Last month, the member states of the European Union (EU) and European Parliament approved – in a fanfare of publicity – a climate and energy package proposed by the European Commission (EC). It has been popularly described as the 20/20/20 package – to establish a 20% share for renewable energy and to cut greenhouse gas emissions by 20% by the year 2020.
The European Commission regards itself at the forefront of climate-change policies worldwide. It intends to use this agreement to put pressure on the US, China, India and other countries to adopt similar policies.
In December this year, 190 countries will meet in Copenhagen to try to agree on a successor to the Kyoto Protocol, the main provisions of which expire in 2012. Thus, 2009 is going to be very important for climate-change policies in the UK and elsewhere.
Many people applaud the EC’s lead in reducing carbon emissions, although as an economist, I remain sceptical about an organisation that is still committed to the fiasco of the Common Agricultural Policy. If it cannot sort out the CAP what hope is there for effective climate-change policies?
The EC’s biggest challenge is to ensure that the 27 member states implement the policies that have been agreed. It is easy for the politicians to sign agreements but much more difficult to incorporate them in national legislation.
Let me take the proposed 20% reduction in greenhouse-gas emissions as an example. The magnitudes of these vary enormously within the EU and are greatest in the coal-producing countries, such as Poland and Germany.
Intention is that the 20% objective be achieved through national reduction targets, which will vary among the countries, and through a Europe-wide carbon-trading scheme in which power plants and other relevant industries buy permits to pollute.
The emissions trading scheme (ETS) has already been weakened, however, under German pressure, by exempting most companies in processing industries, such as steel and cement, from paying for permits. Further, power stations in central and eastern Europe, which are mainly coal-fired, were given large discounts on the price of carbon.
There are already fundamental economic flaws in the ETS which remind me of the Common Agricultural Policy.
The cost of a permit to produce a tonne of carbon dioxide fell by about half in the last six months of 2008 and, at the time of writing, was around just 15 euros. That seriously reduces the incentive to cut emissions.
I am not in the business of forecasting carbon prices, but it seems very likely that they will fall even further because of the global economic recession. Steel production, for example, is declining rapidly. That may also be true of electricity consumption and production. It is therefore possible that the price of carbon could be close to zero for the next few years.
The EC wishes to take a longer-term view to 2020, of course, but it is unfortunate that the ETS and related policies will be in a shambles during 2009 before the vital Copenhagen meeting.
Nevertheless, I hope that the economic downturn will result in a radical overhaul of the EU’s carbon-trading policies.
The 20% target for renewable energy is also looking increasingly unrealistic, not least in the UK. Wind energy, for example, is heavily subsidised – often with subsidies hidden to the consumer – and I think it will inevitably be difficult to justify such subsidies in the current economic climate.
The costs of wind energy appear to have rocketed, as illustrated by companies such as BP and Shell withdrawing from some important projects. The recession may bring down those costs but, at the present time, there are increasing doubts over the economics of wind energy, at least offshore.
I wrote in this column a few months ago that low oil&gas prices will inevitably lead to a reduction of investment in alternatives such as wind and marine energy, biofuels, tar sands and coalbed methane. Recent events have strengthened rather than weakened that opinion.
A specific example is the EC’s desire to help finance up to 12 carbon capture and storage (CCS) demonstration projects. They would be closely linked with ETS, but how many will actually proceed?
It is excellent that both the Scottish and UK Governments are committed to a big increase in renewable energy, although the 20% UK national target is totally unrealistic in the foreseeable future. Renewables accounted for less than 1% of UK energy consumption in 2007, compared with 15% in Sweden, for example.
2009 will be a vital year for renewable energy and climate-change policies. I support the EC’s 20/20/20 objectives in principle but wish there was much more economic realism about what can be achieved, in both Scotland and the rest of the UK. How about 10/10/20?
Tony Mackay is MD of Mackay Consultants
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