Europe's Energy Union and the road to Paris and beyond | 2015
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EUROPE’S ENERGY UNION AND THE ROAD TO PARIS AND BEYOND Towards an EU model reconciling climate, energy security and competitiveness needs
Final report of the Climate-Energy-Industry Working Group Spring 2015
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Europe's Energy Union and the road to Paris and beyond | 2015
EUROPE’S ENERGY UNION AND THE ROAD TO PARIS AND BEYOND Towards an EU model reconciling climate, energy security and competitiveness needs
Final report of the Climate-Energy-Industry Working Group
Spring 2015 Brussels
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This report has been drafted on the basis of a series of meetings, discussions and written contributions from the members of the Climate-Energy-Industry Group, under the sole responsibility of Friends of Europe. The views expressed in this report do not necessarily represent a common position agreed by all members of the Working Group, nor the views of the organisations they represent, nor of Friends of Europe’s Board of Trustees, members or partners. Reproduction in whole or in part is permitted, provided that full credit is given to Friends of Europe and that any such reproduction, whether in whole or in part, is not sold unless incorporated in other works. The report should be cited as follows: Friends of Europe (2015), Climate Energy Industry Working Group, Final Report, Brussels, 2015. Friends of Europe is grateful for the financial support it received from GDF Suez for the organisation of this Working Group as well as the publication of this paper. Friends of Europe is responsible for guaranteeing editorial balance and full independence, as evidenced by the variety of the Working Group members.
Author: Mike Scott and Danuta Slusarska Publisher: Geert Cami Director: Nathalie Furrer Design: Marina Garcia Serra Š Friends of Europe - Spring 2015 Image credit: CC/Flickr NASA Goddard Space Flight Center. This report is printed on responsibly produced paper
Europe's Energy Union and the road to Paris and beyond | 2015
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Table of contents Why this project marks an unusual new departure
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This report would not have been possible without
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Executive summary
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15 areas where the Working Group members could agree 16 25 recommendations of the report
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Introduction: Europe’s climate-energy-industry “trilemma”
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1. Climate: Business as usual is not an option
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A. Climate change is a fact and has a cost
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B. The impact on economy and business
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C. Climate policy in Europe
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D. Europe is not alone
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2. Energy: A difficult transformation in Europe
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A. Energy security: A chronic problem
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B. Rising energy costs
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a. The energy price gap
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b. Competitiveness concerns and risk of carbon leakage
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C. The way ahead
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a. Some renewables are becoming cost competitive
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b. Completing the internal energy market
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c. Energy efficiency
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d. External policy
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3. Seizing the opportunities: Building the industries of the future
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A. Societal and economics benefit
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B. The rationale for greener business practices
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C. Economic importance of industrial activities
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D. New EU industrial policy
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4. Financing the transition
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A. Putting investment on a sustainable track: Main challenges
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B. Reforming the carbon market
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a. Getting the price signals right
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b. Free allocation of allowances
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C. Alternative financing mechanisms
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a. Green bonds
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b. Other forms of finance
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c. The fine line between low risk and univestable: Getting risk allocation right
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D. Shifting taxes from labour to environmentally harmful activities 62 a. Multiple benefits of Environmental fiscal Reform (EFR)
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b. Current approaches and prospects for the future
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c. Competitiveness concerns
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d. Smart design of EFR
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The way forward
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Glossary
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List of abbreviations
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References
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Europe's Energy Union and the road to Paris and beyond | 2015
Why this project marks an unusual new departure This year is widely seen as make or break time for climate action. Global leaders have to meet the challenge of agreeing on an ambitious new international climate deal at the UN climate conference in Paris in December 2015. At the same time, concerns have risen over energy security because of the Ukraine crisis and turmoil in the Middle East, and the issue of Europe’s failing industrial competitiveness has gained ground on the EU agenda. The ‘Energy Union’ plan outlined in late February by the European Commission aims to address these issues, but it remains to be seen how it will resolve Europe’s ‘energy trilemma’ by reconciling the competing demands of making energy sustainable, secure, and affordable. Friends of Europe resolved in 2013 to address precisely this policy challenge by launching an innovative Climate-Energy-Industry Working Group, composed of senior figures from a broad range of backgrounds, including national policymakers, key EU officials, representatives from international organisations, financial institutions, civil society organisations, industry and academics. Their recommendations on how to create synergies between climate, energy and industrial policies, and on how to reconcile sustainability, security of supply and competitiveness, are contained in this report. The Working Group members represented the full spectrum of divergent interests in the climate, energy and industry arenas, ranging from energy intensive industries, concerned that EU-only climate actions put them at a competitive disadvantage in the global economy, to climate and environmental groups that insist on the over-riding importance of halting climate change. A process of four open and constructive debates between Working Group members from November 2013 to June 2014 yielded draft text for their comments and amendments. The risk of bringing together such competing interests in a truly heterogeneous group was that participants would do little more than state their own long-held views and disagree with those of others. To avoid this,
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Friends of Europe broke the group up into smaller teams. While keeping the stakeholder balance, these enabled people to really work through the issues in detail and see how far seemingly divergent views could be reconciled. The result was the emergence of far more common ground than many members had expected, instead of stereotypes and silo mentalities that are often seen as dominant characteristics of the climate-energy-industry debate. Two significant examples of convergence of views were on carbon leakage and national subsidies. Members agreed that carbon leakage – the risk of manufacturing moving out of Europe to countries with looser or nonexistent constraints on greenhouse gas (GHG) emissions – would be bad for European industry and bad for the planet. With this in mind, environmental NGOs were ready to acknowledge the problems energy-intensive industries faced when confronted with higher energy costs than so many of their nonEU competitors and technical limits to major emission reductions in some sectors – and therefore the need for some carefully designed and targeted cost reliefs. In return, representatives of energy-intensive industries were more inclined to accept the overall ambition of EU climate policy. Likewise, both green and industry groups found common ground in agreeing that national subsidies and support mechanisms fragment the European energy market and add to costs, and should therefore be co-ordinated with a view to being phased out altogether. It would be misleading, though, to suggest that the representatives of so many different interest groups were able to bury the hatchet on all topics. A glance of the members shows inevitable differences of approach, despite an overall mood of consensus and co-operation. That is why the Working Group proposals should be read carefully, as they contain the nuances needed to achieve the agreement of a majority of members. The ideas from this unusual project spanning some 18 months have been distilled into 15 areas of agreement and 25 policy recommendations to the European Commission, the European Parliament and EU national governments. The message is clear: policymakers at all levels need to act urgently and in a much more co-ordinated way if Europe is to regain credibility and effectiveness. Public opinion as well as the relevant stakeholders must
Europe's Energy Union and the road to Paris and beyond | 2015
get clear signals that the EU is serious about accelerating decarbonisation while boosting its industrial activity and guaranteeing long-term security of supply. Showing that reducing CO2 emissions and strengthening economic growth are not mutually exclusive is, after all, the best way to encourage other countries around the world to follow Europe's lead. We hope that this report will spark a new and more constructive debate in Europe.
Giles Merritt Secretary General Friends of Europe
Nathalie Furrer Director Friends of Europe
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This report would not have been possible without We would like to thank the following individuals* for their contribution to this report: Mogens Peter Carl, Chair of the Working Group and former Director General, Directorate General for the Environment, European Commission Juan Alario, Senior Energy Advisor and Associate Director, European Investment Bank (EIB) Jason Anderson, Head of EU Climate & Energy Policy, World Wide Fund for Nature (WWF) European Policy Office Antonella Battaglini, Executive Director, Renewables Grid Initiative Chris Beddoes, Director General, FuelsEurope Krzysztof Bolesta, Special Adviser to the Minister, Ministry of the Environment, Poland Martin Brough, Director, Utilities Research, Deutsche Bank David Buchan, Senior Research Fellow, Oxford Institute for Energy Studies Dan Byles, Member, House of Commons, Energy and Climate Change Committee, United Kingdom Geert Cami, Co-Founder and Director, Friends of Europe Maria Da Graรงa Carvalho, Member, Committee on Industry, Research and Energy, European Parliament Arnaud Chaperon, Senior Vice-President, New Energies Division, Total Philippe Chauveau, Head of Climate Change Policy, Solvay Energy Services Laura Cozzi, Principal Analyst and Deputy Head, Directorate of Global Energy Economics, International Energy Agency (IEA) Chris Davies, Member, Committee on Environment, Public Health and Food Safety, European Parliament Luc de Marliave, Head of Public Affairs Total New Energies, Total
Europe's Energy Union and the road to Paris and beyond | 2015
Bruno De Wachter, Convenor of the Economic Framework Working Group, European Network of Transmission System Operators for Electricity (ENTSO-E) Fernand Felzinger, President, International Federation of Industrial Energy Consumers (IFIEC) Europe Monica Frassoni, President, European Alliance to Save Energy (EUASE) Nathalie Furrer, Director, Friends of Europe William Garcia, Executive Director Energy HSE & Logistics, European Chemical Industry Council (CEFIC) Celine Gauer, Director, Markets and Case I: Energy and Environment, Directorate General for Competition, European Commission Thérèse Jérôme, Senior Representative to the European Institutions, GDF Suez Mark Lewis, Senior Analyst, Energy & Climate Research, Kepler Cheuvreux Michel Matheu, Head of EU Strategy, Electricité de France (EDF) Paul McAleavey, Head of Air and Climate Change Programme, European Environment Agency (EEA) Marco Mensink, Director General, Confederation of European Paper Industries (CEPI) Giles Merritt, Secretary General, Friends of Europe Russel Mills, Global Director Energy & Climate Policy, The Dow Chemical Company Gordon Moffat, General Director, European Confederation of Iron and Steel Industries (EUROFER) Arne Mogren, Programme Director, Power, European Climate Foundation Karsten Neuhoff, Head of Department, Climate Policy, German Institute for Economic Research (DIW Berlin) Stephanie Pfeifer, Chief Executive Officer, Institutional Investors Group on Climate Change (IIGCC) Andrzej Rudka, Adviser to the Deputy Director General, Directorate General for Enterprise and Industry, European Commission
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Vianney Schyns, Advisor Climate & Energy Policy, International Federation of Industrial Energy Consumers (IFIEC) Europe Steven Tebbe, Managing Director, Carbon Disclosure Project (CDP) Europe Patrick ten Brink, Senior Fellow and Head of Office, Institute for European Environmental Policy (IEEP) Brussels Office Wendel Trio, Director, Climate Action Network Europe (CAN) Jean-Pascal van Ypersele, Professor, Université catholique de Louvain (UCL) Earth & Life Institute (ELI) Kurt Vandenberghe, Director, Climate Action and Resource Efficiency, Directorate General for Research and Innovation, European Commission Sirini Withana, Senior Policy Analyst, Institute for European Environmental Policy (IEEP) Brussels Office Mechthild Wörsdörfer, Director, Energy Policy, Directorate General for Energy, European Commission Bryony Worthington, Shadow Minister for Energy and Climate Change, House of Lords, United Kingdom Peter Zapfel, Assistant to the Director General, Directorate General for Climate Action, European Commission
*Positions are those held at the time of participation.
Europe's Energy Union and the road to Paris and beyond | 2015
Executive summary The Working Group’s conclusion is that climate, energy and industrial policies can and must be mutually reinforcing, and that with better governance and the right policy mix, environmental sustainability, energy security and industrial competitiveness objectives can go hand in hand. But this will remain a distant goal unless today’s policies are not changed. Reducing emissions and tackling the effects of climate change are indisputably goals that should be pursued by all major GHG emitters. There is a limit to how much more carbon the world can or should emit and Europe must play its part in encouraging and leading the global battle to cut emissions both by its own efforts at home and by working to enact a global deal on limiting emissions. In order to be persuasive and credible on the international stage, our efforts at home must be seen by others as conducive to growth, not to deindustrialisation or carbon leakage. Of course, despite its long-term benefits, the low-carbon transition has an undoubted immediate cost. The broad sense of our Working Group was that the current cost of climate policy can be reduced and should be borne by society as a whole, industry included. However, a carefully designed and targeted relief for low-income households, as well as for energy-intensive industries exposed to international competition, that would reward their R&D and resource efficiency efforts in the absence of a global climate action, is needed. The silver bullet for reconciling climate, energy security and competitiveness goals is resource efficiency. There are huge opportunities to reduce us of energy and other materials year-on-year that will make the EU more competitive, ease the pressure of high prices, reduce our dependence on imports and cut emissions all at the same time. That is why the EU needs concrete action on energy efficiency and circular economy. The focus of improving energy security and of reviving EU industry must be on introducing policies that are both climate and industry-friendly. This is entirely possible if Europe makes the most of what we have. For energy security, this means reducing reliance on energy imports by increasing domestic low-carbon energy production, diversifying supply sources, reducing energy consumption,
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and expanding grids and interconnections. The energy dependence should not however be replaced by a reliance on imports of finished products. For industrial policy, it means encouraging Europe’s manufacturing sector as a whole, with a special focus on those sectors that are at the forefront of innovation, low-carbon technologies and resource efficiency. Among the specialities of tomorrow will be a range of new low-carbon energy and energy efficient technologies and applications, large-scale electricity storage projects and smart grids, but also new materials such as graphene, nano-materials and the whole range of key enabling technologies that make up the “Internet of Things”. There are currently too many industrial policies, in different sectors and across member states. The need is for an overall vision, something that is missing today. A strong, innovative and sustainable industrial base and value chains are key for Europe’s economic recovery, competitiveness and citizens’ wellbeing. The industries on which Europe’s prosperity has been built must contribute to the shared vision for the future. For example, Europe’s coal supplies can play a role in its energy security, provided that only high-efficiency power plants are accepted and a way is found to reduce GHG emissions from burning coal (for example through carbon capture and storage technologies). The low-carbon economy offers significant opportunities for all sectors of the economy, including energyintensive industries, to innovate, adapt more resource-efficient practices, and gain competitive advantages. It is crucial and possible to decarbonise the European economy in a cost-effective manner. European industry has reduced its emissions very significantly since 1990. To ensure it continues to develop in a sustainable way, a reformed EU Emissions Trading System (ETS) must provide robust price signals that prices in the full environmental cost of carbon and discourages investment in high-carbon energy and consumption of high carbon products. The carbon market should be complemented by new financial instruments, such as green bonds, with strict EU standards, that offer a great opportunity to tap new low-interest sources of capital for low-carbon investment. Because of extremely low bond yields, financial markets are currently willing to finance over very long periods at low rates of return if private investments can be de-risked, securitised or refinanced.
