Ambitious New Energy Policy Proposed for EU
by Christine Lepisto, Berlin on 01.14.07
The EU announced on 10th January an ambitious new energy policy: EU member states will be required to reduce CO2 emissions to 20% below 1990 levels by 2020. The more ambitious goal of 30% was compromised based on the very valid argument that if the EU unilaterally pushes up costs for local factories/energy suppliers, the economically and strategically important industries will go offshore--while the product of the offshore companies will prance back to European consumers without penalty after having been produced in a much less environmentally friendly way than the already tightly controlled EU factories would have done. The hammer in their argument: a ton of CO2 is a ton of CO2 whether it comes from the EU or elsewhere. The EU policy does hold open the option to return to the 30% commitment if international support for the proposal can be gathered, and a 60-80% reduction by 2050 will be the EU's target in international negotiations.
In spite of its groundbreaking optimism, the EU plan failed to satisfy eco-advocacy groups like WWF, which emphasizes that the 20% goal is not sufficient to ensure that catastrophic global climate change will be deterred, and Greenpeace, which criticizes the emphasis on sequestration technologies such as pumping excess CO2 deep underground, rather than on alternatives and efficiency. The nuclear question was left open, and many questions are raised by the new policy, including: Can the course be held as the presidency of the EU transfers from Finland to Germany? Can a unilateral energy policy bring advantages, or does economic disaster loom larger than the climate change threat?
The EU's new policy rests on three pillars: Liberalization of the energy market; Increased use of renewable energy sources; and Increased energy efficiency.
Liberalization of the energy market
The policy proposes to enhance freedom of consumer choice but falls short of the vision of an EU-wide integration of control over the energy sector. With Member States varying from the French market, 80% supplied by nuclear plants, to the Polish market, overwhelmingly dominated by coal-burning facilities, the national governments strongly resisted the idea of a single seat of control in Brussels. France and Germany united to fight the proposal for breaking up the vertical integration of national giants like Éléctricité de France and E.On, but a late U-turn by the Germans finally passed the proposal to require that distribution networks be unbundled from the power plants, ultimately to be managed by independent operators. If the independence is not demonstrated, the power companies will face mandatory break-ups. The German support is critical to the policy as a whole, with the EU Presidency transitioning from Finland to Germany.
Increased use of renewable energy sources
The commission has committed to increasing annual spending on R&D by 50% (574M/year to 886M/year). Additionally, the Intelligent Energy-Europe Programme will benefit from the doubling of its budget (from €50M/year to €100M/year) for the period 2007-2013. Matching funds from the Member States and industry will be sought to further extend the development capacities for new technologies.
Increased Energy Efficiency
A unique aspect of the EU policy is that the mandatory caps on emissions apply to nations rather than to business sectors. This angle leads to innovative ideas about how consumer emissions can be minimized alongside the traditional thinking about emissions trading markets and industrial or energy sector controls. Proposals targeting a 20% improvement in energy efficiency recognize the importance of changing transportation behavior in addition to setting efficiency standards for vehicles, buildings and appliances; promoting energy services; and creating incentives for more efficient products.
Will Leadership Create Change?
But can leadership in the EU really encourage international commitment to similarly abmitious goals? The controversial Kyoto protocol calls for only a 5% reduction in CO2 emissions, while exempting developing economies likely to have the greatest influence on the emissions trends. The USA has declined to endorse the Kyoto agreement; however, on 12 January, two presidential hopefuls, Republican John McCain and Democrat Barack Obama joined forces with Independent Senator Joe Lieberman to propose a bill in the US Congress setting an enforceable but modest goal of returning to 1990 levels by 2020 in industry, oil refineries and power plants (For more see the New Scientist). While leadership may bring breakthroughs in international negotiations, the fact remains that a unilateral climate policy is a very risky economic proposition. One must put the question forward: Is there value in leadership if no one is following?
Competitive Europe or Continental Economic Disaster?
A critical factor in the success of the new energy policy will be its ability to stimulate competitiveness. The argument that environmental protection reduces societal costs for clean-ups and health problems is difficult to sustain in the face of a global economy in which citizens can benefit from cheap products while displacing the environmental costs to developing lands. Incentives for technological innovation may be created, but if the infrastructure to build and market the innovative new visions has moved to the country of cheapest production, the innovations will be quickly vulnerable to copy-cats. Perhaps the most interesting argument, set forth by Stavros Dimas (EU Commission Member responsible for Environment), is that unified environmental policies underpin the single-market approach of the European Union, a recognized success estimated to have created 2.5 million new jobs and €800 billion in new wealth for Europeans. Ultimately, Dimas correctly recognizes that for the effort to function, the companies that make the investments must also reap the benefits. This is the real challenge for policy makers, and it will be the point upon which success or failure turns.
