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Friday, October 17, 2008

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

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