Europe Sets its Sights on 2030

by Mark Nicholls

EU Climate Action Commissioner Connie Hedegaard

EU Climate Action Commissioner Connie Hedegaard

The European Commission has made its bid for the bloc’s 2030 climate change and renewable energy targets – setting the stage for two years of tough lobbying. MARK NICHOLLS reports.

“We did it,” was the verdict of Climate Action Commissioner Connie Hedegaard on the 40 per cent emissions reduction target her department succeeded in lobbying for.

Advocates of action on climate change greeted the European Commission’s proposals with some relief.

“We did it,” was the verdict of Climate Action Commissioner Connie Hedegaard on the 40 per cent emissions reduction target her department succeeded in lobbying for – a target that confounded “all those arguing that nothing ambitious would come out of the Commissioner today”.

“Overall it’s a positive outcome,” agreed Paul Harris, Head of Natural Resources Risk Management at Bank of Ireland Global Markets, in Dublin. “To achieve consensus on an increase of this magnitude is a good achievement and, in terms of the upcoming climate talks in Lima in December, it goes a long way to restoring Europe’s leadership role in the context of international negotiations.”

The greenhouse gas target – a big increase from EU’s existing 2020 goal of a 20 per cent reduction against 1990 levels – was at the higher end of expectations. The Commission’s Energy Commissioner, Gunther Oettinger, was pressing hard for 35 per cent.

In exchange Oettinger – backed by the UK government – won a proposed relaxation of the EU’s renewable energy targets. Rather than the nationally binding 2020 renewable energy targets, of an aggregate of 20 per cent, the European Commission is proposing a 27 per cent target that is only binding at the EU level. This will give member states more leeway as to how they meet emission reduction targets.

The Commission is also apparently backing away from a binding energy efficiency target: the 2020 targets include a 20 per cent increase in energy efficiency, a goal the EU is likely to miss. However, a decision on energy efficiency has been deferred to June. The proposals are the Commission’s opening shot in a policy process unlikely to be completed before the end of next year. The European Parliament’s initial response was to demand more ambition: in a non-binding vote on February 5, it called for a renewable energy goal of at least 30 per cent, a 40 per cent energy efficiency target, and at least a 40 per cent greenhouse gas reduction. The member states are to consider the Commission’s proposal at a summit in March.

Concerns about cost and competitiveness are writ large throughout the Commission’s proposals. It claims that the climate and renewable energy targets will add just 0.15 per cent to the cost of EU’s energy system by 2030, “if targets are met cost-effectively”. It believes that the average annual cost of €38 billion ($52 billion) between 2011 and 2030 will be “to a large extent compensated for by fuel savings”. And it frequently trumpets the intent of the plan to increase domestic energy supply, reduce fuel imports, and increase energy efficiency.

“It does seem like a reasonable balance between climate ambition and cost have been found,” says Lisa Beauvilain, an investment manager at Impax Asset Management in London. She notes that the Commission is forecasting electricity price rises of just 1 per cent between 2021 and 2030 under the full 2030 package, compared with a 30 per cent rise in this decade.

“The ultimate cost will of course depend on the future carbon price development and on any potential further tightening of the renewables or energy efficiency targets, for instance as a part of the 2015 global climate negotiations,” she adds. “But with the data of today, the balance looks reasonable.”

That the Commission’s proposals were more ambitious than they could have been did not placate environmental groups. “They will do little to tackle climate change and, in their current form, give little certainty to Europe’s once thriving but now fragile cleantech sector,” argued Greenpeace UK executive director John Sauven.

Certainly, some environmental groups argue that the EU is on course to come close to this 40 per cent target with existing policies and the overhang of surplus carbon allowances within the EU’s Emissions Trading System (EU ETS). This oversupply – caused by economic recession, the overgenerous allocation of permits by governments, and a flood into the EU of international carbon offsets –has brought the price of EU allowances to a little over €5 ($6.9) per tonne of carbon dioxide, down from a high of almost €30 ($41) in 2008

EMISSIONS TRADING TO THE FORE

The European Commission’s proposals include legislation to help address this oversupply, and push carbon prices back up to a level where they once more drive investment decisions. It proposes a ‘market stability reserve’ that, from 2021, will hold back up to 12 per cent of any accumulated oversupply, if the total volume of emissions allowances in circulation exceeds 833 million.

This measure follows the Commission’s ‘backloading’ proposal to temporarily fix the market oversupply. This proposal, which is currently under consideration by the European Parliament, is set to delay the auction of some 900 million allowances from this year and next, to 2019 and 2020.

The Commission is also breaking with existing practice by closing Europe’s doors to international carbon credits, such as those from the UN’s Clean Development Mechanism.

