The EU needs more to reach its climate and energy objectives

Wednesday January 22, 2014 18:29

Today’s communication by the European Commission on a 2030 policy framework for climate and energy brings good and bad news. The good news is that it contains a proposal for reform of the EU emissions trading system, including a new reduction target, and a binding target for renewable energy. But it can be questioned whether the benefits of energy efficiency will be fully reaped, and whether coherence between policy domains and Member States will be sufficiently improved.

Reforming the EU-ETS: a necessity

The EU Emissions Trading System (EU-ETS) is the EU’s key instrument for climate policy. So far, the ETS has proven to be an effective instrument for operational decisions at best, but not for strategic investments. For structural changes, potential investors in low carbon technology need clear guidance from the public sector in terms of a credible long-term carbon price signal. Experience so far illustrates that carbon price risks in the EU-ETS are considerable and are entirely with investors. 

For the EU-ETS to adequately serve as a foundation for long-term decision making it needs to be reformed substantially. The EC communication’s proposal on this matter is a step in the right direction, but much will depend on its precise elaboration: the detailing will make or break the effectiveness of the instrument. 

Different targets required to address different challenges 

The energy economy of the EU faces challenges in climate, energy security, job creation, affordability, and others. Energy efficiency (EE) and the penetration of renewable energy sources (RES) reduce the import dependency of the fossil fuels importing Union. Through reduction of the energy import bill and expansion of ‘new sustainable’ industrial activity, cost-efficient RES and EE stimulation contributes immediately to income and employment growth in the Union. This is amplified indirectly by their positive effect on the Union’s terms of trade. Furthermore, RES and EE reduce the outflow of substantial resource rent transfers to fossil fuels exporting countries. Capturing the large ‘no regrets’ EE potential is a resource-efficient win-win. On top of that a spate of RES and EE options have a large dynamic cost-reducing innovation potential. 

Even  a perfectly reformed EU-ETS would not be able to cover this myriad of challenges. In such matters, “One goal, one instrument” is a wise principle. Targets for renewables and efficiency are suboptimal as well, as realizing them is not an objective in itself but a vehicle to address various issues. But targets are a good second-best instrument in the absence of specific instruments addressing e.g. energy security. In this respect, the proposed binding EU target for RES should be welcomed, even if its exact height can still be disputed. But for EE, the current communication does not provide a leading point on the horizon. This is an important point of concern as EE is at least equally important for a sustainable energy future as RES. 

Improving coherence should be a focal point

Improving coherence between policies is essential. In the past decade, climate and energy policy interferences have led to undesired effects. For example, we have seen RES development watering down the price signal of the EU-ETS, and RES policies enhancing biomass co-firing without fully safeguarding the climate benefits. Those kinds of effects will need to be prevented. 

Additionally, coherence and cooperation between Member State (MS) policies need to be improved. Current RES shares were designed with the expectation that strong intensification of inter-MS cooperation and trade in RES would occur. This has not materialized so far, but still remains very important for the future. Also, fast cost-efficient convergence of support schemes across the EU are needed. At the same time allowance has to be made for providing supplementary technology-specific support to promising RES technology with, currently, a high cost gap and country-specific concerns.

Category: Corporate, Policy Studies