Europe's Energy Union and the road to Paris and beyond | 2015
Fiscal reform that shifts taxes from labour to environmentally harmful activities can be a powerful tool to support growth, innovation and employment, while contributing to environmental and climate goals. Carbon and energy taxes can incentivise investment, encourage fuel savings and fuel switching, drive consumer choices and reduce demand, and so improve energy security. There is a great deal of uncertainty over costs in the energy sector, as fossil fuel prices are extremely volatile and technology change is making costs for emerging technologies hard to forecast. While it is important to pursue predictable policies, the lack of any sort of flexible mechanisms to respond to these fluctuations can and has already led to policy failures. For instance, the fixed price of the German solar subsidy resulted in higher energy bills as technology costs fell and deployment far exceeded expectations. Likewise, the fixed quantity ETS led to the collapse in carbon prices as the recession hit. With a global climate action more urgent than ever, the EU should not abandon its climate ambitions. The low-carbon transition will be a long haul and the EU must play the leading role. To make the transition smoother, member states need to implement all existing EU legislation and coordinate their energy strategies. Pursuing unco-ordinated, unpredictable and inefficient energy policies, disconnected from citizens, will only increase costs, fragment the market, jeopardise energy security and discourage investment. Investors, as they sink their money into long-term low-carbon investment, will want a stable policy framework and the assurance that EU policy will not waver along the way.
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15 areas where the Working
Group members could agree‌ 1. The evidence for man-made climate change is overwhelming and decarbonisation at an affordable cost must remain a priority for EU policymaking. 2. Failing to tackle climate change has a cost far higher than that of climate policies. 3. CO2 emissions reduction and economic growth are not mutually exclusive, providing that reinforcing climate and industrial policies are put in place. 4. Only international climate action will create the same level playing field for all actors and help meet global climate change objectives. The EU must therefore push other countries for comparable climate efforts at the global level and for a new climate agreement in Paris in 2015. 5. The central pillar of EU climate policy should be an effective, well-functioning, and reformed carbon market, complemented by other financial instruments to finance low-carbon technologies, energy efficiency and energy infrastructure at a reduced cost, such as green bonds and public procurement. 6. Energy subsidies, for all sources of energy, should be phased out over time as technologies mature and become cost-competitive. 7. Energy efficiency is a silver bullet that can contribute to all three goals of EU energy policy: sustainability, energy security and competitiveness. The energy-saving and investment potential is large, in particular in buildings and transportation. 8. European overall economic competitiveness is influenced, but not determined by energy prices1. However, low-income households, as well as a number of particularly vulnerable energy-intensive sectors, with high energy share in total production costs and exposed to international competition, need a carefully designed and targeted relief in the absence of comparable climate efforts undertaken in other major economies.
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http://www.worldenergyoutlook.org/publications/weo-2013/
Europe's Energy Union and the road to Paris and beyond | 2015
9. A strong, innovative and sustainable industrial base and value chains are key for Europe’s economic recovery, competitiveness and its citizens’ wellbeing. 10. Innovation and R&D are vital to Europe’s future prosperity, and resources must be focused on areas such as low-carbon technologies, resource efficiency, energy storage and distributed energy. 11. The EU must diversify its external energy supplies and reduce its vulnerability to suppliers with dominant positions. 12. Consistent implementation of all existing EU legislation across member states should be a priority before introducing any new legislation. 13. The single energy market, once completed, should become a crucial tool to make it easier and less costly to decarbonise and to secure energy supply across the EU. 14. Member states should be given flexibility to implement their energy strategies, as long as they co-ordinate them, or even harmonise them, regionally and at an EU level. 15. The EU should develop a wide range of indicators to monitor progress towards energy, climate and industry goals, support future policies and show where to direct funding for R&D.
...and a few where they couldn’t There were some predictable areas of disagreement, including the energy-mix choices and new 2030 climate and energy targets. There was division on whether the EU should have confined itself to just one target (for emissions reduction); the need for a new renewable energy goal was particularly called into question. There was widespread agreement on the need to reform the carbon market, but little consensus on how to do so, with suggestions ranging from tighter allowances allocations for everyone and restoring the meaningful carbon price signals to more free allowances for energy-intensive industries to prevent carbon leakage.
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25 recommendations of the
report
These recommendations are principally based on the outcomes of Working Group discussions, and have been complemented by oral and written contributions from group members and other experts, as well as authoritative studies. They are not all consensual, but were supported by the majority of the Working Group members. Reduce energy costs while ensuring energy security 1. Focus on low-carbon domestic energy sources, backed up by a panEuropean energy market and upgraded infrastructure. 2. Develop renewable energy projects particularly in the countries where the cost is the lowest. The EU-wide nature of the 2030 renewable target provides an opportunity to achieve this. 3. Support energy efficiency efforts, research and innovation, and encourage demand side management, in both public and private sectors. 4. Use capacity mechanisms, coordinated regionally or at EU level, as a last resort to ensure energy security in the long run, but not to prevent inefficient power plants from being shut down. 5. Encourage member states to co-operate and co-ordinate their national energy policies in order to avoid ‘beggar thy neighbour’ policies and market distortions. This should include exchange of information, as well as coordination of projected investment in new production facilities and of national support schemes. 6. Identify and help the vulnerable energy-intensive industries exposed to competition from the rest of the world, in the absence of comparable climate efforts undertaken in other major economies. This carefully designed and targeted relief must focus on rewarding best practices and be co-ordinated at the EU level. 7. Keep energy users informed about the policies adopted and encourage their involvement.
Europe's Energy Union and the road to Paris and beyond | 2015
(Re)invent industrial policy for the 21st century 8. Aim for a 20% share of the global market for goods and a meaningful share in global industry investment. 9. Ensure a top quartile performance in innovation, quality and environmental benchmarks. 10. Focus on encouraging production and development in Europe of future-proofed products and services and of smart and sustainable value chains. 11. Boost investment and innovation in key enabling technologies, as well as in areas such as smart grids, energy storage, low-carbon technologies, and resource efficiency. 12. Support R&D close to production and protect the intellectual property thus created in Europe. 13. Reshape the current industrial system to encourage more circularity and more collaboration across sectors and between companies. 14. Orient policy towards demand-side factors (mobility) rather than supply-side (automotive industry). In other words, think first about the nature of demand and then about new ways to meet it. 15. Do not protect free riders and unsustainable companies. Create the right framework to finance the low-carbon transition 16. Reform the EU ETS in order to get the carbon price right. 17. Change the current system of free allocation for sectors at risk of carbon leakage in the absence of an international climate agreement from ex-ante historical production allocation to ex-post allocation adjusted to actual production. 18. Direct the revenue raised through the EU ETS to low-carbon and carbon-efficient projects and R&D, as member states are supposed to, but often fail, to do.
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19. De-risk and reduce the cost of financing of low-carbon technologies, energy efficiency and infrastructure projects by supporting the green bonds market. 20. Use public procurement to encourage the purchase of low-carbon products and low-carbon consumer products. 21. Remove unnecessary policy risks from low-carbon projects while preserving the flexibility of future policy to respond to new evidence and market fluctuation. Make better use of fiscal policies and fair trade rules 22. Shift taxes from labour to environmentally harmful activities. Careful and co-ordinated design and implementation of environmental tax reform is needed to avoid negative impacts on competitiveness and increase economic and societal gains. 23. Be transparent and strengthen EU oversight of national energy subsidies, and phase them out as technologies become cost-competitive. 24. Focus national renewable energy support on emerging low-carbon technologies and R&D. 25. Take measures at national, EU and international levels to counteract uncompetitive practices from the rest of the world, in particular with regards to energy-intensive goods imported into the EU, but without resorting to protectionism or violating WTO rules.
Europe's Energy Union and the road to Paris and beyond | 2015
Introduction: Europe’s climate-energy-industry “trilemma” Europe needs to invest $2tn2 in the power sector over the next 20 years to keep the lights on, while continuing the trend toward decarbonisation. Disconnected, unpredictable and inefficient energy policies will make that challenge still more difficult. The EU is still highly dependent on external energy supplies, importing 53% of all the energy it consumes at an estimated cost of more than €1bn per day3 (2013). Some 27% of Europe's gas needs have been supplied by Russia's Gazprom, and 15% transits through Ukraine. A deterioration of the EU’s economic and political relations with Russia could lead to serious disruptions to consumers, affecting particularly Eastern EU countries that do not have alternative pipeline or LNG connections. The issues surrounding Europe’s energy security are also highlighted by the unrest in Iraq and Syria, the ongoing disruption of supplies from Libya, the question mark over Iran’s re-entry into the global market following a possible deal on its nuclear capabilities and the volatility of energy prices. Compared to Americans riding high on the shale gas and oil boom, electricity and gas prices paid by European households and industry4 are higher, partly due to increases in taxes, levies and network costs, although the recent collapse of oil prices has come as an important, but probably temporary, relief to European consumers5. These price differentials are significant for low-income households, as well as for energy-intensive industries exposed to international competition. Europe cannot afford high decarbonisation cost if it wants to remain competitive in the medium term. At the same time, Europe’s wholesale electricity prices, paid
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http://www.iea.org/publications/freepublications/publication/weio2014.pdf http://ec.europa.eu/energy/en/topics/imports-and-secure-supplies Except for some member states (e.g. Germany) that have introduced tax exemptions and rebates for energy-intensive sectors. According to the IEA Chief Economist Fatih Birol in Davos in January 2015: http://www.weforum.org/videos/geo-economics-energy
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to generators, are far too low to cover the cost of new generation. According to the IEA, at least a 20% increase in wholesale electricity prices is needed to encourage the utility companies to invest in power stations.6 An EU-wide energy policy has been a tantalising goal for decades. However, in the last few years we have seen diverging trends in national energy strategies, leading to growing political and regulatory uncertainties. With some member states pursuing ‘beggar thy neighbour’ policies and undervaluing opportunities for cross-border interconnections, a fully operating internal energy market is far from a reality. Germany's no-to-nuclear Energiewende has pressed ahead with more renewables without getting rid of coal use. Various central and eastern European countries seek energy independence from new nuclear power projects. France has banned shale gas exploration while the UK is encouraging it. National divisions over external energy policies are equally persistent. At the same time, tackling climate change is more urgent than ever, as highlighted by the latest Assessment Report (AR5) of the Intergovernmental Panel on Climate Change, the most comprehensive study of the subject. International competition in clean and energy efficient technologies is getting tougher and negotiations on the new climate deal in 2015 are under way. Europe aspires to retain its leadership in low-carbon energy and energy efficiency technologies, investment and innovation with its climate and energy targets and a reformed carbon market. Meanwhile, competitiveness and energy security concerns are reaching a crescendo. The European Commission’s Energy Union strategy7, released on 25 February 2015, is a first step to enhance an integrated European approach to reconcile these concerns with the long-term climate strategy, but much still needs to be done to address the existing trade-offs and avoid silo thinking. These are the issues Europe needs to get to grips with, and fast. This paper aims at doing so.
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http://www.iea.org/publications/freepublications/publication/weio2014.pdf http://ec.europa.eu/priorities/energy-union/docs/energyunion_en.pdf
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1. Climate: Business as usual is not an option A. Climate change is a fact and has a cost There is more scientific evidence than ever that climate change is occurring and that its causes are man-made. 2014 has seen the publication of the 5th Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC), the most comprehensive study of the subject yet. The report concludes that “warming of the climate system is unequivocal. The atmosphere and ocean has warmed, the amounts of snow and ice have diminished, sea levels have risen, and the concentrations of greenhouse gases have increased.”8 Moreover, evidence has grown that “human influence has been the dominant cause of the observed warming since the mid-20th century. Continued emissions of greenhouse gases (GHGs) will cause further warming and changes in all components of the climate system.” The latest report9 also emphasises the concept of a Carbon Budget – there is only a limited amount of CO2 that can be emitted before warming of more than 2°C becomes inevitable. Having two chances out of three of staying within the 2°C limit would require cumulative CO2 emissions from all anthropogenic sources since 1870 to remain below about 2900 GtCO2 (with a range of 2550-3150 GtCO2). About 1900 GtCO2 had already been emitted by 2011, leaving a budget of about 1000 GtCO2 for the future in the context of a 2°C limit. At the rate we are currently emitting GHGs, the budget will be exhausted within about 30 years.
