesting, for example. While some disagree with the report’s conclusion that membership of the customs union and the single market represents the best option on offer for UK trade, the report does at least engage with the alternatives and key debates, such as whether the EU is trade diverting or creating and the fact that the European Parliament can be a liability in trade talks.

We agree that on trade grounds the UK is at the moment better off inside (a reformed) EU.

The Transport report expresses concern about EU action that “fails to take account of the distinct circumstances of Member States with peripheral geographic locations, such as the UK.” The Environment and Climate Change report also contained some interesting factoids. The House Builders Federation for example noted that “in some areas 85% of Community Infrastructure Levy is required for mitigation of the Habitats Directive 92/43/EEC, leaving little funding for schools and roads, commenting that this is disproportionate and unsustainable.” And that EU rules can add 18 months to the life cycle of a planning application.

These reports present a useful catalogue of the extent to which the EU now permeates almost all aspects of the UK economy and society, and the logical conclusions of the transport and environment papers is that we need to do more to maximise the EU's trade opportunities but also have some seriously effective mechanisms to fight over-regulation, such as "red" and "green" cards for national parliaments.

Still, the desire for these reports not to reach any ‘controversial’ conclusions, whilst understandable on one level, has created another problem for David Cameron. European partners, media and his MPs may eventually ask ‘Why commission a review that seemingly contradicts your own policy?’ And why seek change when the "evidence" shows that everything is all well apart from some problems at the margins. We still think the basic idea behind the BoC is sound but there's a problem with what this exercise has turned into. It's not so much an attempt to assess the balance of powers but a descriptive public consultation. In its attempt to avoid drawing conclusions, it is doing precisely that, even when the wider criteria against which to measure EU involvement - which should be the point of this exercise - is absent.

Consider the Culture, Tourism and Sport report. In places, it reads like a European Commission advert for EU intervention. For example,

“…Over the last 20 years a Media Programme has supported some highly acclaimed British films including This is England (Shane Meadows, 2006), The King’s Speech (Tom Hooper, 2010) and The Iron Lady (Phyllida Lloyd, 2011). In 2010, UK companies received €8.7m to support the production, distribution and screening of films in the UK, and over €6.7m was invested to boost the European cinema releases of over 40 British films.”

That a report drafted by the Department for Culture, Media and Sport with evidence submitted by various organisations drawn from the culture sector should conclude that the EU’s culture competence is “an important source of funding for the sector, as a driver for new creative partnerships, and as a vehicle for promoting the UK’s ‘soft power’” is hardly a surprise.

Some spending on warm and fluffy initiatives such as films may seem like no big deal. But this is one of the fundamental problems with this entire exercise. Because there is no one weighing these micro aspects of EU membership against a wider set of principles it tells us little about the wider UK national interest. I.e. this funding is simply money the UK has already handed over to Brussels and that surely, if these projects should be publicly funded at all, this should be a decision made by people far more accountable to UK taxpayers than EU officials?

The Balance of Competence Review process was meant to provoke debate about the impact of the EU on the UK writ large. Unless he starts a process of putting these individual reports into the wider context of his vision for the EU, this could become a painful process for David Cameron.

When the lights go off who will be to blame the UK or EU?

Will EU policies switch off the lights?

When 100 years ago a British Foreign Secretary observed that:

"The lamps are going out all over Europe, we shall not see them lit again in our life-time"

he was referring to a particularly bad phase in European politics.

100 years later EU energy and climate change policies mean Europe could soon be trying to relight those same lamps in the face of impending power cuts.

Today OFGEM the UK's energy regulator has issued its latest report on the UK's generation capacity and it makes interesting reading (by candlelight).

Firstly they predict that by the winter of 2015 (election year) there are likely to be several hours of power cuts (figure 24). This has been brought about because of the closure of coal plants and a growing reliance on wind (figure 1). The report names the EU's Large Combustion Plant Directive and the fact that only 17% of wind generation can be relied upon compared to 80-90% for other generation methods. OFGEM concludes "reasonably small changes in conventional generation availability have a material impact on the risk of supply shortfalls". Worryingly wind seems to be there least when we need it most. Key graphs here:



Power cuts in election year?

Gerneration capacity in the UK will be less reliable

So why has this come about? A large part of the problem emanates from climate change policies locked in at the EU-level (it has to be said, promoted by the UK Government at the time). Open Europe has long pointed out that EU policies are riddled with contradictions and inflexible targets. Here is a recap:

• The Emissions Trading System (ETS) - a market based system of cap and trade that in theory should produce the most cost effective emission reductions. In practice, an over allocation of permits and the economic downturn have lead to such a low price of carbon and it is not doing its job.
• The EU's renewables target -This imposes a mandatory level of renewable electricity production from renewable energy. This flatly contradicts the first policy as renewables are not always or often the cheapest way to reduce CO2 emissions. And, even if they were, by mandating them you push the price of carbon down yet further so reducing the pressure for lower emissions in other sectors.
• Large Combustion Plants Directive - this mandates that many coal fired plants should close on pollution grounds.

