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.

Is Ed Miliband's "energy price freeze" compatible with the UK's EU commitments?

How will Ed Miliband's new Energy policies go down in the EU?

At our fringe event today at the Labour Party conference - that we organised together with IPPR (write-up to follow) - we sought to answer the question, how Labour should respond to a changing Europe. Well, here's a potentially interesting twist to that question.

Ed Miliband in his leader's speech earlier today promised to freeze energy prices for 20 months after 2015 if he is elected Prime Minister. Furthermore he also seemingly promised to reduce carbon emissions from the UK's energy sector to zero by 2030. Interesting ideas, both brave and potentially effective with the electorate (they can also count as real policy announcements). However, we wonder whether he has thought through the EU implications of all of this.

First, it's impossible to discuss energy policy without considering the EU dimension. Although UK governments - Labour and the Coalition - have no doubt added extra requirements, much of the cost of reducing CO2 and other emissions are now locked into legally binding EU agreements. Incidentally, Ed Miliband was Energy Minister from 2008-10 when many of these policies were being developed. Capping price increases while keeping the underlying policies will do nothing for long term energy affordability. Meeting the renewables target is costly and requires significant investment - this will not be forthcoming under a price freeze and the UK is already behind schedule in terms of meeting its target. UK energy companies may also find it impossible to stomach the cost of managing both policies at once.

The real question then is whether Miliband is also ready to go to Europe to renegotiate these policies to achieve affordable energy in the long-term?

Secondly, is it possible for the UK to unilaterally freeze prices in the UK while championing an integrated EU single market in energy? An integrated single market is one real way to help reduce prices - and is something that we believe Labour has rightly called for in the past.

Some have already questioned whether the move would be legal under EU competition law. We believe it might, just. Since there is currently no single market to break in energy but also because UK firms receive no competitive advantage from the move. Any imported energy would also face the same price cap since it is applied at the consumer level. Given the problems above though, tinkering along the edges of the plan seems likely (possibly to reduce the impact on UK energy firms) this could well create legal issues with the EU.

Thirdly, did Ed Miliband really mean to commit his party to reducing UK energy carbon emissions to Zero (its worth noting he made similar suggestions last year)? The EU's already ambitious targets are to cut carbon emissions by 85 - 90% by 2050, so bringing that forward to 2030 would add a huge cost to the UK's energy bill. We wonder whether he actually means 100% of UK electricity (note, not total "Energy") should be carbon free? That could technically be possible (just), but likely at an incredible cost, and require vast amounts of investment in both nuclear and renewables.

Perhaps we have been here before. When Tony Blair signed the UK up to a binding 15% of energy, it was thought by some he believed he was signing up to 15% of electricity. Former UK scientific adviser Sir David King for instance suggested that 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."

It's an interesting idea - and credit to Ed Miliband for actually trying to address an issue that will be very important to people for years to come - but we would like to see more details.

But more fundamentally, it's also a reminder that, not matter how it tries, Labour won't be able to escape tough decisions on how to approach EU policy - in all its various shapes and forms.