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.

Even more hot air? EU emissions targets post-2020...

Grand room, grand ideas....

Today, over a two hour working lunch in Dublin Castle's grand State Dining Room, EU Environment Ministers will be discussing the EU's contribution to reducing global CO2 emissions post-2020. The Commission's Green Paper on the menu is austere stuff - it calls for reductions in EU emissions of up to 80 - 95% by 2050.

This raises many obvious questions. Leaving aside arguments over climate change, the impact on living standards and whether unilateral decarbonisation is sensible in a global economy, is this plan remotely credible? And if it is, where does the EU believe the cuts will come from? 



Commission's plans to reduce CO2 by 80 - 95% (Mt CO2 eqv)

Firstly, as you can see on the right, as these cuts are calculated over 1990-levels, we're already some way down the road (due to a recession and continued de-industrialisation). But the majority of the heavy lifting is yet to come.

You can also see from this that emissions from some states (Spain for instance) are allowed to go up before 2020. This is due to "burden sharing" allowed under EU rules. If the assembled ministers decide to do that again for 2030 it will mean higher cuts for the UK.

So, again, where will the cuts come from? Well, mostly  from industry and power generation, it seems. The most startling projection is that power generation is planned to reduce to 0%. Right...


EU Green paper: Power generation - 0% CO2?

This is a massive and expensive undertaking as you can see from looking at the UK's current electricity generation mix (below). Currently, at only 7% renewables, a large share will either have to be modified to use Carbon Capture and Storage technology or replaced by new nuclear or renewables, such as wind. Beyond that, the UK's emissions from industry will also have to decrease by a very large percentage. Is that remotely credible while maintaining a manufacturing base? Strangely the only area to be exempted from the emissions cut is agriculture - always a special case in the EU. 


UK electricity gerneration (2010)

EU farm subsidies - the mother of all misallocations

Its been a busy few days on the EU budget front with the inconclusive EU leaders’ summit on the EU’s long term budget, and the Commission’s new proposal for the 2013 annual budget (largely unchanged from the version MEPs and member states were unable to agree on). Much of the attention in the talks were given to absolute numbers over substance, which is why Tuesday's Court of Auditors' report on the 'single farm payment' – accounting for roughly one third of the EU budget – is very interesting. The CAP as a whole (comprising the rural development component and the remaining market distorting subsidies) accounts for around 40% of expenditure - €56.8bn this year alone.

Specifically, the report looks at the effectiveness of the ‘Single Area Payment Scheme’ (SAPS) which is just EU jargon for the bulk of farm subsidies to most of the new EU12 member states under the CAP (The EU15 states plus Malta and Slovenia have a different support scheme called the Single Payment Scheme. A unified scheme for all 27 states is due to be introduced in 2014. The generic terms for both is usually 'the single farm payment').

The language is, as usual, cautious but it's quite clear that by EU standards, the Court of Auditors absolutely slams these subsidies. In the report’s executive summary we read that:

• The definition of ‘farmers’ is inadequate leading to subsidies being paid out to "beneficiaries not or only marginally involved in farming". In some of the Member States concerned, SAPS aid was paid to organisations not involved in farming, including public entities managing state land, hunting associations, fishing clubs and ski clubs. So the farce continues.
• The subsidies fail to take into consideration either the specific regional characteristics of farming activity, nor the contribution of farmers to the production of public goods. 
• The payments disproportionately benefit large landowners (who are more likely to be relatively wealthy) while the majority of farmers receive very small amounts of aid. 
• There is no option to differentiate payments within member states to take into account the agricultural potential of regions or environmental criteria. In other words, those who say the CAP in its current form is the best tool for delivering 'food security' or environmental objectives (including bio-diversity) don't know what they're talking about.
• The Commission has not analysed the effects of SAPS aid on the restructuring of the farming sector - a huge 'blind spot' given that modernising agriculture is one of the stated objectives of the CAP, and given that by giving people income support irrespective of the economic activity their engaged in (if any) is usually an active disincentive for reform. 
• The Commission has also not yet analysed the effects of the subsidies on land prices. Again a massive blind spot given that the regime is effectively subsidising landowners. 

