3E Intelligence

Looking back at the first half of the year, I can only conclude that my doom-and gloom predictions for 2008 were unfortunately spot on. With stock markets continuing their dive down and oil prices exploding upward, this year could indeed turn out to become the “annus horribilis” I feared. To be honest, things look even a bit more gloomy than I expected (who would have believed me if I would have predicted a 140 dollar price for the oil barrel?).

The “climate fatigue” I foretold has also gone further than I expected and is turning into a possible “energy counter-revolution”. When prices of gasoline and heating oil will not go down in the next months (and I do not foresee so), we might see the recent street protests of the truckers becoming a full-fledged citizens’ movement against rising oil and food prices. As l mentioned yesterday during a debate in Brussels, is it so surprising that consumers do not want to pay for solving the energy/climate crisis when the political and economic elites keep sending messages that we can solve this mess with the necessary technological innovations (be they biofuels, carbon capture, or nuclear). When will these “leaders” have the courage to lead and warn their constituencies that “the party is over“.

And even my prediction that the words “crisis of the EU” would be spoken again was on the money although that was not really a difficult one. Unfortunately our EU leaders continue to whistle in the dark and pretend all is well with the Union. Even sarcasm is no longer appropriate to describe this lack of leadership.

Last but not least, the most dark scenario (an Israeli attack on Iran) seems to come closer every day. The final Bush legacy?

As Ireland is getting ready for a crucial referendum on 11 June, climate change policy is being used as an argument to say “yes” to the new Lisbon Treaty. But does the EU’s “Constitution light” really help in tackling global warming? Is the current EU part of the problem or part of the solution?

Labour leader Eamon Gilmore stated on 7 June that the inclusion of climate change in the Treaty by giving it a legal basis is an indication of the EU’s leadership on the issue. Problem is that much more than a legal statement of intention is really needed for a climate change U-turn. If we want to reach any of the (moderate) IPCC targets, we will have to make radical changes to our taxation systems and this is precisely the weakest link of the European Union’s institutional structure.

Because of the unanimity rule on taxation policy (still part of the Lisbon Treaty), the Union has never been able to agree on the necessary carbon tax which would be a much better instrument than the unconvincing Emission Trading Scheme. It will also never be able to instigate the necessary shift from taxing labour to taxing declining natural resources.

This is why I would vote “No” if I were allowed to have a say on the Lisbon Treaty. This Treaty does not provide any real answer to the climate and energy crisis and should therefore be rejected.

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

Politicians should stop pretending that decarbonising our economies can be done on the cheap. This is the conclusion of a damning analysis of EU climate/energy policies published by Oxford energy professor Dieter Helm in the Wall Street Journal today.

Helm starts his evaluation with a critical look at the EU’s achievements in terms of emission reductions. The apparent decoupling of economic growth and emissions is just “smoke and mirrors”, says the UK expert. If one factors in the “carbon outsourcing” (our imports from China, where the EU and US have exported their smoke-stack industries), the picture is less rosy.

“If this carbon outsourcing is factored back in, the U.K.’s impressive emissions cuts over the past two decades don’t look so impressive anymore. Rather than falling by over 15% since 1990, they actually rose by around 19%. And even this is flattering, since the U.K. closed most of its coal industry in the 1990s for reasons unrelated to climate change. No doubt, recalculating the figures for other European countries and the U.S. would reveal a similar pattern.”

It is consumption and not production that matters, according to Dieter Helm.

“This means that if global warming is to be limited, the U.S. and Europe will have to take much more drastic action to reduce those emissions embedded in their own consumption. Their appropriate emissions-reduction targets will have to be based on the consumption of goods that cause those emissions in the first place. This not only means that the true scale of required emissions reductions in the Western world will be much higher but that the impact on economic growth and living standards there will also be more severe than so far believed.”

Criticising the Stern report, Helm goes on to explain why he thinks costs of decarbonising our economies will be much higher. There will be high “policy costs” with policy makers investing heavily in the wrong solutions.

Helm’s conclusion is strong but, in my view absolutely correct:

“The U.S. and Europe refuse to acknowledge that halting the relentless rise in the concentrations of greenhouse gases in the atmosphere will take a significant slice out of economic growth. It will probably mean living standards will have to be cut if our consumption is going to be environmentally sustainable. We are simply living beyond our — and the planet’s — means.”

