3E Intelligence

Europe’s energy-intensive industries surely have done a great job in the last six months convincing European policymakers that stringent CO2 measures for their sector would lead to relocations and thus “carbon leakage”. As a result of this successful lobbying, EU leaders last week felt obliged to make promises to protect these industries by possibly giving them free carbon allowances in the future emission trading scheme.

Here is the paragraph of the Council Presidency conclusions related to this carbon leakage issue:

“The European Council recognizes that in a global context of competitive markets, the risk of carbon leakage is a concern in certain sectors such as energy intensive industries particularly exposed to international competition that needs to be analysed and addressed urgently in the new ETS Directive so that if international negotiations fail, appropriate measures can be taken. An international agreement remains the best way of addressing this issue.”

On which scientific evidence is this decision based? Is carbon leakage really happening as a result of the EU’s climate or environment policy?

It is surprising how little research has been done on this subject. The only really good study I found has been undertaken by four Dutch research institutes in the framework of the Netherlands Research Programme on Climate Change. The study “Spillovers of Climate Policy. An assessment of the incidence of carbon leakage and induced technological change due to CO2 abatement measures” dates from December 2004.

Here are a few extracts of the conclusions of this 251-pages report (my highlighting):

“Based on analysing the trends in regional production structures of energy-intensive bulk materials (steel, paper, aluminium, cement and fertilizers), it can be concluded that industrialised countries have been losing global market shares in the production of these materials over the past three decades. This loss in global market shares has been predominantly demand-driven, i.e. caused by the development of new markets and increasing demand in developing countries, rather than by an overall shift of competitive advantage from the industrialised countries towards the developing countries (and a consequent relocation of production structures in the actual, strict sense of the word).”

…

“1. In the past, environmental policy has generally not been a significant decision criterion for the location of investments in the energy-intensive industry and, hence, it does not represent a key explanatory factor for such investments in the developing world.

2. In general, compliance costs as a result of environmental policy are limited in pollution intensive industries, and other cost factors seem to be more decisive investment criteria, with the most important ones being market size and growth (regional demand) and the wage level. Hence, industries with increasing returns to scale will not relocate easily if the pollution abatement costs do not rise more than a high threshold level.

3. The limited effect of environmental policy seems plausible also in view of the companies’ pursuit of higher value added products and their concomitant relatively low interest in conventional energy intensive products. It is also supported by statements of industry representatives
who point out that all countries that are attractive for investment have rather stringent environmental legislation and that, secondly, multinational enterprises would risk their reputation by investing in pollution havens. Moreover, if income levels of developing countries increase, they will demand stricter environmental legislation and, hence, these countries should normally not be a long-term pole of relocating energy-intensive or other, highly polluting industries. Finally, some global players tend to use the most recent technology worldwide since this minimises planning and maintenance costs, particularly in energy-intensive industries producing typical products such as basic chemicals, cement, or pulp and paper.”

The study draws three policy implications from these empirical conclusions:

“The first-best policy to reduce carbon leakage is to increase the size of the group of abating countries. To reduce global carbon leakage, it is not important that additional countries to any international agreement are forced to substantial reductions; it is enough if they agree to any binding target (which might be a zero reduction target with respect to their baseline emissions, i.e. an allowed increase of emissions from, say, 1990 levels).

Without such broader participation, it might be worth considering whether domestic or regional (EU) reduction policies could be designed in a manner to reduce carbon leakage. The second-best policy would be to implement import and export taxes for the international trade of CO2-intensive products with non-abating countries. It is commonly believed that such a form of trade discrimination would not be allowed under the rules and disciplines of the WTO, but there are precedents by the way of multilateral environmental agreements with (discriminating) trade provisions that have not (yet) been challenged before the WTO. Nevertheless, it appears that the participating countries to the Kyoto protocol do not actively investigate this second-best policy.

A third-best policy would be to differentiate the stringency of domestic CO2 reduction policies among sectors. On the basis of their CO2-intensity and sensitivity to international trade, economic sectors can be classified into ‘exposed’ and ´sheltered’. In general, sheltered sectors may be less vulnerable to leakage than exposed sectors, although differences among sectors and even among firms within these broad classes may be significant. Any policy that would simply shift a part of the CO2 reduction burden from the exposed to the sheltered sectors could reduce leakage, but would probably increase aggregate national abatement costs. This increase in costs could be justified from a global cost-effectiveness perspective if the relative increase in costs would be less (in absolute terms) than the resulting reduction in leakage rate.

