Financing the low-carbon economy

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Political objectives to reduce CO2 emissions and transform the energy system are set to shape the EU's industrial and economic development in the coming decades, but the 'third industrial revolution' has been challenged by a financing squeeze as the world grapples with the worst financial crisis since the Great Depression.

Background

In 2000, Europe's leaders formulated a non-binding action plan designed to catapult the EU's economy into 21st century. The Lisbon agenda, as it became known, was supposed to further unite the European economies by boosting innovation, jobs and growth, while ensuring greater social cohesion and environmental sustainability.

Eight years on, stock-taking exercises and assessments of the Lisbon agenda progess have revealed that much work remains to be done (EURACTIV 12/12/07). Major global upheavals have also dramatically altered the political and economic landscape that Europe's leaders gazed upon in 2000. 

Meanwhile, mainstream scientists raised the alarm on global warming and climate change, prompting the issue to a top seat on the EU's political agenda for the past two years. 

Proponents of a low-carbon economy say a massive clean technology financing push now could create jobs, bring down CO2 emissions and lessen fossil fuels dependence. But Europe's economies lack drive, and many of the brakes on economic growth and investment that plagued the EU at the beginning of the decade continue to persist at its close.

Issues

'Green' or 'clean' technologies are considered key for the implementation the EU's climate and energy package adopted last December, which is designed to slash EU CO2 emissions by 20% by 2020 while boosting renewable energy use by 20% over the same period.

Clean technologies in the energy sector include renewables such as wind, solar and hydrogen. But they also include more conventional technologies, such as 'sustainable' nuclear fission and carbon capture and storage (CCS; see EURACTIV LinksDossier), which environmental groups question whether can truly be considered clean. 

Technologies that reduce CO2 emissions in the transport sector are also being increasingly employed, with further innovations on the horizon, though question marks remain over why electric vehicles in particular have taken so long to become commercially viable (see EURACTIV LinksDossier on 'Cars & CO2').

Perfect storm?

Since 2008, Europe has suffered the most severe economic recession for a generation, and the ensuing sovereign debt crisis has threatened to unravel the Eurozone itself. In the US, the implosion of the housing market and banking crisis helped nudge the national unemployment rate towards 10% in 2011, the highest levels for many decades. 

Other major global economic players are also feeling the pinch. China's recent injection of half a trillion US dollars into its economy was widely seen as a plain admission that the economic breath of the 'dragon' is cooling at a worrying level for Communist party officials. 

With its Emissions Trading Scheme and 2020 clean energy targets, Europe has been the powerhouse of the world's emerging low carbon economy for many. But as bail-out's of several member states and a liquidity drought have eaten into available funds, the possibility of applying measures such as binding targets to energy efficiency have fallen by the wayside. 

In December 2008, EU member states first agreed on what environmental groups say was a severly watered-down package of climate change-related measures, including a revised EU Emissions Trading Scheme (EU ETS; see EURACTIV LinksDossier) for major industries and CO2 reduction 'effort sharing' rules for non-industrial sectors. 

Traditional industries were widely considered to have been afforded a 'free ride' by the bloc's climate deal with, for example, free allocation of carbon permits and generous benchmarking. This in turn raised concerns that continued exemptions for heavy industries in a nominal bid to avoid 'carbon leakage' - their relocation to pollute elsewhere - could wreck efforts to finance the transformation to a low-carbon economy. 

Barack Obama: The great hope

The economic downturn and an arguably weaker-than-optimal climate and energy package did not initially dampen hopes that the US would invest in a 'New Green Deal'. In the US as elsewhere, CO2 emissions fell quickly as a result of the recession, but then picked up again with an anaemic recovery to reach record levels.

Equally, US reluctance to sign up to the Kyoto Protocol, or effect a deep sea oil drilling ban, even after disaster in the US Gulf, disillusioned many. So did his over-ruling of the Environment Protection Agency (EPA) by delaying smog-tightening rules.

The US President Barack Obama did promise to spend $150 billion in clean tech over the next decade. But environmentalists argue that he then backtracked and compromised on his energy and climate bill. Even so, his supporters argue that he pushed the US car industry to adopt better fuel efficiency standards - and greater electric car production. 

President Obama has promised greater support for environmental causes after 2012 if he is re-elected, such as new regulations on coal ash.

On the ground

In the near term, however, funding flows have stalled investments in capital-intensive projects in many energy sectors around the world. Since the 1980s, research and development investments in the energy sector have also been decreasing in the EU, and most European energy firms spend less than 1% of their net sales on clean technology innovation, according to the European Commission.

The challenge is further complicated by the need to upgrade Europe's traditional and basic energy transmission infrastructures, like power grids. In a 13 November green paper on energy infrastructure, part of a larger energy strategy package, the Commission says €300 billion worth of investments are needed over the next 25 years to replace ageing electricity and gas networks and to anticipate soaring demand hikes.

And while more and more electricity produced from renewable sources is set to flow into EU grids following the adoption of an ambitious directive on renewable energies (EURACTIV 09/12/08), much of the expected spending on infrastructure is likely to support the transmission of electricity produced from fossil fuel sources, raising concerns that Europe is locking itself into many more decades of dependence on non-renewable fuels rather than laying the foundations for a low-carbon future.

Market magic? 

An agreement to use 300 million ETS allowances as a 'carrot' for early movers in the development of CCS demonstration plants goes some way towards keeping CO2 emissions under control even if fossil fuels like coal continue, as is widely predicted, to play a central role in the EU's (and the world's) energy mix.

