Professor Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs in London, UK.
Carlo Stagnaro is Research and studies Director at Istituto Bruno Leoni in Milan, Italy.
Europe’s plan to decarbonise its economy by 2030 is very likely to meet Albert Einstein’s definition of insanity: “doing the same thing over and over again and expecting different results”. Current plans require emissions to be reduced to 20 per cent below 1990 levels by 2020 whilst 20 per cent of energy needs must be met through renewable energy sources. Now the EU aims even higher. The EU Commission released a new plan. This raises the decarbonisation target. The Commission proposes that emissions are cut to 40 per cent of 1990 levels by 2030 with 27 per cent of energy being from renewables. This will be a fiasco. Not only is decarbonisation likely to be expensive in itself, but regulating in favour of renewables compounds economic problems. The European economies will become less competitive, there will be more red tape and more regulatory uncertainty. On the edge of a conflict over Ukraine, that might drive natural gas prices up for a long time, Europe should rather find ways to make energy more affordable.
Both the goals and the policy instruments of the proposed climate plan are disappointing. As far as the main goal is concerned, cutting European emissions by 40 per cent below 1990 will be costly. The Commission seems to deny this reality as it claims that, in the past, there has been little or no contradiction between climate goals and economic growth. It argues: “Between 1990 and 2012 the EU succeeded in cutting its GHG emissions by 18 per cent, while GDP grew by 45 per cent “.
This is true, but reveals only part of the story. A large part of the reduction happened because of the recent deep recession. From 1990-2008, the EU27 cut its emissions by just 11 per cent, and partly because the accession countries could renew their post-Soviet, obsolete industrial sectors by employing more advanced, cleaner technologies. In the EU15 the emissions reduction in that period was only 6 per cent. European climate strategies did contribute to reducing emissions but only to small extent. It should be noted too that, as with any economic process, the marginal cost of cutting carbon emissions will increase as the cuts get bigger. The emissions target contributed, however, to an increase in energy prices in Europe, therefore making the economic crisis worse.
A recent study by the Potsdam Institute for Climate Impact Research – that relies on some rather heroic assumptions – estimated that cutting emissions by 40 per cent will cost 0.7 per cent of GDP per year in 2030. This may seem like a small amount but, given the EU’s appalling growth record, it is a further nail in the coffin of its failing economy.
However, the most incoherent aspect of the EU’s proposals is that they have decided – once again – to pursue carbon reduction in costly ways. Even assuming that unilateral carbon reduction makes environmental and economic sense, it does not follow that the Commission should regulate how that goal should be pursued.
It is especially unfortunate that the Commission have chosen an expensive renewable energy strategy again. There are several alternatives to renewables when it comes to carbon reduction – including switching to less carbon-intensive fossil fuels. New technologies may well be developed in the next 15 years, too. And, when faced with simple carbon taxes or cap and trade schemes that raise the price of fuel, people may choose to economise on energy use altogether rather than switch to expensive renewables: offshore wind, for example, is three-and-a-half times the cost of conventionally generated electricity. This is why there is an economic consensus that, if we are to cut emissions, the best instruments to use are carbon taxes or cap and trade to encourage innovation, new technology and local decision making in order to cut carbon output in the cheapest possible ways.
So, why has the EU decided that we should pick winners in advance by determining that the carbon reduction target should be met at least partly through increased use of renewables? The answer has little or nothing to do with the environment or climate: it is all about the so-called industrial policy of trying to create green industries and green jobs.
The experience with this policy has been disappointing. Part of the impact of climate policy has been to shift manufacturing to countries where green taxes are lower but where there are higher levels of carbon intensity in the production process – a very perverse outcome. At the same time, the EU was importing large numbers of solar panels from China subsidised by EU taxpayers – an outcome that brought an appallingly protectionist response from EU.
Intriguingly, under the proposed package renewable targets will be mandatory at the EU level, but there will be no national targets. This is likely to lead to attempts by each member state to free ride on the efforts of other states. This will then precipitate regulation from Brussels and the further centralisation of energy policy. Perhaps this is the Commission’s aim. However, the uncertainties that will result will make investments more, not less, costly. Again this will contribute to making Europe a poorer region beset by pervasive governmental intervention.
The EU Commission always insists on Europe’s “leadership” on climate policy. However, as one looks around one realises that no other nation in the world is willing to follow. It is possible that Europeans are the only ones who really care about the environment, and that they are also the smartest people on the planet. It is also possible, though, that they are simply on the wrong track. This latter explanation should not be ruled out too readily.