House of Lords - No Country is an Energy Island: Securing Investment for the EU's Future

No Country is an Energy Island: Securing Investment for the EU's Future - European Union Committee Contents

CHAPTER 4: delivering policy clarity—2030 framework

99. The European Commission's 2011 'Roadmap for moving to a competitive low carbon economy in 2050' identified a 40% greenhouse gas reduction target by 2030 as "the most cost-effective pathway" to 2050.[201] EU legislation, though, is currently limited to a 2020 target with a supporting framework. There has therefore been a debate about whether an EU framework, including a target accompanied by further supporting measures, should be set out until at least 2030.

100. The Commission responded to the debate by issuing a Green Paper on 27 March 2013 to consult on a new framework. The paper reflected demands that climate goals have to take account of the economic crisis, but still pressed for a low carbon economy that is less dependent on fossil fuel imports. It consulted on possible future targets such as a 40% cut in carbon emissions over 1990 levels and for 30% of energy needs to be met by renewable sources, both by 2030.[202] The Green Paper will now be the subject of discussion before legislation is proposed.

101. There was a consensus amongst the evidence received that clarity and consistency is required about what will be the energy and climate change framework until 2030. This was highlighted as necessary to provide more certainty for investment, and also because inertia in the energy system could make it much more expensive to make rapid carbon reductions later on. It was argued that maintaining steady progress towards well-defined goals was the most efficient approach, and that industry needed long-term visibility of these goals.[203] Moreover, a clear 2030 framework was highlighted as important to ensure that the EU has a credible and deliverable figure in mind before the UNFCCC conference in Paris in 2015, when it is hoped to secure a substantial new international climate change agreement.[204]

102. For a number of witnesses, such as Vestas, the strategic objective for a 2030 policy must be a continued reduction in greenhouse gas emissions.[205] This objective had to include a 2030 target as a necessary stepping stone, as otherwise there was the fear that people would "kick the can down the road and not do anything".[206]

103. Member States must be under no illusion: failure to agree a 2030 framework will restrict investment, with subsequent implications for energy costs, climate change ambitions and energy security. A comprehensive framework must be underpinned by a greenhouse gas reduction target set at the suggested level of 40% compared to 1990 levels, and in line with at least an 80% reduction by 2050.

EU Emissions Trading System

104. It was stressed that green investment requires a supportive carbon price. Professor Helm stated that "If there is no carbon price, there is no money to be made from reducing carbon", meaning that without a carbon price, there will be little if no investment in green technologies.[207] In acknowledging the necessity of a carbon price to support green investment, the vast majority of witnesses stressed that the current carbon price under the EU's Emissions Trading System (ETS) is too low.[208] The evolution of prices until May 2012 is set out below (see Figure 1). Since then, prices have hovered around the €5 mark, and recently dipped as low as €2.75 on the primary market.[209]

FIGURE 1

Evolution of carbon prices[210]

Source: Intercontinental Exchange. Data for front-year futures contracts with delivery in December

105. The ETS was intended to perform a multitude of roles. As a market-based approach to achieve the most efficient emission reductions, it was also expected to help incentivise low carbon investment in the EU, was linked internationally as part of the EU's contribution to global climate goals (including support for low-cost emission reduction in developing countries) and was intended to be a source of funding for innovation (such as for carbon capture and storage (CCS)). There was agreement among witnesses ranging from the Commission to EDF that, in essence, the ETS market design has worked in contributing towards delivering efficient emissions reductions. Meeting these reduction targets, however, cannot be solely attributed to the ETS, but rather, is due to a combination of factors, including: the economic recession; weak original targets; the contribution made by renewable energy; an oversupply of imported overseas credits[211]; and a greater import of energy-intensive products. The resulting low demand for emission allowances has resulted in a price—and level of uncertainty—that has not encouraged low carbon investment and has significantly reduced the amount of funding available for innovation through the NER-300 (see paragraph 57 and Appendix 4).[212]