So in other words, the single farm payment is a ill-targeted subsidy with no clear links to either the delivery of public goods or economic reform. In today's economic climate, to maintain such a fundamentally irrational policy must be considered something of an accomplishment.

What should we have instead? As we argue in our dedicated report on this issue, there could be a broad rationale for having a publicly subsidised system for delivering public goods in the countryside such as bio-diversity. One way of achieving something at least remotely sensible, would be for the CAP to be slimmed down (we proposed a 30% to the direct subsidies which would have saved over €12bn this year) and refocused to deliver a range of environmental benefit through a system of transferable agri-allowances (if intrigued, check out the full study).

But the current system just has to go. 

Another cold front on the way from Europe?

Ofgem's 'Electricity Capacity Assessment', published today, makes for some interesting reading as we enter the winter.

This is from the executive summary:

The high level of spare capacity in the GB electricity market is set to end quite rapidly over the next few years. As identified in our 2009 Project Discovery analysis the impacts of replacing older coal and oil power stations under EU environmental legislation together with changes to the generation mix over the next decade pose new challenges to security of supply. Recent developments have strengthened this view. Indeed, power stations 'opted out' under the [EU's Large Combustion Plant Directive] are using up their running hours faster than expected: most LCPD opted out plant will come off the system well before the 2015 deadline.

In short, a mixture of EU environmental legislation and a change in the UK's energy mix, also driven in large part by EU renewables targets, means that the UK's spare energy generating capacity could fall from 14% now to only 4% in three years, under Ofgem's baseline scenario. The graph below shows that in a 'high winter peak demand' scenario, the situation could get far worse, with the UK having no spare capacity in 2015/16, which could very likely to lead to blackouts.

So, as well as trying to get a lot more gas and nuclear power stations built, the UK Government may also need to choose between complying with EU environmental legislation and keeping the lights on.

Spain v Commission: another round

The relationship between the European Commission and the Spanish government is clearly not all warm and fuzzy at the moment. After the discussion on deficit reduction targets, Spain has now also come under fire for its use of EU structural funds.

Spanish Agriculture Minister Miguel Arias Cañete (in the picture) recently told MPs that the plan for the construction of desalination plants across the country has turned out to be "a spectacular failure". He explained,

According to the plan, 51 plants were to be built. At the moment, 17 are in use and 15 are under construction. €1,664 million was invested, and we need an additional €762 million if we want all these 32 desalination plants to be operative.

Furthermore, Arias Cañete noted that the existing plants are only working at 16.45% of their maximum capacity. Although the project was launched by the previous Socialist government, it is now for the new centre-right cabinet led by Mariano Rajoy to sort out the situation and decide, among other things, if it is still worth starting work on the remaining 19 plants, as initially planned.

As you may expect, the bulk of funding for these plants came via the EU's structural funds, out of which Spain has done very well. And the European Commission is not happy. Here is what a spokeswoman for EU Environment Commissioner Janez Potočnik said in an e-mail quoted by El País,

A significant amount of European funds, around €1.5bn, has been invested in desalination plants across Spain over the past few years. We have taken note of the statement to the [Spanish] parliament that they are working at 16% of their capacity. This calls into question the effective use of European taxpayers' money.

The Commission also said that it now expects the Spanish government to "take the appropriate measures to achieve the best use of these infrastructures paid with EU funds", warning of "a big negative impact on the availability of European funds for Spain".

Incidentally, in our recent report on EU regional spending, we pointed out that while EU subsidies may have benefited individual regions during a limited period of time, they have been poorly targeted in Spain. When Spain needed to address its overheated economy and property bubble, EU structural and cohesion funds were channelled towards infrastructure projects, which were already subject to abundant private credit and over-investment at the time. Indeed, 28% of these funds are still set to go towards infrastructure projects in different forms during the current EU budget period (2007-2013).