In the UK these policies have been supplemented by the Treasury's self-imposed carbon price floor which effectively funnels more cash to non fossil fuel electricity production. As renewables are already heavily subsidised this is in effect a subsidy for nuclear. And if no new nuclear plants are built it is really a pointless bung to existing plants.

So how has the UK got itself into a position of not having enough electricity generation? Well underinvestment caused by a changing regulatory environment led by unrealistic and contradictory EU climate policies that have lead to a closure of coal plants and their replacement by unreliable wind energy.

Will Poland become the new North Korea of Europe?

This question can of course be filed under John Rentoul’s ‘Questions to which the answer is No’ category, but there is a significant chance that Poland will be the only EU member state to veto a new EU deal on climate change later today, meaning that at the very least we can expect Europe-wide condemnation and statements along the lines of Poland risking becoming permanently “isolated” right? After all, this was largely the immediate reaction in the European and UK press to David Cameron’s veto over embedding rules on budgetary discipline for eurozone members within the EU Treaties (see our response here), after he claimed such a move was not in the UK's national interest.

We doubt it though.

Some quick background: at today’s meeting of EU environmental ministers, it will be decided whether to adopt the EU’s 2050 low-carbon roadmap which seeks to set out a series of ‘milestones’ in terms of emissions reductions up to 2050. According to the roadmap, the most cost-efficient way of moving to a low-carbon economy is to achieve a 25% reduction by 2020, a 40% reduction by 2030, and finally a 80-95% reduction by 2050 (compared with 1990 levels). Agreeing on the roadmap is a first step to set legally binding emissions targets for the years beyond 2020.

The plan is backed by the Commission, the European Parliament and many member states (including the UK). However Poland has expressed strong concerns, indeed it already vetoed the 25% target once, back in June last year. Given that over 90% of Poland’s energy is generated from coal, this position is not surprising. Polish Environment Minister Marcin Korolec wrote to his counterparts warned against going beyond the agreed 20%, arguing that:

“There is no point whatsoever in gambling with the European economy’s future, introducing policies that might put our industries in jeopardy versus our competitors”

Ultimately is possible some sort of a deal could yet be thrashed out, but as yesterday’s Gazeta Wyborcza reported, Polish Government sources have made it clear they will not hesitate to block the deal unilaterally if is feels it is against its national interest. Unsurprisingly, many other member states and EU officials have not hidden their frustration with Poland's position.

There probably won't be any Auf Wiedersehen Polen headlines in the press, but this episode serves as a useful reminder to those who interpret UK-EU relations as a case of the latter being in permanent isolation. The truth is, as ever, far more complex.

Various EU member states maintain a special interest over economic sectors, industries and/or EU policy areas where they feel these are vital to their wider national interest. For example, the French have a dominant position in agriculture, the Spanish in fishing, the Germans in car manufacture and the UK in financial services, while Poland’s equivalent, naturally, is energy and environmental legislation.

Rather than trading in hyperboles, we should seek to establish a practical and intellectually consistent model for European cooperation, which can comfortably harbour such diverging interests.

Taxing questions

The EU's new Taxation Commissioner Algirdas Semeta has announced that he is planning to revive previously shelved plans for an EU-wide carbon tax, aiming to set a minimum levy of €10/tonne of CO2 emitted (although the exact level is a bit unclear) from energy sources such as petrol, coal, and natural gas when they are used as motor and heating fuel, or to produce electricity.

Based on the Commission's previous proposal we've calculated that such a tax would cost the UK economy at least £3.2bn a year. This cost will hit poorer consumers and small businesses disproportionately hard.

Is the cost worth it? Well, a carbon tax can, and has worked in some member states - Sweden being the most conspicous example (the country has cut carbon emissions by 9% since introducing a carbon tax in 1991, while the economy has grown by 48% during the same time period). Unlike the EU's flawed Emissions Trading Scheme, a carbon tax would create a firm price on carbon (although still largely arbitrary) and ensure that polluters have to pay rather than being rewarded. This, in turn, would provide a strong incentive to switch to, and invest in, green energy. If replacing other, poorly targeted, CO2 policies a carbon tax could be the right way to go.

But apart from this discussion, the proposed tax raises two further important issues.