B. The impact on economy and business The changing climate will have profound effects on all sectors of the economy. Without immediate action to curb GHGs, says the World Resources Institute, communities, ecosystems, and critical infrastructure across the globe will be increasingly threatened by dangerous impacts from flooding, drought, sea level rise, and wildfires10. A study by the EU’s Joint Research Centre, Climate Impacts in Europe11 says that Europe will see an increase in heavy flooding, forest fires and heat-related deaths by the end of the century if we continue on our current path of emissions. Total damages for Europe would be about €190bn, 1.8% of current GDP, the report says,
http://www.metoffice.gov.uk/media/pdf/4/b/MOSAC_18.20_Stott.pdf IPCC, 2014: Summary for Policymakers. In: Climate Change 2014: Synthesis Report of the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, http://www.ipcc.ch/report/ar5/syr/ 10 http://www.wri.org/blog/2013/09/5-major-takeaways-ipcc-report-global-climate-change 11 http://ftp.jrc.es/EURdoc/JRC87011.pdf 8 9
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with up to 200,000 heat-related deaths and 800,000 hectares of southern European forest being hit by fires. Crop yields could fall by 20% in Southern Europe, river flood damages could reach around €11bn a year while the amount of cropland affected by droughts is projected to increase seven-fold. Damages to transport infrastructure could increase by 50% while a 1 metre rise in sea levels would put about €18.5bn of transport assets at risk of permanent or temporary flooding. Meanwhile, damages from sea floods would more than triple and the tourism industry would take a €15bn per year hit. The study adds that if temperature rises are limited to 2°C, climate damages are reduced by €60bn per year. The 2003 heat wave in Europe is estimated to have caused up to 70,000 deaths and, while the summer average was only 2.3ºC above the long-term average in Europe, August temperatures in several cities were up to 10ºC higher than normal. A global temperature increase of 4ºC means that around 2040 every second European summer could be as warm (or warmer) than the extreme summer of 2003.12 The impact of climate change on business assets is also considerable. European utilities share price, $ term. Jan 2005=100
Since 2008, Europe’s top 20 utilities have lost half of their €1tn market capitalisation.13 They overinvested in generating capacity from fossil fuels, boosting it by 16% in Europe as a whole and by more in some countries. The decline in demand and the rise of renewable energy benefiting from priority dispatch have led to a large oversupply, with many conventional power plants making losses. This trend is slowly being reversed, with the most prominent example of E.ON recently announcing plans to spin off its fossil fuel and nuclear assets entirely in order to focus on renewable generation.14
Conventional plants could be left stranded, or unusable, by a global climate agreement. To fail to plan for the possibility could harm investors’ returns. Some oil companies have also been criticised for not taking into account climate policy moves by national or regional governments or the increasing physical impacts that climate change is likely to have, such as devastating floods and droughts.15 Moreover, all the known fossil fuel reserves are priced in to the valuations of fossil fuel companies, even though climate science says that only a fifth of them can be safely exploited. Many observers say that this means there is a “carbon bubble”, with fossil
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http://www.worldenergyoutlook.org/energyclimatemap/ http://www.economist.com/news/briefing/21587782-europes-electricity-providers-face-existential-threat-how-lose-half-trillion-euros http://www.bloomberg.com/news/2014-11-30/eon-banks-on-renewables-with-plan-to-spin-off-conventional-power.html http://carbontracker.org/wp-content/uploads/2014/09/CTI-Shell-Response-Exec-Summ-030714-2-1.pdf
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fuel assets given a value far higher than they are actually worth. If their use is restricted, then the value of many of these companies will fall dramatically, with implications not just for the companies themselves but also their investors.
C. Climate policy in Europe The EU is set to over-achieve its GHG reduction objectives both under the Kyoto Protocol and its own EU 20/20/20 climate and energy package. Adopted in 2008, this set out the triple objectives of obtaining 20% of energy from renewable sources, reducing GHG emissions by 20% and improving the EU’s energy efficiency by 20%, all by 2020. In 2012, total EU emissions were 19% below 1990 levels and are projected to be around 24.5% lower in 2020, according to the European Environment Agency16, while the economy grew by 45% during the same period. As a result, the EU’s energy intensity is half what it was in 1990 and the bloc has shown that it is possible to decouple growth from emissions, which is crucial if we are to have any hope of reducing the impacts of climate change. Annual and cumulative changes in GDP & GHG emissions at EU level, 1990-2012
Source: EEA, 'Why did greenhouse gas emissions decrease in the EU between 1990 and 2012,' 2014
16
http://www.eea.europa.eu/publications/why-did-ghg-emissions-decrease
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CO2 emissions, energy use and GDP in 1970-2010
Source: The World Bank, PwC analysis, 201317
However, while there is good progress across member states towards 2020 targets on GHG emissions and renewable energy, progress towards greater energy efficiency, the only target that was not mandatory, is less advanced. The EU has now agreed its climate and energy targets for 2030: a 40% reduction in emission levels (from 1990 levels), a renewable target of at least 27% that is binding but only on the EU itself and not on individual member states, and a non-binding 27% energy efficiency improvement that, on review in 2020, could be raised to 30%. The IEA’s 450 scenario analysis for Europe indicates however that a 50% CO2 emissions reduction by 2035 vis-à-vis 1990 levels is feasible as long as an international climate agreement is achieved and consistent with global action to deliver the 2°C target 18. The consultancy Ecofys says the European Commission’s proposals will barely bring the EU on track for a fair contribution to limiting the global temperature rise to below 2°C, that the 27% target for renewable energy implies a very modest annual growth (1%1.5%) and that the 2030 targets are not in line with the EU’s own climate goals for 2050 of an 80%-95% cut in GHG emissions. 19 The European Commission rejects this last claim, saying a 40% cut in emissions by 2030 would put the EU on the path to an 80% emission reduction by mid-century.
17 18 19
http://www.pwc.nl/nl/assets/documents/pwc-decarbonisation-and-the-economy.pdf http://www.worldenergyoutlook.org/media/weowebsite/2013/energyclimatemap/redrawingenergyclimatemap.pdf http://www.ecofys.com/files/files/ecofys-2014-assessing-the-eu-2030-targets.pdf
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D. Europe is not alone With its climate policies and goals, Europe aspires to lead the global climate change action and enjoy the ‘first mover’ advantages. That said, Europe currently accounts for some 10% of global emissions, its unilateral action would therefore not suffice to meet global climate change objectives and can put European industry at risk of losing international competitiveness. Global climate negotiations under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC) are attempting to come up with a framework for a deal that would see all nations agree to binding emissions reductions, to be signed in Paris at the end of 2015. The progress in climate negotiations has so far been slow, with long-standing differences between the developed and developing countries regarding the responsibility for emissions reductions and for financing mitigation and adaptation to climate change. The divisions remained pronounced at the Lima COP20 climate conference in 2014, even though ahead of it, the two biggest emitters, the U.S. and China, had shown willingness to change their international stances. In a joint announcement in November 2014, Presidents Obama and Xi Jinping agreed to strengthen their climate change ambitions, with Obama committing to accelerate U.S. emissions cuts and Xi committing China to cap its emissions by 2030 at the latest. In the U.S., the Environmental Protection Agency has recently published new rules 20 cutting emissions from power plants by 30% from 2005 levels by 2030. As for China, the world’s largest emitter, the country has also become the world’s largest installer of renewable energy capacity21, has introduced seven pilot carbon markets and has said it is ready to accept binding targets to cut emissions 22, something that it has previously strongly resisted. China has pledged to reduce the energy intensity of its economy by 45% by 2020 from 2005 levels and it has been shutting coal-fired power stations and highly-polluting factories, in part to combat its chronic air pollution problem.
20 21 22
http://www2.epa.gov/carbon-pollution-standards http://www.ren21.net/Portals/0/documents/Resources/GSR/2014/GSR2014_KeyFindings_low%20res.pdf http://www.reuters.com/article/2014/06/03/china-climatechange-idUSL3N0OK1VH20140603
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As a report from Climate Strategies affirms, “Europe is not alone in taking steps to decarbonise its economy. It is one of a diverse group of countries and regions advancing policies to enhance energy efficiency in building, industry and transport; to increase deployment of and industrial capacity in renewables; and to price carbon.”23 While Europe has car fuel efficiency targets of less than 5 litres per 100 km by 2020, so do Japan, India and China. The U.S. and Canada have also significantly tightened up their standards. In 2013, 66 countries had feed-in tariffs for renewable energy in place. There are some 60 carbon markets already in place or being developed around the world. .The Globe International report24 on climate change legislation, published in 2014, revealed that almost 500 climate change laws were passed in the 66 countries covered in the study. The next report, due out in 2015, will cover 100 countries. Ambitious, robust climate policies not only give the EU credibility in global climate negotiations, but they can also create strategic economic advantages in important emerging sectors such as renewable energy, energy efficiency and energy storage. They will help improve Europe’s energy security by diversifying types and sources of supply, reducing its dependence on fossil fuels and on imports from parts of the world that are not always stable or friendly to the EU’s ideals. “In addition, clear climate change policy can create an attractive environment for investment in clean technologies,” says Climate Strategies. “Such investments can create new growth sectors and much needed jobs in Europe and thus also contribute to Europe’s economic recovery.”
23 24
http://climatestrategies.org/wp-content/uploads/2014/02/staying-with-the-leaders-final-2.pdf http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/03/Globe2014.pdf
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2. Energy: A difficult transformation in Europe The energy sector is responsible for about two thirds of global CO 2 emissions and will therefore play the key role in climate change efforts. 25 The EU’s energy policy aims to reconcile the need to decarbonise the energy sector and the need to ensure secure and affordable energy supplies, in particular with the new Energy Union strategy 26. Europe's energy sector is undergoing a major transformation. The gas and electricity sectors are slowly moving from public monopolies into competitive private companies in liberalised markets and electricity generation is being decarbonised, with strong growth of wind and solar power in particular. At the same time, nuclear power plants are being phased out in some countries and built in others, alternative gas supplies are being developed and diversified, and the transport sector is becoming more fuel-efficient and is starting to use alternative low-carbon fuels. 27 The completion of the internal energy market is expected to deliver more competitive, efficient and affordable energy; and decarbonisation is meant to ensure a sustainable energy sector for the long run, with acknowledged short-term costs. However, many member state governments have been dragging their feet over implementing EU legislation, in particular with regards to liberalisation packages. The efforts to create a more competitive and sustainable energy sector have also coincided with a major economic downturn. The European Commission acknowledges that “such economic hardship often triggers reluctance to change, and this is becoming visible in the energy sector: measures to protect jobs and enhance the competitiveness of national industry are impacting market liberalisation; the affordability of the short term costs of achieving sustainability is questioned; reliance on existing market players, structures and technologies grows heavier.� As representatives in the Working Group from the energy-intensive sector pointed out, sluggish demand has also weakened the business case for new investment, in particular to expand or modernise industrial plants,
25
http://www.worldenergyoutlook.org/publications/weo-2013/ http://ec.europa.eu/priorities/energy-union/docs/energyunion_en.pdf http://ec.europa.eu/energy/sites/ener/files/documents/20140122_swd_prices.pdf
26 27
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which generally provide an opportunity to introduce more energy-efficient equipment or technology. The slowdown also invalidated the investment assumptions of Europe’s traditional utilities that electricity demand would continue its steady long-term increase of previous decades, and therefore justify investment in new gas or coal-fired generation. Instead, electricity demand fell by 3% in 2008-2012, while over the same period renewable capacity increased by 50%, oblivious (due to being subsidised) to low demand and low prices 28. This has produced surplus capacity in conventional generation.
A. Energy security: A chronic problem The EU is highly dependent on energy from abroad, importing 53% of its energy needs at an estimated cost of more than €1bn per day 29. This includes: 90% of its crude oil, 66% of its natural gas, 42% of its solid fuels such as coal, and 40% of its uranium and other nuclear fuels. For fossil-fuel-poor Europe, energy dependence is not a new problem, but it has long been neglected, with other climate and energy priorities dominating the EU political agenda. With the annexation of Crimea by Russia and the political unrest in Ukraine, however energy security has returned to the top of the EU political agenda. “Current events on the EU's Eastern border have raised concerns regarding both the continuity of energy supplies and regarding the price of energy. This has provoked apprehension regarding short term access to energy, in particular access to affordable gas supplies in the coming months. It has also raised questions about the adequacy of the measures taken for the medium term”, says the European Commission. In response, the European Commission was mandated to define a new energy security strategy 30, outlined below. It is in line with the recently proposed Framework Strategy for a Resilient Energy Union with a Forward Looking Climate Change Policy 31.