Spain needs a lot of things, but more roads or non-operational desalination plants are not among them.

All of this goes to show that EU regional spending is in urgent need of a radical overhaul, which would far better serve Spanish and European economies. In case you missed it, we set out how such an overhaul should look in the report we published in January.

The expression "win-win" springs to mind.

Beijing beating Brussels at its own game?

Last week in Brussels, we organised a very interesting event looking at trade between the EU and Asia - the importance of which can hardly be over-stated given Europe's, shall we say, current economic predicament.

At the event, Conservative MEP Syed Kamall warned against the EU pursuing an “anti-business agenda” in trade talks, including excessive environmental standards, as “we end up with everything but trade.”

Today, we received another reminder of the dangers involved in the EU pursing green protectionism: other trading blocs may do the same.

From PA we learn that the EU, the US and Japan have launched a complaint at the World Trade Organisation, claiming that China is limiting its export of rare earths. This is a pretty bad situation, as these minerals are vital to the production of high-tech goods, such as hybrid cars, weapons, flat-screen TVs, mobile phones, mercury-vapour lights and camera lenses. And as China accounts for more than 90% of global production of 17 rare earth minerals that are used to make this stuff, Europe is pretty dependent on the trade.

But here's the intricate part, China says it's 'only protecting the environment'. The country's Commerce Ministry said in a statement:

"The Chinese policy objective is to achieve sustainable development in order to protect resources and the environment, and this is not a trade-distorting way of protecting domestic industries."

Tricky. Now, we're certainly not siding with China here, but merely making the humble observation that if Europe continues to flirt with Non Trade Barriers of various sorts, including 'green' ones, others may start to play it at its own game.

Perhaps something to keep in mind when certain EU leaders call for a "buy European act." Sooner or later, chickens could come home to roost.

How to make the EU’s farm policy work for jobs, growth and the environment

Open Europe has today published a new report looking at the EU’s farm policy – the Common Agricultural Policy (CAP) – and how it could and should be reformed. As we set out in the report, the UK gets a bad deal from the CAP, contributing £7.1bn more than it gets back over the current EU budget period. At the same time, the subsidies it receives are spent in a way that actively channels resources away from areas and sectors that could generate the most economic or environmental benefits.

Short of entirely liberalising the policy, Open Europe has proposed a radical overhaul, linking subsidies to measurable environmental benefits, while allowing productive farmers to opt in or out of the scheme. At the same time, the overall CAP budget would be rationalised, reducing the UK’s contribution to the EU budget by £7.3bn over seven years.

The full report can be downloaded here, but these are the key points:

- On-going negotiations over the EU’s long-term budget provide an opportunity for the UK to reverse the serious poverty of vision that has characterised British diplomacy and government thinking on CAP reform for decades – but the window for doing so is quickly closing.

- The UK remains a big loser from the CAP. Between 2007 and 2013, the UK will contribute £33.7bn to the CAP and get back £26.6bn; a net contribution of £7.1bn. Per hectare, the UK receives £188, compared to for example France, Germany and the Netherlands which receive £236, £251 and £346 respectively.

- There remains no clear link between the wealth of a country and how much it receives from the CAP. Latvia, for example, gets £115 per hectare from the EU’s Single Payment Scheme – the least out of all member states – despite average farmers’ income being only 35% of the EU average. By contrast, wealthier member states such as Ireland and France continue to do well out of the CAP.

- Despite a series of reforms, the main ‘benefit’ of the CAP is that on the whole, it is less damaging than it used to be. Owing to its arbitrary design and contradictory aims, the CAP fails to meet its own objectives of delivering bio-diversity, boosting farmers’ competitiveness and promoting rural jobs and economic development.

