Have the cards already been dealt in Climate Policy and CO2?

Have the cards already been dealt in Climate Policy and CO2?

Mr.Watson in the well-informed European Power Daily (EPD) reported on the 18th of July, that the European Commission’s proposals from the 22nd of January, 2014, can be considered as fully adopted, claiming that: “Germany and the UK have voiced clear support for planned reforms, while Denmark and Sweden are also understood to be in favor. Some coal-dependent member states, led by Poland, are expected to oppose the measures, although the reforms could still be agreed in the EU Council under its qualified majority voting rules”.

In other words, the deal is already sealed. What about the MEPs? They will also back the proposed solutions. The EPD suggests that “many EPP members [the European People’s Party – EPP] who voted against backloading” will not want to “be ‘burnt’ over such a small issue again, so they will just not intervene”. The EPP, on its part, will not act against the will of its governments, which means that “the EPP will not take an opposing line as a whole”.

I could go on and quote other statements reported by other news outlets which suggest that the cards have already been dealt, and those who try to take part in the ongoing discussion have no chance of convincing other participants that their arguments are valid.

Having said this, I suggest applying a more holistic approach and use this opportunity to point your attention to a few key facts which perhaps will reach the awareness of policy-makers in the EU and MEPs.

Emissions of CO2 and other greenhouse gases

Putting aside all arguments on whether greenhouse gas emissions are detrimental to our climate or not, I believe the efforts to ensure that the environment is kept clean on our planet deserve our full support. We have to take into consideration that the world population is expanding at a very fast pace, and that its current level of over 7 billion will soon, over the next three decades, be increased to as much as 9 billion. Our children and grandchildren will be the ones to witness the results of our present-day attempts to limit CO2.

Emissions of CO2 and other greenhouse gases

Putting aside all arguments on whether greenhouse gas emissions are detrimental to our climate or not, I believe the efforts to ensure that the environment is kept clean on our planet deserve our full support. We have to take into consideration that the world population is expanding at a very fast pace, and that its current level of over 7 billion will soon, over the next three decades, be increased to as much as 9 billion. Our children and grandchildren will be the ones to witness the results of our present-day attempts to limit CO2.

How others deal with CO2

It needs to be admitted that there are no countries which disregard the issue of environmental protection; they all try, according to their capacities and the popular awareness of their societies, to implement relevant activities in this field. As the factors which impact on the environment are very diversified, so are the implemented measures. Under the influence of the EU’s philosophy, the effectiveness of the states’ activities has been evaluated through a comparison of the percentage of decreased emissions of CO2 with previous periods. This method of evaluation is flawed, because, if a given country has a low level of emissions due to it being poor and undeveloped, then conversely, its economic development will trigger a percentage increase in its emissions.

What seems considerably more fair is to use an easy and clear indicator (although with small imperfections) which shows a country’s emissions of CO2 throughout a year in tonnes per capita. This way, it is easier to relate its level of CO2 emissions to that of countries which have a similar level of economic development, and also to states which have a low level of emissions. A certain regularity can be identified here. Countries with a higher level of economic development emit more CO2 per capita than those less developed. This, in turn, allows for an easier and more reliable evaluation than the percentage-based method.

Below, is a table which shows emissions per capita in the EU Member States and the so-called ‘reference’ countries.

The table clearly shows that, in 2012, the average emissions per capita in the EU stood at 7.42 tonnes, and in the US, it was 16.36 tonnes. This means that, to be able to start the race from the same starting line as the EU, the US should cut its emissions ‘overnight’ by 55%, and then negotiate the global climate package.

The United States –The US was the first country to launch an attack against global warming, initiating a long series of programmes with this aim, and its efforts have been cheered by EU officials and the Greens. Although I have joined the ranks of enthusiasts, I would like to direct their attention to the far-reaching pragmatism of the so-called ‘Obama Programme’. Firstly, the US does not differentiate between the CO2 emissions which are covered by the ETS in Europe, and those which are not. I agree with the US: emissions are emissions. They require action in every field, as their source is irrelevant for the climate. Anyhow, the EU is exceeding the US in many fields of CO2 emissions. Take for example car emissions: according to Obama’s Programme, a decrease in the average fuel use of cars from more than 17 litres in 2010, to slightly over 7 litres in the years 2017 to 2018, was introduced.

This means that the US will not be able to catch the EU up in this field, at least until 2030.

