One, two, three!…

Nothing to do with Billy Wilder – although that would be more fun. I’m talking of the debate that rages within the EU about its energy and climate policy to 2030: should it be based on three targets, as it currently is, i.e. one target for greenhouse gases, one for renewable energy, and one for energy efficiency? Or should it be based on one single, CO2-only target?

Let me start with my favourite quote from Yogi Berra, the famous american philosopher who also happened to play base-ball. As he was asked if there was any difference between theory and practice, he responded « in theory there is no difference; but in practice there is. »

In theory, one single target would be superior. A broad CO2 pricing instrument would achieve GHG emisssion reductions at the lowest possible cost. Emission reductions driven by subsidies for renewables are too costly per tonne of CO2 abated. Furthermore, when you have a CO2 target, having separate renewable energy and energy efficiency targets do not lead to additional emission reductions. It only reduces the CO2 price, then too low (as it is at present in the EU emissions trading system) to provide long term signals to investors. Renewable targets have ultimately favoured… coal over gas in the power sector, and coal use has recently been increasing in several EU countries.

In practice, things are somewhat different. Since the EU package was adopted, the renewable energy targets have delivered, not only in fostering the deployment of renewables (especially in the power sector), but also with respect to cost reductions. The CO2 target might be reached, thanks to a combination of the RE target and the languishing economy. The price of CO2 is low, mostly as the result of the stalling growth. The recent and limited increase in coal use (in relative terms, by the way, more important in France than in Germany…) is due to the low CO2 price, the low coal price (thanks to the shale gas revolution in the United States) and the high gas price.

Not only there is a difference between theory and practice, there is also a difference between « targets » and « instruments ». A CO2 target is, unfortunately, not necessarily enough to provide a robut price signal throughout the economy. Carbon taxes are difficult to implement, as again shown in France these days with the « ecotax » for transport. The EU ETS is weak, as already analysed on this blog. By construction of the EU ETS, no other policy would deliver additional emission reduction – it has no price floor. Nor has it sufficiently ambitious targets in the current economic context. Its designers have simply forgotten to account for uncertainty in target setting – another difference between theory (forecasts) and practice (actual pathways).

Conversely, agreeing on renewable energy targets does not mean agreeing on any kind of incentives, at any level. Mistakes in designing policy instruments have been made in the past, but lessons can be learned and similar mistakes can be avoided from now on.

Then, the elephant in the room: nascent technologies are always costly but have great cost reduction potential. Climate change is a long term issue. The short term cost-effectiveness, in achieving a short term emission target, is not the same as the long term cost-effectiveness in achieving long term emission reduction pathways. Put capital intensive investment in renewables or in infrastructure change in direct comparison with coal to gas shift in existing power generating fleet, makes no sense: it would simply lock-in our societies in fossil-fuel dependence and high-emission paths. Paying more today to bring renewable energy technologies to competitiveness, to the opposite, is key to deliver deep emission reductions in the future. And guess what? It is already working.

In brief, I would think that when we have 1) implemented not only a CO2 target, but a CO2 pricing instrument that spans across the economy and provide a sufficient and robust CO2 price; 2) redesigned the electricity market so that it is conducive of capital-intensive investments; and 3) almost exhausted the potential for rapid cost reductions of emerging renewable energy technologies and brought them to competitiveness, then we could seriously consider opting for CO2-only targets.

And to put it even more bluntly – given the increasing evidence of climate change, the time already lost and the mounting sense of urgency, are you prepared to give up the policies that worked, in favour of the policies that haven’t so far? For myself, I’m not.

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