Europe | Charlemagne

Europe’s energy woes

The storm over new European Union climate-change targets

ENERGY and green policies should be ideal for common European action. Pollutants know no borders. The cost of renewables such as wind turbines and solar panels can be cut, and their drawbacks mitigated, if they are linked across Europe. When the wind stops blowing in Germany the sun shines in Spain; if both sources die down, French nuclear plants or Swiss hydroelectric stations can take up the slack. A proper European-level emissions-trading scheme should minimise the cost of reducing greenhouse gases. And a successful low-carbon transition should reduce dependence on imported fossil fuels.

Yet the reality is messier. The EU struggles with a hotch-potch of national policies, conflicting and expensive subsidies, Balkanised energy markets and ever-growing reliance on fuel imports. After years of crisis, Europeans are more concerned with the cost of climate-change policies than with their benefits. European industries pay three to four times more for gas, and over twice as much for electricity, as American ones (which benefit from cheap shale gas). One reason Europe has so far met its emissions targets is its long economic slump. Yet recession and deindustrialisation are hardly a climate-change policy.

So the EU’s new planned emissions targets, announced this week, were contentious. When wages are being squeezed to regain export competitiveness, it is hard to sell the idea of higher energy prices, particularly when the rest of the world is doing too little to cut greenhouse gases. The current policy is known as 20-20-20: by 2020 its members should reduce greenhouse-gas emissions by 20% (relative to levels in 1990), with 20% of the mix produced from renewable sources and a 20% improvement in energy efficiency. After an unusually acrimonious internal debate, the European Commission called this week for the ambition to be raised to a 40% reduction in emissions by 2030. It wants a “binding” EU-wide target of at least 27% for the share of renewables, though there would be no new national targets for renewable energy. The commission also refrained from proposing new legislation to regulate the development of shale gas.

The decision to give greater flexibility for countries to determine their own energy mix is a victory for Britain. But there were protests from several quarters. Green lobbyists called the targets too tame. By 2030, many say, Europe needs a 55% emissions cut, with 45% of energy derived from renewables, if it is to meet a goal of cutting greenhouse gases by 80-95% in 2050 (the cut in rich-world emissions deemed necessary to limit the rise in global temperatures to below 2°C). By contrast the EU’s business lobby is alarmed about rising energy costs, and says the EU is at risk of naively becoming “a lone front-runner without followers”.

Increasingly, the commission has had to cast the argument in terms of saving Europe rather than the planet. A long-range policy gives predictability to investors in low-carbon technology, it says; such investment, in turn, spurs innovation and the creation of green-tech industries. For the countries of the troubled southern periphery, renewable technology would help redress trade deficits; for those on the eastern fringe, it would reduce vulnerability to bullying by Russia. In a sop to industry, the commission proposes to maintain free emissions allocations to an ever-growing number of sectors deemed to be vulnerable to rising energy costs (including makers of clocks and musical instruments).

The commission’s own models suggest the new targets could make output fall by nearly 0.5% of GDP in 2030 (compared with current trends); or increase by a similar amount if energy-savings measures were strengthened, free allowances scrapped and a carbon tax applied across the rest of the economy. A bigger emissions cut of 45% appears to do no more damage. But such a proposal would be dead on arrival at the March European summit. “The art of politics is to propose something that is achievable,” says Connie Hedegaard, the climate-change commissioner.

Europe’s confusion is due, in part, to conflicting national priorities. Germany is giving up nuclear power and betting heavily on solar and wind energy (all while burning more coal). France remains heavily committed to nuclear and bans shale-gas exploration. Britain is going all-out for shale gas (and nuclear), being a laggard in renewables. But it also does not help that Brussels has too many commissioners with overlapping responsibilities. The latest package was agreed on only after an 11th-hour battle between Ms Hedegaard and Günther Oettinger, the German energy commissioner who, unlike the German government, wanted only a modest emissions-reduction target of 35%.

Off-target

The fury over emissions targets misses a deeper problem: Europe’s carbon and energy markets are dysfunctional. The emissions trading scheme was meant to put a price on carbon to encourage alternatives. But poor policy design, a recession and too many exemptions mean the price has collapsed. The commission has proposed a sort of “central bank” of emissions permits to stabilise the market, but it will take years to sort out.

And although many are right to worry that Europe’s energy prices are higher than its competitors’, too little attention is paid to wild differences within Europe. Households and businesses in some EU countries pay up to four times more for gas or electricity than in others. Wholesale prices are falling or flat, but retail prices are rising because of differing regulations, price controls, taxes and levies (eg, to pay for renewables). Spain generates large amounts of solar and wind power, but can export little to France given poor grid interconnections. Unless Europe’s markets are fixed so that emissions permits, gas and electricity can be traded across the continent, ever more ambitious climate-change targets risk becoming an ever more expensive failure.

Economist.com/blogs/charlemagne

This article appeared in the Europe section of the print edition under the headline "Europe’s energy woes"

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