Another spectacular feature of the Obama Programme is the fact that it imposes CO2 emission limits on coal-fired power plants which currently cannot be complied with. This triggers a continuing shutting down of such plants (of which 80% should already have been phased out due to their obsolescence). However, if one is to look closer at this policy, what is noticeable is the far-reaching pragmatism of President Obama, who does not want to destroy US industry, but to further develop it. Shutting down US coal-fired power plants enables exports of US coal to global markets which are happy to purchase it, because it is cheap.

Another example can be provided in the natural gas sector. It is estimated that natural gas is competitive in relation to coal-powered power plants who are paying US$100 for one tonne of coal, if gas is priced in the range of US$250 – US$260 per 1,000 m3. In the US, the price of gas is currently about US$160 per 1,000 m3, and it is most likely to remain below US$260 in the forthcoming decade. Which investor would, therefore, want to invest in coal-fired power plants in the US, bearing in mind the US$250 breakeven point, if gas allows investors to save close to US$100 compared with coal?

If investors from the EU were provided a price level of, for instance, US$250 for 1,000 m3 of natural gas, this would solve the problem of coal-fired power plants immediately, because who would want to invest in these facilities with such an attractive gas price level? I have never met an analyst who would forecast that, by 2030, natural gas prices will be set at the level of US$250. In other words, coal will remain the cheapest energy source in the EU (apart from nuclear energy) until 2030, and most likely afterwards, as well.

We should not be counting too much on shale gas from the US, as, from today’s perspective, it seems that the price of this gas in the EU will be in the range of US$300 per 1,000 m3, and European shale gas will not be much cheaper. All the experts know that natural gas is not as clean as it appears, because, in the process of its transmission, significant amounts of methane (which are 22 times more detrimental to the atmosphere), are emitted. It is unfortunate that no one is calculating these emissions, because we would learn that, contrary to general assumptions, in comparison with natural gas, coal is not as “dirty” as some believe it to be.

The Americans aim to cut CO2 emissions by 30% by 2030, which would translate into per capita emissions of 11.45 tonnes. Currently, the EU has an average emission rate of 7.42 tonnes per capita. This means that we already emit 35% less than the US, which is aiming to reach the level of 11.45 tonnes by 2030. In the meantime, the EU will continue to lower its emissions. Can the US further decrease its emissions? Of course it can, but why should it? Why should it kill its own industry? EU officials do not want to see things this way.

Other countries

China – is cited by numerous politicians as an exemplary case of a country which combats global warming. Its emissions were close to the EU average, at 7.09 tonnes per capita in 2012. China’s emissions are lower than that of the US, Canada (16.4 tonnes) or Australia (18.77 tonnes). However, the problem with China is that its emissions are concentrated in a very small area of the country, in the most industrialised regions, so the country is left with no choice. China can either reduce the emissions, or endanger the lives of its citizens in these regions. This not applies to CO2, but also to all other greenhouse gases, as well as NOxs or particles.

Australia Emissions of 18.77 t – launched its fight with emissions, introducing some of the ETS concepts, but very quickly resigned from it, as it hampered development of its economy.

Canada – Emissions of 16.4 t – it does what it considers useful and acceptable. It is not really eager to decrease emissions at the pace suggested by the EU.

Examples of non-EU countries with high emissions – South Korea ( 12.97 t); Russia ( 12.39 t); Japan (10.40 t). All these countries are combatting emissions insofar as it is not hampering their economic development, which means they, too, have pragmatic stances on this issue.

European Union

General remarks – the EU’s approach is not pragmatic, but philosophical, and its overarching assumption is that the world needs to be saved, in spite of the costs incurred by the EU’s societies. In the last five years, the EU can boast of such ‘accomplishments’ as lowering CO2 emissions and becoming a world leader in this field, but, at the same time, its unemployment, in particular among the EU’s youth, increased, whilst the competitiveness of its industry, in comparison with the main global players, decreased. Moreover, dependency on external sources of energy increased. A significant share of foreign investment shifted to countries which have not adopted a climate change policy as restrictive as that of the EU’s, numerous EU member states have financial woes, and the prices of energy have doubled.

The EU should firstly determine the resolution of its own development issues as a top priority, and then, once these are solved, proceed with climate change issues, and only when they are not hampering the economic development of the EU and its respective Member States.

Combatting emissions from coal – the use of the term „decarbonisation” instead of „emission” is the reason behind a major conceptual confusion. Decarbonisation is, on the one hand, rightly associated with the molecular formula, CO2, where carbon is one of its components. Unfortunately, in most cases, EU officials and MEPs associate decarbonisation with combatting coal. Instead, the aim is to combat CO2 emissions, which are not only generated by coal, but also all organic components including fuels, natural gas, organic waste, organic products, etc. If we are to fight for the aim of reducing CO2 emissions, we cannot only simply target coal. This differentiation should be absorbed at all the levels of the EU. We should be combatting CO2 emissions, not coal.

