What lies behind the Government’s renewed interest in the Severn barrage?

A lasting monument to the EU's renewables targets

It has been reported that David Cameron’s attention has fixed on the old idea of building a Severn barrage to provide renewable energy. Much of the reporting puts this in the context of the politics of infrastructure spending; however there may be another reason that we have previously highlighted for his renewed interest. That being that he has little choice if his own desire to comply with the UK’s EU target of producing 15% of its energy form renewable sources by 2020 is to be met.

Background
The EU’s renewable target, (agreed by Tony Blair in 2007) requires the UK to shift from just 1.3% of total energy from renewables in 2005, the baseline year under the EU Directive, to 15% by 2020 – the largest proposed increase of any member state (see graph below). The Government predicts that this will come at a net cost of £66bn to the UK over 20 years. This is a huge cost given that the UK already faces a major energy generation challenge – a quarter of existing power plants in the UK are due to close by 2020 – and that Britain should be in the enviable position of being one of the EU’s top energy producers, largely due to North Sea oil and gas, which makes it far less reliant on traditional energy imports than other member states.

The consensus is that the 15% target is likely to require the UK to produce 30-35% of its electricity from renewables by 2020, because it is far harder to source energy for transport or heating from renewables. The UK currently has one of the lowest proportions of electricity generated by renewables in the EU, illustrating the scale of the challenge.

So why do EU rules make the barrage almost a certainty?Article 5(2) of the original proposed renewables directive (requested by Britain) made it clear that the UK would have to build the controversial Severn Barrage in order to meet its EU renewables target.

The proposed article stated that:

“Member States may apply to the Commission for account to be taken, for the purposes of paragraph 1, of the construction of renewable energy plants with very long lead-times on their territory under the following conditions:

(a) construction of the renewable energy plant must have started by 2016;

(b) the renewable energy plant must have a production capacity equal to or in excess of 5000 MW;

(c) it must not be possible for the plant to become operational by 2020;

(d) it must be possible for the plant to become operational by 2022."

Given the extremely specific description (something five times more powerful than a large nuclear power plant which will be built between 2020 and 2022), this can only realistically have refered to the barrage.

Expensive stuff given this was possibly all based on a "mistake"
In 2008, the UK Government's former chief scientific adviser, Sir David King, suggested that Prime Minister Tony Blair and the other EU leaders did not understand what they were committing themselves to when agreeing the target:

"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."

Tony Blair thought he had signed up to  increase this: 15% of electricity from renewables

But he actually committed the UK to this: 15% renewable share of all energy by 2020

Leaving this: A UK renewables gap even the barrage might not fill

Source: Open Europe: The EU Climate Action and Renewable Energy Package: Are we about to be locked into the wrong policy? (2008)

But the whole idea was rather muddled in any event

Focusing on renewable energy from a climate change point of view sounds good but the 2020 rush to renewables is illogical as it ignores and actually diverts resources away from the easier and cheaper CO2 reduction wins to be gained from all other technologies (clean gas, clean coal, CCS, reducing consumption or even renewables that are at an earlier stage of technological development).

Several aspects of the EU’s climate change policy (forgetting the UK’s own self-imposed targets) are also self-defeating, including the competing and complex nature of the individual policies: the Emissions Trading System (ETS), which is essentially meant to be a market-based carbon pricing framework, and the aforementioned renewables target, which is essentially designed to change the energy mix of member states, often through subsidy.

In practice, forcing electricity generators towards prescribed renewable technologies, such as wind, through the 2020 target and government subsidy lowers the carbon price under the ETS because firms are being subsidised to meet the cap. This undermines the ETS’ carbon pricing function, which is meant to be the driver of investment in the cheapest low carbon alternatives.

A similar conflict can be seen between the EU’s initial push for a biofuels target, and the subsequent move to sustainability criteria, and additional production costs, due to the previously unforeseen impact certain biofuel production had on food prices and land use. All told, this policy mix is unlikely to be the best value for money option in reducing CO2 emissions.

Up in the air: Can the EU’s tax on airline emissions ever work in its current form?

