The EU struggles with its huge green challenge

By 2020 the EU wants to reduce its CO2 emissions by 20 percent compared to 1990. In addition its ambition is to obtain 20 percent of its energy from renewable sources as well as to increase its energy efficiency by 20 percent. With these 20-20-20 targets the EU took up a leadership position among the rich countries in the fight against climate change. However, setting targets is one thing, materialising them is another. Still, the first target looks like a pushover.

Target no. 1: reducing emissions

The objective of a 20 percent reduction of greenhouse gas emissions is an extension of the commitment the EU made on the occasion of global climate negotiations, more specific the Kyoto protocol. At the time the target was an 8 percent reduction of the 1990 emissions by 2012.

In 2009 European emissions had already dropped by 17.3 compared to 1990, which means that today the 2020 target is almost achieved. Lest the EU rest on its laurels in the next decade, some suggest increasing the reduction target to 30 percent by 2020. Others however fear Europe’s deindustrialisation if the EU would take that decision unilaterally. After all, how can you compete with China and other blocks if CO2 emission in Europe is more expensive?

Several factors explain the good result of 2009. After the Berlin Wall came down the eight former communist countries that in the meantime became EU member states saw their economies and thus their emissions collapse. As a result they are still up to 40 percent better than the Kyoto requirement (8 percent reduction).

The good result is not due to an energy consumption reduction, but to that single paradigm shift in European energy consumption since 1990: the replacement of CO2 intensive coal mainly by gas, oil and renewable energy (see table). Thanks to this, most of the old EU member states will also achieve their Kyoto targets.

Other contributions were made by the 2009 recession and the ensuing fall in economic activity. According to the European Environment Agency, emissions fell by 6.9 percent that year. Finally, the figures are embellished by the recent relocation of many polluting industries to countries such as China. These industries’ emissions now burden the figures of those countries. If one would calculate emission quota on the basis of European consumption, and thus also take into account the imported products from China and elsewhere, a different picture would emerge. It is not unthinkable that the EU would not achieve its emission targets.

Target no. 2: more renewable energy sources

The second target will be a tougher nut to crack: producing 20 percent of our energy from renewable sources nine years from now. The most recent data indicate that in 2008 we obtained 10.3 percent (from 8.8 procent in 2006) of our energy from renewable sources (wind, sun, biomass, hydropower, geothermal energy).

Recent research shows that this target can only be achieved if the EU significantly steps up investments. By 2020, 200 billion euro is needed for the construction of smart electricity grids which can process and transport renewable energy, i.e. wind from the North Sea, sun and wind on the Iberian peninsula and in North Africa, and biomass in Central Europe. The market will only provide half of that sum. The European Commission reckons it can cut that shortage of a hundred billion euro by 40 percent by means of a more flexible licensing policy. Another 800 billion euro is required for the construction of the actual sources of the renewable power, i.e. wind mills, solar panels and biomass plants.

Recently the European Commission had a study executed on renewable sources by consultancy firm Ecofys, Ernst & Young, the Fraunhofer Institut and the Technical University of Vienna. The outcome? The market would only generate 450 billion euro in investments by 2020. This means we are facing an investment gap of 350 billion euro, or 35 billion euro per annum.

Target no. 3: increasing energy efficiency

The third target, namely increasing European energy efficiency by 20 percent, seems a long way away. By 2020 Europeans would have to consume 390 million tonnes less in oil equivalent compared to the business as usual scenario.

Late 2010 the Commission had to admit that ‘the quality of national energy efficiency action plans is disappointing and enormous opportunities are left unused’ and that ‘the target is still far from being achieved’. At the energy summit which the Hungarian EU presidency organised in early 2011, decisive action to close the gap was put off until next year.

Taxes are one way of fighting energy misuse. However, Belgium is not performing well in that respect. According to the EU our ‘implicit’ tax on energy is one of the lowest among the 27 member states. Only the Baltic countries, Slovakia, Romania and Bulgaria have a lower energy tax. Clearly there is considerable margin in Belgium for reducing labour taxation by rising energy taxation.