CO2 Emissions in the EU – as evidenced by the above table, emission levels in respective EU countries are highly diversified, and EU directives should not adopt a single, standard stance for all these countries. Cutting emissions by 20% in Luxembourg (21.75 tonnes per capita), which is the biggest producer of CO2 per capita, and, at the same time, the richest EU Member State, with a GDP of €83,400 per capita, is a completely different story from that of reducing them in Romania, where they are the lowest (3.91 tonnes per capita), and the GDP per capita is a tenth of Luxembourg’s, at €7,100.

Taking into consideration these disproportions, Romania’s industry should be granted the chance of unconstrained development, and the country should be exempted from any EU commitments, and supported by EU funds to bolster its industrial development, if it complies with the BAT approved by the sector. The only constraints should result from the regulations set by the Romanian government, which knows how to protect the country’s environment and foster its industrial potential to “catch up” with the EU within the framework of the cohesion policy.

I would also like to use this opportunity to debunk a myth which is injurious to Poland, and states that as Poland is a heavy coal consumer, it is a country which “pollutes” the EU.

Despite its use of coal (though its consumption has been decreasing), Poland produced 8.42 tonnes of CO2 per capita, in 2012. At the same time, Luxembourg emitted 21.75 tonnes p.c., Estonia 15.75, the Czech Republic 10.81, Finland 9.88 , the Netherlands 9.82 , Germany 9.75 , and Belgium 9.85 tonnes. This means that Poland was exceeded, in CO2 production, by seven EU Member States. On a related note, Denmark, which is generally considered as a very environmentally-friendly EU country, produces 6.97 tonnes of CO2 per capita, with 48% of its electricity being generated by coal.

If we look at the reduction in emissions in the years 1990 to 2012, countries such as Austria, Slovenia, Ireland, Greece, Portugal and Spain not only failed to cut their emissions, but, in fact, increased them (see the table below).

Objectives by 2030

Decreasing the greenhouse gases emissions in the EU by 40% in comparison with the year 1990 is a very incoherent goal. If we look at the chart from point 5.3, some countries already complied with this objective a long time ago, while others are still aiming to achieve it, and the road leading to it is very costly. If we assume that lowering CO2 emissions costs about US$600 per tonne, then, once we multiply this by millions of tonnes, the total figure is exorbitant. The countries should be the ones to decide what they can or cannot afford, and the EU should provide financial support to solutions which lead to the reduction of emissions with the use of BAT within each industry sector separately.

Emissions trading system - ETS – is a very controversial solution which has not been implemented practically anywhere else in the world except in the EU. The division of emissions into the half which is covered by the ETS system, and the remainder, which is not, is somewhat artificial. To achieve climate goals, it is irrelevant whether the reduction in emissions is made in transport (see Obama’s plan in this respect) or by establishing an efficient waste treatment system in the cities, or in the cement, steel , refinery or chemical industries. The results obtained in the fields which are excluded from the ETS are equally interesting, and, in some cases, perhaps even more interesting than those in the fields covered by the ETS, owing to increasing social awareness and relevant EU and national programmes.

However, the ETS system seems to be serving only those who want to benefit from speculating with the emission allowances, because the ETS, as shown by our experience in the last few years, does not stimulate the reduction of CO2 emissions.

Supporters of the ETS would like the price of a tonne of CO2 to be as high as possible and that is why they want to prevent the amounts of CO2, which are released due to new technological solutions, from entering the market. This means they are also in effect working against the technological developments which provide inexpensive CO2 allowances to the market. The latter does not allow financial investors to earn as much as they had planned. This is why, under the banner of combatting CO2, backloading was introduced, because, in my opinion, MEPs were not fully aware of its implications. Investors and lobbyists, on their part, want the system to be even stricter, as suggested by the well-informed European Power Daily.

Aiming to increase the price of CO2, they want to manipulate prices, to make them as high as possible, at least in the price range of €50 - €60 per tonne of CO2, and it is clear that they will achieve this, through introducing a linear indicator of 2.2% per year, and additionally by “taking the surplus of CO2 off the market”, through administrative decisions by the EU. Rich companies from the EU-15 will not oppose this, because such a mechanism allows them to hamper the potential development of companies from the poorer Member States, the EU-11.

As a result, instead of convergence, we will witness a continuing divergence in the level of development among the EU’s Member States, and the resulting division into two regions with a different pace of development. If we were to follow the example of the US, we could easily shut down the ETS system, and instead let our economy rely on the development of cleaner technologies.

