Copenhagen Climate Conference

(This is the fifth of six chapters in Eberhard Rhein’s Malta lecture series.)

The technologies for generating low or zero-carbon energy exist. But will they be applied? Not only marginally but at the global scale required to successfully mitigate climate change?

That depends essentially on the type of incentives governments offer.

Without much higher prices of fossil energy humanity will not invest enough in energy efficiency and renewable energies.

No single government or even groups of countries like OPEC are able or willing to raise fossil prices to the level required for phasing out oil, gas and coal. That price should be in the order of $ 150-200/barrel rather than $ 50-100.

We therefore have to search for alternative, indirect ways by which to reduce the cost/price differential between fossil and alternative energies.

Government instruments

Governments dispose of a limited arsenal of effective instruments. But they shy away from using them.

Here are the recipes of what they should do:

  • Abolish all subsidies on fossil energies.

In 2007, non-OECD countries have spent more than $ 300 billion on such subsidies. If they had spent this huge amount on energy efficiency or renewable energies global C02 emissions would be substantially lower.

  • Tax the consumption of fossil energies at much higher rates.

EU member states do impose very high excise taxes on gasoline (up to 70 percent of the consumer price), the equivalent of € 400 per ton of C02 (!), but the USA and most emerging countries hardly levy such taxes;

  • Subsidise research on modern energy technologies.

That is what several any OECD countries have done, also for giving a push to the development of modern energy technologies.

  • Subsidise the generation of renewable power

Some OECD countries have successfully done so, above all Germany and Spain through feed-in tariffs.

  • Impose ceilings on C02 emissions

This practice, called “cap and trade” is presently the most popular. It creates a market for C02 emissions and allows governments to avoid high energy taxes.

  • Setting energy efficiency standards

This method is a very effective curb on energy consumption and emissions. It is easy to monitor and should form an essential component of any national climate policy

Governments usually resort to a combination of measures.

Let us look at the EU climate package of December 2008.

Cap and trade constitute the core instruments for coping with one half of its C02 emissions originating in the power sector and energy- intensive industries.

The EU has converted C02 emissions into a fictitious scarce good by imposing limits on how much energy-intensive companies can emit and reducing these annually in line with its overall C02 reduction targets (minus 20 percent by 2020).Each of the more than 12 000 companies subject to the system has to respect its annual emission entitlements. If it requires more it has to buy them in the EU-wide C02 market, and it can equally sell any surplus there.

Three factors determine C02 price:

  • The volume of emission rights attributed;
  • The world market prices for oil, gas and coal,
  • The world economic situation.

The lower the volume of emission rights the higher the price obtained in the auctions and the bigger the incentive for companies to invest in C02-free technologies, like nuclear or wind.

Low world market prices for fossil energy will lower the incentive for companies to invest in low-emissions technologies. Companies may rather continue operating their coal-fired power plants.

Last not least, in boom times everybody will demand a lot of energy for transport, power generation and manufacturing. Business will therefore also be prepared to pay higher prices for emission certificates than in times of recession.

The EU emission market reflects these effects: a ton of C02 presently trades at only € 8, compared to € 30 in 2008. In the present situation, the stimulus to shift from fossil to non-fossil energies is low.

To tackle the other half of emissions the EU and member states resort to a series of measures at raising energy efficiency and inducing companies and citizens to switch to renewable energies.

The three most important measures concern the fixing or tightening of energy efficiency standards for

  • Light vehicles,
  • Electric light
  • Thermal insulation of building

The EU will impose stricter fuel efficiency standard on light vehicles. As of 2015, the average new car must not emit more than 130 g C02 per km. By 2020, that standard will be lowered to 95 g/km.

This is the result of a protracted battle between automobile makers and EU governments. It is important to fix the industry for the next 10 years in view of setting the right signals. The industry should have no difficulties in meeting the 2020 standard. It has to so if it wants to keep up with the Asian automobile industry that is rapidly advancing towards more fuel-efficient electric vehicles

The EU has also decided to phase out the incandescent bulb before 2015. That is an equally important step, as light remains an important contributor to C02 emissions even though its share goes down compared to electric appliances.

Finally, the EU has decided to tighten the thermal heating/cooling standards for buildings by extending them to all new and retrofitted buildings whatever their surfaces. In view of the weight that heating plays in EU energy consumption these are strategically the most relevant standards. But the key problem here is implementation. How to induce house owners and tenants to make the necessary investments?

How should one assess the effectiveness of the EU climate package?

  • It sets a clear policy framework for 2020 that fixes business and consumers for the next decade.
  • It is comprehensive by tackling most sources of C02 emissions, except agriculture and aviation.
  • From a global perspective it is inadequate. The EU should have been more ambitious; but in view of the economic situation at the end of 2008 that was not possible. It is therefore necessary to keep the options open for a revision, in case other countries go along.

The EU package contains a few lessons about the practicalities of climate policy in a global setting:

· Every country finds it hard to impose strict reductions on its citizens and therefore insists on action by all major emitter countries. That makes it so difficult to tackle climate change. It is a global phenomenon and requires global action, in an inextricable manner.

· Countries opting for cap and trade systems must put the emphasis on deep cuts. It is these that matter. The possibility to trade emission rights only facilitates the job. But cap and trade systems require competent government services for the setting and monitoring of volumes. It is doubtful whether countries like China and India can handle it effectively.

· It is important to give business a long-term perspective. If business has the certitude that in 2025 emissions have to be 30 percent lower companies will start preparing as of today. That is what we witness in Europe: Utilities would not invest so much in nuclear and wind without the obligation to cut their emissions by at least 20 percent until 2020. Similarly, automobile companies would not step up their research in alternative technologies, from diesel to hybrid and electric, without the EU imposing an emission standard of < 100 g/C02 per km by 2020.

· Governments will need to resort to a mix of instruments for achieving their emissions targets. Cap and trade, excise taxes and efficiency standards are the major ones, together with subsidies for R&D.

· For about half of the emissions it will not be possible to fix emission ceilings, because the emissions are the results of the action of billions of human beings, when they using energy for warming buildings, lighting rooms or driving cars.

To tackle these sources of emissions, governments should levy high excise taxations and fix tough fuel efficiency standards.

Eberhard Rhein 07.04.09

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