Researcher: Move to 30% CO2 cuts feasible if distributed across sectors

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The EU could cut emissions by 30% by 2020 without incurring any additional costs, according to Niklas Höhne, director of energy and climate policy at renewable energy consultancy Ecofys. But the switch to a higher target needs to be balanced across sectors, he told EURACTIV in an interview.

Niklas Höhne is director of energy and climate policy at Ecofys, a consultancy specialised in renewable energy and energy efficiency.

He was speaking to Susanna Ala-Kurikka.

To read a shortened version of this interview, please click here.

Earlier Ecofys research argued that the EU could cut its greenhouse gas emissions by 30% by 2020 without incurring any additional costs, because the resulting lower energy bills will repay them. Is this still the case today?

When we did the work it was before the economic crisis, so it did not include the effects of the crisis. We did not do a full update after the crisis, but we made simple assumptions, such as what would happen if one started later with the reductions, and if one included the effect of reduced emissions due to the crisis. So it's not a full-scale recalculation – that's something one should do in the future – but just a rough estimate of what would happen.

The result is that two effects cancel each other out. One effect is that in the earlier study we assumed that reductions would happen very soon – in 2007, 2008 – but that's no longer possible because we're in 2010. So that would decrease your possible reductions.

But the emissions reductions that have happened already now because of the crisis would increase your possibilities to go for lower emission levels.

So both effects cancel each other out and we're still on the same trajectory: the EU could cut its greenhouse gas emissions by 30% by 2020 and 45% by 2030 without incurring an additional cost because the resulting lower energy bills will repay the cost.

The European Commission estimated that the cost of meeting the current 20% emissions reduction target has dropped due to the economic downturn, making a 30% cut only €11bn more expensive than what governments signed up to in 2008. Do you agree?

The Commission uses a different method for the calculation of costs – we use a bottom-up method, while they use a more overarching economic model.

When you compare these different types of tools, you find that high-cost reductions are in the same order of magnitude, and that is very reassuring. There is consistency between their analysis and ours for the high cost reductions which would be achievable at a certain carbon price.

The two approaches differ in the area where reductions can be made with net gains rather than costs. With our approach we assume that even if a measure is cost-effective, it does not necessarily happen, and with the economic model that the Commission is using, those kinds of effects simply don't exist.

In total, they mention that 30% would now cost €81 billion, but with cost it's always a big question – €81 billion of which baseline? We would argue that it's probably a bit less if you use a different way of calculating those costs.

What are the big barriers preventing negative-cost emissions reductions from happening?

They are the usual barriers for energy efficiency. We have done this analysis based on a social perspective, and for the whole society we used a discount rate of 4%, so the energy you save in a few years still gives you quite a benefit today.

Businesses don't work with 4%, they work with a 9%, 10%, maybe even 20% discount rate. That means that any energy you save in five years' time is not taken into account in their calculations. So they have much faster payback times in their internal thinking and that causes them to decide against investing in energy efficiency.

From a societal perspective, payback times of 10 years are OK, but from the business point of view it's far too long.

How do you then incentivise businesses to make the investment in any case?

There are several ways of doing it. One is to provide regulation so that they just have to do it. Another is to take away the risk on upfront investment.

A very good way to make homeowners renovate their houses to become more energy efficient is to provide low-interest loans for these renovations, so the upfront investment is not as difficult as it would otherwise be.

What changes to the EU legislative framework would upgrading the emissions reduction goal to 30% imply?

I would recommend that if there is a move to 30%, it has to be very balanced over the different sectors, both within the ETS and outside.

If you want to do a lot on energy efficiency in the non-trading sectors, for instance energy-efficient appliances, it has a big effect on electricity demand in the EU ETS and therefore also on emissions in the ETS. So increasing one without thinking about the other is dangerous because it could result in a system that is not consistent.

One would have to provide more incentives in the non-trading sectors and take these into account when looking at what additional incentives will be needed in the trading sectors. I think for the emissions trading system, it is very important right now to reconsider the cap, to look at a set-aside, for example. This is now the last chance to save the EU emissions trading system.

What is your opinion on an EU-wide carbon tax, which is one of the options?

We already have in place the emissions trading system for the traded sectors. If the cap there is significantly strengthened, we can ensure that this is an efficient system and there is no need for a tax.

In the non-trading sectors there are policy tools at hand that could be more effective because all sectors are different. A tax on transport fuels, for example, will not have much of an effect. We already have a lot of taxes on fuel and they will not make the consumer change their car. Standards will lead to much more results in transport; just look at the great track record of the EU's emission standards for air pollutants (not greenhouse gas emissions) from cars and trucks.

The same will happen in buildings. We have already seen that renovating a building pays off already in the current system. If you add a tax it will pay off even better, but the question is whether that moves the barrier to people really doing it. Again, the instrument of choice is low-interest loans to incentivise renovations and high energy-efficiency standards for buildings.

Do you think the arguments against a more ambitious climate policy, notably carbon leakage, are reasonable?

The whole question of carbon leakage is heated and the main question is whether it will really occur. If you look at it in detail, it can occur but only for a very limited number of sectors – only for a limited number of products is this such an issue that it will cause closing down or relocating to a different country.

A maximum of 20% of the EU's emissions could be affected, but I assume it's even less.

So I think the discussion about carbon leakage is heated, it applies only to a small amount of emissions, while the rest are not really affected.

The European Commission has already defined sectors vulnerable to carbon leakage but is now in the process of developing the benchmarks according to which free credits will be distributed to factories. How should these be determined?

Benchmarking is looking at the industries in detail and looking at where the emissions are, whether there are some companies that produce a product very efficiently while others produce exactly the same product with much more emissions. Comparing companies together is very useful and also helps the companies to position themselves.

What the European Commission now can do is to set these benchmarks in a way that really offers an incentive to make emissions reductions. I think there is good process under way to set good benchmarks and collect data.

The idea is that those companies covered by the leakage provisions get free allowances and they will get as much as the best 10% of companies currently use. So if they are worse than the best 10% of companies they will still have to make quite some reductions.

If we find in the EU that these best companies have very low emissions, then all the other companies will have to go down to at least that level or buy allowances. I’m pretty sure in the EU there are companies which are quite well-equipped. So even if all industries in a sector are given free allowances, some have to do a significant amount of reductions towards this benchmark.

Setting the benchmarks really has to be based on the best available information and [we must be] very careful not to create a new loophole, to grant emission allowances where in practical terms there should not be any additional allowances granted.

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