106. Professor Helm noted that the ETS had produced a "short-term, volatile and low price",[213] and along with other witnesses called for reform of the ETS in order to increase the carbon price. There was widespread agreement that the ETS required reform for a number of reasons: the need for clarity for industry investment; the potential economic benefits of low carbon investment; the economic risks associated with stranded investments in higher carbon energy; innovation and energy security benefits; and the climate and diplomatic benefits to be derived by the EU from taking a lead.[214]

107. Some witnesses questioned the benefit of reforming the ETS, noting that the EU accounts for only about 10% of overall global carbon emissions. CoalPro described an expensive EU system as "utter futility" given this.[215] However, others noted that a credible EU climate policy remains globally crucial, and that other regions are following the EU's lead: California and Australia have now implemented an ETS, the South Korean Parliament has legislated one to start in 2015 and China has seven pilot ETS programmes as part of its current Five-Year Plan.[216]

108. The Commission has published a paper setting out ways in which it believes reform could take place.[217] Most of the options focus on reducing directly the supply of allowances, but also include the option of price guarantee measures such as a floor price. This could take the form of a stated minimum reserve price on future auctions of ETS allowances. Prices in the existing market would rise as the current surplus was used up, until the market required allowances from auctions bought at or above the reserve price. The UK introduced a unilateral floor price from 1 April 2013 for its power sector, implemented with a carbon tax.

109. Many witnesses were supportive of the idea of a floor price, and suggested that price uncertainty in the ETS is a major impediment to investment.[218] It was also emphasised by Mr Wolf that determinants of the price of carbon needed to be as predictable as possible.[219] Some referred to the potential benefits of a floor price in reducing the real and perceived risks around low carbon investment, such as the shale gas displacement impact on coal.[220] In addition, a floor price would greatly reduce the uncertainties around revenues. Although the ETS was originally projected to raise several hundred billion Euros in the period up to 2020, current prices mean revenues will only be a small fraction of that.

110. A number of witnesses expressed concern about the political difficulty of agreeing a floor price, pointing in particular to resistance from the Commission.[221] The Commission itself conveyed unease about the complexity of Member State politics, and the risks of 'managing the market', including concern that discussing a floor price would also provoke discussion of a ceiling price.[222] The Californian system has both a floor and a ceiling to create a wide 'price corridor'.

111. There were a number of other suggestions about how the carbon market might be reformed, all of which were included as options in the Commission's paper on possible future reform of the ETS (see paragraph 108). WWF, for example, suggested a change to a 2.6% cap reduction[223] annually from the present through to 2050, rather than the current 1.74%.[224] The Commission and SSE similarly supported the development of a framework between 2020-30 that incorporated a "more restrictive target", which they deemed would help ensure a higher carbon price.[225] WWF and the Secretary of State considered that a more supportive price would be delivered by the permanent retirement of a number of allowances.[226] Others, such as Mr Dan Jorgensen MEP, argued that the possibility of off-setting to other countries, outside the EU, should be ended.[227] WWF also pointed to the issue of oversupply of imported overseas credits, which it said are largely responsible for general oversupply.[228]

112. On the proposal to 'backload' (see Appendix 4) the auctioning of allowances until later in Phase III (which ends in 2020) the Commission was clear that "explicit support" from the UK and Germany was required, warning that failure to adopt the proposal would suppress the carbon price even further.[229] Witnesses considered backloading to be a necessary and helpful first step, but stressed that the longer-term trajectory must be clear.[230] The Secretary of State confirmed that the UK would be willing to support the proposal as long as it was linked to a deal setting out a timetable for deciding on longer term structural reform of the ETS, which should include the permanent retirement of allowances.[231] It was stressed by the CBI, however, that before short-term adjustments could be made, such as with backloading, it was first necessary to be certain about the long-term direction of energy and climate change policy—in particular, beyond 2020.[232] The proposal was rejected by the European Parliament on 16 April 2013 and will be reconsidered by the European Parliament and Member States.

113. The recession and other factors have made the ETS marginal in terms of driving emissions reduction. Its history and current design render it ineffective at achieving its other goals. Experience has demonstrated the extreme sensitivity of the ETS to unanticipated developments.