28 29, 30 31
IEA, World Energy Investment Outlook 2014, page 111 http://ec.europa.eu/energy/en/topics/imports-and-secure-supplies http://ec.europa.eu/priorities/energy-union/docs/energyunion_en.pdf
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EU Energy Security Strategy Short-term measures In the short term, the European Commission carried out energy security stress tests to simulate a disruption in the gas supply. The aim was to check how our energy system can cope with security of supply risks, and to develop emergency plans and back-up mechanisms which may include: increasing gas stocks; developing emergency infrastructure such as reverse flows; reducing short-term energy demand; switching to alternative fuels. These stress tests revealed two main weaknesses. First, failure to complete several infrastructure projects launched after the 2009 gas supply crisis. Second, a number of national supply strategies were either unilateral or insufficiently co-ordinated with those of other member states. Medium to long-term challenges In addition to short term measures, the strategy addresses medium and long-term security of supply challenges. It proposes actions in five key areas: • Increasing energy efficiency and reaching the 2030 energy and climate goals. • Increasing energy production in the EU and diversifying supplier countries and routes. • Completing the internal energy market and building missing infrastructure links to quickly respond to supply disruptions and redirect energy across the EU to where it is needed. • Speaking with one voice in external energy policy, including having member states inform the European Commission early-on with regards to planned agreements with third countries which may affect the EU's security of supply. • Strengthening emergency and solidarity mechanisms and protecting critical infrastructure.
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The focus in improving energy security must be on introducing policies that are both climate and industry-friendly. This means reducing reliance on energy imports by increasing domestic low-carbon energy production, diversifying supply sources, reducing energy consumption, and expanding grids and interconnections. Given insufficient grid connections and unavailability of electricity storage on reasonable economic terms and on a large scale in the short term, Europe needs a balanced low-carbon mix with a significant share of dispatchable generation (hydro, biomass, nuclear, natural gas and CCS at a later stage) to complement renewables. Member states should have flexibility to choose their preferable energy mix, depending on their capacities, as long as they co-ordinate their strategies regionally and at an EU level.
B. Rising energy costs a. The energy price gap Energy policy needs to take account of the fact that European industry and households pay significantly more than their counterparts elsewhere, notably in the U.S., where development of the shale sector has driven gas prices to the lowest level for decades. While the current collapse of oil prices comes as an important relief to European consumers, this downward trend is likely to be only temporary, as affirmed by the IEA Chief Economist Fatih Birol in Davos in January 2015 32. The drop in U.S. gas prices has pushed coal out of the U.S. power market and into Europe, where it has become the fuel of choice for many utilities 33. In addition, between 2008 and 2012, EU household electricity prices increased on average by more than 4% a year, with industrial electricity prices (excluding VAT and recoverable taxes) rising by about 3.5% per year, although there are wide regional variations.
32 33
http://www.weforum.org/videos/geo-economics-energy http://www.publications.parliament.uk/pa/ld201314/ldselect/ldeconaf/172/172.pdf
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33
Average industrial energy prices including tax by region
Source: IEA, 201334
Industrial electricity prices by region and cost component in the IEA New Policies Scenario
Source: IEA, 2013
34
http://www.worldenergyoutlook.org/publications/weo-2013/
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There has been a lot of focus on the impact of renewable energy support schemes on electricity prices. However, the contribution of these schemes is far less than many suppose, as the IEA Chief Economist Fatih Birol points out. “Too much of the blame for Europe’s high energy prices is being directed at its ambitions on climate change while the main factor – the high cost of imported energy – is being all but ignored,” he said in a speech to London's Imperial College at the start of 201435. “Even renewable subsidies, which have become a serious burden in some markets, are still far from being the dominant factor in price formation,” he added. While the energy component of the price did increase slightly and the relative share of the bill made up by network costs remained stable, the taxes and levies component of bills rose significantly36. In the EU-weighted average price of electricity for industry, the taxes and levies component increased by 127%, although this excludes exemptions and it still makes up a small part of the bill (below 10%) in most countries. However, in Germany, Austria and Italy, the proportion is above 20%. For households, the taxes and levies component of the EU-weighted average price went up by 36.5% and its share accounts on average by 30% of the final price (up from 26% in 2008). Electricity price evolution by component 2008-2012
Source: European Commission, 2014
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http://www.ft.com/intl/cms/s/0/80950dfe-8901-11e3-9f48-00144feab7de.html#axzz3TuByopeg http://ec.europa.eu/energy/sites/ener/files/documents/20140122_communication_energy_prices.pdf
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Gas price evolution by component 2008-2012
Source: European Commission, 2014
Policy support cost (PSC) and tax levels in 2012 by country
Source: Eurelectric, 201437
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http://www.eurelectric.org/media/131606/prices_study_final-2014-2500-0001-01-e.pdf
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Progress on an integrated retail market for electricity and natural gas in the EU has been difficult. Persistent divergences across member states remain with few indications that prices may align in the near future. The reasons, says the European Commission, include the high share of non-market elements in people’s bills; most consumers remain on uncompetitive tariffs from incumbent utilities; energy pricing is seen as complex, dampening demand to switch energy supplier; too many member states still regulate prices for large groups of consumers, leading to cross subsidisation, the accumulation of tariff deficits and barriers to entry for new suppliers. Yet, reshaping the European electricity system could reduce energy expenditure by between €27bn and €81bn a year by 2030, according to a study by Accenture for Eurelectric, the association of major European electricity utilities. The report says that: • Better co-ordination of renewable energy deployments across Europe could save up to €20bn a year. • Increased market integration – including cross-border trading and increased cross-border interconnections – could save up to €27bn by limiting the costs of managing increasingly variable load supplies, improving the functioning of the energy market and safeguarding security of supply. • More intelligent grid management using advanced analytics and smart grid technologies could save up to €15bn. • Improved demand response and energy efficiency could save up to €20bn by reducing peak demand and improving reliability. b. Competitiveness concerns and risk of carbon leakage According to the International Energy Agency’s World Energy Outlook (WEO) 201338, “the cost of energy is just one of several factors that affect the overall cost of producing goods and services, and, therefore, profitability. Other costs, including labour, capital, other raw materials and maintenance, also affect competitiveness significantly. These costs – and the overall attractiveness of an economy to potential investors – are influenced heavily by institutional factors
38
http://www.worldenergyoutlook.org/publications/weo-2013/
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(including financial, monetary, tax, legal and regulatory systems), politics and geopolitics, infrastructure, technology, education and labour markets.” International competitiveness is therefore influenced, but not determined by energy prices, concludes WEO 2013, “as in most sectors and countries energy accounts for a relatively small proportion of total production costs.”In Germany, for example, 92% of manufacturing companies have energy bills that make up less than 1.6% of revenue. A Climate Strategies report39 adds that “Europe spends a similar proportion of its GDP on energy as the United States and other major competitors. Prices stimulate higher efficiency and countries with higher energy prices are often more energy-efficient, which limits the impact of higher energy prices on bills.” However, for some types of economic activities – depending on their degree of energy intensity - the energy share in total production costs can be much higher, says the IEA. “For those activities, marked disparities in energy prices across regions can lead to significant differences in operating margins and potential returns on investment. In some cases, energy prices can be the single most important factor in determining investment and production decisions.” The share of energy costs in production costs in energy intensive industries
Source: IEA, 201340
39 40
http://climatestrategies.org/wp-content/uploads/2014/02/staying-with-the-leaders-final-2.pdf http://www.worldenergyoutlook.org/publications/weo-2013/
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The increase in the energy costs and the gap in energy prices between Europe and the U.S. affect the competitiveness of European energy-intensive industries, as energy costs account for considerable shares in the total costs of paper and pulp products, chemical goods, glass and ceramics, aluminium, cement, iron and steel, and refining products, although there are variations across plants, technologies and countries. As a result, those industries get special treatment, such as tax exemptions or free ETS allowances. It was however stressed during the Working Group discussions that competitiveness must be seen at multiple levels (i.e. the national, sector, firm, and site level) and in the context of the wider national and European economy. There is a difference between the impact of high energy prices on particular industrial sectors (in 2011 the combined share of the energy-intensive industries was around 20% of the gross value-added of manufacturing industry41) and the costs to the European economy as a whole. That said, we must remember that “there are non-energy reasons why European industry’s share of global output, and to some extent of global exports, should decline,” as the Oxford Institute for Energy Studies says. “Europe’s economy is mature, its population is not growing, and so demand has been flat. By contrast, many emerging economies have been growing and industrialising fast. So new investment, often by European multinational groups, has naturally been moving to these regions of strong demand, especially in Asia.”42 Energyintensive industries already site themselves in countries with abundant energy resources – aluminium smelters have gravitated to countries such as Canada, Iceland, Norway and Russia, which have plentiful hydro-electric or geothermal power, while the low-cost oil and gas producers of the Middle East have an innate advantage in petrochemicals, although this is exacerbated by marketdistorting energy subsidies. There are also non-energy reasons for energy-intensive sectors to stay in Europe, such as proximity to customers, and the high quality and reliability of power supplies. With the IEA stating that the U.S.’s price advantage is set to persist for many years, “it would be costly and fruitless for the EU to try to counter such resource advantages with any energy price subsidies of its own – especially when many Middle East countries artificially augment their energy advantage by subsidising their oil and gas prices even more,” the Oxford Institute for Energy Studies states43.
41 42, 43
Eurostat, 2011 data http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/04/Costs-Competitiveness-and-Climate-Policy.pdf
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As Bruegel argues44, “countries with low energy prices are indeed better at exporting energy-intensive products. However, countries with high energy prices find opportunities for exporting other products. Overall, the products disproportionally exported by high energy-price countries generate more jobs and higher value added than the energy-intensive products exported by low energy-price countries (‘Laser, light and photon beam process machine tools’ vs. ‘Ammonium nitrate fertilizer’). “Furthermore,” it adds, “we found no evidence in high energy-price countries for a knock-on competitiveness loss from energy-intensive products to products further down the value chain (e.g., aluminium - cars). Consequently, supporting energy-intensive industries at the cost of non-energy intensive industries risks destroying more jobs and value added in the latter than it creates in the former.” This suggests that Europe does not face a choice between becoming more sustainable or becoming more competitive. Rather, to become more competitive, companies will need to become more sustainable. However, in the absence of comparable climate efforts undertaken in other major economies, a number of particularly vulnerable energy-intensive sectors exposed to international competition deserve a carefully designed and targeted relief. It must focus on rewarding best practices by making these sectors more resource-efficient, innovative and less fossil-fuel reliant, and must be co-ordinated at the EU level.
C.The way ahead a. Some renewables are becoming cost competitive According to the World Energy Council, “electricity production from fossil fuels – coal, gas and oil – makes up roughly 65% of global power generation, but in 2012 net investment in renewable power capacity outpaced that of fossil fuel generation for the second year in a row ($228bn for renewables versus $148bn for additional fossil fuel generation).”45 Renewables are set to take a bigger share of generation output in years to come, from 23% in 2010 to around 34% in 2030. Clean energy investments rose sevenfold from 2004 to 2011, with wind and solar continuing to account for the biggest share. Wind (on and offshore) is projected to rise from 5% in 2012 to 17% of installed capacity by 2030, overtaking large-hydro.
