Conventional wisdom among climate policymakers holds to the idea that greenhouse gas mitigation, energy efficiency, and renewable energy targets will combine to deliver the EU’s 20% emissions reduction goal for 2020 relative to 1990, with a higher 30% target still on the table.
But the reality is that there is a long-standing and unresolved tension at the heart of the EU’s 2008 20/20/20 energy and climate package. And the bloc’s roadmap for 2050 (ENDS Report, March 2011), aimed at cutting emissions by at least 80% relative to 1990, has brought matters to a head. It’s not just about whether to go for 30% or a near offer, but about how the three elements work together, or do not.
The European Commission is deeply concerned that a renewed drive for energy efficiency, together with a continuing surge in renewable energy investment across the EU, will undermine carbon price signals in phase III of the EU emissions trading scheme (ETS) from 2013. Already in Germany, the power sector is battling low profitability from its conventional power plants which must now power down inefficiently when renewable electricity is available. These utilities are struggling to find the cash to invest in the vast amount of new low-carbon plant needed to decarbonise its grid, not least in back-up and baseload plants.
The UK is not there yet, as it has much lower levels of renewable electricity penetration into the grid. But we could eventually face a similar dilemma, unless we get the various elements of electricity market reform right. In particular, we need to get the balance between energy efficiency and new power capacity right, and then find the money to build the new plant. So far, the main emphasis of electricity market reform has been on getting £200bn of new plant built by 2020, while energy efficiency has tended to be seen as a useful bonus when it ought to be the first course of action.
The commission is so worried about the impact of low-cost energy efficiency measures on an already weak carbon market, that it has floated a plan to remove a large number of EU allowances from auctions in phase III, possibly 500-800 million of them between 2013 and 2020, to prop up carbon prices. To be fair, carbon prices have also dropped as a result of falling energy demand and industrial production in the recession, though part of this is due to greater energy efficiency and renewable energy uptake – surely things we should be celebrating.
But if it is really the case that the lowest cost emission reductions from energy efficiency threaten the ability of the EU ETS to drive low-carbon investment and cut emissions, then one wonders how much thought went into how the three elements of the EU 20/20/20 package interact. Or maybe no one expected the 20% energy efficiency target to be met, particularly as it was voluntary. It has been, after all, by far the poorest performer of the bunch. The EU’s updated Energy Efficiency Action Plan may yet change all that, even though it remains voluntary.
It is often argued by carbon traders that the EU ETS was never meant to drive the larger capital investments in low-carbon technology covered by other schemes, such as the UK’s Renewables Obligation, presumably because the carbon price needed to do that would be so high, that it would cause economic dislocation and put off investment in the EU’s power sector altogether unless ratcheted up gradually.
But surely the least we could expect from the EU ETS is for it to drive both behavioural change and installation of cost-effective energy efficiency technologies – precisely the kind of measures outlined in the Energy Efficiency Action Plan. There is evidence this is happening in industry, but with little sense of urgency. That is why the bloc is revisiting its energy efficiency policy.
There is also evidence that escalating energy prices and energy security worries, not the EU ETS itself, are finally focusing corporate minds on efficiency. But then we come back to our dilemma. Measures aimed at industrial energy efficiency will lead directly to a cut in energy demand, and even measures in the non-EU ETS sectors including households, offices, and retail will lead to an indirect cut. That will tend to push down the carbon price, reducing the low-carbon investment incentive.
So we need to be clear what we want here. Unless there is a completely different approach, such as a move to carbon taxes, low-cost reductions in emissions through energy efficiency and increasing contributions from renewable energy will almost certainly mean heavy intervention in the carbon market to counteract downward pressure on the carbon price. Without it, the EU ETS risks becoming increasingly irrelevant as a driver of change.
Perhaps the commission’s plan to withhold allowances to prop up the carbon price to allow for greater energy efficiency measures is the only way forward now, since EU member states still can’t agree to a tighter cap. We are where we are. But there are surely some powerful lessons for the UK, as it seeks both to rebuild its electricity market from scratch with a carbon floor price and to boost domestic and small business energy efficiency through the Green Deal. The three key elements of climate policy need to be dealt with coherently, or market reform will simply replicate earlier failure.