The EU’s meagre performance in terms of energy efficiency is confirmed by the fact that European energy consumption, despite a relatively modest economic growth, has continued to grow by 8 percent from 1990 to 2008. Whereas only coal consumption has decreased, oil consumption has stabilised and natural gas has risen by 50 percent over the last years.

Move over the graph to display exact numbers. Source: Eurostat

A toothless tiger

The European Emissions Trading System (ETS) is supposed to be one of the flagships of the EU climate and energy policy. The ETS focuses exclusively on sectors with high carbon emission from solid fuels, such as power stations and the steel, iron, petrol and gas industries. These are expected to bring down their emissions by 21 percent between 2005 and 2020.

The ETS is a so-called cap and trade system: the EU imposes a cap on emissions (minus 21 percent) and subsequently issues a certain quantity of emission permits (of one tonne CO2 each) in relation to that cap. Companies will then either buy permits or make the necessary investments to cut their emissions, depending on which option is cheapest for them. The politicians set the cap, the market realises cost efficiency. Unfortunately the reality turns out to be less attractive than the theory.

The system encourages CO2 reducing investments only when CO2 emission rights are expensive. To be expensive they need to be scarce, which they are not for a host of reasons mainly due to politics and lobbying.

To begin with, many companies were given emission rights without having to pay for them. Later on, as the ETS was picking up, they sold them with a profit. Thus for example, the world’s largest steel company Arcelor Mittal made two billion euro out of its emission rights trade. The ngo Carbon Trade Watch therefore labels the ETS a competition policy of disguised industrial subsidies rather than a climate policy. In addition the EU decided that emission rights do not expire annually, as was the case in the first phase of the ETS, but that companies may accumulate them. Since a number of companies suddenly needed less emission rights during the 2008-2009 crisis, they could save them for the following years.

Secondly, the EU decided it was possible to import rights from other countries. Whenever companies invest in emission reduction in other parts of the world, as is made possible by the so-called Kyoto mechanisms, they can import those rights into the ETS. This causes an increase in the number of permits in the system. This way companies can raise the number of emission rights by up to 13.3 percent. This allows them to achieve their targets without effectively reducing their emissions. In 2009 European companies imported 82 million emission permits, or four percent of the original cap.

‘A gigantic carbon bubble is inflating itself’ says Arnold Mulder of Groningen University, who recently conducted research on the ETS. ‘By 2013 there will be an surplus of 1.4 billion emission rights, which could grow to 2.2 billion in 2020. This lowers the chances that we reach the cap by six percent. The European Commission intends to extract 500 million rights from the system as of 2013. But that is crisis management. It does not solve the system’s fundamental flaws.’

Unstable versus stable prices

As a result of the surplus, emission rights prices are very low and the system is not working properly. For this reason investments are too low and national governments introduce all sorts of other measures to promote renewable energy production. This in turn further undermines the ETS activities, says Mr. Mulder. While the number of permits remains stable, the subsidies for low-carbon energy production cause demand for emission permits, and hence their price, to fall.

Obviously a CO2 tax would have been a simpler alternative than the ETS, but that was politically unfeasible. Unfortunately the political solution that proved feasible is an ineffective one. Aviel Verbruggen, professor at Antwerp University and energy specialist: ‘The European companies were in favour of the ETS on condition that it would be a toothless tiger. Who could blame them: they do not want to compete with companies from China, Japan or the US who are not paying for their emissions.’

Moreover, according to Mr. Mulder the ETS leads to unstable prices. ‘The public authorities can keep the supply of permits more or less stable, provided the 27 member states and the many industrial lobbies could somehow agree on this. But the demand for licenses strongly depends on economic growth as well as on many other factors.’ Unstable prices are interesting for emission rights traders, not for those who really want to invest in green energy. They prefer stable and predictable prices.

Jutta Kill of the ngo FERN points out that the ETS focuses on quantitative targets rather than the kind of qualitative shift that is needed in electricity grids and storage capacity. ‘To achieve that you need government intervention and investment.’

We visit EEX in Leipzig, one of the four exchanges where emission rights are traded. Here, emission rights are just like any other financial product: their trade is really a game with figures on screens. This is a market where, besides the companies concerned, mainly banks and financial players seek to earn short-term profits. As more and more derivatives were developed over the years, the market volume grew to significant proportions. However that does not mean that money is actually being generated for the benefit of green investments.