114. We support the backloading proposal to amend the ETS in the short-term but we agree with some of our witnesses that it will be ineffectual without a commitment to a timetable for longer-term structural reform. This should be agreed by 2015 in advance of the Paris international climate change negotiations.

115. The dominant options for rejuvenating the ETS include tightening the cap and setting a floor price. The uncertainty in revenues makes it impossible for governments to budget effective use of ETS revenues, and the price collapse has reduced the major source of expected EU finance for CCS.We therefore conclude that a floor price would simultaneously increase investor confidence and help to stabilise possible financing for infrastructure, low carbon innovation and related applications.

116. A combination of both tightening the cap and introducing a floor price, seen as part of a package to attract new investment and support efficiency and innovation, may help to alleviate some of the political opposition to both options. Structural reform is important to restore credibility and meet the multiple goals of the ETS, but a clear trajectory for a reduction in the cap over the period to 2030 would remain important.

Renewable energy target

117. There was a divergence of views among witnesses on the desirability of a 2030 renewable energy target as part of the 2030 framework. Several supported such a target on the basis that the 2020 target has stimulated investment. Mr Tindale and SSE noted how the 2020 target has driven investment into renewable energy,[233] by setting out clear targets against which to invest.[234] Mr Tindale identified another argument in favour of a renewable energy target, pointing out its possible role in persuading the public to support other low carbon alternatives, such as nuclear power, in the medium-term in the knowledge that renewable energy was being further developed.[235]

118. A number of witnesses agreed that the 2020 target had been helpful but were unwilling at this stage to commit to a 2030 target. ScottishPower said that a 2020 target was helpful, but whilst it "would not rule out" a target beyond 2020, this target might be "a more indicative target", allowing Member States greater flexibility.[236] BNEF agreed that the 2020 target had offered appropriate "investment certainty"—including sufficient flexibility to Member States over which renewable energy sources to support—but considered it was too early to set a 2030 target.[237] It stressed that much could happen in 18 years, especially in terms of the potential for economic and technological changes.[238]

119. Others, meanwhile, were opposed to any form of a renewable energy target, arguing that it favoured one set of (potentially expensive) technologies over another. Mr Atherton, for example, commented that a renewable energy target would be unhelpful, such as the target the UK signed up to in 2006, which effectively locked us into "very immature, very technically uncertain and very expensive" technologies—in other words, offshore wind.[239] Mr Atherton further argued that the deadline for meeting the 2020 target should be delayed by at least five years, and Professor Helm shared his scepticism about the wisdom of the 2020 target.[240] EDF also rejected the idea of a renewable energy target, believing it to be "misguided", viewing it as having undermined the carbon market itself, with concerns that it would lead to permanent subsidies (to the cost of the consumer).[241]

120. The Secretary of State suggested that an electricity decarbonisation target should be explored instead, claiming that the "logic for a decarbonisation target in the UK is quite strong".[242] Such an idea was, however, rejected by RenewableUK, who noted the need for more precision about the type of technologies required and in what quantities they would be necessary.[243]

121. A strengthened and more effective ETS can provide a broad underpinning for the most cost-effective low carbon technologies, but it cannot support all of the necessary transformations. An EU-wide renewable energy target beyond 2020 is desirable, and so we therefore support a renewable energy target up to 2030. Failing that, a 2030 decarbonisation target at the EU level for the power sector should be set. Member States could then set their own specific renewable energy targets, which should be reported to the Commission.

Energy efficiency

122. There was a general consensus that energy efficiency is a crucial component of the EU's energy transformation. Oil & Gas UK noted that efficiency could help save energy, and was also economically beneficial with important implications for affordability and competitiveness.[244] A number of witnesses were supportive of inclusion within the 2030 framework of an energy efficiency target of some form, as well as some demand-side response policies.[245]