44 45
http://www.bruegel.org/nc/blog/detail/article/1235-what-should-europe-do-about-high-energy-prices/ http://www.worldenergy.org/wp-content/uploads/2013/09/WEC_J1143_CostofTECHNOLOGIES_021013_WEB_Final.pdf
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Starting from a lower base, solar PV capacity should grow from 2% in 2012 to 16% by 2030. A significant amount of this growth is due to the projected fall in the costs of these technologies – especially for PV which will become cost-competitive with conventional sources of power in several markets. The Fraunhofer Institute For Solar Energy Systems reports that in November 2013, “the Levelised Cost of Electricity (LCOE) for all PV power plant types reached parity with other power generation technologies and are even below the average end-customer price for electricity in Germany of €0.289/kWh,” while “wind power at very good onshore wind locations already has lower costs than new hard coal or Combined Cycle Gas Turbine (CCGT) power plants.”46 Levelised Cost Of Electricity, November 2013
Source: Fraunhofer Institute For Solar Energy Systems
http://www.ise.fraunhofer.de/en/publications/veroeffentlichungen-pdf-dateien-en/studien-und-konzeptpapiere/study-levelized-cost-ofelectricity-renewable-energies.pdf
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Levelised Cost of Electricity (LCOE), 2030
Source: Fraunhofer Institute For Solar Energy Systems
But more importantly, by the end of the next decade “even small rooftop PV systems will be able to compete with onshore wind power and the increased LCOE from brown coal, hard coal and CCGT power plants. PV utility-scale power plants in Southern Germany will drop considerably below the average LCOE for all fossil fuel power plants by 2030. The LCOE at locations with favourable wind conditions will reach parity with that of brown coal power plants by 2020 at the latest,� the Institute adds. These developments bring into question the need for national support schemes (feed-in tariffs) for mature renewable technologies (solar and onshore wind). According to a new European Commission report on subsidies and
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costs of EU energy47, the total value of public interventions in energy in 2012 were €120bn-140bn, the largest amounts going to renewables, in particular to solar (€14.7bn) and onshore wind (€10.1bn), followed by biomass (€8.3bn) and hydropower (€5.2bn). Among conventional power generation technologies, coal received the largest amount in current subsidies with €10.1bn, followed by nuclear (€7bn) and natural gas (about €5.2bn). These figures do not however reflect the free allocation of emission certificates nor tax support for energy consumption, which would reduce the gap between support for renewables and other power generation technologies. There should therefore be a distinction between mature renewable technologies that need, and are receiving, declining rates of subsidy as they approach cost parity with traditional forms of energy, emerging renewables that need sustained subsidisation to help drive down costs and renewable technologies that are already competitive – the three groups need different policies. But it was pointed out that even as subsidies become unnecessary for some technologies, project developers and investors still need to be certain they will be able to recover their costs. To cope with this distinction, policy should be at the same time predictable and dynamic to adjust as costs decline, to avoid taxpayers paying more than is necessary. Further expansion of all renewable technology deployment is a must if Europe wants to decarbonise its economy. However, the Working Group concluded that privileging new, more cost-effective ways of financing can substantially reduce their costs. The use of energy subsidies and other forms of state intervention can only be justified in few cases – such as to facilitate access of new technologies to the market, to boost R&D, to compensate for unfair competition from the rest of the world, and to support the ring-fencing of generation technologies - and must be carefully designed and coordinated at the regional or EU level. b. Completing the internal energy market In some member states, when conditions are right, renewable energy, supported by feed-in tariffs, produces more electricity than domestic demand and capacity has to be taken off line. At the same time, some member states are considering introducing capacity remuneration mechanisms to keep a number of fossil fuel power plants on standby to generate whenever
47
https://ec.europa.eu/energy/sites/ener/files/documents/ECOFYS%202014%20Subsidies%20and%20costs%20of%20EU%20energy_11_Nov.pdf
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generation from intermittent renewables falls off (when the wind doesn’t blow or sun doesn’t shine). Both type of ‘payments’ can add an extra financial burden to energy consumers in the form of levies added to the energy price they pay. Generation capacity would be used more efficiently, reducing the need for back-up generation capacity and thus the cost of capacity mechanisms, if European electricity markets were integrated. A single market would also increase competition and so should drive costs down for consumers, as well as reducing some of the distortions created by national policies. This implies that a gradual removal of support for fossil fuel energy sources and mature renewable technologies, the use of EU ETS auction revenue to help energy-intensive industries, and the allocation of free allowances must be co-ordinated at the EU level. Developing cross-border trading arrangements through agreements on market coupling and network codes, and building more physical crossborder interconnections are also crucial , as such interconnections are also a pre-condition for any future EU-wide renewable and capacity subsidy schemes. Lack of adequate interconnections means that “major trade gains are still left unrealised between Italy and France (about €19m per year), Germany and Sweden (about €10.5m per year) and the Netherlands and Norway (about €12m per year). Significant gains can also be expected from increasing transmission capacities between Spain and France as well as between Sweden and Poland”48. At the geographical ends of the EU, Iberia and the Baltic states are virtual ‘energy islands’, isolated from Europe’s main energy market. At the insistence of Spain and Portugal, EU leaders agreed in October 2014 that these two regions should be helped to increase their interconnections with the rest of the market up to a level of 10% of their overall generation capacity by 2020, and possibly to 15% by 2030.49 Interconnections should go hand in hand with boosting energy storage. Bloomberg New Energy Finance predicts there will be 3.7GW of energy storage capacity in Europe as soon as 2020, almost all of it in Germany, Italy and the UK. Worldwide, there will be more than 11GW of capacity. Energy storage will be a $2bn market by that time and it will already be helping to smooth peak demand and improve the reliability of grids.
48, 49
http://www.europarl.europa.eu/RegData/etudes/etudes/join/2013/504466/IPOL-JOIN_ET(2013)504466(ANN04)_EN.pdf
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The EU must make the single energy market, complemented by interconnections and energy storage, a reality and take action against countries that prevent this from happening. It is true that the considerable expansion of renewables has depressed wholesale electricity prices, with a negative impact on investment in conventional generation capacity, in particular gasfuelled plants. Capacity mechanisms can therefore be necessary in certain cases to ensure energy security and generation adequacy in the long run, but they should be carefully designed, and organised at a regional or EU rather than national level to avoid further distorting the market. They could be complemented or, in some cases, replaced by a combination of cross-border trading (surplus energy from one market to be sold to another market that needed it), electricity storage, and demand-side response, facilitated by the roll-out of smart meters and smart grids. c. Energy efficiency One of the keys to reconciling climate, energy and industrial policies is an increased focus on energy efficiency. Efficiency is a no-regrets policy that can help the EU to reduce its energy use, the costs of energy to households and industry and its GHG emissions. The opportunities are huge. According to Ecofys, for every â‚Ź1 saving in direct energy cost savings, an additional â‚Ź1 can be saved in lower energy prices. Worldwide, efficiency can cut fuel bills by $1.9tn per year in 2020 and $3.1tn per year in 2030 as a result of lower energy use. In addition, the reduced demand for fuels will also reduce the pressure on prices, cutting the global energy bill by $1.2tn by 2020 and $1.4tn by 2030.50 Energy efficiency improvements could avoid the need to invest as much as $1.25bn - $2.5tn worth of power production infrastructure that would otherwise need to be built by 2030. LED lighting alone could lead to 640 medium-sized power plants not needing to be built, while improving the efficiency of the entire energy system by 1-2% per year would cut demand by the equivalent of 2,500-5,000 medium-sized power plants. Efficiency also increases energy security, reduces imports of energy and could create more than 6m jobs by 2020, as assessed by Ecofys. Efficiency
50
http://www.ecofys.com/files/files/ecofys_2012_the-benefits-of-energy-efficiency-why-wait.pdf
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investments create 380 jobs per TWh saved, while investing in coal-fired power plants creates about 110 jobs per TWh generated. However, there are and will be job losses in the generation and extraction industries. Energy consumption has fallen in the EU in recent years, dropping 8% between 2006 and 201251, in part because of the financial crisis and consequent recession but also partly because of EU climate policies52. The EU aims to improve energy efficiency by 20% from 1990 levels by 2020 - a target, however, not mandatory. For 2030, the European Commission recommended that the EU adopt a 30% energy saving goal, but the European Council of EU government leaders could only agree, in October 2014, on a target of “at least 27%”, though with the possibility of raising this later to 30%. The European Parliament, in its resolution from 5 February 201453, had called for a more ambitious 40% goal. As the environmental group E3G says: “A 30% target will leave cost-effective energy savings potential untapped. In an era of rising energy prices and concerns about reliance on Russian gas this makes no sense at all.” The European Commission’s own impact assessment54 shows that a 40% efficiency goal would deliver a fourfold increase in GDP compared to a 30% target, triple the number of jobs and an additional €200bn in savings on the EU energy import bill. The European Commission also cautions that leaving efficiency potential untapped will hamper the European economy by limiting productivity, economic output and employment, damage the EU’s trade balance, create uncertainty in the markets given exposure to energy price volatility, lead to a loss of budget revenue and make the transition to a low carbon economy more expensive. d. External policy Europe should seek to counteract the unfair advantages that many countries have from preventing the export of their energy resources, as happens in the U.S., or subsidising local consumers of oil and gas, as occurs in the Middle East, Russia or Asia.
51 52 53 54
Eurostat press release, 17 February 2008 EEA Briefing, Informal Council Meeting of EU Environment Ministers, 14 May 2014 http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-2014-0094+0+DOC+XML+V0//EN http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014SC0016&from=EN
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Such measures contradict the spirit and letter of the World Trade Organisation (WTO) and similar practices affecting other raw materials have been condemned by the WTO and been made the subject of EU compensatory action at the border. Such action is perfectly possible under EU anti-dumping and anti-subsidy legislation. The G20 members also committed to rationalise and phase-out, over the medium term, “inefficient fossil fuel subsidies” and called on all countries to “adopt policies that will phase out such subsidies worldwide”. Yet, the IEA found that governments across the world spent over $500bn in subsidising fossil fuels in 201355. We propose that the EU and its member states take action to: 1. Apply existing EU legislation (anti-dumping, anti-subsidy) to imports of energy-intensive products from countries that apply discriminatory measures in favour of domestic use and transformation of energy to the disadvantage of EU producers; 2. Include an energy and raw materials chapter in the ongoing Transatlantic Trade and Investment Partnerships (TTIP) negotiations with the U.S.: the EU can envisage opening its market even further to energy-intensive imports from the U.S. if U.S. industry is put at the same level playing field with respect to energy prices as European industry; 3. The question should be raised by the EU in the WTO with the purpose of adopting even clearer and more easily applicable WTO rules in respect of energy pricing.
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3. Seizing the opportunities: Building the industries of the future Decarbonisation should not be seen as a threat to European industry. Quite the contrary, it creates significant opportunities – both for existing industries to become more efficient, innovative and gain competitive advantages, and for new companies to create jobs in the green economy.
A. Societal and economics benefit In the “green economy” sector, employment in the EU increased from 3m to 4.2m between 2002 and 2011, rising by 20% even during the recession years56. “The potential of employment creation linked to the production of energy from renewable sources, energy efficiency, waste and water management, air quality, restoring and preserving biodiversity and developing green infrastructure is significant and is resilient to changes in the business cycle,” the European Commission report57 says. Evaluations of the impact of decarbonisation on employment in the power sector are generally net positive, as, overall, jobs that disappear in conventional energy sources are replaced with jobs in the renewable energy sector and sectors providing solutions to more efficient energy use. The European Commission, using the E3ME model, assessed that achieving a 40% of GHG reduction in 2030 would create on the aggregate level of around 645,000 additional jobs. In a scenario based on 40% GHG reduction, ambitious energy efficiency policies and a 30% renewables target, this would increase to 1.25m additional jobs in a 2030 perspective. According to the Centre for European Policy Studies58, under a high renewable energy deployment scenario, jobs in primary fuels in the electricity sector would fall from 611,000 to 170,000 by 2050, but this would be far outweighed by an expected leap in electricity production net employment from 1.2m to 5.2m by 2050, compared to an increase to 2.6m jobs under a business-as-usual scenario. The increase will be driven by around a tenfold increase to more than 1m jobs in each of the wind, solar and biomass sectors. However, the analysis by the European Commission59 suggests that impacts will differ on the sectoral and regional levels, as the negative employment effects will 56 57 58 59
http://italia2014.eu/media/1360/background-session-green-growth-and-employment-plus-roundtables.pdf http://ec.europa.eu/transparency/regdoc/rep/1/2014/EN/1-2014-446-EN-F1-1.Pdf http://www.ceps.eu/system/files/WD392%20Behrens,%20Coulie,%20Teusch.pdf http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52014SC0015
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be pronounced in some sectors, such as extraction industries. Those impacts can be contained or even reverted in some sectors depending on the approach to environmental taxation (reduction of labour taxation compensated by increasing revenues from carbon pricing60). With respect to skills, there will be a need for reskilling and up-skilling, so education and trainings systems will have to adapt to the structural changes. E3ME model projections of employment impacts for 2030 compared to Reference of GHG reduction scenario with additional policies for EE and RES (assuming revenue recycling to consumers and energy efficiency and renewable energy investments) % change compared to Reference
‘000s of persons
2030
EMPLOYMENT Reference
GHG 40%
GHG 40% + EE + 30% RES
GHG 40%
GHG 40% + EE + 30% RES
Agriculture
9391
9402
9407
0,1%
0,2%
Extraction Industries
500
479
498
-4,2%
-0,4%
Basic manufacturing
14839
14913
14944
0,5%
0,7%
Engineering and transport equipment
15277
15367
15429
0,6%
1,0%
Utilities
2280
2301
2308
0,9%
1,2%
Construction
16599
16708
16890
0,7%
1,8%
Distribution and retail
35314
35348
35452
0,1%
0,4%
Transport
9411
9455
9471
0,5%
0,6%
Communications, publishing and television
20307
20384
20440
0,4%
0,7%
Business services
41048
41225
41293
0,4%
0,6%
Public services
66735
66797
66814
0,1%
0,1%
Total employment
231701
232379
232947
0,3%
0,5%
Source: European Commission, 2014
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Another asset arising from the low-carbon transition is the energy saving potential. The IEA says that “the scale of global investment in energy efficiency and its contribution to energy demand are as significant as those of other developed supply-side resources”.61 Energy efficiency markets around the world drew investment of up to $300bn in 2011, a level on a par with global investments in renewable energy or fossil-fuel power generation. This said, only one-third of the economic potential of energy efficiency is being used.62 Implementing the Best Available Technology in the oil and gas sector could increase the efficiency of the electrical systems in the upstream business from 20% to 50%, says the World Energy Council.63 In power generation, the global average efficiency of power plants is 34% but the best coal-fired power plants have efficiency of 46% and the best gas-fuelled plants have 61% efficiency, while in transmission grids, high voltage transmission lines could cut losses from 12% to 4% per 1,000km. In buildings, the potential savings are between 20% and 40%.