You can’t say Brussels wasn’t warned. After protests and criticism from various non-member states and international organisations, the European Union’s decision to impose a carbon tax on flights in and out of the EU has fallen flat, as China announced it would ignore it and the US Congress prepares to ramp up action against it. It seems quite a feat, even for the EU, to get China and the US on the same side of a trade dispute.

The new legislation, which came into effect this year, forces all airlines flying in or out of Europe to buy carbon permits (from the EU’s Emission’s Trading Scheme) to cover their emissions. This is intended to help Brussels meet its 2020 commitment to reduce greenhouse gas emissions by 20% from 1990 levels. Until now, the aviation industry’s environmental impact had not been regulated – and in that sense the EU’s proposal may be positive as a first salvo. The move has been welcomed by environmentalists, who point out that airlines’ share of world emissions (currently 3%) is set to soar in the coming years.

Interestingly enough, governments are far more vocal about the drawbacks of the trading scheme than its impact on the airlines specifically. This is because airlines could actually stand to gain under the new scheme, according to a report in The Economist. Under the plan airlines will only be charged for 15% of the carbon that they emit – or possibly less if their government has an offsetting scheme. The scheme will give airlines a valid excuse to raise prices to compensate for the higher operating costs – although the chances of them using the opportunity to squeeze out more profits cannot be ruled out. By increasing ticket prices by just 25 eurocents, Ryanair stands to gain more than €10 million from the new scheme. The lax carbon quota also means that the scheme is unlikely to achieve its environmental aims, although this is true of much of the EU ETS. In sum, there is a good chance that consumer behaviour won’t be affected by the small price rise, and that airlines will increase the number of flights as their profits rise. This would further undermine the weak environmental credentials of the policy.

It’s likely that non-EU member states are kicking up a fuss because the new scheme implies a loss of sovereignty. China’s foreign Ministry accused the EU of applying “unilateral” measures to the global airline industry. Under the new scheme, airlines (all of which are state-owned in mainland China) pay for 15% of the carbon burnt across entire trips, rather than just that used flying over Europe. Airlines would therefore essentially be taxed outside of the EU’s jurisdiction. In addition, there is less scope for non-EU governments to impose their own tax to off-set carbon emissions – a big issue given the questionable format of the EU tax.

Beijing and Washington are also wary of Brussels’ wider meddling in global environmental standards. The EU’s mooted Fuel Quality Directive is set to impose regulation which would reduce the lifecycle intensity of greenhouse gasses emitted by the transport industry. Such a move would jeopardise US and Chinese interests in high carbon fuel, which has a ruthlessly efficient lobby industry. It’s likely that China and the US are partly arguing against the current measures, as they hope to thwart further EU plans and avoid setting a precedence of adhering to EU environmental standards.

Regulating the airline industry has valid environmental aims but in this case the EU’s proposal looks to not only fall short of these goals but also of foreign policy and consumer protection consideration. This comes as no surprise given the EU’s track record on the environment, as Open Europe has shown. It’s a reasonable opening gambit, but the EU should now focus on negotiating with China and the US to find a global consensus on how best to approach the issue.

Cap and trade - not the only way to skin the cat

Following his defeat in the mid-term elections, US President Barack Obama has now announced that he will drop his plans for a cap and trade system to reduce CO2 emissions. The idea behind cap and trade is to put a limit on greenhouse gases and then allow companies to buy and sell pollution permits under that ceiling.

President Obama said:

Cap-and-trade was just one way of skinning the cat; it was not the only way...I'm going to be looking for other means to address this problem.

As we've argued many times before, the cost of the EU's Emissions Trading Scheme (EU ETS) is massive and it's far from clear that a cap and trade system is the best way to achieve global emission cuts, while also encouraging investment in alternative energy. Obama's decision is sensible. But it clearly has implications for Europe, not least since the EU might now be put at more of a competitive disadvantage in the absence of a cap and trade system in the US.

Interestingly, former deputy prime minister John Prescott - who was a key UK negotiator at the Kyoto global warming conference in 1997 - today argued that in light of Obama's decision world leaders should ditch their hopes for achieving enforceable targets for emissions reductions. Instead, he said, they should push for a voluntary agreement at the upcoming Cancun summit:

Let's have a voluntary agreement. Let's stop the clock. Instead of Kyoto having to be done by 2012, stop it for about five years, put in a voluntary agreement and a verification system.

