1. No category

Europe's Energy Union and the road to Paris and beyond | 2015
1
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
2
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
Friends of Europe is a leading think-tank
that aims to stimulate thinking on key global
and European political challenges.
We are a key player in 6 policy areas:
Future Europe | Smarter Europe | Greener Europe
Quality Europe | Global Europe | Security Europe
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
Some of the familiar faces and household names who have used Friends of Europe’s high-profile yet neutral platform
to put across their ideas to decision makers and to public opinion
For more information on Friends of Europe’s work and to download our publications, please visit
www.friendsofeurope.org
friendsofeurope
friendsofeurope
friendsofeurope.foe
friendsofeurope
Brussels
3
4
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
5
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.
Table of contents
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.
15 areas where the Working Group members could agree 16
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
© Friends of Europe - Spring 2015
Image credit: CC/Flickr NASA Goddard Space Flight Center.
This report is printed on responsibly produced paper
Why this project marks an unusual new departure
7
This report would not have been possible without
10
Executive summary 13
25 recommendations of the report 18
Introduction: Europe’s climate-energy-industry “trilemma”
21
1.Climate: Business as usual is not an option 23
A.Climate change is a fact and has a cost
23
B.The impact on economy and business
23
C.Climate policy in Europe
25
D.Europe is not alone
27
2. Energy: A difficult transformation in Europe 29
A.Energy security: A chronic problem
30
B.Rising energy costs
32
a. The energy price gap
32
b. Competitiveness concerns and risk of carbon leakage
36
C.The way ahead
39
a. Some renewables are becoming cost competitive
39
b. Completing the internal energy market
42
c. Energy efficiency
44
d. External policy
45
6
Friends of Europe | Greener Europe
3. Seizing the opportunities:
Building the industries of the future 47
A.Societal and economics benefit
47
B.The rationale for greener business practices
49
C.Economic importance of industrial activities
50
D.New EU industrial policy
51
4. Financing the transition 53
A.Putting investment on a sustainable track: Main challenges
53
B.Reforming the carbon market
56
a. Getting the price signals right
56
b. Free allocation of allowances
58
C.Alternative financing mechanisms
59
a. Green bonds
59
b. Other forms of finance
61
c. The fine line between low risk and univestable: Getting risk allocation right
61
D.Shifting taxes from labour to environmentally
harmful activities62
a. Multiple benefits of Environmental fiscal Reform (EFR)
62
b. Current approaches and prospects for the future
63
c. Competitiveness concerns
63
d. Smart design of EFR
64
The way forward 69
Glossary
70
List of abbreviations
71
References
73
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,
7
8
Friends of Europe | Greener Europe
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
9
10
Friends of Europe | Greener Europe
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
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)
David Buchan, Senior Research Fellow, Oxford Institute for Energy Studies
Marco Mensink, Director General, Confederation of European Paper Industries
(CEPI)
Dan Byles, Member, House of Commons, Energy and Climate Change
Committee, United Kingdom
Giles Merritt, Secretary General, Friends of Europe
Geert Cami, Co-Founder and Director, Friends of Europe
Russel Mills, Global Director Energy & Climate Policy, The Dow Chemical
Company
Maria Da Graça Carvalho, Member, Committee on Industry, Research and
Energy, European Parliament
Gordon Moffat, General Director, European Confederation of Iron and Steel
Industries (EUROFER)
Arnaud Chaperon, Senior Vice-President, New Energies Division, Total
Arne Mogren, Programme Director, Power, European Climate Foundation
Philippe Chauveau, Head of Climate Change Policy, Solvay Energy Services
Karsten Neuhoff, Head of Department, Climate Policy, German Institute for
Economic Research (DIW Berlin)
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
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
11
12
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
Vianney Schyns, Advisor Climate & Energy Policy, International Federation of
Industrial Energy Consumers (IFIEC) Europe
Executive summary
Steven Tebbe, Managing Director, Carbon Disclosure Project (CDP) Europe
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.
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.
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,
13
14
Friends of Europe | Greener Europe
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.
15
16
Friends of Europe | Greener Europe
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.
1
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.
17
18
Friends of Europe | Greener Europe
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.
19
20
Friends of Europe | Greener Europe
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
2
3
4
5
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
21
22
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
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
1. Climate: Business as usual is
not an option
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.
A. Climate change is a fact and has a cost
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.
23
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,
6
7
http://www.iea.org/publications/freepublications/publication/weio2014.pdf
http://ec.europa.eu/priorities/energy-union/docs/energyunion_en.pdf
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
24
Friends of Europe | Greener Europe
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
Europe's Energy Union and the road to Paris and beyond | 2015
25
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
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
Source: EEA, 'Why did greenhouse gas emissions decrease in the EU between 1990 and 2012,' 2014
12
13
14
15
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
16
http://www.eea.europa.eu/publications/why-did-ghg-emissions-decrease
26
Friends of Europe | Greener Europe
CO2 emissions, energy use and GDP in 1970-2010
Europe's Energy Union and the road to Paris and beyond | 2015
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.
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
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 emissions22, 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
27
28
Friends of Europe | Greener Europe
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.”
Europe's Energy Union and the road to Paris and beyond | 2015
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,
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
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
29
30
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
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.
EU Energy Security Strategy
A. Energy security: A chronic problem
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.
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.
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.
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.
“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.
• 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.
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.
• 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.
• Increasing energy production in the EU and diversifying supplier
countries and routes.
• Strengthening emergency and solidarity mechanisms and
protecting critical infrastructure.
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
31
32
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
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.
33
Average industrial energy prices including tax by region
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.
Source: IEA, 201334
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.
