Is decarbonization worth it for Europe?

Is decarbonization worth it for Europe?

Davide Tabarelli | President and cofounder of Nomisma Energia
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It is in ethical terms and provides an increase in soft power, because it strengthens Europe's reputation for leadership, which is coveted around the world. The challenge of high electricity prices remains, though, with resultant loss of competitiveness for European industry

What a question! Of course it is. In a world dominated by many truths and anxiety over climate change, this question may seem futile. Reflection is, however, useful. Decarbonization will work for Europe in ethical terms, because it strengthens Europe's political leadership, which is coveted around the world and helps to overcome—and sometimes hide—the many domestic problems each county is coming up against, such as economic crises and political upheavals. Not diverging much from the position of his predecessor, the French President Emmanuel Macron, immediately focused on the fight against climate change as a means to reinvigorate the French national tendency towards grandeur, slightly weakened over the years, and to stem the populist drift to the right. He speaks less of nuclear and the future of France's 52 aging nuclear power stations. This is a more complex topic, although the fate of the entire European electricity industry depends on it. In Berlin, where environmentally friendly policies have always been open for discussion, climate change is an essential binding factor in Merkel's early-2018 grand coalition between parties of the left and right. However, it seems to have been forgotten that 40 percent of electricity production, vital for the leading manufacturing economy in Europe, is based on carbon and lignite.  Across the English Channel, a country in shock after the Brexit referendum of June 2016 is relying on environmental policy to regain the international leadership that has been irreparably compromised. However, the closure of coal-fired power stations, implemented with commendable consistency over the last two years, has pushed up prices. End consumers, already bothered by the dismal effects of liberalization, are unhappy and are therefore pushing politicians toward decisions which, if implemented, would push the industry back 30 years.

It all started with fuel quality

The European Union has historically considered the environment an objective on which to focus energy policy. Conversely, its member states have accumulated very different energy facilities, resulting in often-divergent policies. Therefore, more than 20 years since the guidelines aiming to create a single electricity and gas market, integration remains far off. Since the 1970s, the environment has been a factor for easy cohesion, on which all parties agree, although initial provisions were only concerned with fuel quality. In 1986, the European Council set out an energy strategy, with fundamental objectives such as the increase of renewable energy sources. It was not until after the 1992 Rio Conference that a commitment was made to reduce CO2 emissions and Europe was very eager to make such commitments. The 1995 White Paper and the 1997 Green Paper anticipated Directive 2001/77/EC, which set non-binding targets for renewable energy sources. The drive sped up in 2007 when the Commission presented its new strategy, the famous 20-20-20, leading to the April 2009 package of directives, for the first time setting binding targets. In terms of CO2, the commitment was to reduce emissions by 20 percent by 2020 compared to 1990 levels. For renewables, the target was set at 20 percent of final energy consumption, also by 2020, compared to 1990 levels of 8 percent.  Europe was therefore confirmed as the far-and-away world leader for decision-making in favor of renewables and reduction of CO2 emissions. Strengthened by domestic political consensus, in December 2009 this leadership should have signed the Copenhagen Protocol to replace the expiring Kyoto Protocol. However, the talks floundered. Bereft of the Protocol, European diplomats had their work cut out, arriving years later at the December 2015 Paris Summit, which still dominates decisions in the field. The results achieved to date by Europe are encouraging in terms of CO2 emissions. They were 24 percent lower in 2016 than in 1990, the benchmark year, meaning that the 2020 target of -20 percent been met and exceeded. With this progress in hand it is easy to believe that the new threshold suggested for 2030, -40 percent on 1990 levels, will be achieved. However, many of the favorable dynamics of the past will not be so easy to repeat. Demand for energy in Europe has fallen with the ongoing deindustrialization process, resulting in great impoverishment in certain parts of Europe, especially in the south.

The first priority is economic recovery

Europe’s first priority, to attempt to stem the tide of populism, is to create jobs that can be sustained through the economic recovery. In turn, this requires higher energy consumption, especially fossil fuels. Due to the rapid closure of many coal-fired power stations in the post-unification 1990s, East Germany will come up against many obstacles in the future, both because coal makes up for the high costs of renewables, and because many deprived areas in the east of the country cannot do without their coal  extraction industries.  Poland, too, has made it very clear they do not wish to give up coal, not only for the well-founded economic reasons but above all to avoid dependence on gas from Russia.

 

European Union CO2 Emissions and Targets

European Union CO2 Emissions and Targets

The strong growth of renewables in the past, which has reduced emissions from the electricity generation sector, has been achieved with generous, unrepeatable incentives of over EUR 50 billion. The target for renewables, 20 percent of final energy consumption by 2020, is further off, as well as more expensive. In 2017, renewables made up 13 percent of final consumption, a level that has been struggling to increase for three years, suggesting that it will be impossible to reach the target in two years’ time. The strong growth of recent years has been difficult, despite the significant fall to values similar to those of fossil fuels in direct costs. However, renewables have hidden costs. There is greater complexity due to their intermittent nature and management spread over millions of small installations that require investment in the electricity grids, problems which will inevitably affect prices to the end consumer. Since the inception of environmental policies, Europe has been at the forefront of implementing a trade in emissions permits, the Emissions Trading System (ETS), where the previously widely trusted invisible hand of the market has encountered fairly few difficulties in the real world. The prices of emissions permits for one ton of CO2 have fallen to lows of EUR 4 in the last two years, from initial values of over EUR 20, despite forecasts for current levels of EUR 40. Only in 2018, permit prices have regained ground toward EUR 10, but this is still vastly lower than the CO2 cost reductions achieved with renewables, of between EUR 100 and 300 per ton of CO2. Despite this, the ETS is the flagship of the European policies that the rest of the world is attempting to mimic. Incentives for renewables, investment in electricity grids and the cost of CO2 permits have raised electricity prices in Europe, the weakest element in the whole situation. Although politicians don’t say so, there's no such thing as a free lunch. Compared to the rest of the world, the discrepancy is clear, with values in Italy and Germany, the two leading countries in environmental policies, double or triple those in China or the United States. The loss of competitiveness of European industry is also due in part to high energy prices, a sacrifice made to reduce CO2 emissions by 1.3 billion tons, whereas they have increased in the rest of the world in the meantime by 12 billion tons. Efforts in Europe, which accounts for 10 percent of global emissions, have been excessive. Decarbonization is not therefore always worth it.

 

Industry Electricity Prices Worldwide

Industry Electricity Prices Worldwide