For his part, German Economy Minister Rainer Brüderle warned yesterday against imposing more environmental rules on German industry, arguing that global competition doesn't allow for a go-it-alone approach. He has a point.

The better way forward for the EU would be to set overall targets but then allow individual member states to reach them in whichever way they deemed to be the most cost-effective.

There is more than one way to skin the cat - also in the EU.

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.

ETS awards millions in windfall profits to oil companies and heavy industry

As national ministers meet this week in Copenhagen to discuss a new climate change deal, Open Europe has found that under the EU's Emissions Trading Scheme (ETS), oil and gas companies' operations in the UK were granted a surplus of carbon permits worth €28.6m in 2008. For example, ExxonMobil received €4.3m and Total received €5.4m.

Meanwhile, heavy industrial polluters such as Corus received €47m, while cement firms Hanson and Lafarge received €17.3m and €20.2m.

The EU is keen to be seen to take the lead at the UN climate change summit in Copenhagen and has already announced ambitious targets to reduce its carbon emissions. However, the EU's principle policy for achieving those reductions, the ETS, is fundamentally flawed.

Due to the economic downturn, many heavy polluters, such as oil and gas companies and heavy industrials, have been left with a surplus of carbon permits - essentially a free asset that firms can sell on to bolster their short term profits.

The glut of surplus permits on the market has driven down the price of carbon and led to a sharp increase in the number of permits being traded via carbon exchanges. Open Europe has found that the two largest carbon trading exchanges, European Climate Exchange[1] and Bluenext[2], which includes members such as Barclays Bank, JP Morgan, Merrill Lynch and Shell, have earned a combined average of €245,000 a day from the trading of carbon permits so far in 2009, in transaction fees alone. In total, they have made over €57m between them in 2009.

Instead of producing a firm carbon price to encourage investment in greener technologies, the ETS has become a subsidy to some of the UK's biggest polluters and has simply created a new breed of carbon traders, which are cashing in on a policy that is failing to achieve its core objective.

Click here to read more.

Europe's Smoot-Hawley?

Negotiations on the EU climate package may or may not be completed by the end of this year. Even if a political deal is done, the hugely important issue of which industrial sectors will receive 'preferential treatment' will still need to be resolved - this could take up to 2011, according to the terms of the directive.

This might sound like an arcane subject, but it will have profound implications for the very existence of certain heavy industries in Europe after the reformed Emissions Trading Scheme begins in 2013 - and by extension, the structure of global trade.

To say businesses are concerned is an understatement. For energy-intensive industries subject to high levels of international competition, this really is a matter of life and death. They will not be able to remain in Europe if they need to pay for carbon permits or shoulder significantly higher energy costs.

With the stakes this high, there will be a huge fight over which industries are given special protection by the EU.

The German Environment ministry has produced a very helpful graph on the subject (click to enlarge). Basically, the higher the 'trade intensity', the less potential for the sector in question to pass through a higher carbon price to consumers (because of the effects of steep international competition). When high trade intensity is combined with a high carbon cost (as a percentage of gross value added), this spells big trouble for the industy sector concerned.


Chemicals, paper, aluminium, steel, glass and fertilisers look particularly exposed, but many sectors will be affected.

What measures can be taken to stop industries going offshore? Handing out free carbon permits for these sectors is the preferred solution for the UK government. However, this poses problems for industries (such as aluminium and chemicals) for whom the main cost burden of carbon pricing is indirect - ie. as a result of higher electricity prices. Furthermore, this solution could just provide industry with an incentive not to produce in Europe. By scaling down production here, and shifting it overseas, companies would be able to sell off their freely acquired permits for a profit.

Working on the assumption that European governments do want to keep heavy industrial jobs in Europe, this makes it very likely that we are heading for 'border tax adjustments': new tariff barriers in plain English.

The possibility of introducing these 'green tariffs' is indeed very clearly written into the draft Directive, and is a solution favoured by a protectionist camp of countries led by France. As the German graph illustrates, there is a very wide range of industries which will want to stake their claim to EU 'protection'.

Green tariffs would of course need to be applied to all imported finished goods assembled from the basic industrial products in question.