The member states

The weakness of the ETS makes other measures all the more important. In 2009 the EU made the target of 20 percent renewable energy by 2020 into an obligation. The effort is being distributed over the member states. Belgium, for example, has to increase its renewable energy from 2.2 percent in 2005 to 13 percent in 2020, whereas Sweden must achieve 49 percent by that time.

Some countries promote renewable energy production by offering green energy producers good prices whenever they feed the grid with their power. Germany successfully pioneered this approach with its so-called ‘feed-in’ tariffs. Other governments imposed on producers the obligation to produce a given percentage or quota of green power by a given deadline. According to energy specialist and professor Aviel Verbruggen, the Flemish quota system is twice as expensive as the German one. The Ecofys study, which was mentioned earlier, agrees that feed-in tariffs are cheaper, more efficient and easier to put into practice. The Flemish Government challenges this claim.

Whatever the strategy adopted by a country, governments should play an active role through instant price adjustment in reaction to the rapidly evolving technological landscape. ‘It is naive to think that the market will solve problems of policy’, says Mr. Verbruggen. ‘Prices for solar panels have halved between 2008 and 2009, while Flanders waited until 2010 to take action. An alert administration would instantly react to this.’

The EU budget screened

The EU does not have an enormous budget at its disposal: 141 billion euro is not much more than one percent of the Union’s gross national income. Still it is worth while examining whether and how the EU aligns its own expenditure with the 20-20-20 targets.

The European Commission, more specifically the Directorate General for Home Affairs, examined to what extent the EU budget subsidises pollution and non sustainable practices. Its findings are striking.

The structural and cohesion funds, worth 51 billion euro per annum, are the second largest EU budgets after agriculture. At first glance the funds appear to evolve positively: with 30 percent, three times as many resources are now earmarked for environmental themes than during the previous Commission’s term of office, proportionately speaking. 62 percent of these environment investments go to infrastructure for transport and waste (water). There is more interest in end of the pipe solutions that in prevention.

A mere 2.6 percent of the total amount goes to renewable energy, whereas in excess of 12 percent go to roads and air traffic: thirteen billion euro per year or half of all transport investments. Rail transport only gets half as much, while clean urban transport has to do with some scraps.

The Commission report is clear about it: ‘If the EU wants to promote sustainable transport and the fight against climate change, it must systematically reorient its transport financing toward public transport, cycling and rail transport.’

The report also is critical of the Common Agricultural Policy, which represents about 57 billion euro yearly. Over the past years that policy underwent significant changes. Export subsidies are dwindling and support to farmers was dissociated from production and shifted to direct income support for farmers in order to avoid wasteful overproduction. The report adds a critical note on direct income support for farmers. ‘Because it is based on historical production in the previous phase the system supports producers who had the most (energy) intensive practices at the time, instead of redistributing to smaller farms (…). Direct support for more environmentally-friendly agriculture remains limited proportionately speaking.’

Large sums of European money for nuclear energy

It is worth while taking a closer look at the EU’s energy investments. The largest amounts come from the above-mentioned cohesion funds: 4.7 billion euro (in six years’ time) for renewable energy and 4.2 billion euro for energy efficiency.

The framework programmes for scientific research and technological development constitute another important expenditure. In Framework programme 6 (FP6) 835 million euro were spent on energy between 2002 and 2006, of which more than a third on renewable energy and a quarter on energy efficiency. A striking fact was that in FP6 815.5 million euro was allocated to nuclear fusion research and 189.2 to nuclear fission. In other words: three times as many subsidies were allocated to nuclear energy (research) than to renewable energy.

In fact this proportion has changed only minimally in the framework programme for the 2007-2013 period. 2.35 billion euro go to research on energy, of which almost half to all types of renewable energy together. A larger amount of 2.71 billion euro go to nuclear fusion and nuclear fission for 2007-2011 alone.

The DG for Home Affairs report concludes that a quarter of the amounts spent is controversial in terms of sustainability (particularly nuclear fission and fusion).