Analysts at Thomson Reuters Point Carbon say these measures will have a big impact on carbon prices. They forecast that carbon allowances will average €35 ($45) between 2019 and 2030 – €12 ($16) higher than would be the case without the stability reserve.

Some industry groups have been arguing for a simpler climate change strategy, pegged to the carbon price alone. The Commission’s proposals “go in the right direction,” said Hans ten Berge, secretary general of Eurelectic, the EU-wide electricity industry association. “Importantly, both 2030 targets are EU-wide, allowing them to be met through a stronger ETS, rather than through a continuation of costly national [renewable energy] subsidy schemes.

RENEWABLES LOBBY DISHEARTENED

But the renewable energy industry was, unsurprisingly, dismayed by what it saw as a weak target that Brussels would struggle to enforce. The European Wind Energy Association said the Commission had “capitulated to anti-renewables lobby groups”.

Its CEO Thomas Becker said: “The previously far-sighted and ambitious European Commission is a shadow of its former self, hiding behind the UK and other backward-looking member states and lobbies. By effectively advocating repatriation of energy policy to member states, President Barroso appears to have forgotten his previous calls for ‘more European integration’ on energy policy.”

Jennifer Morgan, the director of the climate and energy programme at the World Resources Institute (WRI), a leading environmental think-tank, shares his view. “WRI’s finds that binding national targets and policies are required to drive further renewables development,” she says. “The European Commission’s proposal replaces national targets with a regional target – leaving implementation open to chance – a risky proposition as other countries forge ahead on renewables development.”

However, the Irish Wind Energy Association “cautiously welcomed” the Commission’s position but, as its CEO, Kenneth Matthews, explains, it would like to see the target raised to 30 per cent and made binding at the national level. “Eight significant member states, including Germany, expressed a desire for binding renewable energy targets at the national level,” he says. He notes that even if only the EU target remains binding, there will still have to be agreement among member states about how that target is delivered.

INTERNATIONAL ACTION

Meanwhile, the Commission is recommending that the 40 per cent target be the basis for its negotiating position in the UN climate talks. A major new agreement is set to be agreed in Paris at the end of 2015. Unlike in previous rounds of the negotiations, the Commission is not specifying a higher target that it is prepared to commit to if other major economies step up.

However, it does leave the door open to increasing its ambition. “Should the 2015 global climate agreement enable the EU to increase its greenhouse gas (GHG) reduction target for 2030 to more than 40 per cent, use of international credits with the EU may become relevant,” the Commission says.

THE INVESTMENT LANDSCAPE

Given the uncertainty over the final shape of the 2030 package, analysts say its ultimate impact on the environmental technology sector is impossible to divine. But analysts at HSBC note that the proposed 27 per cent renewable energy target implies a decline in the growth rate of renewables next decade – with 150 GW of new capacity, compared with 210 GW expected from 2011-20.

“From the renewable technology perspective, we see increased risk for the offshore wind technology given its higher capital costs and project development risks,” its analysts say. This could have global implications: “In case of a scale down in the UK offshore wind expectations, supply chain development and technology cost reductions are likely to slow down, thereby adversely impacting the offshore wind installations globally.”

For other investors, the EU’s policy landscape is becoming less important. “Targets and government support at any level we view as a long-term positive,” says Steven Falci, head of strategy development, sustainable investment, at Kleinwort Benson Investors. But with the EU now a relatively mature market for wind and solar, his firm sees more opportunity in Asia and the US, “where we see more near-term regulatory support and demand”.

In Europe, Falci says the bigger opportunity lies in increasing energy efficiency, especially in the building stock – and here, the investment case is “very much cost driven … Regulatory support, leadership and targets are important, but the key element is the economics.”

NEXT STEPS

The European Commission proposal is the first step in what will be a long policymaking process. The immediate next step is consideration of the plans by member states, at the European Council meeting of March 20-21. Some member states – notably Poland – remain opposed to a 40 per cent target. “It won’t be easy to get all EU countries to sign up to this target,” says Haege Fjellheim, a senior analyst at Thomson Reuters Point Carbon. “The European Council in March may well see an exchange of views rather than the adoption of a final EU position.”

European parliamentary elections later this year mean that draft legislation is not likely to emerge until early 2015, with a final agreement unlikely before the end of 2015.

“The paper was very much the start of a process, but I would hope that the 40 per cent target remains intact,” says Harris at Bank of Ireland. “There is an opportunity for member states individually to deliver meaningful policies that continue to drive renewables, low-carbon and energy efficiency investment, but that’s dependent on an acceleration of economic recovery in the bloc.”