November 14, 2014
Last Thursday, I took part in the Energy Conference in Ústí nad Labem in the Czech Republic. During the debate, the panel discussion moderator asked me why Poland contested the EU climate policy for such a long time only to agree to the elevated emission reduction target. My answer was that I believed that it was not us who had changed, but the European Union, which had seen its mistakes and decided to step back (for more, see: http://napedzamyprzyszlosc.pl/en/blog/eu-s-controversial-climate-policy). Naturally, this will not be a simple task, and success is far from certain, because we have created some strong lobbying groups in the EU, which will not give ground easily. What is good, however, is that we now have a single EU-wide emission reduction target – to cut emissions by 40% below 1990 levels, and a single instrument – the price of emission allowances. I have explained on numerous occasions before, also on this blog, why having multiple objectives is harmful. Under the European Commission’s current proposed framework, the additional targets (27% share of RES in the Energy Union’s overall energy consumption and an energy consumption reduction target of 30%) are not binding.
In the climate policy debate, it is the targets that elicit the strongest emotions. This is probably because those taking part in the discussion take it for granted that the target and the instrument share a strong causal relationship, which they do in the models used to evaluate the economic impact of the climate policy. These models obviously abstract from unpredictable events, including not only recessions and economic crises, but also positive developments, such as the emergence of innovative technologies which alter the pricing balance of energy sources, while the fact of the matter is that reality is teeming with unforeseen circumstances. In effect, such forecasts only manage to approximate actual events, or miss them completely. This holds especially true for long-term projections, such as those used to plan out climate policies. When validating such models against reality, the emission reduction target to be achieved in 20 years is as credible as the projection’s verifiability over the 20-year horizon. What really counts is the instrument, which determines the policy’s effectiveness and cost for the taxpayer.
Theoretically tied only to the target value, the instrument of the EU climate policy – the price of emission allowances – has been designed to react to all favourable and unfavourable developments along the way, which causes the result to be opposite of what was intended. The price of emission allowances drops close to zero in reaction to any unforeseen emission reductions in the wake of a deep recession and the meagre economic recovery that follows. In the end, the policy provokes confusion and discourages investment rather than urges companies on in the right direction. In business terms, it is an increased regulatory risk. Let’s then not be afraid of ambitious climatic targets, as they pose no threat. What is dangerous, however, are the ill-considered instruments employed to achieve such goals, which needlessly add to the already high uncertainty associated with the extremely long-term character of the climate policy.If we were able to introduce an instrument immune to the unpredictable which would be able to differentiate energy prices depending on emission levels, we would set a new direction for businesses to invest in, as well as for developing new technologies. The climate policy would gain credibility. Businesses would choose the cheapest available emission reduction technologies and join forces with scientists in search of new ones. What about reducing emissions? How much of the target would be achieved in 2030 and 2050 would depend on any disruptions that happen along the way and affect economic growth in that time horizon. If we grow faster, emissions will increase. Slower growth, on the other hand, will mean less emissions. Still, irrespective of how the economic situation develops and whatever new technologies emerge, we will be successful in creating a low-carbon economy at a much lower cost. The good news is that such an instrument already exists. Can you guess what it is?