But there is more. In March and April 2011 – at a time when the situation at the Fukushima nuclear power plant was getting way out of hand – the Commission proposed increasing the amount for nuclear fusion by another 1.3 billion euro. The reason: the costs for the construction of the experimental nuclear fusion reactor (ITER) in Cadarache, France are much higher than budgeted. With this, four times as much would be allocated to nuclear energy research than to renewable energy between 2007 and 2013.

 That is remarkable. All experts agree that nuclear fusion cannot contribute to our energy supply before the year 2050. Therefore it is of no help in the energy paradigm shift needed to achieve the 2050 climate targets (at least 80 percent less CO2 emission by 2050).n

Grey mice deal

Other examples show that the EU does not make a resolute choice in favour of renewable energy. When the economy threatened to grind to a halt as a result of the financial crisis, many national governments decided to do investments in view of keeping the economy alive. Some argued for a Green New Deal, a massive investment scheme in renewable energy and energy savings. The EU was not exactly enthusiastic about this idea. On 6 May 2009 the European Economy Recovery Plan was subsequently approved, representing 4 billion euro in energy investments. 2.2 billion of these investments went to new gas pipelines and 1 billion to test facilities for carbon capture and storage. A meagre 375 million euro was allocated to wind energy at sea. Recently the Parliament decided to earmark the balance of 146 million euro for local energy saving initiatives. The result is that in Europe the Green New Deal has become a grey mice deal.

The European Investment Bank (EIB) for its part has increased its renewable energy budget from 0.5 billion in 2006 to 2.8 billion in 2009. In the 2010-2012 period the bank wants to earmark a quarter of its credit amounts for the fight against climate change. 20 percent of its total energy financing is dedicated to renewable energy. The question remains how sustainable the other 80 percent are.

‘The EIB compensates the private sector’s reticence in terms of renewable energy but it has limited leeway. State banks too should put in more efforts in favour of renewable energy’, the Ecofys study remarks.

The European Bank for Reconstruction and Development supports the former communist countries of Eastern Europe. In the framework of its Renewable Energy Initiative the bank invested 277 million euro in the 2006-2008 period. Another half billion euro would be invested by 2020.

Compared to the above-mentioned financial needs these amounts are inadequate to say the least. The Ecofys study as well as the Commission itself are signalling a shortage of 450 billion euro to reach the 2020 objectives. In that respect the choices for nuclear fusion, and the choices by the recovery fund and the EIB are remarkable, to put it mildly. Bart Staes (of European Greens), member of the European Parliament, argues in favour of a countermovement to put the Green New Deal back on the agenda. ‘Only this way can the energy shift take place, creating millions of jobs in the process. Such a deal must reject nuclear energy and make a radical choice in favour of renewable energy and energy savings.’

Taking responsibility

The Ecofys study considers more government intervention essential in order to achieve the targets. It concludes: ‘The advantages of a proactive and participating government are manifold and have significant impact on the access to and the cost of capital. Government participation can provide important amounts of capital, either in the form of shares or of debt. This makes project financing cheaper. Moreover excessive profits can be prevented. Indeed government participation causes part of the profits to flow back to the treasury. By participating in projects governments also gain a better insight into the challenges and limitations. A public entity taking responsibility for this kind of participations can constitute a guarantee for a stable renewable energy policy.’

This conclusion hardly comes as a surprise. According to the UN, South Korea and China rank highest in terms of green investments. Undoubtedly part of the explanation for this lies in the fact that control over the financial sector is among the key characteristics of the East Asian development model. That said, China has a much stronger hold on money than South Korea that was forced to liberalise its financial sector when it became a member of the Organisation for Economic Cooperation and Development. In China money can barely leave the country and savers have no choice but to accept low interest rates. Also, the largely state-controlled banks heed instructions from the Chinese authorities to extend credit for whatever policy direction – as was shown during the financial crisis.

That is an advantage for the massive long-term investments (often with a low return), which are necessary for the green energy revolution. The climate crisis was and is a gigantic market failure. Governments must therefore take up their responsibilities instead of hoping that the market will solve the problem for them.

With thanks to Raf Porto Carrero, Lisa Develtere and Alma De Walsche.