- The share of the CAP spent on explicit environmental aims in the UK is only 13.6%. By failing to differentiate between different types of land, direct CAP subsidies actively channel public resources away from where they could create the biggest environmental gain.

- At the same time, by providing income support irrespective of whether any meaningful economic activity takes place on a farm, direct CAP subsidies often act as an outright disincentive for farmers to modernise, in turn locking in unviable business models and hurting Europe’s competitiveness.

- The cost to consumers and taxpayers across Europe of the EU’s farm subsidies and tariffs now stands at €86.9bn – of this €52.5bn stems from CAP subsidies. If, hypothetically, the CAP and other EU measures to protect farming, such as tariffs, were fully liberalised and the money freed up were re-channelled to more productive areas of the economy, it could be worth a boost in output equivalent to €139bn or 1.1% of EU GDP. Britain would experience a boost in output of €14.2bn or the equivalent of 135,000 full-time and part-time jobs.

- Full liberalisation of the CAP would be economically viable. However, given the widely held belief that that there is still a role for the state to play in delivering objectives such as bio-diversity, land management and R&D, such an option is most likely to gain political support.

- Therefore, we propose a pragmatic mix: a new, radically revamped EU farm policy, allowing for resources to be effectively allocated to both production and environmental benefits while better targeting jobs and growth. This would involve four steps:

1) The current CAP structure would be replaced with a system of agri-environmental allowances. Funding for member states would be allocated according to environmental criteria, such as bio-diversity, but be administered nationally. Payments could then be transferred between farmers depending on where the environmental gain is the greatest.

2) After complying with some minimum environmental standards, farmers would then be free to opt in or out of this scheme, with those farmers wanting to focus exclusively on production being free to do so.

3) EU-level funding for rural economic development should be limited to the poorer member states only, and be migrated over to the EU’s structural funds. Farmers should also be able to qualify for time-limited support from a fund similar to the EU’s Globalisation Adjustment Fund, targeted at making farmers more competitive and able to move into other parts of the economy.

4) A limited pot of money for agriculture related R&D should remain at the EU level.

- By simultaneously streamlining the CAP budget, such a system would reduce the UK’s contribution to the EU budget by £7.3bn over seven years.

Of Pots, Kettles and Lib Dem MEPs

Before we get going, let us qualify the following post by saying that the Lib Dem MEPs have been doing a reasonably good job, particularly in areas such as financial regulation and transparency. Unfortunately, they seem to have dug themselves into a bit of a hole in this instance…

Lib Dem MEP Chris Davies moved to criticise Conservative MEPs today, for “refusing to back the government’s position” over the increase of the EU’s 2020 CO2 reduction target to 30%. The Conservative MEPs suggest that the target should not be increased from the current 20%, despite the Government's policy to support the increase. Davies went on to say that the Conservative MEPs were demonstrating “their real views about efforts to curb global warming”, and that "to be sure of success they need Conservative support. All indications are that they will not get it."

It’s all well and good to highlight disparities between the Government and the Conservative party at large, but, unfortunately, this time, the Lib Dems seem to have forgotten that they are also part of the Government…

As we’ve already noted, Lib Dem MEPs voted last month to scrap the UK’s rebate and in favour of an EU tax. Not only was this clearly against the Government’s position it was also expressly against their manifesto for the 2009 European elections.

Pot. Kettle. Black. No?

EU green fatigue

An increasing number of countries in Europe are beginning to suffer from what can best be described as 'green fatigue'. In fact, the mood has changed radically since March 2007 when EU leaders agreed to their ambitious green targets.

This is particularly obvious in Germany, Europe's industrial powerhouse and paymaster.

Over recent days, the EU's directive on biofuels (soon to be overtaken by the Renewables Directive) has been absolutely hammered in the German press. As it stands, the Directive requires gas stations to sell fuel with 10 percent ethanol content - which has triggered boycotts, due to drivers’ fears that the new fuel will harm their vehicles.