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More interesting energy commentaries and publications are available on Helm’s personal web site.

In a recent interview with EurActiv, Jeremy Rifkin expressed his belief that “Europe can lead the third industrial revolution”. In the closing debate of this year’s European Business Summit, the American author repeated his admiration for the EU’s policies but added cautiously that “the EU might well tell the right narrative, but the US could well do it”.

Rifkin’s warning confirms my views (which I have already expressed several times on this blog) that the EU leads on talking about the need for a low-carbon economy, but that, on the ground, many more interesting developments are taking place in the US and that once the sleeping giant wakes up to the climate/energy crisis, it might quickly overtake the EU in terms of real and effective action.

One of Rifkin’s arguments in his story about the “European Dream” is the fact that the European Union now is the biggest market in the world (Rifkin talks about Europe’s ‘golden goose’). If you ask me, this is a very weak argument when it comes to leading a new economic revolution which is needed because the market has not exactly functioned as it should(see Nick Stern’s report: “Climate change is the biggest market failure ever”).

Furthermore, the United States disposes of some “golden geese” which I think are much more essential to take leadership in the transformation to a new eco-industrial society: a “risk-taking entrepreneurial mentality”, a system of dynamic venture capitalists who do not shy away from investing in nine failures to get the tenth investment right, and a political system which is less structurally linked to the economic and financial elites (less of Europe’s neo-corporatist “social economy” which is based on a historic compromise between state power and economic interests).

All this makes the US much more open to the “creative destruction” and radical innovation which will be needed to move as quickly as possible from the second fossil-fuel-based industrial economy to the new solar economy. For anyone who is still in doubt, just look at the new green tech boom which has grabbed the former Silicon Valley or the sudden awakening of American banks and even Wall Street to the carbon crisis.

Rifkin’s session was not the only event during EBS 2008 which strengthened my view that the EU could soon be surpassed by the US in terms of leading the transformation to the green economy. In Thursday’s high-level debate between Commission President Barroso and Business Europe chief Antoine de Sellière, the European businesses leader expressed his frustration with the EU’s explicit focus on climate change. Sellière urged the Commission President to refocus on its “economic compass” (competitiveness) demonstrating that business still sees the EU’s efforts to tackle climate change not as an opportunity but as a burden.

Mr Séllière’s speech expressed big doubts about EU renewable energy policies and demanded more support for new nuclear power. This message was all the more remarkable as the EBS sessions on renewables and nuclear had clearly sent other messages: a resounding “yes” to renewables and lots of scepticism about the role of nuclear power.

In conclusion: European business should not go soft on its low-carbon revolution or it will lose the economic competitiveness it is pretending to defend.

One week after it presented its new energy/climate change package (see my post of 23 Jan), the EU is holding its annual Sustainable Energy week. Just as in last week’s proposals, the use of renewable energy will be in the spotlight. Two sessions on Monday will be dealing with the role of renewables in respectively the heating and cooling sector and rural electrification.

Energy efficiency is the other focus of the first day with a special session on how the electricity sector is introducing best practices in energy efficiency in its operations and another one on the role of ICT for saving energy.

Over the weekend, the Independent on Sunday published the findings of a new Accenture report showing that climate change is still very low on big businesses’ agenda.

One year after it presented its first climate/energy package, the European Commission published [press release] on Wednesday 23 January five further proposals dealing with

• the strengthening and extension of its greenhouse gas emissions trading scheme (ETS);
• the individual commitments of member states to reduce non-ETS-sector emissions by 2020;
• the support mechanisms to produce electricity from renewable sources;
• the actions to stimulate carbon capture and storage;
• new state aid rules allowing for environmental actions.

This new package comes at a time of economic uncertainty (some would say “recession”) and one month after the international climate top at Bali nearly failed to reach an agreement on how to move forward on international climate change efforts. Since the beginning of 2006, the EU’s “green” paint has clearly come off as industry lobbying groups (especially Business Europe) have started endless attacks on the climate-energy proposals in the name of Europe’s competitiveness and member states have hesitated to take the necessary measures to deal with the climate-energy chaos. It is clear that neither business nor member states are willing to walk the Commission’s talk.

Not that the Commission or the Parliament cares in any way. The rhetoric was as jubilant as ever (a “historical day”, a “far-reaching package”, good for “the planet”, the economy, European citizens and even the European Union construction itself) and no less than four commissioners found it necessary to put themselves in the media spotlight (next time a press conference with all commissioners?)

