Benefits and barriers to the EU low-carbon transition
The UN talks in Durban last December signalled real progress by climate negotiators in agreeing a global deal to reduce carbon emissions. The EU was at the forefront of the negotiations as participating countries created the first timetable for agreeing to binding carbon targets. Europe’s ambitious commitment – to reduce further its greenhouse gas (GHG) emissions from 20 to 30 per cent below 1990 levels by 2020 if other countries agree to their own targets – was fundamental to this leadership.
Through its Kyoto commitments, array of regulations and flagship cap-and-trade emissions trading scheme (ETS), Europe has long led the development of global climate policy. European businesses have, therefore, been among the first in the world to adapt and respond to these new requirements. Their reaction and the prospect of future regulations, however, has been mixed.
Many businesses, particularly those in energy-intensive industries such as steel and cement, complain that the high costs of European regulations will force them to move their facilities to countries that have less onerous regulations or face losing out to businesses from those regions. They believe that if this ‘carbon leakage’ takes place it will do little to reduce overall emissions, since production would simply take place somewhere else. Indeed, they point out that since the EU is only responsible for 11 percent of emissions it can do little to address climate change by taking unilateral action.
While some issues, like the cost of carbon or climate regulations, spark a substantial debate, other issues unite businesses. Across Europe there is consensus that the EU and its member states could do more to provide regulatory certainty for businesses by avoiding the plethora of overlapping regulations and sudden policy changes like those in many countries on support for renewable energy.
Fast-growing countries, like China and India, are feared not just for placing competitive pressure on existing processes and production techniques, but also for winning the race to develop new technologies – last year for the first time, India invested more in clean energy than the UK, while China is second only to the US.
At first glance there appears to be a polarisation between the views of energy-intensive and low-carbon businesses. Indeed, many policymakers are currently asking whether taking a lead on emissions reduction is compatible with a competitive economy. Although reducing emissions and promoting growth go can hand in hand, there are certainly both winners and losers.
The starting point is that, at the aggregate level, Europe will benefit from taking the lead in the low-carbon transition. As long as a global emissions reduction agreement is reached in 2015, being ahead of the curve is good for Europe’s economy. The International Energy Agency has shown that every delayed $1 of investment in the energy sector will cost an additional $4.3 after 2020. The European Commission’s own analysis shows that the benefits of moving to a more ambitious emissions reduction target outweigh the costs. But uncertainty around the low cost of carbon is undermining investment decisions. In order to provide greater certainty for low-carbon innovators and investors, we advocate the creation of a central carbon bank in Europe that would have the sole remit of ensuring that emissions reduction targets are being met by intervening in the market to hold back ETS allowances if the price is too low, and issue allowances if prices rose too high.
There is scant evidence that carbon leakage is currently taking place, particularly since energy-intensive industries have had a significant number of free ETS allowances. Other cost pressures on businesses, including differing labour costs and a whole range of other administrative and regulatory compliance costs (of which environmental regulations are only a small part), are far more likely to explain existing offshoring decisions. Yet there is little doubt that widening the gap between Europe’s carbon reduction ambitions and those of other regions could produce carbon leakage.
Creating a level playing field for goods sold in the European market, regardless of origin, is preferable to a lower level of EU ambition, which could jeopardise global negotiations. As such, we endorse the investigation of how World Trade Organization (WTO)-compliant border levelling mechanisms for energy-intensive sectors could be introduced in the absence of a global deal. Such measures could include extending the EU ETS to compel importers of energy-intensive goods such as cement, aluminium, steel, paper and pulp, and chemicals to purchase ETS allowances equivalent to the best available technology.
Policymakers should see this process as providing a level playing field for European businesses in the event that a global emission reduction agreement or ambitious global sectoral targets fail to materialise. Policymakers should remain focused on the goal of agreeing binding emissions reduction targets to 2020 by 2015. This alone would do the most to ensure that the low-carbon transition maximises benefits and minimises costs for European businesses – something on which all businesses, and indeed citizens, around Europe can agree.