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Open Europe Flash Analysis: An admission of an expensive failure - the EU proposes new energy and climate change targets

(PresseBox) (London, ) Summary: The European Commission’s proposal today for a new set of energy and climate change targets is a welcome shift towards increasing member states’ discretion and choice over a key policy area, which could improve cost-effectiveness. That said, it amounts to a clear admission of past failure, and is a lesson in why EU policy-making must embrace greater flexibility with far stronger checks against proposals being passed despite the absence of sound economic evidence. In an illustration of just how costly this mistake has been, Open Europe estimates that 95% of the original £20.4bn in estimated recurring annual benefits of the EU’s overall policy have so far failed to materialise, whilst the estimated average annual cost of £3.4bn has most likely held up. Open Europe will soon publish a comprehensive study of the EU’s climate change policy and the most effective way ahead.

What has been agreed and how has it changed from the 2020 framework?

A binding target to reduce Green House Gas (GHG) emissions by 40% compared to 1990 levels – up from 20% in 2020. As currently, this will be shared by sectors covered by the EU Emissions Trading Scheme (ETS) and those not, with targets for the latter shared out to member states in national plans.

A binding target to have 27% of energy produced in the EU by renewables by 2030 – however, there will be no binding targets for specific member states. The Commission suggests this could mean 45% of electricity being produced by renewables. There will be a new ‘governance system’ to manage progress in renewables in each state (see below for more on this). This is a significant change from the current binding national targets making up the target of 20% of energy from renewables by 2020. This is thanks to significant push behind the scenes by countries such as the UK for greater flexibility.

No new specific target on energy efficiency or on transport fuels. This is largely down to the struggle to meet the previous targets and the move against biofuels.

No specific regulation on shale gas. This is a big win for the UK and Poland. There may be further work on EU wide safety standards, although this makes sense as long as they are not pushed too far in an attempt to regulate the use of shale.

Is this an admission of failure?

Yes, albeit a veiled one. The key here is the renewables target. Although there is a binding target for the EU the lack of national targets seems to be a clear admission that the current framework has not worked and was a case of rushed decision-making lacking firm grounding in environmental or economic evidence. As such – and as predicted in a 2008 Open Europe report – it’s clear that the binding renewables targets have been an expensive failure.

What has this cost the UK and Europe?

According the UK government impact assessment of the EU Climate and Energy package, which included the original renewables target, the average annual recurring cost was expected to be £3.4bn, while the benefits were expected to be around £20.4bn recurring annually (both in 2013 prices). However, we estimate that up to 95% of the benefits envisaged in the impact assessment have not materialised while the cost has stayed broadly the same. This is because the stated benefits of this regulation are reliant on two assumptions. Firstly, that a global deal is struck on climate change and, secondly, that the EU is pivotal in securing this deal. In reality, though, neither of these has come to pass. Globally, emissions continue to rise and there is no deal in sight, leaving only small localised benefits from cutting emissions and switching to renewable energy.

Is the EU ETS being salvaged?

There is a move to overhaul the Emissions Trading Scheme (ETS) after 2020, which will include fewer permits being released each year. In the meantime, the temporary decision to delay the release of a large number of emissions permits (back loading) will remain in place.

It’s not clear whether this will be sufficient to salvage the ETS. Questions will remain about whether excess permits will ever re-enter circulation. Even with the current temporary reduction of permits in place the price has remained far too low to encourage the necessary long term investment into renewable technology needed to meet the current target. There will also still be significant exemptions to stop ‘carbon leakage’ (where production moves abroad to avoid paying the costs of the ETS), while large sectors including transport, construction and agriculture remain outside the system.

What does this shift in policy teach us?

Given the sizeable shift towards greater flexibility, there is a clear sign that the current policy has been inadequate. However, despite many, including Open Europe, arguing this at length from the beginning, it has taken six years for this realisation to set in – at a huge economic cost to Europe’s households and businesses.

There is a clear lesson here: locking in long term EU policies with prescriptive top down targets is not the way to go:

EU policies need to be flexible to allow for potential economic shocks and differences among member states.

Long term policies should not be locked in without a review clause and on-going oversight on the costs and benefits.

There must be a way to review or repeal outdated EU legislation.

Can the EU afford to stick with the current approach for another six years?

As the accompanying package on energy prices highlights, the EU is facing a severe problem on the competitiveness front. For the UK and other countries, a clear question now has to be asked about meeting the existing 2020 targets, especially when it is now known they are likely to expire. Should they stick to the rigid structures and invest only in certain technologies to meet the 2020 targets? Or should they already be embracing the more flexible approach? Keep in mind that the UK still has to move from 4% of energy from renewables up to 15% to meet its target, this will require sizeable investment.

The 2020 targets remain legally binding, but for some countries the economic cost may pale in comparison to the huge shift in the energy market needed to meet the targets.

What happens now?

All this said, it remains early days and there are plenty of conflicts over this policy. Today only marks the Commission tabling a proposal. For the proposal to become policy, all 28 EU member states have to agree to at least part of the proposal in addition to the European Parliament assenting, with other parts of the package agreed by qualified majority amongst national ministers. The European Parliament has traditionally pushed for a much stronger agenda on the environment and climate change and will likely continue to do so through binding national targets. Member states are split on the issue but the Commission proposal suggests those against binding targets are winning out behind the scenes.

It is also important to keep in mind that there is a clear national dimension here. Some countries, the UK included, do have strict environmental policies themselves, so may consider going their own way despite the new framework. The key point here is that they now retain flexibility to respond to any change in the macroeconomic situation or global political context, something which has not been possible over the past few years.

Open Europe will shortly publish a major new study on the cost and benefits of the EU’s climate change policies and propose a better way forward.