As most researchers argue, however, that leakage in the short to medium term is primarily caused by changes in relative prices of energy goods (the energy trade channel) and not by industrial relocation, an alternative option would be accept an ‘unavoidable’ rate of leakage in the short to medium term and concentrate on action to avoid leakage by industrial relocation in the longer term. The most obvious course of action would be to stimulate innovation to improve the CO2–efficiency of exposed sectors in order to remain or even enhance their competitiveness on the world market.”

The Spring Summit of European political leaders has been another showcase of why this generation of policymakers will be unable to deal with the current climate-energy chaos. Although the 27 decided to support the Commission’s climate/energy package, short-term protection of European (or better German, French, and other national) economic interests and jobs is still much more a priority for politicians who are incapable of thinking beyond their potential next term in office.

The caving in of Chancellor Merkel to big old industry’s scaremongering about “carbon leakage” (read “delocalisation”) is particularly significant, as the same Mrs Merkel less than one year ago (at Heiligendamm) was hailed as the new “Valkyrie” in the war against climate change.

It is remarkable how fast certain interests have been able to hegemonise the “carbon leakage” rhetoric and how supposedly “smart” politicians have fallen back to their old reference frameworks(their competitiveness or Lisbon paradigm) to water down one of the key elements of Europe’s so-called leadership on climate change: the European emission trading scheme. Continuing to give free emission allowances to these industries will, in the long run, mean the collapse of the whole emission trading system itself. But why care? Après moi, le déluge. Have politicians not learned any lessons from their coal “débacles” in the 80s?

As far as I know, no serious scientific study has been undertaken or initiated to determine the real dangers of the climate delocalisation. Carbon leakage is indeed a problem but it would be helpful if the EU could do some serious impact assessment before believing the exaggerated horror stories which are now distorting the political discourse on these issues.

Moreover, by promising free carbon allowances to its heavy industries, the European leaders will probably undermine any future American plans for a similar cap-and trade system. All three candidates for the US Presidency have planned 100% auctioning of carbon allowances once they would be US President. Does anyone believe this will happen now that the European so-called climate change leaders have gone chicken?

Putting the building blocks in place for a smooth transition to the new sustainable and post-oil energy future will require no less than a monumental global coordination effort of ALL economic superpowers. When these superpowers will continue to put their own short-term interests higher than the long-term survival chances of our global civilisation, then James Lovelock’s Cassandra call will come true and Gaia will have its revenge.

Further reading:

• Council: Conclusions of the Spring Summit
• Independent: EU leaders promise to act against China and US in carbon crusade
• International Herald Tribune: EU leaders commit to new year-end climate change deadline
• Guardian: Concessions to Merkel threaten climate change plan

The Spring Summit of European political leaders has been another showcase of why this generation of policymakers will be unable to deal with the current climate-energy chaos. Although the 27 decided to support the Commission’s climate/energy package, short-term protection of European (or better German, French, and other national) economic interests and jobs is still much more a priority for politicians who are incapable of thinking beyond their potential next term in office.

The caving in of Chancellor Merkel to big old industry’s scaremongering about “carbon leakage” (read “delocalisation”) is particularly significant, as the same Mrs Merkel less than one year ago (at Heiligendamm) was hailed as the new “Valkyrie” in the war against climate change.

It is remarkable how fast certain interests have been able to hegemonise the “carbon leakage” rhetoric and how supposedly “smart” politicians have fallen back to their old reference frameworks(their competitiveness or Lisbon paradigm) to water down one of the key elements of Europe’s so-called leadership on climate change: the European emission trading scheme. Continuing to give free emission allowances to these industries will, in the long run, mean the collapse of the whole emission trading system itself. But why care? Après moi, le déluge. Have politicians not learned any lessons from their coal “débacles” in the 80s?

As far as I know, no serious scientific study has been undertaken or initiated to determine the real dangers of the climate delocalisation. Carbon leakage is indeed a problem but it would be helpful if the EU could do some serious impact assessment before believing the exaggerated horror stories which are now distorting the political discourse on these issues.

Moreover, by promising free carbon allowances to its heavy industries, the European leaders will probably undermine any future American plans for a similar cap-and trade system. All three candidates for the US Presidency have planned 100% auctioning of carbon allowances once they would be US President. Does anyone believe this will happen now that the European so-called climate change leaders have gone chicken?

Putting the building blocks in place for a smooth transition to the new sustainable and post-oil energy future will require no less than a monumental global coordination effort of ALL economic superpowers. When these superpowers will continue to put their own short-term interests higher than the long-term survival chances of our global civilisation, then James Lovelock’s Cassandra call will come true and Gaia will have its revenge.

Further reading:

• Council: Conclusions of the Sprint Summit
• Independent: EU leaders promise to act against China and US in carbon crusade
• International Herald Tribune: EU leaders commit to new year-end climate change deadline
• Guardian: Concessions to Merkel threaten climate change plan

One of the lessons I took back home after my week’s stay in California is that there is a lot happening in the USA on “sustainability entrepreneurship”. During an inspiring dinner meeting with some friends of the Global Footprint Network, we discussed about several exciting start-ups which have introduced “ecological constraints thinking” into their business operations.