B. The rationale for greener business practices At the firm level, there are significant opportunities for gains from greener business practices for all sectors of the economy. A growing number of companies, including Apple, Google and IKEA, plan to procure some or all of their energy needs from renewable sources, helping both to secure their energy supplies and to reduce their exposure to energy price volatility in the decades to come. A large number of companies from energy-intensive sectors are among the most energy efficient in the world and are shifting towards renewable energy. For instance, the chemicals company AkzoNobel has set itself a target to earn 20% of its revenues from more sustainable products by 2020. However, as the European Climate Foundation points out, many of the opportunities in the low carbon economy will come only from greater collaboration, which will require a change to the way many companies do business. Additional emissions improvement opportunities until 2030 “lie largely in cross-company and crossindustry optimisation opportunities with high integration complexity”64. Thus AkzoNobel has a target of cutting carbon emissions not just in its own operations but across its entire value chain by 25-30% per tonne compared to 2012 levels.
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http://www.iea.org/newsroomandevents/pressreleases/2013/october/from-hidden-fuel-to-worlds-first-fuel.html http://www.worldenergyoutlook.org/publications/weo-2012/ http://www.worldenergy.org/wp-content/uploads/2014/03/World-Energy-Perspectives-Energy-Efficiency-Technologies-Overview-report.pdf http://europeanclimate.org/wp-content/uploads/2014/03/ECF-Europes-low-carbon-Transition-web1.pdf
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The trend towards greater collaboration ties in with attempts to create a more “circular economy”, where the focus switches from a linear “take, make, dispose” model of business that relies on large quantities of easily accessible resources and energy, to one that is increasingly focused on reducing the amount of materials, resources and energy used to make and consume goods and services and in reusing those resources. According to the Ellen MacArthur Foundation, there is a $1tn global opportunity in changing the way we think about the economy. Opportunities lie in moves to design sustainability into products – for example, Dutch company Phonebloks has designed a modular mobile phone that will reduce the amount of waste created throughout the life of the product and also give consumers more choice over the features in their phones. Another option is to reuse the materials that are causing the problem. The Fraunhofer Institute for Environment, Safety and Energy Technology says that up to 80% of CO2 emissions from German industry could be captured and reused by rooftop greenhouses65, while Bayer Material Sciences has started making chemicals using CO2 captured from a power plant run by RWE and Lanzatech is making ethanolbased jet fuel for Virgin Airlines using CO2 captured from steel plants66.
C. Economic importance of industrial activities Industrial policy went out of fashion in Europe after the upheavals of the 1970s, but in the wake of the financial crisis, it is back on the agenda. In particular, governments in OECD countries are concerned about losing manufacturing capacity to emerging markets and an increase in outsourcing by businesses in industrial countries.67 The concerns over the loss of manufacturing are often related to the erosion of the so-called industrial commons, according to the OECD. “This argument suggests that the loss of core manufacturing activities may set off a reaction, which will subsequently erode adjacent activities in the value chain, both upstream and downstream, including activities related to innovation and design, all of which could eventually weaken the competitiveness of OECD countries.” Some commentators say high-income countries may struggle to retain innovative, R&D-based and higher value-added activities if they rely on these areas alone: ceding capacities in manufacturing might result in the loss of R&D and design capabilities in the longer term.
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http://www.ellenmacarthurfoundation.org/business/featured-articles/point-of-view-treating-emissions-as-resources-by-braungart-mulhall http://greenchemicalsblog.com/2013/07/25/bayer-to-commercialize-co2-based-polyols/ http://www.errin.eu/sites/default/files/OECD%20report%20.pdf
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The European Commission says the recent economic crisis has underlined the importance of the real economy and a strong industrial sector. “The economic importance of industrial activities is much greater than suggested by the share of manufacturing in GDP. Industry accounts for over 80% of Europe’s exports and 80% of private research and innovation. Nearly one in four private sector jobs is in industry, often highly skilled, while each additional job in manufacturing creates 0.5-2 jobs in other sectors,” the European Commission says in its recent report, For A European Industrial Renaissance.68 In 2013, the EU recorded a €365bn surplus in the trade of manufactured products, generated mainly by a few high and medium-technology sectors. They include the automotive, machinery and equipment, pharmaceuticals, chemicals, aeronautics, space and creative industries sectors, and high-end goods in many other sectors, including food.69 Nonetheless, since 2008, 3.5m jobs have been lost in manufacturing. The share of manufacturing in EU GDP is currently at around 15%, and Europe’s share in world trade of goods has fallen from 17.5% (2005) to 15.8% (2010) to 15% (2013). Growth is hampered by weak internal demand, inflexible administrative and regulatory environments, rigidities in some labour markets and weak integration of the internal market, the report says. It adds that investment in research and innovation remains too low, holding back the necessary modernisation of our industrial base and hampering future EU competitiveness. EU firms face higher energy prices than most of their leading competitors and struggle to access basic inputs such as raw materials, qualified labour and capital in affordable conditions.
D. New EU industrial policy Europe’s new industrial policy needs to focus on encouraging the industries of the future and of smart and sustainable value chains. That does not mean abandoning the heavy industry on which much of Europe’s success has been developed, but it does mean that those industries need to become smarter, more resource efficient and less reliant on fossil fuels. They also need to seek out market opportunities in clean technology and low-carbon products.
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http://europa.eu/rapid/press-release_IP-14-42_en.htm Commission staff working document, Industrial Performance Scoreboard, A Europe 2020 Initiative, 19/12/2013
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It is important that the policy does not protect unsustainable industries and free riders, or lock in poorly targeted subsidies and exemptions. It should encourage resource efficiency, innovation and climate protection. Part of the problem is that there are currently too many industrial policies – both in different sectors and across member states. There is a need for an overall vision, something which is missing at the moment. At the same time, a “one size fits all” policy will not work – the policy must accept some sort of flexibility and be adaptable across countries, time frames and sectors. The policy should also focus on demand factors rather than supply-side issues – so, for example, there should be a policy targeted at answering people’s desire for mobility via public as well as private transport rather than at sales for the automotive industry. We propose that the EU implement an industrial policy that “enables the making of future-proofed products and services in order that the EU remains competitive”. It should enable winners by building on the EU’s strengths, but not seek to pick winners itself. The European Commission’s 2012 Industrial Policy Communication identified six areas in which investment should be encouraged. These strategic, cross-cutting areas are: advanced manufacturing, key enabling technologies, clean vehicles and transport, bio-based products, construction and raw materials and smart grids. Currently, the EU has a goal of manufacturing accounting for 20% of GDP by 2020. Our Working Group suggested that it should rather seek to ensure that Europe’s industrial sector makes up 20% of the global market, secures the top quartile performance in innovation, quality and environmental benchmarks. The EU should also secure a healthy percentage of global industrial investment.
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4. Financing the transition The decarbonisation of the EU economy won’t happen without financial incentives for clean energy, penalties on carbon and new forms of funding. A range of mechanisms is needed to leverage public and private sector finance and direct it towards low-carbon energy or energy efficiency projects, upgrading energy infrastructure, promotion of new technologies and the creation of a new industrial landscape. Innovative financing mechanisms and alternatives to energy subsidies don’t have to be costly or threaten Europe’s industrial competitiveness. Moving to a low carbon system is to a large extent a shift from carbon to capital. Markets will be encouraged to do this if policymakers can raise the cost of carbon emissions and lower the cost of capital for clean investments. According to the IEA, $1.6tn was invested in 2013 globally to provide consumers with energy, a figure that has more than doubled in real terms since 200070. The investment landscape is still dominated by fossil fuels. However, over the past decade, four-fifths of investment in new European power generation went to renewables, with 60% to wind and solar PV alone. As long as support to lowcarbon technologies continues, so will investment in this sector.
A. Putting investment on a sustainable track: Main challenges Investments in sectors such as renewable energy, energy efficiency and grid infrastructure face a number of challenges: 1. The first of these is the global financial crisis, which slowed the pace of investment in renewables from $279bn in 2011 to $214bn in 2013. This was partly because the price of solar systems fell sharply, but it also reflected policy uncertainty in many countries.71 2. The carbon market is not giving the correct price signal for investors. With the price of European Emission Allowances (EUAs) languishing around €5/ tonne for the last 2 years, there is no incentive to invest in low-carbon energy generation. Until investors have the confidence that EUA prices will return to,
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and remain, on a rising price trajectory – giving them the confidence to invest in capital-intensive low-carbon technologies such as renewables, nuclear and carbon-capture and storage (CCS) – it will be impossible to attract the necessary investment to the power sector. 3. Government support schemes, principally feed-in tariffs, have facilitated many renewable energy projects. However, the support schemes have been a victim of their own success, with rapidly-falling technology costs prompting higher levels of investment than envisaged and as a result, overall higher costs to consumers. Many governments responded to this challenge with a welfare tariff for poorest customers and tax exemptions for large industrial customers - the medium-class households as well as the small and mediumsized industry being then in first line to pay for the deployment of renewables. However, many countries have now started reforming their support systems, which is likely to increase the risk in renewable energy projects. The European Commission Directorate General for Competition produced new guidelines on energy and environmental subsidies72 which, among other things, require governments to start auctioning subsidy funding for new renewable projects. Those bidding for the lowest rates of subsidy will get first call on the available money. 4. Renewable energy is extremely capital-intensive, unlike most fossil fuel investments. Renewable energy projects, particularly in wind and solar, have very low operational costs once they are operational, because they use the free fuel sources of the wind and the sun. This means that almost all of their capital expenditure is committed up-front to construction costs. For more established generation technologies, the costs – and therefore the risks – are split between construction and the costs of buying fuel in the operational phase. 5. Renewable technologies are relatively new, meaning financiers have been reluctant to commit funds because of perceived high investment risk: there has been a limited track record to prove that investors will make a return on their investment and there is perceived policy volatility and regulatory uncertainty at the EU and member states level.
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6. While the global financial crisis and its aftermath have damaged investor confidence, low bond yields also bring opportunities. Financial markets are currently willing to finance renewable projects over very long periods at low rates of return, if they can be de-risked, securitised or refinanced. In some cases this could be applied to existing infrastructure as well as new projects, unlocking cash to be reinvested. While there is a danger of transferring necessary risks away from investors artificially, there are many cases where providers of capital are forced to bear unnecessary risk, particularly around future policy change. Successfully removing risk which is not serving a useful purpose is likely to be particularly effective in a world of low bond yields. 7. Energy efficiency often struggles to attract the finance that it deserves. Like renewables, efficiency measures often require large amounts of capital upfront. But the payback times can be spectacular, with many projects paying back their costs in under a year. A number of investors (e.g. Sustainable Development Capital Ltd) and equipment manufacturers (e.g. Siemens) offer finance to companies wishing to install efficiency technologies, with the money paid back out of the savings the measures produce. 8. Advanced technology such as electricity storage to store intermittent renewable energy is a high priority for many researchers and governments, but it is not yet available on reasonable economic terms and on a large scale. Meanwhile, the necessary investment in the dispatchable generation capacity, needed to back-up intermittent renewables, will not take place in an electricity market where, according to the IEA73, wholesale prices are 20% (or $20/MWh) below cost-recovery levels. With this in mind, the Working Group identified three cost-effective ways of financing the low-carbon transition. Those are: • A reformed carbon market • Green bonds and other new forms of finance • Shifting taxes from labour to environment
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B. Reforming the carbon market There was widespread agreement among the Working Group members on the need to reform the carbon market, but no full consensus on how to do so. This chapter reflects the position agreed by most of the Working Group members. a. Getting the price signals right One of the EU’s most cost-effective weapons in the battle to cut emissions is its Emissions Trading Scheme, the world’s first international scheme. However, the EU ETS has been blunted by Europe’s economic slowdown under the present rigid allocation rules lacking a supply response to fluctuating market demand. As a result, prices are far too low to give a satisfactory price signal to energy users. Structural reform allowing for the modulation of the supply of allowances in response to varying demand is proposed to tackle the supply-demand problem of the EU ETS. Such a move would enable policymakers to respond to energyefficiency improvements, and reduce the level of subsidy required for renewable energies on a predictable trajectory over time, thereby helping to stabilise the investment climate for clean-energy technologies. Perhaps the starkest example of faulty price signals in the EU’s energy markets and of the need for structural reform of the EU ETS is the fact that the current level of subsidies on solar power in Germany implies a cost of more than €150/tonne of CO2 abated, whereas the current price for EUAs – the EU’s market price for CO2 abatement - is only €5/ tonne. In an attempt to change this, the European Commission first decided to backload 900m allowances (2013), and more recently proposed the creation of the Market Stability Reserve (MSR), which aims to introduce a degree of supplyside flexibility into the market. A broader proposal of the ETS Directive revision is expected from the European Commission by 2015. The MSR would enable the European Commission to withhold up to 12% of the surplus of allowances every year from 2021 onwards so long as that surplus is above 833m. To deliver the new 2030 target of a 40% emissions reduction, the European Commission has proposed an increase in the annual linear-reduction factor (LRF) from the current 1.74% to 2.2% in order to speed up the fall in the cap on total allowances from 2021 onwards.
