The folly of Europe’s decarbonisation plan

Europe’s plan to decarbonise its economy by 2030 is very likely to meet Albert Einstein’s definition of insanity: ‘doing the same thing over and over again and expecting different results’. Current plans require emissions to be reduced to 20 per cent below 1990 levels by 2020 whilst 20 per cent of energy needs must be met through renewable energy sources. Now the EU is aiming even higher. The European Commission has released a new plan which raises the decarbonisation target. It proposes that emissions are cut to 40 per cent of 1990 levels by 2030 with 27 per cent of energy being from renewables. This will be a fiasco. Not only is decarbonisation likely to be expensive in itself, but regulating in favour of renewables compounds existing economic problems. European economies will become less competitive, there will be more red tape and more regulatory uncertainty.

Both the goals and the policy instruments of the proposed climate plan are disappointing. As far as the main goal is concerned, cutting European emissions by 40 per cent below 1990 levels will be costly. The Commission seems to deny this reality as it claims that, in the past, there has been little or no contradiction between climate goals and economic growth. It argues: ‘Between 1990 and 2012 the EU succeeded in cutting its GHG emissions by 18 per cent, while GDP grew by 45 per cent ‘.

This is true, but reveals only part of the story. A large part of the reduction happened because of the recent deep recession. From 1990-2008, the EU27 cut its emissions by just 11 per cent, and partly because the accession countries could renew their post-Soviet, obsolete industrial sectors by employing more advanced, cleaner technologies. In the EU15 the emissions reduction in that period was only 6 per cent. European climate strategies did contribute to reducing emissions but only to a small extent. It should be noted too that, as with any economic process, the marginal cost of cutting carbon emissions will tend to increase as the cuts get bigger. The emissions target contributed, however, to an increase in energy prices in Europe, therefore making the economic crisis worse.

A recent study by the Potsdam Institute for Climate Impact Research – that relies on some rather heroic assumptions – estimated that cutting emissions by 40 per cent will cost 0.7 per cent of GDP per year in 2030. This may seem like a small amount but, given the EU’s appalling growth record, it is a further nail in the coffin of its failing economy.

However, the most incoherent aspect of the EU’s proposals is that it has been decided – once again – to pursue carbon reduction in costly ways. Even assuming that unilateral carbon reduction makes environmental and economic sense, it does not follow that the Commission should regulate how that goal should be pursued.

It is especially unfortunate that the Commission has chosen an expensive renewable energy strategy again. There are several alternatives to renewables when it comes to carbon reduction – including switching to less carbon-intensive fossil fuels. New technologies may well be developed in the next 15 years, too. And, when faced with simple carbon taxes or cap-and-trade schemes that raise the price of fuel, people may choose to economise on energy use altogether rather than switch to expensive renewables: offshore wind, for example, is approximately three-and-a-half times the cost of conventionally generated electricity. This is why there is an economic consensus that, if we are to cut emissions, the best instruments to use are carbon taxes or cap-and-trade to encourage innovation, new technology and local decision making in order to cut carbon output in the cheapest possible ways.

So, why has the EU decided that we should pick winners in advance by determining that the carbon reduction target should be met at least partly through increased use of renewables? The answer has little or nothing to do with the environment or climate: it is all about the so-called industrial policy of trying to create green industries and green jobs.

The experience with this policy has been disappointing. Part of the impact of climate policy has been to shift manufacturing to countries where green taxes are lower but where there are higher levels of carbon intensity in the production process – a very perverse outcome. At the same time, the EU was importing large numbers of solar panels from China subsidised by EU taxpayers – an outcome that brought an appallingly protectionist response from EU.

Intriguingly, under the proposed package renewable targets will be mandatory at the EU level, but there will be no national targets. This is likely to lead to attempts by each member state to free ride on the efforts of other states. This will then precipitate regulation from Brussels and the further centralisation of energy policy. Perhaps this is the Commission’s aim. However, the uncertainties that will result will make investments more, not less, costly. Again this will contribute to making Europe a poorer region beset by pervasive governmental intervention.

The Commission always insists on Europe’s ‘leadership’ on climate policy. However, as one looks around one realises that no other nation in the world is willing to follow. It is possible that Europeans are the only ones who really care about the environment, and that they are also the smartest people on the planet. It is also possible, though, that they are simply on the wrong track. This latter explanation should not be ruled out too readily.

This article was originally published on ConservativeHome.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

6 thoughts on “The folly of Europe’s decarbonisation plan”

  1. Posted 05/03/2014 at 11:29 | Permalink

    Australia has managed to follow the EU with a more rigorous carbon tax and consequential loss of manufacturing industries. There are those that claim this is not the cause but deliberately fail to acknowledge that it is a contributor. When will countries realise that without universal agreement unilateral action is disastrous. IPCC has acknowledged that even if we stop producing co2 today the residual co2 in the atmosphere will be there for the next 100 yrs. Que??