But the value of these allowances will be conditional upon a healthy or ailing ETS in the EU. Sceptics of market-based mechanisms argue that a straightforward tax on CO2 emissions would raise the necessary monies to fund all manner of clean technologies.

But the notion of a carbon tax is shunned by most governments for political reasons. Public authorities in the EU and beyond appear convinced that setting ceilings or caps on CO2 emissions and allowing companies to trade emission allowances is the best available alternative to taxation. 

"While still in its infancy, the global carbon market and the developing concept of emissions trading shows that it can effectively mobilise new finance for a low carbon future", EU Commission President José Manuel Barroso said in September 2007.

Tightening the emissions cap over time will supposedly lead to scarcity of allowances which will drive up the price of polluting and thus incentivise companies to invest in clean technologies that pay off within several years, rather than continuing to purchase emissions allowances. The EU ETS is widely considered to be the world's 'flagship' cap-and-trade system, and supporters of the scheme hope it can be eventually linked up with other carbon markets, notably in the US. 

Searching for answers

The Commission, which in November unveiled a Strategic Energy Technology (SET) plan and a clean technology 'map', is expected in March 2009 to provide further insights on the financing puzzle in a Communication on SET plan financing. Brussels has also put forward a Communication on lead markets, featuring six priority areas including renewable energy and sustainable construction (see EURACTIV LinksDossier).

An endorsement of market-based mechanisms are likely to play a central role in the communication, since EU funds are limited and member states will have already contributed significant amounts of taxpayers' money as part of a multi-billion euro EU-wide economic bailout package (EURACTIV 11/12/08).

Positions

In its 'roadmap' for 2009, the European Commission's energy and transport (TREN) directorate admits that "a very substantial investment (public and private) will be required to progress towards the 20% greenhouse gas emission reduction [target]". 

The EU executive's president, José Manuel Barroso, is convinced that a massive clean technology push will create "thousands of new businesses and millions of jobs in Europe," according to a 23 January 2008 press release.

But recent fallout in global financial markets has raised doubts whether a recession is the right moment to spend huge sums on clean technology investments that may only pay off in several years' time, rather than spending on short-term stimulus and job preservation programmes.

German Chancellor Angela Merkel, who chaired the EU when the 27 member states made their historic commitment to slash CO2 emissions by 20% by 2020, made international headlines when she lobbied heavily in the run-up to an 11-12 December 2008 EU summit for an easing of emissions reduction obligations for her country's heavy industries. Too stringent a CO2 reduction regime would not make sense in light of competitiveness and employment concerns, Merkel argued.

Italy and Poland, accompanied by seven other Central and Eastern EU member states, raised similar concerns.

Proponents of renewable energies and other clean technologies argue the moment is in fact ripe for a 'paradigm shift' in which the entire energy system, including key infrastructures, need to be re-thought. 

A greener future, according to low-carbon economy 'gurus' like Jeremy Rifkin, requires a move away from a centralised system, whereby large thermal power plants produce and transmit electricity over large distances, towards a more decentralised power generation system in which buildings and municipalities generate their own heat and power with renewable energy technologies (see EURACTIV LinksDossier).

Nick Mabey, founding director of British think tank E3G and formerly an advisor in the UK Prime Minister's Strategy Unit, criticised the EU for basing its CCS funding primarily on the EU ETS, insisting that carbon prices are not high enough to make CCS competitive, even more so if a strong UN climate deal is reached, capping the EU allowance prices by the price of externally purchased permits. 

"There is a fundamental tension between using international trading in the ETS to lower the cost of meeting the EU's targets, and expecting the ETS to send sufficient price signals to drive the low-carbon power investment needed to reach the EU's 2050 objectives," Mabey argues, calling for complementary policies including "both European public funding and clearer regulation". 

Renewables industries are calling for the development of a firm legislative framework to safeguard future investment in cleaner energies.

The European Renewable Energy Council (EREC) underlined in November 2008 that the renewables sector could deliver more than 20% of the EU's energy needs by 2020 if member states continued to invest in new technologies. "The long-term stable framework is key for future development," said EREC Secretary General Christine Lins in a statement in November 2008.

The European Solar Thermal Industry Association (ESTIF) said the EU's Renewable Energy Directive adopted in December creates a positive investment climate for a more long-term development of their industries. The European Wind Energy Association (EWEA) similarly stated its belief that the directive would allow the wind power industry to expand in order to meet an increasing share of European electricity needs.

Environmental organisations have been lobbying for a focus on renewable energies and energy efficiency in the transition to a low-carbon economy.

Greenpeace  recommended in its December report that all subsidies for inefficient plants, appliances, vehicles and buildings, as well as for fossil fuel use and nuclear power installations be phased out. It also called for progressive efficiency standards, and for binding targets and "stable support" for renewable energy.

WWF also suggests redirecting annual subsidies away from fossil fuels towards supporting the "switch to an efficient and clean system". Nuclear is not seen as part of this vision.

Timeline

  • 22 Nov. 2007: Commission presented SET Plan (EURACTIV LinksDossier).
  • 12 Dec. 2008: EU leaders agree compromise deal on climate and energy package (EURACTIV 12/12/08).
  • 17 Dec. 2008: Parliament plenary votes in favour of deal (EURACTIV 18/12/08).
  • 7 Oct. 2009: Commission publishes communication on SET Plan financing (EURACTIV 07/10/09).

Further Reading

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