There would be the hellish task of trying to work out the relative carbon value of cars, electronic equipment or toys manufactured from a number of different components, often in a number of countries with differing environmental standards... There will be a feeding-frenzy for lobbyists in Brussels, seeking to fill this 'information gap' and secure special treatment for their industry.

If there is one lesson we can take away from the 1930s, increasing tariff barriers and slowing down international trade a surefire way to turn recession into global depression.

The EU climate package is a driver of protectionism. It risks creating major economic distortions, new barriers to international trade and possible retaliatory tariffs from other trade blocs.

Could this be Europe's Smoot-Hawley Act?

Emissions trading isn't working

Sorry to keep coming back to the subject, but it is becoming increasingly apparent that the EU's Emissions Trading Scheme really is in trouble.

Heavy industry, especially steel, is slashing production, meaning lower emissions, less scarcity of carbon permits, and hence lower carbon prices.

Point Carbon reports that prices for carbon permits within the EU ETS slumped 8 per cent yesterday, falling to 16 euros a tonne. The price will hit a floor between 12 and 14 euros per tonne, according to "several traders". This is less than half what the price of carbon was just five months ago.

It is probably true that carbon prices will not totally crash in the current phase of the ETS, as they did during the first phase of the scheme when a huge oversupply of permits meant they became worthless. But that is not really the issue any more. As we've argued again and again and again, price volatility such as what we're seeing now undermines incentives to channel long-term investment towards large-scale (often very capital-intensive) carbon saving projects and technologies.

Especially in the current climate, there is no way that the Chief Financial Officer of a large emitter can approach a bank asking for credit lines to fund new low carbon investment with any realistic expectation of what the price of carbon will be when the investment comes to be realised in 3, 5 or 10 years time.

Speaking to industry practitioners, this is the major structural failure in the EU Emissions Trading Scheme. It won't get any better in the next phase of the scheme (running from 2013 to 2020), even if all the political issues surrounding the basic structure of that trading phase are resolved soon (very unlikely).

As we've learned over the past few months, EU policymakers did not (and could not) predict economic slowdown and slumping carbon prices. And economic trends are only one element amongst many others (weather, politics, technological change) which drive carbon prices. The managing authorities of cap and trade schemes like the ETS will never have the knowledge to be able to allocate the right number of permits in order to create a stable carbon price. So there's no telling what could be happening in carbon markets in ten years time - and that is the fundamental problem.

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.

Will EU climate policy cripple German business?

German Environment Minister Matthias Machnig and chambers of commerce boss Martin Wansleben have an interesting exchange which highlights the sharp divisions opening up towards the EU climate change plans in Europe's biggest emitter and industrial powerhouse.

Both the heavy industry and green lobbies in Germany are powerful, and the outcome of their rivalry will have a decisive effect on negotiations over the EU's climate package, with profound implications for the rest of Europe.

Machnig: We want emissions certificates in the energy sector to be auctioned 100%.

Wansleben: That’s fatal! It will lead to higher electricity costs for everyone. Business and consumers will never accept that.. It is inefficient and too expensive for Germany as a business location… We must set in motion policy that also incorporates large-scale emitters such as the USA, India and China.

M: Of course we want a global emissions trading system..the industrial countries will have to take the first steps. Our industry will have the advantage of becoming more competitive.

W: You’re mistaken. Many companies here in Germany will not survive that.

Carbon price hits eight month low

According to Point Carbon, carbon prices for permits traded within the EU Emissions Trading Scheme (EUAs) have "crashed", and are now priced at less than €20/tonne. The chart below illustrates how far the price has come down over the course of just one month.



We have made the point repeatedly that price volatility is a major flaw in carbon markets, and acts as a serious disincentive to large-scale capital investments designed to cut carbon emissions. Decisions on this scale of investment take place over a timeframe of years, possibly decades, making it very difficult for big polluters to make plans on the basis of an erratic carbon price signal.

Carbon prices are driven by scarcity in carbon permits, which in turn is determined by a number of complex and unpredictable factors - including weather patterns, fossil fuel prices and expected economic growth. The latter two factors in particular are behind the current slump in prices in Europe.