Der Spiegel notes:

"All EU countries were supposed to have introduced E10 by the end of 2010, but only France and Germany have complied. And problems have not been limited to Germany. Because of slight differences in the E10 biofuels used in France, the ADAC, Germany's largest automobile association, is recommending that German drivers avoid E10 fuels should they cross the border into France."

In a comment, Handelsblatt criticises the Directive, arguing that due to rising food prices and environmental concerns "In 2008, EU Energy Ministers opposed extending the share of biofuels to beyond 10 percent". But, it notes:

“That isn't the end of the story however...Stable or falling prices for farm products, about which the agricultural lobby - led by France - is complaining, will be a thing of the past. The ones who need to pay, are consumers. In Europe, but especially in developing countries."

It concludes: "to burn food in order to obtain fuel is just a crazy idea."

We've warned against the EU's biofuel policies on several occasions, for example in January 2008, when we wrote that allocating more resources to biofuels would be a serious mistake:

"Biofuels are only likely to achieve between 0.9% and 1.1 % reductions in total EU emissions. This is a serious misallocation of resources. If the huge expense of achieving the miniscule reduction in greenhouse gases through biofuels were to be redirected towards reforestation projects, almost 28% of the EU’s total emissions would be saved. Even if it were to be redirected towards (relatively cost inefficient) renewables (at current costs), these funds would deliver a 2 – 5% reduction."

Meanwhile, the European Commission has just announced that EU climate policy will cost €270 billion annually, over the next 40 years. This is a massive amount. But the Commission is still intent on raising the EU's targets from the current levels of 20%.

FAZ comments:

"The ability of European industry to compete internationally will be undermined as a result of unilateral climate change targets. Energy-intensive production, for example of metals, is merely being transferred to third countries (...) without improvements to the world's climate. The Commission doesn't ask itself these fundamental questions."

To be fair, Germany's Commissioner in charge of the energy brief, Günther Oettinger, has been very critical of his own institution's attempt at raising CO2 targets. "I believe 20 percent is the right, middle way," he said, warning that if the EU would go it alone, "than we not only lose jobs, taxes and social contributions. We will also have no reduction of CO2 levels."

He seems to have lost, though, as the Commission has just announced that it will be pushing for a 25% target, up from 20% compared to 1990 levels.

Still, opposition to the EU's green agenda - agreed at a time when Europe's economy was booming and the EU was looking for a new role for itself (the 'world peace' theme was getting a bit dated) - is clearly growing.

The EU's fisheries policy gets battered

If there ever was a competition for the worst EU policy, the Common Fisheries Policy would probably end up on top. The policy simply has to go.

So it's encouraging that the EU’s Fisheries Commissioner Maria Damanaki yesterday did the right thing and called for an end to the CFP-mandated practice of throwing back dead fish overboard if fishermen's quotas have been exceeded:

"I consider discarding of fish unethical, a waste of natural resources and a waste of fishermen's effort. But I would like to go further – since our stocks are declining, these figures are not justifiable anymore. If we continue with our policy, then we will soon face a situation where the production capacity of marine ecosystems is at risk”.

This is of course hardly a revelation; groups from across society and the political spectrum have been warning about the economic, social and environmental catastrophe that is the CFP for a long time.

To give only a couple of examples of what Europe's fishing industry has come to under the CFP :

· 80% of Europe’s fisheries are considered to be overexploited or in danger of collapse

· 1.3 million tonnes of seafood are thrown back every year in the North Atlantic alone, including two out of every three haddock caught to the west of Scotland

· The value of fish that thrown back every year by the Scottish fishing fleet alone was estimated at £40m, resulting in higher prices for consumers.

Momentum against the CFP is building, and the recent “Fish Fight” campaign fronted by TV chef Hugh Fearnley-Whittingstall has brought the issue to a much wider audience, helping to put pressure on the EU for reform. While Damanaki’s pledge is good news, this time it must be followed by concrete action. After all one her predecessors, Joe Borg, called the discards policy “morally wrong” and pledged root-and-branch reform back in 2007, but to no avail.

