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EU: The Moving Target

 

To be sure of hitting the target, shoot first, and call whatever you hit the target.” Ashley Brilliant, Cartoonist & Author

With a relatively modest amount of fanfare, on October 23 the EU announced it had endorsed a “binding” target to reduce emissions by 40% by 2030 vs a 1990 base.  This was the EU’s opening gambit in the UNFCCC negotiations for the Paris summit next year, when the post-2020 global agreement “with binding legal force” is supposed to be finalized. The EU is anxious to prod other countries (specifically the US and China) into making serious reduction pledges, and putting out large target of their own gives them some negotiating moral high ground.

However, the media largely ignored the many qualifiers in the announcement, beginning with the 1990 baseline which – shock – allows them to take credit for the modernization of the former Soviet economies in Eastern Europe and the UK’s rush out of coal fired generation. This is a perfect example of the EU policy of cherry-picking targets. The rest of the world, meanwhile talks about 2005 as a base, inconveniently before the collapse of much of the EU economy in the crisis of 2008.

Then there is the ETS problem. We have written about this in the past , but for new readers, the allowance quotas to 2020 turned out to be far more than were needed by a depressed economy, and the allowance price has been languishing in the single figures (in Euros) since 2009. Various schemes have been dreamt up to address this but all have fallen foul of the basic problem that the designers of the ETS (rightly) made it difficult to manipulate the market easily. The only practical option was to simply delay auctioning allowances until something else turned up, and the 2030 goal was always the likeliest candidate. Sure enough, the 2030 target includes a proposed removal of allowances from the 2020 period through a process which it describes as “preserving predictability and environmental integrity” (they forgot to mention market credibility). There is also a higher reduction target for the ETS sector vs the rest of the economy in the 2030 period (43% vs 30%, compared in this case to the 2005 ETS base year). The ETS covers only single sources emitting over 25,000 tons CO2, roughly half the EU emission total, but a falling proportion. The decision does allow a country to include transport emission inside the ETS cap, which the Danes have already proposed.

Then there is the fact that the decision is an EU level one. The EU negotiates as a bloc in the UN process, so this is a necessary step in having a commitment for the Paris negotiations. However, it does not bind any single country, and there needs to be subsequent agreement on how to share out the allowed emissions between countries. The communiqué described this effort as balancing “fairness and solidarity”. This will be a monumentally ugly process, especially given the growing influence across the continent of parties on the right whose tolerance for painful things coming from Brussels is, shall we say, limited. Plus there may well be a referendum on the UK’s continuing membership in the EU during the next parliament. Not the most promising context for those allocation squabbles.

EU industry will scream about the new target, particularly if there is no comparable response from the US or China (our assumption in both cases). There is already considerable evidence that the main consequence of past EU ETS policy has been to drive carbon intensive industry to China, rather than to decarbonize it. Member states have had to do some awkward, expensive and arbitrary negations to provide concessions to major companies (Arcor Mittal having blazed the trail in the last round of ETS discussions) to prevent politically unpalatable major plant closures. The decision recognizes this is going to happen, and tries to limit it to poorer countries and the most efficient plants. We’ll see, but don’t bet on it.

Because everyone must have a prize, the 2030 target also includes a separate 27% share renewables target and a separate 27% energy efficiency target. This is politically attractive but entirely unhelpful to the actual climate goal. The ETS target will be binding and the more constraints set on how to get there, the higher the cost will be, and the more likely that the ETS market will need further manipulation. Outside the ETS-covered sectors, the renewables target is mostly about biofuels, which are in turn largely about agricultural policy (and arguably net negative to climate progress). Anyone who has dealt with EU agricultural policy understands that that part of the EU political map is marked “Here be dragons”.   Finally, neither the renewables nor the efficiency targets will be translated into national targets, so it is not clear how these will actually be accomplished.

The target is described as “domestic”, i.e. the EU will not allow offsets from outside the union meet it. We think this has zero chance of survival. The EU will be under pressure to meet its share of the $100 billion/year developed countries are supposed to “mobilize” for developing countries by 2020, and it defies belief that they will not seek to kill two birds with one stone by allowing companies to buy cheaper credits overseas.

Rather touchingly, if inconsistently with just about everything that has gone before it, one of the last sections of the EU decision talks about energy security and the need to take measures to improve natural gas supply and infrastructure. And of course the section closes – how else – with a call to “convey consistent messages related to energy security” to “strategic partners and major energy suppliers”. Good luck with that.

On to Paris.

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