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EU's controversial climate policy

EU's controversial climate policy

The fact that European climate policy is inherently flawed and will not contribute to achieving its ultimate goal (i.e. a global reduction of greenhouse gases) has been clear from day one, when the European Commission adopted the climate and energy package, also known as the 20/20/20 package, back in 2008.

In 2009, Oxford academics published an assessment of that package, highlighting a number of fundamental flaws which undermine its credibility and effectiveness[1]. The main problem with the EU policy is that it seeks to reduce emissions by an arbitrarily defined percentage of 20%, which for some reason was also adopted as the target for renewable energy sources and energy efficiency.

A mismatch between the number of targets and available instruments is a rookie mistake made in designing an economic policy. According to the Tinbergen Rule, also known as the golden rule of economic policy, the three targets of the EU package should be controlled by three independent instruments. If there are fewer instruments than targets (and the package contains only one instrument), the resulting measures will lack coherence. This means that attainment of an arbitrary target related to energy from renewable sources or energy efficiency improvement would lead to a different level of the overarching target than the 20% reduction of carbon emissions envisioned in the package. For more details about the nature of this conflict, please refer to a very reader-friendly explanation by professor Robert Stavins of Harvard University, an expert in environmental economics [2].

The package is also inherently flawed in that it is based on carbon production, rather than consumption, thereby sidestepping Europe’s responsibility for developing countries, making it difficult to reach a truly global agreement. To avoid European taxes on carbon production, industrial production is being moved out of the Community, to countries where energy can be produced much cheaper but based on higher-emission technologies, and then finished products are brought back to Europe as carbon imports.

In addition to those problems, the 20/20/20 package includes other flaws posing an obstacle to the reduction of global emissions. For one thing, the twelve-year time horizon is too short; it is shorter than the R&D horizon, which makes it impossible to look for innovative solutions, limiting the choice to available now technologies only. Furthermore, neither energy security nor the impact of the EU package on energy consumption costs, which is important in the context of the EU's economic competitiveness, were given enough attention in the package.

One might argue that a climate policy which seeks to cut down on carbon emissions will always undermine the competitiveness of an economy, because it involves substantial fees for the use of natural resources. But the scenario can be quite different for a well-designed climate policy. After all, competitiveness is a relative category. If all economies shared the same cost of climate protection, it would have no impact whatsoever on their competitiveness. However, the level of climate protection expenditure, which depends on the planned scale and time-frame of carbon emission reductions, is a different matter. If carbon emission targets are too ambitious, they might give rise to excessive climate protection expenditure, which could not be offset by improved efficiency; in consequence, we could face a global economic slowdown.

Coming back to the subject matter, an ill-designed climate policy cannot be corrected – it must be revamped in a controlled fashion to eliminate all inherent flaws. Otherwise, such a policy will ultimately lose credibility, because the effects of those flaws surface sooner or later and trigger uncontrollable and costly amendments. Our Company has been examining this matter for quite some time in the context of regulatory risks. The 'Europe 2020 Strategy' consultations, which took place in spring 2010[3], provided a good opportunity to present a broader audience with the outcomes of our studies and analyses, as well as our proposals for the revision of the EU energy and climate policy.
Back then, we were already arguing that EU climate policy should act to prevent the threat of global warming. Our measures, taken on a national and European scale, should contribute to the reduction of global emissions, as only in this way can global temperatures be effectively reduced. At the same time, we should encourage other countries with high emission reduction potential to follow in our footsteps. Otherwise, all our cost-intensive initiatives will fail to contribute to climate protection. Worse still, they could actually increase global emissions instead.

We made the point that at the time when Europe's energy and climate package was designed, it was widely belived that prices of natural resources would never stop rising. With such an assumption, subsidies to renewable projects, such as wind turbines or solar cells, cutting down energy production costs, would ultimately make those technologies commercially viable. However, the shale gas revolution has driven down the prices of fossil fuels, at the expense of the economic viability of many renewable energy sources[4]

We are of the opinion that the effectiveness (and credibility) of the European energy and climate policy is also undermined by the fact that the prices of carbon emission allowances depend not only on the target level of carbon reduction in the 20-year time horizon (which is calculated based on a mathematical model as a difference between the two projected emission paths: the business-as-usual scenario and the desired target path depending on the instrument level), but also on all unpredictable events which could occur within that time frame - both negative (such as crises or disasters) and positive (such as innovations). This gives rise to significant uncertainty regarding that instrument, which additionally increases the costs of adjustment. We would rather recommend a much more effective 'instrument-to-target' policy instead, whereby the effects of all unpredictable events would determine the achieved level of the adopted target (carbon emission reductions), which in itself is a 'model' assumption anyway. This is all the more important if we consider that the future of the energy sector lies in technologies yet to be discovered, which is an unpredictable factor as well. The effect of the shale gas revolution, which caught everybody by surprise, serves as the best example. Still, the EU would rather bet on selected, well-known technologies, believing that in this way it could reduce uncertainty. Being economically unviable at first, technological progress is to eventually make them economically viable, provided that sufficient investments are made. However, we must not forget that unforeseen innovations can catch us by surprise and change our reality. As far as innovations go, a planned economy makes no sense at all.

 

[1] “EU Climate-change Policy – A Critique”, in D. Helm, C. Hepburn (eds.) “The Economics and Politics of Climate Change”, Oxford University Press, Oxford, 2009
[2] (“Will Europe Scrap its Renewables Target? That Would Be Good News for the Economy and for the Environment” http://www.robertstavinsblog.org/)
[3] http://www.demoseuropa.eu/files/Adam%20Czyżewski%20-%20prezentacja.pdf
[4] For more information, see the report at: http://www.fuellingthefuture.orlen.com/en/publications/energy-environment-development-objectives-which-need-not-be-at-odds

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