The common sense void in which the CFP exists is a big reason why hostility to the EU is growing, exemplifying Brussels’ painful inability to reform its policies as the circumstances around it changes (on this one, it's not the Commission's fault as a handful member states, most importantly Spain, continue to block reform). It is so detested that it even managed to unite such diverse groups as climate change sceptic Conservative MPs and Greenpeace activists.

Although dumping the discards policy will not solve all Europe’s fishing problems, it's certainly the right place to start.

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.

EU subsidised travel? The next step in a Summer's dream

The glorious weather in London today has reminded us of a story we noted last month - but have not yet had a chance to share here :-)

In these rather gloomy (except today) and dark times of recession and gloom, what could be more uplifting than a holiday, to an exotic destination within the EU, subsidised by the European Union. Sounds great huh? Well, perhaps it's not so uplifting or great when we consider where the cash will actually come from - our less than exotic taxes.

It may strike many as a rather strange ‘initiative’ for the EU to introduce when we consider that most member states are presently stuck in a debt trap deeper than the Spanish caves of Drach. But no, as ridiculous as it sounds, this isn’t a joke. Under the Lisbon Treaty, tourism was brought in as a new EU competence with the aim of boosting the industry.

However, rather predictably, Eurocrats have used the opportunity to exercise their somewhat ‘backward’ understanding of economic theory. Deciding that, rather than stimulating demand for tourism, they will instead create supply. Last month at the European Tourism Stakeholders’ Conference, the Vice-President, Antonio Tajani, announced that “taking holidays is a right”, saying that:

“our unrivalled tourism resources must become fully accessible to those for whom travelling is difficult: the elderly and persons with reduced mobility…young persons and families at a disadvantage who – for various reasons – also face difficulties in exercising their full right to tourism”.

In particular, subsidies would be given for the disadvantaged to travel during the low season to encourage year round tourism flows.

Aside from the economic illiteracy of the ‘initiative’, some may be confused as to why Brussels would champion the right of tourism for all when fighting climate change, through reducing carbon emissions and introducing carbon taxes, is heralded to be a key EU priority. In fact, the EU already pays out for a variety of campaigns urging us to "travel responsibly" such as the You Control Climate Change! and Climate Action schemes.

Of course, this contradictory behaviour is par for the European course. Many will remember the controversial junket taken in March this year when 250 delegates (including 68 members of the European Parliament) jetted off to sunny Tenerife to discuss a variety of issues including the environment and sustainable tourism.

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.

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.

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.

Decision time

There have been widespread fears for some time that the Large Combustion Plants Directive, which will force the shutdown of nine oil and coal-fired power plants by 2015, will raise the possibility of blackouts in Britain.

A survey of energy experts by the BBC has reconfirmed this fear. Although the shutdown of such a large amount of coal capacity obviously does raise the risk of the lights going out, what is most likely to happen is the rapid construction of new gas plants (which can be brought online in just a few years) to fill the generation gap. But even higher gas dependency is in itself bad news for energy security and the availability of cheap power.

Whatever happens, it is pretty clear that this Directive is a huge problem for the UK's already strained energy infrastructure.

At a conference yesterday organised in Brussels by the Major Energy Users Council, many participants were deeply concerned over the Large Combustion Plant Directive, raising the question of whether the British government should refuse to comply with the directive, or perhaps negotiate a special dispensation.

One important point that arose was that, although the Directive works towards a 2015 deadline, the British Government will have to make a decision very soon indeed if it wants to try and go down this route.

This is because, as a result of the LCPD, power generation companies are unlikely to invest to maintain the plants in the run-up to 2015, and may even begin to 'cannibalise' parts of the equipment. This means that the damage to UK coal plants may already have been done within a few years, meaning that they will not be able to stay open in any scenario - even if the Government attempted to withdraw from the LCPD in three or four years time.

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.