Firstly, why an EU-wide harmonised tax? We must remember that the EU already has all manner of climate change policy instruments playing different tunes. It has an extensive cap-and-trade system for large emitters of CO2, such as power generators and heavy industry. It has heavily prescriptive renewable energy targets and biofuel targets (the latter of which even the Commission now admits might be a mistake). It also has various other environmental regulations restricting emissions such as the Large Combustion Plant Directive, which will force the closure of nine of the UK's power plants by 2015.

Those in favour of an EU-wide tax say that it must be harmonised across Europe in order to avoid 'distortions to the Single market'. However other countries, Sweden for instance, have successfully implemented a domestic carbon tax without any detrimental impact on their economies.

But more importantly, if the stated end goal is not EU tax harmonisation in and of itself but emissions reduction, all that really needs to be decided at an EU level is the extent of the emissions reduction targets. As for the means, who cares? The job of meeting these targets should be left up to member states, who are best equipped to devise a policy mix tailored to their individual circumstances - and when it comes to energy, these are often very diverse.

A carbon tax may be a cost-effective option, or it may not. But it should not be the European Commission's job to decide.

This leads us to the second issue. There are understandable concerns that the Commission has an ulterior motive for its carbon tax. While the current proposal would see member states collecting the revenues from any tax, such "eco taxes" have long been seen by many within the Commission as a way of directly financing the EU budget - a view shared by EU President Herman Van Rompuy.

If such a carbon tax were established, it would clearly create an obvious focal point for those calling for an EU funding stream that bypasses member states' treasuries, with the ultimate aim being a direct tax.

All the more reason to follow a pragmatic approach that concentrates on the stated aim of cutting emissions at the lowest cost to businesses and consumers, rather than creating yet more centralised and complex EU rules that limit member states' ability to tailor climate change policies to their own needs.

Turn the air con down

The Department of Energy and Climate Change has produced an Impact Assessment for the Government's 'Renewable Energy Strategy' - in other words, its plans for meeting EU targets for renewable energy. It it rather serious stuff. The plans will cost £4.2bn a year ,with annual benefits of £0.3bn a year. The cumulative cost is estimated at £60bn over 20 years, while the value of carbon saved is estimated at £5bn.

While these large figures might seem pretty abstract to many, the following will not. A significant proportion of the cost will be passed on to consumers, with the Government estimating that domestic electricity prices will increase by 15 percent and gas prices by 23 percent by 2020. This equates to average increases of £75 and £172 to electricity and gas bills.

Besides the cost, the UK’s share of the EU target of producing 20 percent of energy from renewables by 2020, a national target of 15 percent, is widely regarded as 'ambitious' and by others as 'unrealistic'.

Those in the latter camp include the UK's Chief Scientific Advisor at the time the agreement was made (Tony Blair was in the hotseat for us). Sir David King said:

"I think there was some degree of confusion at the heads of states meeting dealing with this. If they had said 20% renewables on the electricity grids across the European Union by 2020, we would have had a realistic target but by saying 20% of all energy, I actually wonder whether that wasn't a mistake."

In a report last year we estimated that the EU's entire climate and energy package, of which the renewables target is only a part, will cost the UK £9bn a year and push an extra 1 million people into fuel poverty.

We're not arguing against an EU role in fighting climate change - a global challenge which the EU can contribute to solving with regional cooperation. We are, however, objecting to the EU's desire to micro-manage and continually centralise policy.

An EU-wide binding renewables target removes the UK’s flexibility to find the cheapest way of reducing emissions, which should be the overall aim. The cost is so high because the Government is now forced to 'pick winners' by subsidising the renewable technologies it thinks can achieve reduced emissions at the cheapest cost.

State bureaucrats do not have the ability to predict new advances in renewable technologies and their relative costs, which are at different stages of development and also depend on the fluctuating price of fossil fuels.

Saving the World - Brussels style

From Swedish blogger Johan Ingero:

The European Parliament has decided to take new, radical action in the fight against climate change. Tomorrow night, all lights will be turned off in the Parliament's buidling between 6 pm and 7.30 pm...

As the EP's Secretary General Harald Römer explained in an internal email:

"In the context of the fight against climate change, the European Parliament has committed itself to cutting down its carbon emissions by 30% by 2020. This is to be achieved through various activities, based on detailed studies, and under the political guidance of the Bureau. The European Parliament is also participating in various activities which aim at drawing the attention of European citizens to this goal.

[...]

Like the previous year, the European Parliament will play its part in this event by switching off all the outside lights and the maximum possible of inside lights in the buildings at Brussels, Luxembourg and Strasbourg, between 18.00 and 19.30. All of the Members and the staff in these three places of work and in the Information Offices in the Member States are invited to switch off, at the same time, the lights in their own offices."

