Cutting Carbon Is A Competitive Asset For Europe

The European Union’s recent package of proposals on climate and energy policy to 2030 was long on the rhetoric of competitiveness, a reflection of the very real concern in Brussels that Europe’s ability to do business is being eroded by high energy prices – or to be more precise, high energy prices compared to the US.

Representatives of European industry have been extremely vocal in their assertion that high energy prices will drive companies out of Europe and that the answer to this is to ease off on the EU’s “unilateral” emissions reduction targets.

“The Commission proposals on energy and climate up to 2030 will do nothing to promote an industrial renaissance, rather they will accelerate the deindustrialisation which is already under way” says Gordon Moffat, Director General of Eurofer, the steel industry trade body, adding that EU emissions reduction proposals are “technically and economically impossible to achieve with current technologies”.

Cefic, the European Chemical Industry Council, adds that the Commission’s 40% emissions reduction target “would run counter to the stated goal of 20% of industry’s share in Europe’s GDP by 2020”. A true European industrial renaissance, director general Hubert Mandery says, “requires making a choice between jobs & growth and affordable climate action, or unilateral climate action at any cost”.

These groups have some powerful allies, with EU industry commissioner Gunther Oettinger telling a recent conference in Brussels that he is sceptical about whether the EU will be able to achieve the target. By 2030, Europe’s emissions will be just 4.5% of the global total, down from 10.6% today. “To think that with this 4.5% of global emissions you can save the world is not realistic,” he said. “It is arrogant or stupid. We need a global commitment.”

However, this narrative is being challenged increasingly robustly. Georg Zachmann at the Brussels think tank Bruegel wrote recently that “countries with low energy prices are indeed better at exporting energy-intensive products. However, countries with high energy prices find opportunities for exporting other products.”

Overall, he added, the products disproportionally exported by high energy-price countries generate more jobs and higher value added than the energy-intensive products exported by low energy-price countries (‘Laser, light and photon beam process machine tools’ vs. ‘Ammonium nitrate fertilizer’). “Furthermore, we found no evidence in high energy-price countries for a knock-on competitiveness loss from energy-intensive products to products further down the value chain (e.g. aluminium and cars).”

Now another report by Climate StrategiesStaying with the Leaders – Europe’s path to a successful low-carbon economy, goes a step further, arguing that it is not the future of fossil fuel-intensive industries that Europe needs to be most concerned about – rather, the region will undermine its future competitiveness if it fails to support its low-carbon industries.

The study, based on a joint analysis by economic research institutes including the German Institute for Economic Research (DIW Berlin), the Institute for Sustainable Development and International Relations (IDDRI) in France and the Grantham Research Institute on Climate Change and the Environment in the UK, finds that Europe’s competitors, including China, India and the United States, have been steadily investing in low-carbon technologies and energy efficiency, and that it is in Europe’s economic interest to remain a part of this evolving group of leaders.

Although action to protect Europe’s energy-intensive industries is fully justified, energy prices have little impact on the global competitiveness of the majority of the European economy, the report adds. In Germany, for example, for 92% of manufacturers’ energy prices make up less than 1.6% of revenue. “While it is important to contain energy costs, they do not determine the international competitiveness of European industry, or of the European economy overall,” the report continues. “Europe spends a similar proportion of its GDP on energy as the United States and other major competitors.”

Countries with higher energy prices tend to use energy more efficiently, limiting the impact of higher prices, Climate Strategies says. The report recognises that the 8% of industries that spend more than 6% of their revenue on energy deserve special treatment – but they get that special treatment, it contends.

It also rejects the argument that Europe is putting itself too far ahead of the pack by acting unilaterally and damaging its industry in the process. “Europe is not alone …. A diverse group of countries and regions is now advancing policies to enhance energy efficiency in building, industry and transport; to increase deployment of and industrial capacity in renewables; and to price carbon,” it says.

“While the EU was preoccupied with the euro crisis, many of its competitors have been investing heavily in renewables and energy efficiency, and are increasingly supporting CO2 emission reductions with some form of carbon pricing,” says Henry Derwent, chief executive of Climate Strategies. “It takes a lot more than current average energy prices to determine competitiveness. This report aims to inject a fuller global perspective into the debate. Europe’s choices now will determine its standing in the lower-carbon future to which major economies are moving.”

Michael Grubb, chair of energy and climate policy at CambridgeUniversity and a Climate Strategies board member, adds: “Europe cannot compete in the global economy based on cheap resources. Like Japan in the 1980s, it must compete on innovation and efficiency. Europe currently has a good position on patents across most low carbon technology sectors, but this risks being rapidly eroded. Europe is not ahead on energy efficiency, and renewable energy targets now exist in 138 countries. Sixty six countries, including Australia, South Korea, South Africa, Canada and Brazil have emulated the feed-in-tariffs widely used in Europe.”

The report calls for measures in three broad areas – energy efficiency, research and development of low-carbon technologies and proper carbon pricing, “to ensure that the costs of environmental damage are reflected in market signals”.

This seems reasonable. Despite the hopes of many, the scale of the US shale gas sector will not be replicated in Europe, even if there will be some production that will help at the margins. This is not for want of trying – it is to do with geology, different legal regimes and land ownership laws. The US’s advantage in this area is inbuilt. Europe should respond to its higher energy prices by becoming more efficient.

It should also continue its roll-out of renewable energy capacity – we are among the least energy self-sufficient regions in the world and our big opportunity to become more self-sufficient is in renewables. The rest of the world is not going to slow its expansion of renewables if we decide to reduce the pace of change. Just look at China, which last year installed 12GW of solar capacity, more than its entire stock of solar power before last year. Now is not the time to step off the path of decarbonisation. The danger is not that we are too far ahead, but that we fall too far behind.