Background

In 2009 the European Union (EU) adopted a climate and energy policy setting targets for 2020, known as the “20-20-20” targets, which required: reducing EU greenhouse gas (GHG) emissions 20% from 1990 levels; raising the share of EU energy consumption produced from renewable resources to 20%; and, improving the EU’s energy efficiency by 20%. The policy provided that the GHG emission target would be met in part through the EU Emission Trading Scheme (ETS), for power and certain other industrial plants, and a 10% emission reduction for the non-ETS sectors, including transport and agriculture. For this latter 10% non-ETS GHG reduction, the EU adopted a Effort Sharing Decision under which Member States were assigned a set goal for GHG emissions, based on relative wealth, with richer nations obliged to reduce more and poorer nations allowed to increase their emissions. For example, Ireland is obliged to reduce GHG emissions in 2020, compared to 2005, by 20%, the United Kingdom (UK) by 16%, while Bulgaria is allowed to increase its emission by 20%.

The EU is currently discussing what policy to implement in the period after 2020, including whether it should continue to rely on hard targets or adopt other approaches. The Dutch government asked the PBL Netherlands Environmental Assessment Agency and Ecofys, a consulting firm, to analyse post-2020 EU policy options, in the context of the EU goal for a low-carbon economy with an 80% reduction in GHG emissions by 2050.

The PBL Report

The report proceeds from the recognition that certain market failures have undermined EU efforts to achieve substantial emission reductions. Those market failures are: little internalization of costs of GHG emissions; underinvestment in energy efficiency improvements; and, underinvestment in low-carbon innovations. Energy efficiency efforts have been less than effective because of limited access to capital, lack of information about the issue and options, split incentives (someone pays cost; others benefit), and high upfront costs. Carbon innovations also suffer from high upfront costs, and knowledge spillover (someone pays for innovating; others benefit from the innovation).

The options explored by PBL attempt to overcome the market failures through “complementary targets for greenhouse gas reduction, energy efficiency, and low-carbon innovation” — a multi-target approach. At 6. Many of the EU environmental NGOs also favor such an approach.

Carbon Pricing

While the ETS is theoretically an efficient and cost-effective means of putting a price on carbon and reducing GHG emissions, in practice the price for carbon is too low to induce carbon-saving practices. Clearly, the ETS needs reform and this report weighs in with a call for a higher price for CO2 and lower ceiling in this cap-and-trade system.

The ETS is also weak as a policy tool because it is limited in duration, limited geographically, and covers only certain sectors. So besides an effective ETS, there needs to be GHG emission reduction targets for all non-ETS sectors, particularly agriculture and transport.

The report argues that carbon pricing, the cornerstone of EU policies, is vitally necessary but insufficient to reduce GHG emissions. It also points out the obvious, which unfortunately needs to be repeated: subsidies for fossil-fuel production or consumption are counterproductive to the EU climate and energy policy. It also points out that it is necessary to avoid locking into any more carbon-intensive assets, a warning that goes to the heart of the battle over fracking for natural gas on the island of Ireland and in the UK, as elsewhere.

What else is necessary involves energy efficiency and low-carbon innovations.

Energy Efficiency

It certainly is no surprise to say that the potential for energy-efficiency remains unfulfilled, in part because of the market failures pointed out above.

Complementary to carbon pricing and GHG reduction targets, the EU policy needs a target for energy-efficiency improvement. In addition, EU regulation of standards for energy efficiency is offered as a way out of the stagnant realm of energy efficiency. Strong regulations and standards for products, buildings and production not only support, and in some cases can replace, hard targets, but they contribute to the internal common market.

Existing programs that are helpful are the EU Ecodesign Directive, the Energy Performance of Buildings Directive, and regulations setting emission performance standards for new cars and new vans and trucks. Examples of other possible effective regulations include California’s standard for battery-charging systems where the new system costs 50 cents and saves $9 in electricity over the lifetime of the device. Another example is low-emission vehicles that have high upfront costs but lower fuel costs over the vehicle’s lifetime.

Low Carbon Innovation

Companies are often not inclined to invest in innovation since they do not reap all the benefits, so some public support is needed, as is a high price on carbon emissions.

It has become too easy to pick the low-hanging fruit that offer quick cost savings and some reductions but remain problematical over the long term. Examples of low hanging fruit are switching fuel from coal to gas, or switching to unsustainable biomass without accounting for land use changes.

The report argues that general targets for renewable energy have helped in the development of several low-carbon technologies, including wind power and solar photovoltaic systems, but have failed with regard to other technologies. What is now needed, post 2020, is support for those technology innovations that can lead, in the long-term, to GHG and cost reductions, even though they may not be the most cost-effective options in 2020. Examples of the innovations for the long-term that are offered are offshore wind, innovative biomass conversion (not direct combustion), and carbon capture and storage (CCS). CCS receives particular attention as it is seen as the only currently available technology that can help the industrial sector meet its obligations for GHG emission reductions. The difficulty is that with a low CO2 price, and little expectation that the price will rise, there is no investment interest in a long-term technology like CCS.

Legislation could require a certain share of final energy demand be met with innovative low-carbon technology, as opposed to renewable energy in general. For example, specific targets could include a number for zero-emission vehicles, heat pumps, or low-carbon industrial processes. Or tougher emission performance standards for new power plants could be set, an option on the US White House agenda.

Conclusion

The complementary, multi-target approach advanced in the Dutch report relies on: carbon pricing, through a reformed ETS and GHG reduction targets for non-ETS sectors, particularly agriculture and transport; an energy-efficiency target and expanded regulations for energy-efficiency standards; expanded support for innovative low-carbon technology (e.g., carbon capture and storage) and renewable energy targets that support long-term, sustainable technologies (e.g., off-shore wind).

The individual components of the policy outlined in the Dutch report are widely known but the report offers a useful, and carefully thought-out, review of what we have learned from research and practices in the climate and energy field over the past several decades. As a result of that review, the report also makes it clear that the targets needed must be legally binding and unconditional

The authors acknowledge that there is a delicate balance between setting targets that are technology-neutral, allowing the creativity of the market to develop new technologies, and targets that also provide sufficient support for technologies that are sustainable in the long-term, as opposed to quick, cheap fixes that will not last.

Sources

Koelemeijer, R. et al. (2013), EU policy options for climate and energy beyond 2020, The Hague: PBL Netherlands Environmental Assessment Agency (May 2013).  www.pbl.nl/en/publications/eu-policy-options-for-climate-and-energy-beyond-2020

European Commission,The EU climate and energy package  ec.europa.eu/clima/policies/package/index_en.htm