Green thoughts

There is so much going on already - and now the Commission decides to drop its energy plans on the world.

No time for anything other than some quick thoughts:

1) "Green inspired" -protectionism. The Commission's proposal for green tariffs marks the true start of the battle over (supposedly) green-inspired protectionism. The phoney war is over.

The UK is clearly going to fight the proposal, but it is not clear how the other member states stand. So much for Mandelson's claim to have seen off the idea... Actually, perhaps we should stop attacking him as he is (at least on this one issue) at least on the right side on this one, albeit in a minority in the Commission.

There is a certain inevitability about a resort to protectionism if you have a trading system. The EU Emissions Trading Scheme means a highly visible cost, focused specifically on large, mobile international businesses.

Barosso said today "We want industry to remain in Europe. We don’t want to export our jobs to other parts of the world." But starting a trade war against the rest of the world might do exactly that.

The problem is that far too little thought in Brussels has gone into how to design emissions-reducing policies at the least cost to competitiveness - in fact the economics is still pretty poorly understood. Broadly speaking, our recent report concluded that carbon taxes seem to be cheaper ways to cut emissions than subsidies.

The EU has done too little of this kind of thinking in general - and has not explored tax at all – as the EU doesn’t have direct tax powers and so such policies would have to be run nationally. That means taxes are not therefore interesting to those who mainly see environmental issues as a way to promote greater EU integration.

With so little thought about competitiveness, it is probably only a matter of time before we have factory closures blamed on the ETS. Indeed, if you look deep in the bowels of their website, that's what the Commission’s own research suggests.

Some of the more federally minded people in Brussels would be likely to see this as something of a beneficial crisis – plant closures would be an excuse to impose EU green tariffs, which in turn boost the idea of a European identity and bolster the importance of the EU. That might sound a bit twitchy – but there really are (important) people in Brussels who think like that. As Delors said: "If this job was about making a single market I wouldn’t have come here in 1985. We’re not here just to make a single market – that doesn’t interest me – but to make a political union." Or as Milliband put it, "the needs of the environment are coming together with the needs of the Union."

Or, as Barosso (more subtly) said today: "If some people in Europe have doubts about the need for the European Union, I think this is exactly the kind of policy that shows why we need a strong European Union more than ever." Point scoring rather than effective environmental action seems to be the motive for too many people in Brussels.

One fundamental issue is that all emissions reducing policies involve some kind of economic cost - though some have a much bigger cost than others. In public the EU generally accepts that there should be different levels of effort from different countries, so isn't it inevitable that any emissions reducing policies will have an impact on relative competitiveness?

The two possible answers to this conundrum are either to reduce the cost of your own emissions reducing policies, or to insist on green tariffs on all developing countries. We think the Commission is on the wrong side of history on this one.

2) Biofuels survive for now, but for how long? It's amazing how the scientific / economic evidence has piled up against biofuels recently – particularly Andy Bounds’ FT report last week on a leaked document showing that the EU’s own scientists don’t believe in biofuels.

Our own recent report makes it clear that European biofuels are the least cost effective way to reduce emissions out there. Talk about a "second generation" is basically just taking a punt on something that may never work. And of course, if it does magically work, we can always do it later. When we were writing our recent reports it became pretty clear that the advocates of every single different technology all claim that they will make huge leaps forward in cost-effectiveness in the coming years. Biofuel fans are not the only ones who make such claims.

There are about a million problems with biofuels, but the one the Commission seems to feel most keenly is that they will lead to deforestation. Hence the Commission has responded with proposals for criteria for "sustainable" biofuels. Some problems with this include, but are not limited to:

(1) "Sustainable" biofuels here means that you didn't burn down rainforest after 31/12/07 to plant them. A lot of the land clearance for predicted demand has already happened.

(2) How enforceable is this? The EU can't control agricultural fraud in Europe, never mind monitor what is going on in the depths of Latin America. Biofuels are perfect for fraud too - untraceable, commodified, mixable. At least the EU can try to count subsidised goats in the mediterranean EU member states. Good luck trying to prove that your biofuels are sustainably sourced.

(3) Even if we could solve problems one and two, the whole idea rests on an illusion. Even if you could make the biofuels "sustainable", the huge target the EU is setting (roughly equal to US plans) will drive up food and land prices. So Brazilian landowners can grown the biofuels on existing farmland, and burn down the rainforest to plant now more valuable food. It’s like squeezing a balloon - the pressure just comes out elsewhere.

3) Are today's targets just a fantasy, or is there a cunning plan? Are we really going to build two giant windmills every day between now and 2020? It seems unlikely somehow. Or is the Council going to redefine nuclear as a “renewable?” That sounds more like the likely euro-compromise.

4) Running the ETS from the centre = taxation without representation. Speaking of beneficial crises, the EU has decided to respond to the failure of phase one of the ETS (and likely failure of phase two) by demanding that it is allowed to determine member states ETS targets from the centre.

This may just be politically completely unrealistic - we don't know. Certainly many member states only take part in ETS, and other green policies, safe in the belief that they won't actually have to do anything, and will probably be able to make some money out of it. Few will be keen to be definitively told how much effort to make.

Nonetheless, assume it were eventually to happen. ETS is basically a (disguised) tax. Central control over the level of scarcity determines the value of this tax. In other words a centrally controlled ETS would be the first true EU direct tax. Is that what we want?

(5) The path not taken. Another way to do run a European emissions policy - or any other international emissions policy - is to have states set themselves demanding targets with legally binding fines. (Funnily enough, the EU members have turned own the option of making the Kyoto fines legally binding). You could then leave member states to hit their target their own way, instead of trying to micro-manage how the member states should hit their targets.

Given that the Commission's micro-management involves pushing members towards policies that are either sub-optimal (renewable subsidies) or actively damaging (biofuels), the need for a different approach seems more urgent than ever.

***Update***

Well, at least some of the papers have picked up on our use of BERRs own numbers to suggest that the Commission's estimate for how much its grand proposal is going to cost is rather an underestimate. BERRs methodology suggests up to 730 pounds for a family of four every year.

There are some bits in the Mail , Sun, Telegraph Express , and Evening Standard .

There is a good leader in the FT too: "Most damagingly, the privileged status of renewables takes the focus away from energy efficiency, by far the lowest-cost means of reducing emissions…"

Also, as if to confirm the point we were making about the danger of a highly visible price focussed on highly mobile firms, there is a piece in the IHT about how workers at a Belgian steel plant have gone on strike to protest against the EU Emissiosn Trading Scheme. A union leader says "You could call this the first carbon dioxide industrial action". Doubtless it won't be the last - as long as the EU's green policies are designed in a way that practically encourages companies to relocate.