Nick Butler: EU Energy Policy Isn’t Working: Time To Start Again

  • Date: 27/10/14
  • Nick Butler, Financial Times

The inconvenient truth is that none of the EU core beliefs on which energy policy was grounded have proved to be true.

The deal reached at last week’s European summit on climate change will satisfy no one. The non-binding Europe-wide targets place no responsibility on national governments and provide none of the confidence necessary for the essential investments in supply and infrastructure that are yet to be made. Poland may be the short-term winner – reflecting a clear shift in European decision-making to the east – but the summit failed to address the hard reality that current policies are not working. A new approach is needed.

The fractious debate which led up to the summit should be understood as marking the end of the “consensus” on energy policy established in 2008. Anyone wanting to understand the details of the debate should read the excellent summary produced by Energy Collective which spells out the positions of the key states on major issues.

Although not a total consensus, the 2008 policy was grounded on the broad acceptance of four cornerstone propositions, which over time have turned to dust. These core beliefs were:

* fossil fuel prices would rise inexorably as global demand exceeded supply;

* Europe could gain a material competitive advantage by being the first major region in the world to develop a low-carbon economy based on renewables;

* a gradually rising carbon price would increase the cost of externalities including air pollution and climate change, until renewables became fully competitive;

* the negative effects of higher energy costs on competitiveness would be mitigated by a global deal with all the world’s major economies making progress towards the common goal of reducing emissions.

The inconvenient truth is that none of these beliefs have proved to be true.

Fossil fuel prices are falling, including the prices of gas, coal and oil. Technology has pushed up recovery factors and reduced production costs. Technology has also created a shale gas revolution which has already transformed the US energy market and looks set to do the same elsewhere, even if it does not reach Europe.

The move to renewables has not given Europe any competitive advantage. Energy costs have risen but the main research and development advances have been made in the US and China. The attempt to establish a carbon price has failed with the result that coal, which as the most carbon-intensive fuel was supposed to be priced out of the market, is back.

Most important of all, there has been no global deal, and while some agreement could be reached at the 2015 UN Climate Change Conference in Paris, the chances of a comprehensive and deliverable agreement are minimal.

Small wonder, then, that the political consensus that enabled the 2008 policy to go ahead has broken.  Consumers, including business, are focused on reducing costs. Many governments especially in eastern Europe are concentrating instead on energy security. Predictably policy is reverting to the national level with every likelihood of fragmentation. Investors are in limbo without the clarity necessary to justify long-term investments requiring hundreds of millions of euros.

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