European energy policies in light of climate ambitions

September 1, 2016

Jukka Leskelä, the incoming CEO of Finnish Energy discusses European energy policies and how they must work towards climate targets

Since the Paris agreement last December there has not been a lack of ambition in global climate. Holding the global warming to “well below 2 degrees above pre-industrial levels” requires quick and determined global action on all levels and sectors. The agreement goes even further by pursuing efforts to limit the global warming to 1.5-degree level. Scientists have analysed that this would practically mean the end of all greenhouse gas emissions caused by the developed World within the next few decades. Especially emissions from energy production and use which should be minimised shortly.

Strong and comprehensive commitment is needed

The EU is strongly committed to do its fair share to achieve this ambition. In October 2014, the European Council decided the level of emissions reductions by 2030. Then the total emissions of the EU should be 40% below 1990 level, with an overall target of at least 80% reductions by 2050.

In the EU climate policies, emissions have been split into 2 categories. Approximately 40% of emissions (energy intensive process industry, electricity generation, and centralised heat production) are covered by EU emissions trading scheme (EU ETS), and the rest represent the “non-ETS sectors”. The non-ETS emissions reductions are divided to EU member states as binding national reduction targets. In July 2016, the European Commission made a proposal for binding national greenhouse gas emission reductions by 2030.

EU ETS is most cost-efficient without other policy measures

The idea of EU ETS is to give space to markets to find cost-efficient emission reductions especially in sectors with a remarkable international trade. The EU ETS caps the emissions to a politically determined level. National climate policy measures in these sectors such as promotion of renewable electricity generation, energy taxes or national greenhouse gas emission standards are in fact not reducing emissions at all. They basically only transfer the emissions under the cap to other sectors or countries and reduce the market signal of the EU ETS.

This clear climate policy infrastructure has been poorly understood by European policy makers across member states. During the last 5 years, markets have provided a lot of learning material for better understanding. National policies have caused massive increases in energy prices and weakened energy security, while emission reductions have only been moderate.

National renewable energy targets under the renewable energy directive gave the member states an obligation to increase renewable energy generation quickly. Most governments decided to do that in electricity generation, which is an understandable decision. However, this created a very strong overlapping policy measure to EU ETS. Markets were not running the investments but the national subsidies. Huge amounts of money were given to generators outside the markets.

It collapsed both the emissions markets and the electricity markets. This has costly consequences both to climate targets and to energy cost and security. In order to meet the ambitious climate change targets with a cost we can bear, stronger coordination and determination in the policies must be taken. The recipes are rather simple.

More markets are needed. Governments cannot continue to base the policies on subsidies that the customers and citizens need to pay. The EU ETS is a market instrument in place and it can deliver the emission reductions needed cost-efficiently. Therefore its role must be strengthened. This can be done best by phasing out overlapping policies. The European Commission has proposed a number of measures to bolster the EUA market. These must be supported.

Non-ETS sectors are the major political challenge

Unlike in the EU ETS, strong national measures and political guidance is needed in the non-ETS sectors. In transport, local heating, agriculture, construction, waste management, etc. The European Commission just gave the proposal on the national burden sharing of these emissions reductions in July.

Renewable energy measures must serve the climate targets. Existing schemes have concentrated on electricity. However, only less than one-fourth of European energy end-use is electricity. Much more emphasis is needed on introducing renewables in heating and transport sectors where use of fossil oil and fossil natural gas are major energy sources.

This can be done by 3 parallel routes.

Firstly, by replacing fossil fuels by biomass and waste. Bioenergy is already by far the largest source of renewable energy in Europe, but much more must be done. Agricultural and forest biomasses are cost competitive options in climate policy. Increasing the use of biomass must be sustainable. The EU is preparing policies to take care on that issue. These policies need to take account the vast existing use of biomass. As an example, more than 25% of primary energy in Finland is forest bioenergy. Still, no forests are grown for energy only. Energy wood is a by-product of forest management and forest industries. Sustainability is taken care under multiple existing policies and measures. These must be respected in coming European sustainability policies. Secondly, fossil fuels can be replaced by carbon-neutral electricity. Electric transport, heating, and processes in industry, could replace the use of fossil fuels massively.

Thirdly, some activities outside the emissions trading scheme could be taken under the EU ETS. Heating could be such a sector. Some reports and early analysis show that this could offer a cost beneficial route to the decarbonising of European heating.

Investment in energy efficiency is always worthwhile

In addition to markets and renewable energy policies, energy efficiency measures are crucial. These require international or European standards, national and local activities from taxation policies to sharing of information. A wealthy energy market is key to energy efficiency measures. Customers must see and feel the actual cost of energy.

Happily, all this can be done. Technologies have developed rapidly. Many renewable and carbon neutral energies are competitive to other alternatives: on-shore wind, heat pumps, bioenergy in heating, geothermal heat and solar energy in many areas, hydro power and nuclear energy. We also have the smart grid under development which enables the customer to be in the centre of the transition. With more public and private investments on research and development this great progress can be further enhanced.

Europe can have carbon neutral energy in just a few decades and this can be done by sustaining and improving our competitiveness. This requires good coordination of markets and policies.