  2. Posted 08/03/2014 at 18:12 | Permalink

    “EU decided that we should pick winners in advance by determining that the carbon reduction target should be met at least partly through increased use of renewables”
    It seems a clear ploy to restrict affordable access to fossil fuels. Such an initiative suggests games are being played.
    co2 was increasing before this proposition was dreamed up. Is this a taking advantage of a known trend to increase dysfunction and curtail economic growth?

  3. Posted 09/03/2014 at 17:03 | Permalink

    Another point about the EU’s carbon reduction record post-1990 is that a lot of it was due to the British dash for basin power generation.

  4. Posted 20/06/2014 at 15:34 | Permalink

    The likelihood of climate change occurring and being man made is very high. The severity of runaway climate change is it would appear cataclysmic (this might require people to think beyond 2050 to understand this). Any professional that is familiar with risk assessments will therefore understand that the mitigation measures need to be put in place and that these cannot fail.

    A robust price signal through a carbon price is obviously the ideal mechanism to promote cost effective decarbonisation. However it would be irresponsible not to acknowledge that to date we have not managed to develop a robust mechanism that can be trusted to provide a carbon tax. We do not live in the theoretical world of economics, in the real world policies are subject to change. It is therefore essential that other mechanisms are used to ensure that decarbonisation can progress. This is the concept of policy resilience.

    As for the folly of being the leaders, European policy has been the key driver to innovation and cost reduction for onshore wind and solar PV technologies. These are now being deployed everywhere around the world and in more and more places these technologies are now cost competitive to fossil fuels. Europe’s folly has provided viable technological solutions to our decarbonisation without which there would be no hope of a global agreement which is obviously essential to avoid carbon leakage and other issues. It cannot be denied that for every MWh produced by renewable is a MWh not produced by fossil fuels.

    I am surprised that you can claim that no other country is willing to follow the EU leadership when the Environmental Protection Agency in the US has effectively just replicated the EU’s large combustion plant directive. China has also indicated that it is likely to proposed a carbon reduction target not just a carbon intensity reduction target, and is now installing more renewable energy capacity per year than fossil fuels.

    Many of the Americana states also have carbon trading schemes whilst China is experimenting with these. All these experiments are necessary, as are experiments with different mechanism, so that we can understand what works best.

    Finally, lets look at the 2020 RE targets. Are they really folly? What are the other options? Nuclear? CCS? Gas?

    Nuclear can’t be built in time and is expensive – so not an option. We don’t have a fully functioning CCS demonstration plant in the whole world despite significant amounts of funding. This includes countries that do not have Renewable targets and it would appear that we won’t be getting any until the end of the decade at the earliest. So that’s not an option either. That leaves us with a transition from cheap coal to not so cheap gas. In the UK that would mean more than 60% of our electricity generation would have to come from gas and with most of our heat. Have you done the numbers on the quantities that represents and the dependency on exports that means? I wonder if you have looked at what it would mean to substitute the entire global coal use for gas, how does that stack up against reserves and what can an economist say about the likely cost impacts? Still not so cheap gas? Or maybe the idea is that only Europe should do this and everyone else should stick to coal?

    The reality is that targets are needed and that if the carbon price silver bullet can be resolved, targets will stop being the drivers of decarbonisation but only used to monitor progress. I would think that it would be very helpful if you guys would work to make sure that this transition is as easy and seamless as possible rather than support policy option that is still so frail.

    A final comment. When it comes to risk mitigation, hoping for a solution, such as new technology to be invented, is not an option. I used to work in the construction industry if i carried out a risk assessment and decided not to address a clear threat whilst hoping that my guys on site would come up with some funky solution to stop them from dying went shit hit the fan I was going straight to prison.

  5. Posted 23/03/2015 at 08:53 | Permalink

    The notion that renewable energy costs three times more than coal is totally factually wrong. Even without considering externalities, new coal plants already cost more than wind on a life cycle cost per MWhr. Solar PV will be cheaper than coal in much of Europe in a decade.

    Moreover, all of these cost comparisons (none of which support the three times figure) are only looking at the cost of producing the electricity. The distribution costs is 30-50 of the end-user price. Many RES sources are distributed energy and are actually cheaper than conventional centralized power production. MIT, Citi Bank, UBS, and numerous other studies in the last year or so have strongly concluded that distributed energy will be the system of the future and that utilities will have to adapt or become dinosaurs. The UK seems to be taking a dinosaur approach in many regards.

  6. Posted 18/11/2015 at 00:48 | Permalink

    There is only one reason that the EU is following this disastrous path: So that they won’t have to buy increasing amounts of gas from Russia.

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