The judgement of bureaucracies (in this case the Commission) - who need to determine the final number of permits to be issued - is of course a key driver of carbon value in cap-and-trade schemes such as the ETS. And it is apparent that these officials were unable to predict a big slump in oil prices and recession in Europe. If winter turns out to be unusually warm, this could push prices down even further...

This illustrates the intrinsic problem of the ETS and systems like it: bureaucrats cannot predict the future, and can never have the knowledge or resources to be able to set the allocation of carbon permits at the "right" level for a five or seven year trading period.

When things don't go the way the officials expected, the result is volatility in the price of carbon. That's why we think it's time for emissions trading to be replaced with a solid, long-term carbon price mechanism such as a tax.

EU 'leadership' on climate change

One of the main gripes the Polish government have about the EU climate and energy package is the proposed reforms to the Emissions Trading Scheme, which from 2013 would force power generators to pay for all their carbon credits rather than receiving them for free.

Given that coal power is about twice as carbon intensive as gas, the graph above shows why the Poles are so upset...

According to Polish officials cited in the WSJ, Polish coal fired plants would need to pay 4.8bn euros per year under the plans.

Leaving aside the debate about making power generators pay for carbon credits (free permits have led to huge windfall profits for these firms, paid for by electricity consumers) this issue exemplifies the problems of adopting such a complex, centralised, and prescriptive approach to cutting carbon emissions.

It would have been far more politically sensible and realistic for the EU to just focus on securing agreement on simple targets for absolute cuts for carbon emissions, and making sure these are properly implemented and enforced. This would allow member states to choose the most appropriate and cost-effective way of reaching these targets and fighting climate change.

Although the Commission has grandious visions of itself as "leading the world" through its approach of micromanaging national energy policies, there's no point formulating policy like this if the only effect is to scare off national governments who - unlike the Commission - are accountable their electorates, and don't want to see their voters freeze or lose their jobs.

Because the Commmission has insisted on such an overpriced and interventionist way of dealing with climate change, the effect will be simply to kill off the possibility of winning consensus within Europe. And that will damage the chances of a more important global agreement on climate change.

If we do see an EU agreement, the likely deal will only come after a string of pretty substantial concessions to the current 'troublemakers', leading to an even more complex web of industrial subsidies, fiscal transfers and economic distortions. As well as free carbon permit allocations to politically favoured industries, there could well be a big increase in the quota of external offset credits from outside Europe (which often just contribute to more pollution). France and others will continue to push for 'green tariffs' on goods from countries with climate policies that are not to their liking, opening up a pandora's box of EU protectionism and tit-for-tat tariff raises with China, India and the US. In a few years time, when it becomes clear the renewables targets are a bad idea and not physically achievable, this part of the agreement will also begin to unravel.

This is not an example the Chinese or Americans are likely to be keen to follow.

By making such an expensive mess of its carbon policy, the EU will not only discredit itself but will also weaken the chances of a global consensus on the issue, and strenghten those who would rather see no action at all on climate change.

So much for European leadership on climate change

Green smokescreen

The leaked paper from UK officials suggesting ways for Britain to wriggle out of EU renewable energy commitments is now up on the Guardian website.

The beginning of the document has a fascinating insight into official concerns over the contradictions in EU climate change policy:

“If the EU has a 20% GHG [greenhouse gas] target for 2020, the GHG emissions savings achieved through the renewables risk making the EU ETS redundant, and prices to collapse. Given that the EU ETS is the EU’s main existing vehicle for delivering least cost reductions in GHG, and the basis on which the EU seeks to build a global carbon market to incentivise international action, this is a major risk.

Remedies to overcome this risk will be difficult to agree or ineffective. Expanding the scope of the EU ETS to include aviation emissions would not by itself create enough demand to overcome price collapse. Tightening EU ETS caps to reflect the renewables target imply taking EU wide emission reductions beyond the 20% GHG target which would be difficult to agree in the EU. Relying on later agreement to a 30% GHG target to rescue damage to the EU ETS is risky if 30% is not realised, and if not, clarity in 2009 or so this, would be very late for redesigning the ETS or renewables target in response.”