Economic disaster is going to come to those countries that have not made themselves independent of foreign sources of energy and non-renewable, limited resources. The EU policy is like a good savings plan for retirement: you may suffer a little now, but will win in the end. Any coincidence that the national savings rate in USA is averaging close to zero?
The article points out an opportunity available to the EU. Nuclear power is good for base load whereas traditional coal fired power is more flexible. Additionally, the EU is leading the world in development of wind energy. The opportunity is an investment in a more intelligent Grid (electric power network) to juggle these resources while reducing GHG emissions and pollution.
Whereas in the United States energy policy analysts have determined that without building more capacity, 80% of automobiles, if properly equipped, could be charged overnight (when demand is lower), I have yet to see a similar analysis from the European Network of Energy Agencies. Yet EU members like Sweden have made a commitment to reducing consumption of fossil fuels and the EU leads the world in electric powered public transportation.
The EU would seem to have an opportunity to take a lead in BPL (Broadband over Power Lines) a.k.a. http://en.wikipedia.org/wiki/Power_line_communication
Understandably there has been resistance to more central control, yet I believe that there are sufficient, brilliant minds available to the Commission to make a go of it, i.e., ensure for all of Europe greater infrastructure surety and integration while benefiting from diverse sources of electricity.
I would like to make a comment regarding your statements of possibly reduced competitiveness from these global warming reduction proposals. It has always been the case that making regulations on business stricter has created increased incentives to innovate and become more competitive - it forces companies to becomes stronger, not the opposite. It makes EU companies more competitive on an international basis in the medium to long term. Companies would take a hit in the immediate short term, but if they didn't, then the incentives would not be there for them to innovate and become more competitive. The belief that this makes EU business weaker is misguided. It makes businesses OUTSIDE of the EU weaker in relation to EU businesses since they can remain profitable WITHOUT innovating and becoming more competitive. But this is only in the immediate short-term. In the medium to long term, the more lax conditions of non-EU companies, which leads to greater complacency and a slower adoption of new technologies and processes, put these non-EU companies at a disadvantage in relation to EU companies. It is my opinion that establishing strict environmental regulations makes the EU more competitive, not less. And it is my belief that one of the key drivers of competitiveness in the EU is strict regulation in a host of areas - this ensures that EU companies learn to remain competitive from quicker development and adoption of new technologies and methods than non-EU companies.
As for the comment that non-EU companies can quickly copy-cat advantages developed by EU companies and thereby eat their lunch, I disagree. The core advantage that EU companies have is EU regulation since this is what forces them to remain on their toes non-stop. Companies copy-catting others are weak companies that earn money from cheap labor and cheap conditions and lax regulations. A company can make money from using dirt cheap labor, or cheap taxation or very lax regulations, but then they are competitive not because they are a top-notch company but because they operate in a society that enables them to make profits as a third-rate company. These companies are able to compete not because they are competitive but because they are given short cuts to profits. Any copy-catting that occurs by non-EU companies of EU companies makes EU companies stronger by forcing them to innovate faster - and it make the copy-catters weaker because they rely on copy-catting rather than in-house innovation to remain profitable.
Lastly, I would like to say something on the comments regarding whether or not this will have an influence outside of the EU. I believe it will for a number of reasons. One of the top reasons is the one I mentioned above. The political leaderships of countries are fully aware that strong companies not only thrive in strictly regulated settings but are more likely to do so. Countries with weak regulations and other 'cheap' factors have no choice since their companies are weak. If their companies were strong enough to be able to whether increased regulation, then they could put stricter regulations that would benefit their societies as a whole. But companies in many thirld world countries are not. As they get stronger, regulations get stricter, taxes increase, labor gets more expensive, etc. When labor gets more expensive in the EU, it makes it possible for non-EU countries to correspondingly raise their level of wages while still maintaining a parity of competitiveness with relation to the EU. When the EU raises its level of environmental regulations, it makes it more possible for other countries to do so since they are thereby not losing their corresponding competitive position with relation to the EU. The EU pushing strong global warming policies makes it more likely that other countries will do the same - especially when you consider that the EU is arguably the most important market in the world. It would be different if a market such as Uruguay were to push through strong global warming measures since the global competitive impact would be negligible. The same can not be said of the EU.