Industrial electricity prices by region and cost component in the IEA New Policies Scenario
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
Source: IEA, 2013
34
http://www.worldenergyoutlook.org/publications/weo-2013/
34
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
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.
35
Gas price evolution by component 2008-2012
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%.
Source: European Commission, 2014
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).
Policy support cost (PSC) and tax levels in 2012 by country
Electricity price evolution by component 2008-2012
Source: European Commission, 2014
Source: Eurelectric, 201437
35
36
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
37
http://www.eurelectric.org/media/131606/prices_study_final-2014-2500-0001-01-e.pdf
36
Friends of Europe | Greener Europe
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.
Europe's Energy Union and the road to Paris and beyond | 2015
37
(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.”
• 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.
The share of energy costs in production costs in energy intensive industries
• 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/
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/
38
Friends of Europe | Greener Europe
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.
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’).
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.
“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.”
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.
41
42, 43
Europe's Energy Union and the road to Paris and beyond | 2015
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
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.
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
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.
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.
Eurostat, 2011 data
http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/04/Costs-Competitiveness-and-Climate-Policy.pdf
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
39
40
Friends of Europe | Greener Europe
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
Europe's Energy Union and the road to Paris and beyond | 2015
41
Levelised Cost of Electricity (LCOE), 2030
Levelised Cost Of Electricity, November 2013
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.
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
46
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
42
Friends of Europe | Greener Europe
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
Europe's Energy Union and the road to Paris and beyond | 2015
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
43
44
Friends of Europe | Greener Europe
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 €1 saving in direct energy cost savings, an additional €1
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
Europe's Energy Union and the road to Paris and beyond | 2015
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
45
46
Friends of Europe | Greener Europe
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.
Europe's Energy Union and the road to Paris and beyond | 2015
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
55
http://www.worldenergyoutlook.org/publications/weo-2014/
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
47
48
Friends of Europe | Greener Europe
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
Europe's Energy Union and the road to Paris and beyond | 2015
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%.
Agriculture
9391
9402
9407
0,1%
0,2%
Extraction
Industries
500
479
498
-4,2%
-0,4%
B. The rationale for greener business practices
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%
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.
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%
49
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.
Source: European Commission, 2014
60
See page 63
61
62
63
64
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
50
Friends of Europe | Greener Europe
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.
65
66
67
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
Europe's Energy Union and the road to Paris and beyond | 2015
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.
68
69
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
51
52
Friends of Europe | Greener Europe
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.
Europe's Energy Union and the road to Paris and beyond | 2015
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,
70
71
http://www.iea.org/publications/freepublications/publication/WEIO_2014_ES_English.pdf
http://fs-unep-centre.org/sites/default/files/attachments/14008nef_visual_12_key_findings.pdf
53
54
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
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.
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.
72
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52014XC0628(01)
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
73
http://www.iea.org/publications/freepublications/publication/WEIO_2014_ES_English.pdf
55
56
Friends of Europe | Greener Europe
B. Reforming the carbon market
Europe's Energy Union and the road to Paris and beyond | 2015
57
European Commission’s proposal to increase the linear-reduction factor from 2021
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.
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.
58
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
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.
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.
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.
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.
59
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.
74
60
Friends of Europe | Greener Europe
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.
Europe's Energy Union and the road to Paris and beyond | 2015
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.
61
62
Friends of Europe | Greener Europe
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/
Europe's Energy Union and the road to Paris and beyond | 2015
63
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 €101bn 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
75
82
76
83
64
Friends of Europe | Greener Europe
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.
Europe's Energy Union and the road to Paris and beyond | 2015
65
• 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
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
87
88
89
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.
66
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
could co-operate to further strengthen efforts and/or inspire progress in
others such as Estonia, Slovakia, the Czech Republic, Lithuania, Bulgaria
and Poland94.
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.
• 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.
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).
• 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.
• 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
67
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
68
Friends of Europe | Greener Europe
Possible future scenarios for EFR in the EU
Europe's Energy Union and the road to Paris and beyond | 2015
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.
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.
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.
69
70
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
Glossary
List of abbreviations
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)
AR5
5th Assessment Report
BCA
Border Carbon Adjustment
CCGT
Combined Cycle Gas Turbine
Carbon leakage - carbon leakage is defined as emissions displaced as a result
of asymmetric climate policy. (IEA, UNFCCC)
CCS
Carbon capture and storage
Economic competitiveness - productivity of an entire economy relative to
others, thus capturing the competitiveness of both industry and services. (IEA)
COP20
20th session of the Conference of the Parties to the UNFCCC in Lima, 2014
Energy cost – amount of money consumers have to pay for their energy
consumption. (European Commission)
COP21
21st session of the Conference of the Parties to the UNFCCC in Paris, 2015
Energy price – price that energy consumers actually pay for a given unit of
energy. (European Commission)
E3ME
Energy-Environment-Economy Model of Europe
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)
ECB
European Central Bank
EE
Energy efficiency
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)
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
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)
71
72
Friends of Europe | Greener Europe
IPCC
Intergovernmental Panel on Climate Change
LCOELevelised cost of energy
LNGLiquefied Natural Gas
LRFLinear reduction factor
MSMember States
MSRMarket Stability Reserve
OECD
Organisation for Economic Co-operation and Development
OMC
Open Method of Coordination
PSC
Policy support cost
PVPhotovoltaics
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
VATValue-added tax
WEO
World Energy Outlook
WTO
World Trade Organisation
Europe's Energy Union and the road to Paris and beyond | 2015
73
74
Friends of Europe | Greener Europe
Europe's Energy Union and the road to Paris and beyond | 2015
75
76
Friends of Europe | Greener Europe
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: [email protected]
Website: www.friendsofeurope.org