As media- and VIP-horny CEOs descend upon Swiss Davos to bathe themselves in the glory of the “rich and famous”, it might be time to start thinking about organising an annual Davos-like summit for the new “eco-economy” entrepreneurs. But contrary to the traditional Davos, this “World Eco-Sustain Forum” should be about discovering new ideas and good existing practices for running future businesses in the era of new global eco-scarcity, not about meeting the Bonos or Jolies of this world (unless they bring loads of money of course).

That being said, such a Forum would also have to find innovative ways of dealing with its own ecological footprint. BTW: Davos generates “about 6,800 tonnes of carbon emissions, equal to the amount released over a whole year by 1,250 passenger cars or 900 homes” (source: The Press Association).

Who is willing to think with me how we can make this happen?

More reading on the traditional Davos meeting:

• World Economic Forum: Davos 2008
• Forbes: Special Report on Davos 2008
• CNN: In the field: Davos
• Financial Times: Davos 2008

How can Europe lead on the necessary transition to a carbon-constrained economic future when the policy measures needed might undermine the competitiveness of European industries? This was the subject of a major conference “Towards a global low carbon economy” organised as the closing event of the EU Commission’s high-level group on competitiveness, energy and the environment on 27 November.

What I learned from the conference is that the spectre of the emerging economic tigers (China in particular) is indeed looming over the European industry and that its leaders are seriously confused and internally divided as to how to respond to the new global challenges. That being said, the debate itself also showed a sophistication in the arguments which was not there when climate/energy issues started a few years ago to overshadow the famous Lisbon agenda (”to make the EU the most competitive economy by 2010″).

Commission Vice-President Verheugen kicked off the conference by underlining some of the key messages of the high-level group’s final reports: there is no solution without the industry as 80% of the investments needed for a low-carbon economy will have to come from business; the solutions need to be cost-effective and we should not undermine the competitive position of our industry and especially of our energy-intensive industries.

In the debate, competition commissioner Kroes claimed that there is no contradiction between energy liberalisation and the fight against climate change. “You just need to get the price right” was Mrs Kroes obvious but also a bit dogmatic recommendation.

Business Europe leader Antoine de Sellière observed that the industry had gone through a change of mindset. “It now understands the urgency of the threat”, he said, a claim that I fail to understand when I see his organisation clinging on to the illusionary “energy efficiency” credo, doing the lobbying of the (French) nuclear sector for a nuclear renaissance (and yes, I think nuclear will have to be part of the global solution) and trying to undermine the credibility of the renewables solution (and also here I share their concerns but less so because of ideological reasons).

Dow Chemical’s Theo Walthie underlined the efforts of his sector to reduce the energy intensity of its production and even went a step further stating that more growth of the sector would be good for climate change: “the more we produce, the more society will reduce its environmental footprint”. Although I believe the chemical industry will play a big role in the ecological economy of the future, this kind of loose generalities will not give it the credibility it seeks.

Environmental NGO leader Mikael Karlsson on the other hand sang the “polluter has to pay” song, and recommended to phase out fossil fuel subsidies. He also had a message for the entrepreneurs in the room: “the business idea of the 21st century is solar”, something which people like Hazel Henderson (”The politics of the solar age“) already understood back in 1981. But then again, big interests sometimes prevent the obvious and then call this the “invisible hand of the market”.

An interesting difference of opinion came to light between industry leaders on the future of the European emissions trading scheme (ETS). Several business delegates recognised the need for mandatory auctioning whereas others still wanted to protect their industries and their windfall profits. It is generally believed that the Commission will put auctioning forward in its upcoming revision of the system.

One important element which turned up regularly in the debate was the need for global sectoral agreements (agreements across industry sectors with benchmarking and standards of how to reduce emissions), but little details were given on how to implement this. For a good introduction to this global sectoral agreements solution, read the Pew Center’s excellent introduction.

In the second session Lakshmi Mittal of Arcelor-Mittal impressed with a strong defense of the steel sector and a warning to match carbon-restraint policies with trade policies in order to prevent delocalisation of heavy energy-intensive industries to China and India. Energy commissioner Piebalgs mentioned ETS, energy efficiency and additional regulation as the three keys to the low carbon economy.

For Vattenfall’s CEO Lars Josefsson, new coal power plants with CCS (and therefore heavy subsidies for carbon capture and storage) are an absolute necessity. I myself have my doubts about investing a lot of taxpayer’s money as long as there is not more transparency on the coal reserves (see my earlier post on this in May “Hopes for green coal futures in ashes?“).

