Global financial crisis makes green energy unsustainable

The EU’s unilateral climate policies face a deepening crisis. Given the manifest reluctance of the world’s big emitters to accept any legally binding carbon targets and in face of our economic crisis, Europe should undertake a comprehensive review of its economically damaging climate and renewables targets and — in the absence of an international agreement — should consider the suspension of all unilateral policies that threaten Europe’s economic recovery.

Unilateral climate policies face a deepening crisis

Climate policy is no longer a big item on the EU’s agenda and the climate mania is gradually coming to an end after almost 20 years. Poland is vigorously blocking any new CO2 emission targets at EU level. There is growing support among Eastern European governments to block any new unilateral climate targets permanently.

In the past, Poland’s intractable hostility to green unilateralism was greeted by universal protestation in capitals around Europe. Today, it is hardly noticed by the media while green campaigners have become elderly and limp. Other and more pressing concerns are taking precedence and are completely overriding the green agenda.

As a result of the deadlock in Brussels, climate and green energy policies are facing a severe and deepening crisis. There is a growing risk that the EU’s unilateral strategy is hampering the economic recovery and, consequently, the future of European competitiveness.

Across Europe, the green agenda is becoming increasingly unpopular. Voters and energy intensive industries are ever more hostile to climate policies because they are inflating energy bills and heating costs. In light of global disagreement over the future of climate policy, hardly any European government is clamouring for green leadership. Even Germany and France no longer want to go it alone. Many European governments simply refuse to go beyond the 20 per cent emissions target.

It is becoming ever more evident that currently favoured solutions to climate change are not in themselves economically viable. What is more, the whole green agenda is confronted by rising doubt and criticism.

The Emissions Trading Scheme and other unilateral schemes have become a growing threat to Europe’s competitiveness and economic recovery. It puts European businesses and, in particular, energy-intensive users at a disadvantage with regards to cost and international competitiveness.

It does not make any sense to make industry and manufacturing, in particular, increasingly uncompetitive — or to drive it out of the continent. Nor does it make sense to weaken Europe’s crisis-ridden economies by driving up energy costs and increasing fuel poverty.

It might be possible to make a case for decarbonisation if it were undertaken on a worldwide basis. But recent UN climate summits show that there is no prospect of this. After the failure of the last UN summits, there is now an indefinite moratorium on international climate legislation. After Durban, the chances for a binding successor of the Kyoto Protocol are close to zero – despite the agreement to continue negotiating.

The international deadlock and the public backlash against green taxes show that conventional climate and green energy policies have no future. No wonder then that even the European Commission is seriously considering whether to discontinue its unilateral decarbonization strategy in the absence of a global agreement.

In the draft of its Energy Roadmap 2050, the commission warns that “if co-ordinated action on climate among the main global players fails to strengthen in the next few years, the question arises how far the EU should continue with an energy-system transition oriented to decarbonization.”

The threat of a global trade war

Europe is also facing the threat of a global trade war over its unilateral climate policies. A group of nearly 30 nations are considering possible retaliation against the European Union’s new emissions trading law – which obliges international airlines, regardless of nationality, to pay for CO2 emissions when using European airports. Airlines have until April 2013 to submit carbon allowances to cover their 2012 emissions, before facing possible fines or bans under the new EU law.

The emissions trading scheme is the main vehicle of the EU’s climate policy. Its unilateral cap on emissions remains a huge and growing burden on European economies and industries because all other major trading nations have rejected similar measures. European consumers are facing up to the reality that their political leaders have already squandered more than €200bn on a completely inane and ineffective project. A recent report by Swiss bank UBS revealed that the ETS has cost European consumers a staggering €210 billion – for “almost zero impact” on cutting emissions.

For more than 15 years, the EU has failed to reach a global agreement on greenhouse gas emissions. Now, the EU’s unilateralism is turning into a risky game of protectionism. When the union added aviation to the ETS on January 1, it forced all global airlines that use European airports to join up. Carriers that refuse to participate will be subject to fines of €100 per ton of carbon dioxide that exceeds the ETS limits, and they could be banned from operating in Europe altogether.

A growing number of airlines and governments outside the EU are, of course, opposed to this kind of protectionism and regard the new rules as illegal – not least, because carriers are also charged for emissions that happen outside of Europe. City analysts estimate that the cost for airlines of joining the ETS will be around €1bn this year and €10.4bn in total between now and the end of 2020. By then, it will cost airlines some €3bn annually. The new green taxes will inevitably increase the cost for airlines and much of this will be passed on to passengers.

