Environmental Pricing and Taxes – The clock ticks

This is my first blog of 2014 and appropriately it is about the passing of time. I going to focus on the targets of a number of countries to reduce greenhouse gas emissions by 80% by 2050 – with the new year, this target is now only 36 years away and I think it is useful each year to take stock of where we are, what has happened and what the target and progress to achieving it looks like in the light of this. To remind you the target is to reduce 1990 emissions by 80%. What I want to focus on is the impact of economic growth, the global situation on reducing emissions and the timeline to make achieving this target practical.

First economic growth, the target is to reduce 1990 emissions by 80% which is a fixed baseline. Growth will generally increase emissions as more goods are produced and energy consumed. We have recently “benefited” from the impact of the recession on European emissions and the two major contributors to achieving the 2020 target of 20% emission reductions will be energy efficiency measures and the recession as both have reduced absolute energy usage. There has been some impact from carbon pricing but the current low carbon price shows that this has not been as significant as the other two factors. Achieving the target to date has been by harvesting the low hanging fruit, further reductions will be more difficult.

Commentators are now predicting an upturn in growth and this will lead either to more emissions or an upturn in the carbon price in the EU ETS if permits are fixed in quantity. If we assume that we will generally have growth over the next 36 years this makes the task of an 80% reduction in emissions from a fixed baseline even tougher. In broad terms it involves removing the 80% target plus the emissions associated with growth over the 1990 baseline over the next 36 years, some commentators describe this as virtually requiring the decarbonisation of the economy over a very short period of time. Making this practical is a major challenge as I will describe later.

The 36 year timeline is significant. In power generation the average length of life of a power station is roughly 30 years. So to achieve decarbonisation of the electricity sector one has to not build power stations after 2020 which produce carbon emissions. If this doesn’t happen some generation capacity in 2050, will still be emitting carbon in 2050 putting the 80% target at risk. We are 6 years away from 2020 and very few European countries have a power policy framework in place that will stop building carbon emitting power stations by that date. If this continues then the only way out is to retrofit carbon power stations. While a lot of work has been done, we still don’t have a scalable technology to do this. We can hope one comes along but as a policy framework this is a gamble.

Secondly, the Global situation. Well all the points above apply at a global level and if the European targets are the right ones then the same targets should be appropriate at a global level. But what we see is minimal progress at a Global level and by the EU’s main competitors in the OECD or G20. There is, as always, great hope of a breakthrough in the Paris COP but past experience suggests this may be over optimistic. However, with a few exceptions, countries outside the EU do not have a policy framework in power generation to de carbonise. The continued strength of coal production underlines this.

The policy question this poses for EU countries is how far can they move forward on decarbonisation, without a global adoption of similar targets, without harming their competitive position in the Global economy? We are seeing increasing political debate on this subject about the impact of carbon pricing on a country’s competitive position both within Europe and Globally.

So let us return to what is a realistic target and timeline? The EU has demanding targets both in absolute terms and in the timescale to achieve them. Decarbonisation is a massive challenge made bigger by the technologies we currently have available. Renewables can help achieve the target, but they cannot do this alone due to the problem of base load capacity requirements in periods when wind and solar power are not available. The only proven non carbon technology at present is nuclear and until other technologies are developed at scalable production size, nuclear power has to be a part of a power strategy based on decarbonisation. Sweden, often held up as an example of decarbonisation, generates 40% of its electricity from nuclear.

It is the combination of the target and the timeline which are so challenging, combined with the competitive impacts on Europe if it presses ahead without similar action from competitor economies, merely exporting emissions and economic activity from Europe does nothing in global terms. So it is not surprising that European business is concerned. This week has seen a call by UK, France Germany and Italy to set a 40% reduction target for 2030. As I have indicated earlier moving from 20 to 40% and beyond will be more difficult, particularly in a period of economic growth. Europe needs to find a way of making policy which leads in this field but keeps the rest of the world following, and not too far behind, otherwise the impact on Europe’s competitive position will be adverse with consequences for growth, jobs and social spending – and all that will be achieved is the export of emissions to those countries who do not adopt similar targets.

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