Very impressive indeed - and what better way to exemplify the EU's global leadership in tackling climate change...?

For those of us not living on Planet Brussels, perhaps a better place to start would have been to end the Parliament's montly travelling circus. This utterly ridiculous exercise means that 5,000 people are transported between Brussels and Strasbourg every month, generating an extra 20,000 tonnes of carbon dioxide each year - for no good reason whatsoever.

In any case, as Johan Ingero points out, turning off the lights in the EP on a Friday afternoon shouldn't be much of a hassle , given that at that time virtually all MEPs are long gone for the weekend already.

China's $300bn request

According to the FT, China has just "raised the price of its cooperation in the world's climate change talks" by demanding that developed countries spend 1% of GDP on transfer funds to poorer nations to help them reduce emissions. For the EU, this would equate to $160bn, and for the US, $130bn. The Chinese conceded that even such large funds "might not be enough".

China has done more than just raise the price for its cooperation - unless this is some kind of ruse, it has thrown a spanner in the works of climate change diplomacy. It is supremely unlikely that the US or Europe would be at all in the mood right now to pledge such enormous sums.

Some transfers will occur through the continuation of the Clean Development Mechanism (CDM) - which allows western governemnts and companies to offset their emissions by buying in permits for apparently 'green' projects in developing countries. But leaving aside the fact that these projects are usually useless or harmful, CDM transfers won't put much of a dent in the amount the Chinese are asking for. If we go with the Commission's estimate that between 2013 and 2020 EU industries in the Emissions Trading Scheme will be allowed to offset around a third of their reduction commmitments through the CDM, this would mean 100-150 million tonnes worth of 'reductions' could be 'imported' in this manner.

Even assuming a relatively high CDM price of $25 per tonne, this would only equate to transfers of just under $4bn. Even if ALL of the reduction commitment under the ETS was to be met through offset credits (which will probably actually happen in the current trading phase), this would imply transfers of about $10bn. There'll be some demand from the non-ETS sectors and national governments, but that won't raise the transfers by more than a few billion dollars worth of permits. It's a long way off $160bn.

In short, what the Chinese are asking for goes way, way beyond the existing mechanisms for transferring (pretty substantial) funds to developing countries to fight climate change. The amount of money being requested is ludicrous and unrealistic and will probably be scaled down, but the principle of asking for large financial transfers is likely to be maintained during negotiations. India has been less brazen, but will probably row in behind the Chinese on this.

As Prof. Dieter Helm (who advises the UK government on energy matters) has pointed out, the rest of the world doesn't regard the EU 20-20 by 2020 targets as realistic or credible (and neither it seems do many EU member states). The EU position is mere “political rhetoric” he says. Bearing in mind this lack of seriousness/ realism on the part of the EU, it's not hard to see why the Chinese want to secure huge sums of cash as a kind of insurance policy before making any binding pledge on carbon reductions.

A Warsaw-Beijing pact on climate change?

According to Reuters, the Poles are calling in some heavyweight support in their bid to outflank the EU on tough new conditions for coal burning industries.

Polish Prime Minister Donald Tusk told a press conference in Beijing Thursday:

"I expect that in China we will find an ally for the global climate talks. We are in a similar situation due to our coal-based economies. We cannot allow fighting climate change to destroy them."

Any global deal on climate change will be close to useless without Chinese backing, meaning Poland's position would be considerably strengthened by any alliance with Beijing on this issue. This follows earlier endorsement for Warsaw from fellow ex-communist EU members and a big western European power in Italy.

As we argued before, the potential for European consensus on climate change policy has undoubtedly been damaged by the overly interventionist and centralised approach adopted by the Commission.

This bodes ill for any EU agreement by the end of the year, and more importantly, any global deal.

Climate change goes off the (Media) scale

According to the Press Association David Cameron has claimed today that the Conservatives are leading the way on climate change. He claimed credit for "pressurising" the Government into drafting the Climate Change Bill. "If it wasn't for our pressure the Government would not have put the Climate Change Bill in the Queen's Speech." Climate change is certainly now taking up a rainforest-destroying amount of space in the newspapers.

It chimed with a question posed to us by a journalist yesterday: "Remind me again - when exactly was it that climate change became a massive issue?". So using the power of intern slave labour we've plotted the number of times the phrase "climate change" came up on the lexis-nexis database of UK papers each month since the turn of the century. For the purposes of assessing what's occupying our national attention we have also plotted "competitiveness".



Climate change was already on the up before Cameron - starting to take off some time in 04. But the graph has certainly gone nuts since he became leader at the end of 05. Climate change now takes up about four times as much media space as competitiveness. It remains to be seen whether it will carry on though. What does this say about where we are as a country?