Green MEP Claude Turmes hammered on the need for resource efficiency and said he had great expectations for the G8+5 meeting next year under Japanese leadership. Turmes also rightly stated that Europe “does not really have a problem of technology innovation but of organisational innovation” and put his hope in the lead market initiative the Commission is to present in 2008.

All in all, the conference demonstrated that the debate on climate/energy security has come a long way and the Commission’s high-level group certainly can take some credit for it. However, the ideological chains of an old-fashioned competitiveness understanding are still weighing heavily on some business sectors and their political champions. If the climate/energy crisis shows one thing, it is that our global economy is bound to a broader ecological system which provides it with the necessary natural capital (energy and material resources and “free ecological services). On such  a “Spaceship Earth economy” the breakdown of these ecological services can only by solved by global cooperation and not by nation-centered competitiveness. An excellent study (”Changing climates“) on how the interdependencies on energy and climate security underpin the need for more international cooperation was last week presented by the UK’s Chatham House.

This does not mean that we do not have to protect our industries and more importantly our jobs. But on how to do this, we should be thinking a bit more out of the box instead of reverting to 20th century neo-liberal “market-only” remedies which have no more policy relevance in our endangered globalised society.

European leaders will meet in Lisbon today and tomorrow to try and agree on a new EU Reform Treaty which is supposed to give the Union instruments to operate more efficiently after its big enlargement from 15 to 27 members (see International Herald Tribune and the Times). Since the two “No” referenda in 2005 on a first version of this new Treaty (then ambitiously or maybe foolishly called the “Constitutional Treaty”), only two issues have fueled the debate: whether or not the Reform Treaty text is the same as the old version which was rejected by the French and the Dutch voters and whether there should be new public consultations or referenda to legitimise the acceptance of the slightly reworked text.

I have expressed my opinion on the irrelevance of the Reform Treaty already on my EUcologic blog, so no need to repeat it in extenso here. What I would like to underline today is how symbolic it is that the new Treaty will probably go into history as the “Lisbon Treaty”.

Lisbon, of course, is the Portuguese capital where in 2000 the Union confirmed its neo-liberal, “competitiveness-first” working agenda. Blinded by the “new economy” and the dot-com boom, EU leaders in 2000 had little eye for the first signs of three major realities that in the following seven years undermined “globalisation optimism”: fundamentalist terrorism, climate change and energy insecurity.

The Constitutional Treaty and the current Reform Treaty were coloured by the policy vision of the Lisbon Agenda and built upon the architectural foundations laid down by the Union’s Founding Fathers. That the new challenges of the 21st century can not be solved by ideological and institutional tools created in the last decennia of the previous century seems to have been too hard to see for the majority of participants in the long and difficult Treaty process. Maybe the “No votes” of French and Dutch voters was an intuitive cry against the lack of a new EU vision?

So maybe, yes, the Reform Treaty will make the Union of 27 a little bit more workable, but will it help in our search for a new international convenant which can build bridges between the world’s have and have-nots (the real cause of global terrorism). And will it help find ways of dealing with our 21st century ecological-economic scarcity crisis? Of course not! If this Lisbon Treaty is not replaced within the next five years with a new vision for Europe, the 27 leaders meeting in Lisbon over the next two days will have laid the tombstone for the European Union.

For all the political rhetoric about the urgency to fight climate change, political and economic elites still do not seem to understand the full ramifications of our global crisis. This is illustrated once more by the revolt of six “new” EU member states (Latvia, Poland, Hungary, the Czech Republic, Slovakia and Estonia) against the Commission’s decision to slash these countries’ carbon emission allowances for companies.

The pending court case(s?) before the European Court of Justice could jeopardise what is generally known as the “crown jewel” of EU climate change policy: the EU’s Emissions Trading Scheme.

At a time when a debate is raging in the US Congress about the best potential instruments to fight global warming, the challenge of the six could even have serious implications for long-term global climate change policies.

What these developments clearly prove though is that for political elites, economic competitiveness (as traditionally defined) is still more of a concern than the negative effects of changing weather patterns (such as the floods in the UK and the heat wave deaths in Eastern Europe). And this is not surprising: in the end the personal future of most politicians will depend more on growing GDP and rising employment figures than on the number of prevented climate disasters. And by the way, the clean-up operations after the floods or the forest fires are likely even to raise GDP for the countries involved.

This all leads us to one conclusion: as long as this “autistic” view of competitiveness will keep guiding our decision makers, we will stay on road for long-term economic collapse. What we urgently need is a new debate on eco-competitiveness and a new instrument to measure a society’s well-being if we are to solve the main challenges of our 21st century.