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European Commission’s proposal to increase the linear-reduction factor from 2021
Source: European Commission, 2014
The proposed structural measures are a useful step in the right direction, but they are seen by many analysts as insufficient either to raise prices to the levels required to inspire confidence to invest in low-carbon power technologies, or to give market participants confidence in the predictability of the long-term pricing outlook. With this in mind, the Environment Committee of the European Parliament voted on 24 February 2015 to amend the European Commission’s proposal by recommending that the MSR start already operating by the end of 2018. It has also suggested that the 900m back-loaded EU allowances (EUAs) should be placed directly into the MSR from its inception, as well as any EUAs left over from the New Entrant Reserve for Phase 3 and any EUAs unallocated owing to closures or under exemptions. The majority of the Working Group members, excluding some industry representatives, agreed that the MSR should start earlier and the 900m backloaded allowances and any unallocated allowances should be either permanently removed or put directly in the MSR, in order to take prices back to levels consistent with incentives for low-carbon investment within the relatively near future (i.e. within the next 2-3 years). This would be a very big boost, although there would still be a risk that market participants might not view the MSR as sufficiently flexible to ensure that prices would remain on a rising trajectory over the longer term. As a result, making the MSR a more discretionary mechanism would enhance its effectiveness.
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b. Free allocation of allowances In addition to auctioning of emissions allowances, the EU manufacturing industry receives a number of allowances for free, on the basis of EU-wide benchmarks of emission performance, to limit climate policy costs and reward best practices in low-emission production. The current system of free allocation was extended after 2020 by the European Council’s decision in October 2014, in order to prevent the risk of carbon leakage due to climate policy as long as no comparable efforts are undertaken in other major economies. The decision also included: • The creation of an innovation fund, with 400m allowances available, to support demonstration projects of innovative renewable energy technologies, CCS and low carbon innovation in industrial sectors. • Optional free allocation of allowances to modernise electricity generation and a new reserve of 2% of the EU ETS allowances to be set aside to address particularly high additional investment needs in member states with a GDP per capita below 60% of the EU average. While the free allocation system is needed to contribute to restoring a level playing field for those industrial sectors exposed to international competition in the absence of a global climate agreement, it must avoid being over-generous and leading to windfall gains. The current system of free-allocation should therefore be better targeted and focused on rewarding best practices by making the energy-intensive industries more resource efficient, innovative and less fossilfuels reliant. Some members of the Working Group have also stressed that in the current rigid ex-ante allocation of free allowances, surplus allowances owned by industry are not available for future growth. This situation encourages carbon leakage of production and investment, and hinders industrial growth. To tackle this problem, four main changes have been proposed in the structural reform of the EU ETS: 1. To change the present rigid ex-ante rules into an allocation based on a provisional production which is ex-post adjusted after each year to the actual realised production of the preceding year. The ex-post allocation avoids overallocation during recession or crisis.
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2. The surplus allowances from the ex-post adjustment are put into a reserve for future growth.74 The reserve for industrial growth can be the MSR but can also be a new “NER” type reserve for industry. 3. The indirect (electricity) emissions should be treated equally compared to the direct emissions of industry. This can be done with an indirect allocation or with an alternative (financial) compensation giving the same certainty and predictability. 4. Alongside the benchmark levels for direct and indirect emissions should be realistic to avoid carbon leakage.
C. Alternative financing mechanisms a. Green bonds In addition to the EU ETS, further financing options are starting to emerge as the renewable industry matures and starts to produce a track record of returns. The most striking development in recent years has been the growth of the green bonds market. Three years ago, green bonds, labelled as such, were a niche market pioneered by a handful of development banks. In the past year, however, labelled green bonds have entered the spotlight with $11bn issued in 2013 (over three times the issuance of any previous year) and over $36bn in 2014. The market is on target to exceed $100bn by the end of 2015, according to the Climate Bonds Initiative. The key to the success of the green bonds market to date has been that investors have not been asked to sacrifice any returns to invest in climatefriendly products – the yields have been the same as equivalent “non-green” bonds. With 55% of pension fund assets exposed to climate risks, there is a ready market for assets that can offset these risks. If investors could be offered better returns for green debt instruments, the market would grow even more quickly. This would have a significant knockon effect for project development and not just because it would make more funds available. Bonds are a secondary financing mechanism for clean energy projects – few investors want to invest in wind farms or solar farms before they are up and running because it is seen as too risky. Therefore utilities
See for example “Dynamic allocation for the EU Emissions Trading System” by Ecofys for the Dutch Ministry of Infrastructure & Environment, the Dutch Ministry of Economic Affairs and the Confederation of Netherlands Industry and Employers (VNO-NCW), 24 may 2014.
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and other project developers have to finance the construction phase of the projects. But there is a limit to how much these organisations are willing or able to commit. A ready market of investors willing to buy the projects from them once they are completed enables developers to recycle these funds into new projects, and expanding the pool of potential buyers enables them to fund more projects. The first green bonds were issued by multilateral development banks such as the World Bank and the European Investment Bank (EIB), but they used their financial firepower to give confidence to other investors to buy the bonds, rather than to offer cheap finance. What Europe needs is a mechanism to issue European green bonds to fund renewable energy and energy efficiency projects that meet strict standards on emissions reductions, at low rates of interest. Supporting the green bonds market could also include: • Credit enhancement. The ECB or EIB should use their strong credit rating to leverage investment from a private sector that might be reluctant to invest in certain projects without the reassuring presence of a supranational financial institution. Any such move would build on the European Commission and EIB’s Europe 2020 Project Bond Initiative, which is designed to raise the rating of infrastructure projects to investment grade to attract additional private finance from institutional investors such as insurance companies and pension funds. • Governmental guarantees. To reduce the risks, green bonds could be guaranteed by national governments or at the EU level. • Standards. The EU should play a key role in setting standards to ensure that investors can have confidence in the fact that money raised through green bonds is used for climate-friendly projects. • Securitisation. Green asset-backed securitisation would allow banks to apply for loans to get green projects off their balance sheet by packaging them and selling these securities to investors. This could also allow smaller scale low-carbon projects to gain access to institutional investors.
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b. Other forms of finance Bonds are not the only financing mechanisms developers are turning to for funding. As the sector matures, the amount invested by early stage venture capital funds is falling, but it is being replaced by other options. Yieldcos are companies that are listed on stock exchanges to raise money for renewable energy projects, with investors receiving dividends paid out of the revenue earned from the power the projects generate over their lifetime. Some companies are issuing project-specific bonds that work on a similar principle, but pay interest on the debt out of revenues. Both these forms of finance offer steady returns over a long period of time at rates considerably better than today’s low interest rates. Another form of investment gaining traction, although from a very low base, is “crowdfunding” of clean energy projects, where individual investors commit small amounts of money to projects and, again, receive returns based on the power generated (or energy saved in the case of energy efficiency projects). This form of funding has proved popular in Germany and the UK. Finally, sentiment towards climate-friendly investment is also being driven by initiatives such as the UN’s Principles for Responsible Investment, the Carbon Disclosure Project and the Asset Owners Disclosure Project, which seek to increase transparency around the climate risks that companies and investors face. c. The fine line between low risk and uninvestable: Getting risk allocation right The cost of capital and the capital structures chosen for infrastructure will depend on the risks facing the projects. Zero real government bond yields show that low-risk investments are currently being made for ultra low returns. However, it would not be a good move to offer investment contracts with zero risk for investors. Investors should be expected to bear risks associated with the quality and performance of the underlying asset. Nevertheless, the largest risk faced by many clean investments is future policy change. This is not a risk controllable by the operators, and policymakers should be aware that if they leave such regulatory risk with investors, this will significantly increase the cost of capital. Policymakers should look hard at ways in which unnecessary regulatory risk can be removed from existing assets while allowing policy flexibility for new investments to be adapted to new evidence and market fluctuations. This could facilitate refinancing of existing assets at lower but more secure returns, releasing capital for new investment.
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D. Shifting taxes from labour to environmentally harmful activities a. Multiple benefits of Environmental Fiscal Reform (EFR) Finally, environmental fiscal reform can help to ‘get the prices right’ in the economy through a range of taxation and policy reforms, including raising taxes on harmful environmental substances or practices and lowering them in other areas such as labour, phasing out direct subsidies (e.g. for coal), addressing preferential treatment (e.g. selective fuel tax exemptions) and ensuring full cost pricing (e.g. for water provision).75 EFR can reduce pollution and increase resource efficiency in a cost-effective way, encourage fuel switching and drive consumer choices. If well-designed, it can contribute to environmental and climate objectives, while also supporting growth, innovation and employment. The revenues raised from EFR can be used as part of a wider tax shifting programme to off-set some revenue losses from a reduction in other taxes, to support fiscal consolidation and reduce the budget deficit, be earmarked for specific expenditures, or be recycled back into the economy. The European Commission defines tax shifting as “shifting taxation from the most growth-detrimental taxes, such as labour tax and corporate income tax, to revenue sources less harmful to growth. The objective is generally long-term gain, in terms of growth and jobs”. Environmental fiscal reform across Europe • Environmental Tax Reform is estimated to have increased GDP by around 0.5% in Finland and in Sweden76, created 9000 new jobs in the Netherlands77 and 0.25 million additional jobs in Germany78 • In Finland energy and carbon taxes helped cut CO2 emissions by over 7% between 1990 and 199879. • In Denmark energy taxes contributed to a 10% reduction in energy consumption between 1983 and199780; in Ireland the CO2 tax along with complementary measures and economic factors contributed to a fall in consumption of petrol and diesel between 2008 and 201181.
Oosterhuis F. and ten Brink P. (Eds) (2014) Paying the Polluter. Environmentally Harmful Subsidies and their Reform. Edward Elgar 2014 http://www2.dmu.dk/Pub/COMETR_Final_Report.pdf 77 Peter, M., Lückge, H., Iten, R., Trageser, J., Görlach, B., Blobel, D. and Kraemer, R. A. (2007) Erfahrungen mit Energiesteuern in Europa — Lehren für die Schweiz, Infras/Ecologic im Auftrag des Schweizerischen Bundesamtes für Energie (BFE). 78 Kohlhaas, M. 2005. Gesamtwirtschaftliche Effekte der ökologischen Steuerreform. Forschungsprojekt im Auftrag des Umweltbundesamts. August 2005. 79 Sairinen, R, (2012) Regulatory reform and development of environmental taxation: the case of carbon taxation an ecological tax reform in Finland in Milne, J., and Skou Andersen, M., (Eds.) (2012) Handbook of Research on Environmental Tax Reform, Edward Elgar, Cheltenham/ Massachusetts 80 Bjørner, T.B. and Jensen, H.H. 2002. Energy Taxes, Voluntary Agreements and Investment Subsidies - a Micro-panel Analysis of the Effect on Danish Industrial Companies' Energy Demand. Resource and Energy Economics, 24, pp. 229-49. 81 http://www.publicpolicy.ie/budget-2013-three-cheers-for-the-carbon-tax/ 75
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b. Current approaches and prospects for the future Environmental taxes account for around 6% of total tax revenues among EU member states, but they could be used more widely and effectively - for instance in the Netherlands they account for around 10% of total tax revenue82. A study for the European Commission estimated that environmental tax reform in 12 EU member states could generate up to â‚Ź101bn of additional revenue by 202583. Approaches to EFR range from national policies to a harmonised pan-EU strategy. Historically (with some exceptions), countries have taken forward the EFR agenda unilaterally according to their own needs, opportunities and political expediencies - in some cases, inspired by efforts in other countries or held back by a lack of action in others84. In other cases progress has been driven by EU legislation such as the Energy Tax Directive and softer processes such as the European Semester of policy review in which the European Commission regularly makes country specific recommendations on environmental fiscal reforms. This has led to a significant diversity in practices among countries. This may be appropriate given different national circumstances, but it can lead to competitiveness problems or less effective results in certain areas. c. Competitiveness concerns Competitiveness concerns can undermine the ambition of clean energy policies. Impacts on competitiveness depend on the design of reforms, decisions on the use of revenues and external factors such as wages, education/skill of the workforce, infrastructure, regulatory framework, access to natural resources, trade barriers, and exchange rate variations85. It is important to distinguish between competitiveness impacts at the national, sector and firm level86 as reforms can benefit a sector, but hit individual enterprises, or lead to gains at a national level but losses at a sector level. Reforms may affect profitability in the short term (e.g. higher input costs); however they can also catalyse innovation (e.g. to improve efficiency) which in Eurostat, Taxation trends in the EU, annual report, 2013 http://ec.europa.eu/environment/integration/green_semester/pdf/EFR-Final%20Report.pdf 84 Withana, S., et al., (2014) Environmental tax reform in Europe: Opportunities for the future, A report by the Institute for European Environmental Policy (IEEP) for the Netherlands Ministry of Infrastructure and the Environment. Final Report. Brussels. 2014. 85 Ekins P. and S. Speck (2012) Impact on competitiveness: what do we know from modelling? in Milne, J., and Skou Andersen, M., (Eds.) (2012) Handbook of Research on Environmental Tax Reform, Edward Elgar, Cheltenham/Massachusetts 86 OECD (2003) Environmental taxes and competitiveness: An Overview of Issues, Policy options and Research Needs, Organisation for Economic Co-operation and Development, Paris 82 83
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turn improves profit margins and boosts competitiveness in the longer-term. In Sweden revenues recycled from a NOx charge to polluting firms in relation to the amount of energy they produce has incentivised innovation, helped cut NOx emissions and increased acceptability of the charge87. Further evidence is needed to determine whether EFR supports or hinders competitiveness and which EFR design choices can encourage industrial competitiveness in the medium to long term. Evidence to date suggests environmental taxes do not necessarily harm a country’s competitiveness88, in part because competitiveness concerns have been taken into account in the design of reforms (e.g. through use of exemptions). Moreover, EFR is only one of many elements that affect competiveness, with other considerations such as labour costs the most important factors. International climate action can also create a level playing field. A global climate agreement that includes agreements for certain sectors to allow companies operating in countries with stringent carbon regimes (which could include carbon and/or energy taxes) to obtain emission reduction credits89 would reduce risks of carbon leakage and competitive disadvantage. d. Smart design of EFR All those concerns can be addressed through smart design and implementation of EFR, which align short-term concerns with long-term needs for change and industrial renewal. Smart design principles for EFR could include: • Phased approach to implementation with gradual expansion in coverage, lower initial rates and a ratcheting up of rates (or reduction in subsidies) over time to help overcome resistance, allow affected actors time to adapt and learn (e.g. CO2 tax in Ireland). • Selective partial exemptions for the most exposed sectors (e.g. an energy-intensive industry operating in a highly competitive market and in a sector with significant international trade). These exemptions should be well designed, entail partial rather than full exemptions (to maintain positive incentives to improve efficiency) and be reduced over time in light of actual needs for exemptions (e.g. Sweden).