But let’s analyse the proposals themselves.

First, the reform of the ETS. Yes, there is an extension to new gases and new sectors and putting the allocation plans in the hands of the Commission instead of the member states makes perfect sense if you look at what a mess national governments made of it in the past (with over-allocations and a price collapse of carbon as a result). But the Commission seems not to have read the full book of lessons from its past mistakes and continues to hand out free allowances for some sectors (including possibly the energy-intensive sectors). I wonder what the economists in the Commission will say when the carbon price nose-dives again as a result of lack of certainty for the market.

Then the burden-sharing for member states for the reductions not covered under ETS (such as buildings, transport, agriculture etc). Here the Commission set individual targets which add up to an overall 10% reduction from 2005 levels. It is clear that there will still serious fighting with the national governments to get these figures approved.

The “piece de resistance” of the second package is a draft law to promote renewable energies. The Commission wants to increase the share of renewables by no less than 11.5% (now it is 8.5%), to be divided “fairly” between the member states. No question if this is even technically possible and whether these renewables might have negative environmental effects (and when they are known as with the 10% target for biofuels, the Commission has prepared “sustainability standards” - wonder how they are going to be monitored).  Of course, here too, the battles with national governments will be of epic character.

Whether the ambitious target for renewables can be reached, will therefore depend upon the member states and if the Commission’s past plans on energy efficiency are anything to take inspiration from, than it might be clear that we should not put our hopes too high. The memo on the first assessment of the national energy efficiency plans says it all (although in very diplomatic language): “Although the action plans provide some encouragement [meaning "a few countries have made some small efforts" - WDB], there appears to be a gap between the political commitment to energy efficiency and the proposals aimed at facing up to these challenges” [the "talk and the walk", you see :(].

Next, the Commission wants to support carbon capture and storage, but here also the reality looks pretty bleak. Companies are not willing to invest in the 12 demonstration plants the Commission wants to build. With Germany and France planning new coal power plants in the next years, the 2020 target to get CCS ready on a commercial scale does seem to make little sense. If the industry is unwilling to shoulder the burden, the Commission could find inspiration in Jim Hansen’s proposal for a moratorium on new coal plants until the CCS is ready.

Last but not least, the issue of costs. The bill for all these goodies would be no more than 3€ a week per EU citizen, whereas the costs of “inaction” are at least ten times that (the Commission apparently has not made its own calculations and just repeats the very political cost statements of the famous Stern report). If the costs were really that small, why all the fuzz about the EU’s competitiveness?

So, overall conclusion: “historical”? Yes, as in the EU missed a historical chance to make a difference. And with the economic recession becoming every day more visible, we might have closed the window of opportunity to really tackle the biggest threat of the 21st century.

After my gloomy predictions post of last week, let’s open the new year on a brighter note and present my wishes and hopes list for European Union policies in 2008.

First of all, I hope EU policy makers finally start looking at the energy/climate crisis in a more coherent and integrated way. Although last year’s climate/energy package pretended to have an “integrated approach”, in reality the climate change perspective dominated its proposals and follow-up actions with little attention for the new energy scarcity aspects of the global economy. Political answers to climate change will have to be balanced with the right actions to deal with our future “peak energy” concerns.

Future energy scarcity is not the only dimension that needs to move higher on the EU policy makers’ agenda, the other remarkable “absentee” being policies which promote serious changes in our unsustainable lifestyles. Technology development alone will not “fix” our problem. In this context, I hope the EU will finally make some progress in its sustainable consumption and production debate.

I also wish that the EU’s “health check” of its agricultural policy would look at the implications of the new energy scarcity and not only at the internal market or the financial support issues. With scarce oil supplies and even higher oil prices in the future, we need a debate on how to make our European food production less dependent on fossil fuel feedstock and cheap global transports.

I hope that at least in a few EU member states the responsibility for climate and energy security would shift from environmental and/or energy departments to financial and economic affairs ministers. As long as climate/energy policy is not seen as a fundamental economic issue, the lack of policy consistency and coherence which has characterised these policies in most countries  will continue.

Last but not least, I wish that the EU’s famous Lisbon strategy becomes a roadmap towards eco-competitiveness where the logic of global interdependence and well-being in a world with ecological limits to growth replaces the neo-liberal logic of short-term competitiveness.