There is clearly little expectation that the ETS on its own will provide sufficient incentives for the massive investment in renewables necessary to reach the targets – which implies that renewable use will have to be enforced by other means, probably through subsidy or regulation. If this happens, the overall scarcity of carbon credits tradable in the ETS will decline, along with the price of carbon and any resulting incentive to reduce emissions through the ETS.

The paper goes on to say that UK officials have been actively lobbying the Commission to consider the “tensions” between the EU ETS and binding renewables targets – this is clearly a major concern in Whitehall.

The leaked paper illustrates perfectly just how far politicians have managed to botch EU climate change policy. They have essentially agreed to a series of mutually contradictory policies which may play well with the media in the short term, but ultimately undermine the end objective of reducing emissions.

As argued in our last post, there’s only so long politicians can maintain this charade of using ambitious-sounding gestures on the environment to their own advantage. Reality has to eventually kick in, meaning the front page of Monday’s Guardian is probably just the beginning of a long hangover the government will have to suffer for making commitments it can’t keep.

An environmental time bomb?

Interesting piece by Andrew Bounds on the FT blog today, which makes a strong argument suggesting the EU will at some point have to make tough decisions on the binding biofuel targets leaders signed up to at the EU summit in March. Indeed, although the 10% target for biofuel use was greeted with enthusiasm by some commentators when it was agreed to, the gloss is sure to come off as the full social and environmental implications of these commitments becomes clear.

First of all, as Bounds notes, whilst EU leaders basked in the positive headlines, hugely important details of the agreement were simply kicked into the long grass for negotiation at a later date. Production, transport and processing of biofuels in itself requires a lot of energy – it’s not yet clear whether this is to be taken account of in the overall targets.

Furthermore, the tide of opinion on biofuels now seems to be turning faster than politicians expected, as the negative effects begin to be felt – food price inflation is already hitting the poor in many parts of the world, whilst deforestation to clear land for biofuel production is booming – especially in South East Asia.

Deforestation (which often involves clearance by burning) is, in environmental terms, a really big deal – despite being frequently overlooked, it is a major contributor to global warming – accounting for perhaps 20-25% of total of carbon emissions, which is more than the total from all vehicles, airplanes and ships. It is also leading to immense pressure on endangered species, such as Orang-Utangs.

The other major strand of EU policy that will feed into this debate is the effect the Emissions Trading Scheme will have. Open Europe’s recent report looks at many of the major environmental concerns associated with emissions trading, in particular the ‘import’ of vast numbers of ‘Kyoto credits’ (which act as a giant system of carbon offsets) into European carbon markets.

Reuters has a fascinating report describing how the demand for credits (which mostly comes from the EU ETS) actually creates “perverse incentives” for deforestation through encouraging project developers to fell rainforest, and then replant it in order to generate credits. These credits are then used by European firms to avoid having to reduce their own carbon emissions.

As we have long argued, EU environmental policy is often badly thought out and riddled with unintended, damaging consequences. All this makes us wonder whether the EU is sitting on an ‘environmental time bomb.’ At some point, the bubble of ambitious-sounding rhetorical green commitments will have to burst as the reality of flawed policy sets in.

failure, lies and spin

It's tempting to write an intemperate blog about this:

Preliminary figures released yesterday show that the EU's carbon dioxide emissions grew by 1-1.5 per cent in 2006, despite the bloc's rhetoric about the need for reductions. The data so-far released – which covers 93% of installations covered by the EU emissions trading scheme – shows that participants emitted less than their quota of free permits, hence the rise in actual emissions.

According to the Guardian, Stavros Dimas, the EU's Environment Commissioner, told scientists from the UN's intergovernmental panel on climate change yesterday that "Only EU leadership can break this impasse on a global agreement [post-Kyoto] to overcome climate change". The article notes that “What Mr Dimas knew - but did not tell the scientists, apparently - is that the EU's programme for cutting carbon, its two-year-old emissions trading scheme (ETS), remains in disarray.”

The Guardian notes that "Mr Dimas and his officials deliberately released the raw data early - without analysis or interpretation - to avoid last year's debacle, when premature release of national statistics brought a disorderly collapse of the market. This year the full, sifted figures will be released on May 15."

Yes - but that's probably not the only reason they wanted to spike the story...