Reforming the ETS – I am aware that EU officials have got used to the idea of the ETS, and that they consider it to be of the highest value. Based on their actions, they care little about unemployment or the decreasing competitiveness of the EU, increasing dependency on imports of the sources of energy, or the high prices of energy, but devote themselves far more to the ETS. The opposite should be the reality.

According to some, the EU does not want to destroy its industry, and it has created the possibility of a temporary opt-out from the ETS regulations (carbon leakage) for some industrial branches, with energy-intensive industries in mind. Clearly, this is a positive solution, but being added to the carbon leakage list requires a decision by EU officials, and this does not foster long-term planning and investments in periods of at least 15-20 years, because a given entity can be taken off the carbon leakage list at any time. This does not foster economic development. The ETS implies an annual decrease of CO2 limits by 2.2%, which translates into commanding technological development.

Compliance with the annual limits of 1.74% by 2020 will not be easy to achieve after 2016, and their further tightening, without taking into consideration the potential technological development, means the necessity of shutting down numerous companies in the EU. As a result, this indicator should be scrapped, as well as the manual steering of the ‘so-called CO2 excess’. When a larger amount of allowances for sale appears on the market, EU officials use administrative decisions to reduce these amounts, in order to obtain high CO2 prices, to the applause of financial investors, and to the detriment of many entrepreneurs.

The EU has to choose what it cares more about – economic development, or rich countries getting richer. The claim that high CO2 prices stimulate the development of renewable energy sources does not correspond with reality, because the RES are experiencing a phase of rapid development, despite the low level of CO2 price per unit. It is also well-known that, given the current state of technological capacities, exceeding the level of RES by 25% in the total energy mix in particular countries, is causing perturbations in the absorption of such energy, (obviously, I’m referring here to wind and solar energy, not hydro).

The best example of such a trend is Germany. The price of energy provided by RES is another factor. It is estimated that, for example, in Germany, due to RES (wind, solar), the price of electrical energy is higher by close to €80 per year, per capita. Germans can afford this, given their GDP per capita of €32,300 in 2012, when contrasted with the EU-11’s average GDP per capita of €9,700, not to mention Bulgaria, whose GDP per capita is only €5,400. What generates a burden of €80 per capita for Germany, will, in fact, be a burden of €240, when we compare the difference in GDP per capita for an average inhabitant of Central Europe and Germany, and this would cause opposition, even in Germany. We care about cheap energy, as it is the determining factor behind the social development of our countries.

We should grant respective Member States the right to decide on the pace of their absorption of renewable energy sources and the costs they are willing to accept. High prices of CO2 will trigger, among others, the shutting down of coal-fired power plants which are based on the cheapest energy source, coal. As I have already shown, the countries which have coal-fired power plants should not be automatically treated as the largest CO2 producers in the EU, and new technologies allow the cutting of emissions by over 30%.

These technologies should be fostered by the EU and EU-based banks, and they are not. This leaves the floor to Chinese and South Korean banks. Why is that? It is precisely because lower emissions mean cheaper CO2. Such a situation in the EU is absurd. So, the restructuring of the ETS, although unnecessary, should be thoroughly overhauled.

My proposal is as follows: the ETS should be shut down now, and the EU’s efforts should be aimed at expanding its industrial base with the use of cutting-edge technologies. For each industry which has no barriers, including the coal electro-power energy sector, there should be a benchmark, defined by industry experts, which would set an acceptable level of emissions. The benchmark would be technologically-acceptable, and based on technologies which are analogical and already used by industrial players, for at least 30% of a given industrial sector.

The appropriately-defined companies which obtain the best results in a given sector, will be allowed to sell defined quantities of CO2 on the market. The companies which are not complying with the defined level of emissions, should be granted a derogation for a five-year period to allow them to reach compliance with the set benchmark. If they fail to do so, the facility should be either shut down, or forced to purchase an adequate amount of CO2 allowances to remain operational. It should be expected that the price of CO2 units will be close to zero, but the objective of reducing emissions will be achieved. That is what it is all about. Above all, we should be concerned with our industrial development, curbing unemployment and boosting the EU’s competitiveness, whilst striving to be energy independent as much as possible.

We may also achieve our goals through the promotion of technological development, decreasing the aggregate emissions per capita, for the EU as a single economic entity, allowing the Member States to accept such a policy concerning CO2, which is not detrimental to their economies. As a result, by 2030, the EU will keep its emissions significantly below the levels earmarked by other industrial powers, such as the US and others.

Bogdan Janicki, Legal Adviser, Senior Adviser at CEEP