123. In 2012, the EU adopted an Energy Efficiency Directive (EED) (see Appendix 6), which some witnesses, including the Secretary of State, were hopeful would lead to a significant energy reduction in the EU. It requires Member States to set their own national targets in order to meet the EU-wide objective of a 20% reduction by 2020 compared to 2007 levels. Progress will be assessed by 30 June 2014. Mr Jorgensen MEP stated his view that the EED will probably result in an energy reduction of 25% across the EU.[246] On the other hand, we heard regret about the limited ambition of the EED and its failure to incorporate Combined Heat and Power (CHP).[247] Witnesses were split on the economic viability of further development of CHP and district heating,[248] although the latter has proved successful in other EU Member States, such as Denmark which, according to the CIBSE, are "conspicuously outperforming the UK".[249]

124. SSE also emphasised that much more needs to be done to improve energy efficiency, energy reduction and energy management, especially as these can make significant contributions to affordability and competitiveness.[250] It stressed that, the more that affordability becomes an issue, the more important it becomes to ensure that a future framework incorporates "demand-side targets and demand-side policies".[251]

125. The Committee also considered the extent to which there is a 'rebound effect', whereby consumers and businesses increase their energy-consuming activities in response to energy efficient methods reducing their effective energy costs. WWF thought that this was a possible consequence, and therefore that any efficiency targets should consider focusing on net energy savings rather than purely on energy efficiency or be accompanied by measures to deter such a rebound.[252]

126. The EU has adopted the EED which needs to be implemented across Member States. We would support further consideration as to the introduction of binding EU-level targets on energy consumption by 2030, consideration which should be informed by the Commission's assessment in 2014 of the implementation of the EED.

127. There are important helpful technologies, such as community heating systems and CHP, which must be further developed. The potential 'rebound effect' reinforces the need for energy efficiency policy to be complemented by measures to price carbon appropriately.

Energy-intensive industries

128. Certain industries, such as cement and aluminium, are particularly reliant on energy. For these industries, energy makes up a significant proportion of their total costs. Some of our witnesses considered whether these industries, which are particularly affected by changes in energy costs, required specific policies.[253] By way of example, the UK Government have announced specific support measures to electro-intensive industries in relation to the UK carbon floor price. The CBI was particularly insistent on the need to ensure support for such industries, noting that the policy framework has to help "specific businesses as well as the consumers facing challenges".[254]

129. INEOS argued that energy-intensive industries make a significant environmental and economic contribution to the green economy, stressing that they must be protected from the effect of punitive fiscal decarbonisation measures on energy prices. It cited Germany and France as examples of best practice in this regard, in the form of tax rebates and long-term energy contracts respectively.[255]

130. Other witnesses noted that many businesses are increasingly wary of measures that may hamper competitiveness and increase short-term operating costs. The IPPR noted that some businesses view ambitious climate change policies in the UK and EU as potentially self-defeating if they lead to carbon leakage (where production and the consequent emissions are displaced to countries with less stringent carbon regulation).[256] The IPPR did qualify, however, that it has found no evidence of carbon leakage occurring, stating that costs attributed to climate change measures as a proportion of total energy costs facing energy-intensive industries are still relatively small (although these costs are projected to increase). It argued, therefore, that the aim should be a set of policies that enable innovative businesses and start-ups to capture new low carbon growth opportunities, whilst assisting existing and hard-to-treat industries to adapt their business models to the transition. IPPR suggested three potential policies that could be implemented at EU level to support energy-intensive industries: raising the carbon price to provide a better incentive for low carbon innovation; expanding the ETS to include imported energy-intensive goods to prevent future carbon leakage; and ensuring that ETS revenues are spent on low carbon projects.[257]

131. In our report on the 2008 revision of the ETS,[258] we acknowledged that some sectors of industry may be at risk of carbon leakage as a result of high energy prices. Our preference was for global sectoral agreements to be reached in order to put these industries on an even footing with their non-EU competitors. In the meantime, we argued, special provisions should be made within the ETS for those industries, such as free allocation of allowances.