Opposing countries – including India, China and the United States – are known as the ‘coalition of the unwilling’ and have agreed to retaliate with the stated aim of getting the EU’s measures either cancelled or postponed.

The US House of Representatives has passed a bill, which prohibits American airlines from participating in the ETS. It is estimated that the ETS would cost US airlines $3.1bn from 2012 to 2020. China too has banned airlines from taking part in the scheme, saying it violates international rules. India has asked carriers not to give emissions data to the EU. The Indian government has warned that the EST for aviation is “a deal-breaker” for any global climate change agreement. Meanwhile, Russia is considering restricting European flights over Siberia.

The world’s most powerful nations are not bluffing. Unless the EU reconsiders and allows for an international agreement, these threats are likely to escalate into the first full-blown green trade war. The EU leadership would be well advised to pull back from the brink.

Germany: Nuclear phase out and the return to fossil fuels

As a result of Germany’s green energy transition, nuclear power is on its way out, but coal, Germany’s dirtiest resource, has become the most important energy source again. Brown coal (lignite) in particular is experiencing a renaissance in Germany. Last year, about a quarter of the electricity generated used this most environmentally adverse resource. Its consumption grew by 3.3 percent. This has made lignite the number one energy supplier.

According to a recent study by the German Economic Research Institute, the Emissions Trading Scheme has had the unintended consequence of encouraging investments in fossil fuel electricity generation.

“Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this “dash for coal”, but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role….”

As a result of its nuclear phase-out, Germany is set for the conversion of its energy mix towards gas and coal. Presently, more than 30 new gas-fired power stations (plus 11 coal power plants) are being built in Germany to fill to looming gap caused by its nuclear phase-out.

At the same time, governments across the EU are cutting back on green energy subsidies or reneging on guaranteed feed-in tariffs for renewables. Government guarantees are no longer safe – this will make green investments ever more dicey. Tens of thousands of solar investors face bankruptcy while 5000 solar companies have gone bust in Germany alone.

The Shale Gas Revolution

The financial crisis is forcing European governments to cut subsidies and incentives for green energy programmes which are not sustainable, let alone during a prolonged period of austerity. Companies too are reducing their green energy investments as natural gas is becoming ever more attractive, increasingly shifting investment away from renewables.

Shale gas promises the start of a new era of cheap, abundant and relatively clean energy. In a growing number of European countries, energy companies have begun to drill rigs to explore potential shale deposits and its commercial extraction. Advocates of renewable, coal and nuclear power sources are increasingly concerned about this new competitor.

A potential shale gas revolution promises to shake up the EU’s green energy and climate policies. Recent studies estimate that there are huge deposits of shale gas in Europe too. Poland, France and the Ukraine alone may have supplies sufficient to last for 200 or 300 years. Energy crisis? What energy crisis?

No wonder then that many European countries see shale as a golden opportunity to generate cheap energy as well as reduce their reliance on imports from Russia and the Middle East.

In sharp contrast to extremely costly green energy policies, the shale revolution has progressed without any taxpayer-funded subsidies, government targets or tariffs. It is driven exclusively by new technologies that make shale exploration profitable.

A new report commissioned by the UK government has given the green light to the extraction of shale gas. The impact of the government’s endorsement is likely to have significant effects for Britain’s and Europe’s energy policy.

According to estimates of the International Energy Agency, globally there is enough natural gas for the next 120 years at current rates of consumption. Supplies of unconventional gas could provide us with this cheap and relatively clean energy for another 250 years or more.

The EU would gain significantly from a shale gas revolution: cheaper energy would make EU manufacturing more competitive, gas and electricity bills would fall and the rising trend in fuel poverty could be reversed.

Because of the potential scale of EU shale drilling, significant levels of employment would be created or supported across a broad range of job sectors. Energy-intensive industries and manufacturers now considering relocating their operations abroad due to increasing energy costs will also be more likely to stay.

Europe’s conventional climate and energy strategy now faces a huge challenge. Ultimately, it will be a matter of whether over-borrowed European governments, businesses and people will be able to resist such a hefty source of new revenue and a clean energy source requiring no subsidy.

Conclusion

Given the manifest reluctance of the world’s big emitters to accept any legally binding carbon targets and in face of our deepening economic crisis, Europe should undertake a comprehensive review of its economically damaging climate and renewables targets and — in the absence of an international agreement — should consider the suspension of all unilateral policies that threaten Europe’s economic recovery.

Dr Benny Peiser is the director of the Global Warming Policy Foundation

European Centre For Energy and Resource Security, May 2012