http://ec.europa.eu/environment/enveco/taxation/pdf/ch5nox.pdf http://www.eea.europa.eu/publications/resourceefficient-green-economy-and-eu/at_download/file Ekins P. and S. Speck (2012) Impact on competitiveness: what do we know from modelling? in Milne, J., and Skou Andersen, M., (Eds.) (2012) Handbook of Research on Environmental Tax Reform, Edward Elgar, Cheltenham/Massachusetts
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• Exemptions linked to effective conditions requiring provision of information and energy management programmes (e.g. voluntary agreement scheme in Denmark). • Monitoring system to regularly review progress (e.g. European Semester, regulation of environmental accounts). • Careful use of revenues, e.g. to reduce other taxes (e.g. on labour), to reduce impacts on heavily affected sectors and encourage transformation.
Possible approaches to EFR in the EU
Source: Adapted from Bassi, S., ten Brink, P., Pallemaerts, M. (IEEP) and von Homeyer, I. (Ecologic) (2009) Feasibility of implementing a radical ETR and its acceptance’. Report under task C of the ‘Study on Tax Reform in Europe over the Next Decades: Implication for the Environment, for Eco-Innovation and for Household Distribution’ for the EEA.
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Coalitions of like-minded countries90 could also help ensure more effective, efficient and ambitious instruments, engaging a wider group of actors (including ministries of economy and finance). Such coalitions could start as voluntary initiatives and potentially evolve into more formal processes. Potential focus areas for coalitions of like-minded countries91 are: • Effective carbon pricing: to improve the effectiveness of existing carbon and energy taxes, e.g. phase out exemptions, ramp up rates, harmonise carbon prices across different fuels and users. A coalition could include frontrunners learning from each other (e.g. how Sweden reduced exemptions for energy-intensive industries), inspire efforts in other countries discussing proposals for CO2 taxes (e.g. Portugal, Italy) and those contemplating how to phase out nuclear energy (e.g. Germany, Switzerland). • Phasing out reduced VAT rates on energy: several member states apply lower VAT rates on electricity, natural gas and district heating, e.g. Belgium, Greece, France, Ireland, Italy, Luxembourg, Malta, Portugal and the UK 92. Such reduced rates, although allowed under EU VAT legislation, reduce incentives to decrease consumption93. Phasing out such reduced rates will be challenging, given arguments about social protection. However these concerns can be addressed by targeting support to vulnerable households. • Taxation of transport fuels: excise duties on diesel are generally lower than on petrol in European countries (with exceptions, e.g. UK, Switzerland, Turkey), despite evidence of harmful impacts on health of diesel consumption. There will be significant opposition to reform and incentives for cross-border fuel tourism which underlines the importance of collaboration, particularly between neighbouring countries, e.g. Belgium, Germany, France, Luxembourg, and the Netherlands. • CO 2-related vehicle taxation: several countries use vehicle registration taxes to promote the purchase of low-carbon vehicles, e.g. the Netherlands, Spain, and Ireland. Countries with such approaches
Withana, S., ten Brink, P., Illes, A., Nanni, S., Watkins, E. (2014) Environmental tax reform in Europe: Opportunities for the future, A report by the Institute for European Environmental Policy (IEEP) for the Netherlands Ministry of Infrastructure and the Environment. Final Report. Brussels. 2014. http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee5_en.pdf 93 Withana, S., ten Brink, P., Franckx, L., Hirschnitz-Garbers, M., Mayeres, I., Oosterhuis, F., and Porsch, L. , (2012) Study supporting the phasing out of environmentally harmful subsidies. A report by the Institute for European Environmental Policy (IEEP), Institute for Environmental Studies - Vrije Universiteit (IVM), Ecologic Institute and VITO for the European Commission – DG Environment. Final Report. Brussels. 2012. 90, 91 92
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could co-operate to further strengthen efforts and/or inspire progress in others such as Estonia, Slovakia, the Czech Republic, Lithuania, Bulgaria and Poland94. • Air passenger taxes: a lack of co-operation, particularly between neighbouring countries, could stop taxes from being effective. The Netherlands abolished an airline tax introduced in 2008 due to passengers using airports in Germany and Belgium. However, shortly afterwards Germany and Austria introduced a similar tax. This highlights the benefits of a more co-ordinated approach especially among neighbouring countries. • Other focus areas include infrastructure charging (e.g. road pricing through the Eurovignette Directive, national and local initiatives where collaboration, particularly between neighbouring countries could help increase efficiency), exemptions for kerosene used in aviation, shipping/ fishing and the agriculture sector (where some form of EU or international co-operation is required).Resource efficiency and the circular economy are increasingly important to policymakers and business, providing a new opportunity for action and potential co-operation, e.g. on environmental taxes and charges in the areas of waste, products (e.g. plastic bags) and water. A number of countries are frontrunners in this area and could be well-placed to collaborate, e.g. UK, Netherlands, or inspire/inform action in other countries. Finally, if the EU is not joined by other countries in an effective international climate agreement, one option to protect the competitiveness of European industry would be Border Carbon Adjustments (BCAs) on goods imported into the EU.95 However, BCAs are difficult to put into practice, and remain controversial as they can violate WTO rules. Nonetheless, some studies suggest that well-designed BCAs could overcome concerns of feasibility and political acceptability. A study by Vivid Economics proposes smart BCAs (e.g. based on emission permits, applied to imports and exports, gradual expansion in scope etc.)96.
http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee5_en.pdf http://www.efv.admin.ch/e/downloads/finanzpolitik_grundlagen/els/Ecoplan_2013_e.pdf 96 Vivid Economics, (2012), Carbon taxation and fiscal consolidation: the potential of carbon pricing to reduce Europe’s fiscal deficits, report prepared for the European Climate Foundation and Green Budget Europe, May 2012 94 95
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Possible future scenarios for EFR in the EU
Source: Adapted from Bassi, S., ten Brink, P., Pallemaerts, M. (IEEP) and von Homeyer, I. (Ecologic) (2009) Feasibility of implementing a radical ETR and its acceptance’. Report under task C of the ‘Study on Tax Reform in Europe over the Next Decades: Implication for the Environment, for Eco-Innovation and for Household Distribution’ for the EEA.
There is growing recognition of the need for progressive, smart and integrated approaches. European goals of smart, sustainable and inclusive growth need appropriate prices to incentivise action. By helping to ‘get the prices right’, smart EFR can stimulate investment and innovation in low-carbon, resource-efficient and circular technologies, processes and products, supporting new competitive advantages and the revival of European industry.
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The way forward While climate action, energy security and industrial competitiveness are inextricably linked when it comes to Europe’s future economic prosperity, many people still see them as embodying mutually exclusive aims. This report shows that climate action doesn’t mean the death of industry and that the industrial sector can and should be the driver of a transition to a lowcarbon economy. It is necessary and possible to reconcile trade-offs, provided reinforcing policies are put in place. This will only happen if evidence-based and coherent policymaking prevails over silo-thinking and stereotypes. The new Juncker Commission has made an important step towards a more integrated approach and better governance with a new Commission’s structure and the recently released Energy Union strategy. What is needed now is to translate commitments into reality. European policymakers, at all levels, need to act urgently, transparently and in a much more co-ordinated way if the EU is to regain credibility and effectiveness. As governments continue to unveil their pledges for the crucial UN climate conference (COP21) in Paris at the end of the year, we need to acknowledge that Europe is not acting alone. Ambitious, robust climate policies not only give the EU credibility in global climate negotiations, they can also create first mover economic advantages in important emerging sectors such as renewable energy, energy efficiency and energy storage. They will also help improve Europe’s energy security by diversifying types and sources of supply, reducing its dependence on fossil fuels and on imports from parts of the world that are not always stable or friendly to the EU’s ideals. Europe should make the most of what it has. If all relevant stakeholders see that the EU is serious about using all of its tools to reconcile the need to decarbonise the European economy with energy security and strengthening its industrial base, they will likely align their strategies and commit efforts to this agenda. We hope that the 25 recommendations outlined in this report will help EU leaders achieve the shared vision.
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Glossary Capacity mechanisms - financial incentives to increase investment in generation capacity, postpone decommissioning of plant, and promote demand-side flexibility. There are different forms: capacity payments, strategic reserves or capacity markets. (European Commission) Carbon leakage - carbon leakage is defined as emissions displaced as a result of asymmetric climate policy. (IEA, UNFCCC) Economic competitiveness - productivity of an entire economy relative to others, thus capturing the competitiveness of both industry and services. (IEA) Energy cost – amount of money consumers have to pay for their energy consumption. (European Commission) Energy price – price that energy consumers actually pay for a given unit of energy. (European Commission) Energy subsidy - any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers. (IEA) Environmental fiscal reform (EFR) - reform of the national tax system where there is a shift of the burden of taxes, for example from labour to environmentally damaging activities, such as unsustainable resource use or pollution. (EEA) Green economy - system of economic activities related to the production, distribution and consumption of goods and services that result in improved human wellbeing over the long term, while not exposing future generations to significant environmental risks and ecological scarcities. (UNEP) Green jobs – jobs that reduce the environmental impact of enterprises and economic sectors (agriculture, industry, services and administration), ultimately to levels that are sustainable. (UNEP/ILO/IOE/ITUC, 2008). Industrial competitiveness – the ability of industry (particularly its energyintensive segments) in a given economy to compete internationally. (IEA) International competitiveness - the ability of both individual firms and entire economies to compete internationally. (IEA) Levelised cost of energy (LCOE) – the cost of power generation without public intervention. (Ecofys)
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List of abbreviations AR5
5th Assessment Report
BCA
Border Carbon Adjustment
CCGT
Combined Cycle Gas Turbine
CCS
Carbon capture and storage
COP20 20th session of the Conference of the Parties to the UNFCCC in Lima, 2014 COP21
21st session of the Conference of the Parties to the UNFCCC in Paris, 2015
E3ME
Energy-Environment-Economy Model of Europe
ECB
European Central Bank
EE
Energy efficiency
EEA
European Environment Agency
EFR
Environmental fiscal reform
EIB
European Investment Bank
ETR
Environmental tax reform
EU
European Union
EU ETS
EU Emissions Trading System
EUA
European Emission Allowances
G20
The Group of Twenty
GDP
Gross domestic product
GHG
Greenhouse gas
IEA
International Energy Agency
IEEP
Institute for European Environmental Policy
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IPCC
Intergovernmental Panel on Climate Change
LCOE Levelised cost of energy LNG Liquefied Natural Gas LRF Linear reduction factor MS Member States MSR Market Stability Reserve OECD
Organisation for Economic Co-operation and Development
OMC
Open Method of Coordination
PSC
Policy support cost
PV Photovoltaics R&D
Research and development
RES
Renewable energy sources
TTIP
Transatlantic Trade and Investment Partnerships
UN
United Nations
UNFCCC
United Nations Framework Convention on Climate Change
VAT Value-added tax WEO
World Energy Outlook
WTO
World Trade Organisation
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Friends of Europe – Les Amis de l’Europe 4, Rue de la Science, B-1000 Brussels, Belgium Tel.: +32 2 893 9823 – Fax: +32 2 893 9829 Email: info@friendsofeurope.org Website: www.friendsofeurope.org