132. Acknowledging the drawbacks of continued free allowances in the long-term, and the difficulty of constructing global sectoral agreements to fully factor in carbon costs, it might also be possible to include importers in the ETS (Article 10b of the ETS Directive) or to impose a tax on carbon-intensive imports from third countries. While Professor Helm was supportive of this approach, the Commission warned not only of the administrative complexities, but also the risk of over-or under-taxing imports. Additionally, the Commission expressed fear that "retaliation and trade measures" would follow in other jurisdictions. Professor Helm rejected that argument, suggesting that a tax would be justified on environmental grounds.[259]

133. We agree that energy costs have a disproportionate impact on a small number of energy-intensive industries and that this is an issue to be addressed in the post-2020 framework. In order to make a full evidence-based position for that framework possible, we recommend that the Commission explore urgently the various options, such as: free allocation of allowances under the ETS; global sectoral agreements; and any global trade-compatible measure that could equalise costs between domestic and third country producers. Some income derived from the auctioning of allowances under an ETS with a floor price could be offered to assist energy-intensive industries to develop and adopt innovative energy efficient technologies.

The politics of a 2030 framework

134. We heard much scepticism surrounding the prospects for reaching an agreement on the 2030 framework. It was observed by witnesses such as Mr Froggatt and Mr Davies MEP that the economic crisis since 2008 has entirely altered the political dynamic, particularly given that everyone was now "nervous about spending any money".[260]

135. Regarding the ETS, Professor Helm noted that there was a great deal of political capital invested, meaning that scrapping it would be an "enormous setback", and unlikely to be an option favoured by the Commission or Member States—therefore, the ETS must instead be improved.[261] On that basis, the development of future policy should be understood as being about economic competitiveness and growth, in addition to decarbonisation. According to Professor Helm, to present an argument in this manner would prove "more fruitful" than if it was based solely on climate change.[262]

136. The Commission argued that targets and burden sharing needed to be set in such a manner that none of the Member States felt that they were "losing out", and indeed that the outcome was of economic benefit.[263] The SSE stressed the difficulty of coming to an agreement because of the differing interests among the 27 Member States. Consequently, that would make it challenging to come up with anything other than "suboptimal" or "lowest-common-denominator" positions.[264] As a result, flexibility may well have an important part to play in achieving an agreement.[265] Ultimately, as the Commission observed, any future agreement could (and may need to) be reached by a qualified majority[266] rather than unanimously among the Member States.[267]

137. Witnesses also drew our attention to the 2015 deadline for a new international climate change agreement under the UNFCCC, with the culminating conference to be held in Paris. This deadline should exert pressure on the EU to agree a position on a 2030 framework ahead of the international negotiations, a view that was expressed by Mr Davies MEP.[268] Regarding the 2013 UNFCCC Conference to be held in Warsaw this November, the government of Poland noted that any decisions taken must maintain "the political momentum for global climate agreement" on the agreed schedule—that is, to be adopted in 2015 and enter into force by 2020.[269]

138. We conclude that the future framework can and should be seen and articulated as an economic opportunity for all Member States. It must overhaul the ETS as an instrument for supporting strategic investment both by industry and, through revenues raised, for supporting innovation (for example, in CCS and offshore turbines), European infrastructure investment and energy efficiency. Provisions on the ETS must form part of a package along with policies on renewable energy and associated infrastructure, energy efficiency, and energy-intensive industries. We note that the unanimous support of all Member States may not be required, as any future agreement could be reached with a qualified majority.

201 COM(2011) 885 Back

202 COM(2013) 169 Back

203 Q 2, Q 189, Q 190,Q 192, Q 209, Q 211, Q 315, ABB Limited, CER, DECC, ETI, WWF Back

204 Q 230 Back

205 ABB Limited, E.ON, EDF, Vestas, WWF Back

206 Q 197 Back

207 Q 140 Back

208 Q 9, Q 95, Q 123, Q 125, Q 191, Q 248, CER, Fiona Hall MEP Back

209 European Energy Exchange Back

210 COM(2012) 652 Back

211 Overseas credits are awarded to emissions reduction projects outside the EU and can be sold to operators in the EU (and elsewhere) to count towards domestic (EU) emissions reductions. The ETS has only accepted credits that qualify under (and are monitored by) the UN under the Kyoto Protocol, and excludes land-use-based credits; additional restrictions apply from 2013 Back

212 Q 67, Q 113, Q 181, Q 199 Back