GREEN GROWTH: FROM RELIGION TO REALITY - Sustainia

Chapter 3provide significant European and Member state fundingfor research, development, and deployment of newenergy technologies (European Commission Staff,2009; The European Commission, 2007; EuropeanCommission, 2009).Figure 4 shows that this policy suite did not arrive atonce–rather, it evolved over time. As it did so, the politicaljustification for each policy evolved as well. The liberalizationof the energy market began in 1996 as a fairlystandard extension of the Common Market, in parallelwith other EU attempts at services and goods market integration.7In its initial form, the European Commissionjustified the program on the basis of more competition inenergy markets, lower prices for retail and industrial customers,and improved investment in energy infrastructure.(TheEuropean Commission, 2001) By 2003, theParliament and the Council had adopted the second gasand electricity directive to begin the process of integratingnational markets via network connection and marketreform. Those reforms were extended and deepened viathe 3rd market directive, issued as part of the 2008 Climateand Energy Package.In contrast to these market reforms, which have a longhistory in European widening and deepening, the EmissionsTrading Scheme was a direct response to externalevents. At the Kyoto talks in 1997, EU member states hadcommitted to emissions reductions of 8% below the 1990baseline by 2012.8 The EU believed that it could achievethese reductions more efficiently acting as a body, than ifeach member state did so on their own. Economic costsfigured heavily in this decision. Since the majority ofEuropean Union trade takes place among the memberstates themselves, a pan-EU emissions regulation mechanismwould minimize potential distortions to the CommonMarket that state-level policy regimes could haveintroduced. It also had the potential to lower compliancecosts, by allowing member states to invest in emissionsreductions (via the indirect mechanism of emissionspermit purchases) where the marginal cost of reductionwas lowest. The Emissions Trading Scheme thus beganlargely as a carbon market, intended to price carbon andso incentivize emissions reduction via efficiency, investment,and innovation.In 2007, two years into the operation of the ETS, theCommission proposed strengthening the ETS and implementingaggressive targets for renewable energy deployment.In what became the so-called 20/20/20 goals,the 2007 Commission white paper (The European Commission,2007a) proposed that, by 2020, Europe obtain20% of its energy from renewable sources, use energy20% more efficiently, and reduce emissions by 20% relativeto 2005 levels. To do so, it proposed moving beyondthe emissions trading scheme to use direct subsidies torenewable energy–so-called feed-in tariffs or other supportschemes–to incentivize renewable energy adoptionand decarbonization of energy production.9 Thisproposal was eventually adopted in December 2008 as aset of legislation known as the 3rd Climate and EnergyPackage.10 In addition to the renewable energy and emissionstargets, the Package also provided for EU-level coordinationof national energy market regulations, establishedan EU-level energy regulator, and reinforced themandate for the breakup of vertically-integrated nationalelectricity monopolies into separate markets for production,transmission, distribution, and retail.Finally, the EU has moved to implement significantsupport for energy R&D relative to its budget. The StrategicEnergy Technology Plan (European Commission,2009) laid out a series of innovation and pilot programinvestments seeded with EU funding but completed byconsortia of private corporations and member states.Those investments complemented existing investmentsin energy R&D in the 7th Framework Programme, whichinvested €2.3 billion in energy-related research over theperiod 2007-2013.3.2 Policy redundancy in the EU emissions reduction suiteThis energy policy suite marks a major accomplishmentfor the EU. It has significantly expanded EU authority overa major sector of the European economy. It has creatednew EU institutions that usurp some member state authorityover energy market regulation. It has led to the formalor legal dismantling of state-owned energy monopolies,foot-dragging by Germany and France notwithstanding.All these developments have given the EU new influenceof the evolution of the rest of the economy, via regulationof how energy is produced, distributed, and used.But, theoretically, much of this policy should not benecessary for the EU’s climate policy goals. Emissionsreductions, in particular, should not require parallelprograms to incentivize renewable energy, energy efficiency,or research and development. Rather, the consistentmessage from economic analysis has emphasizedthe primary of the carbon price alone.11 Given the rightemissions price, market actors should of their own accorddetermine the most efficient way to optimize theirinvestment in greenhouse gas emissions reduction. Bythis argument, separate policies to promote renewablesand push energy efficiency may constitute market-distortingindustrial policy.12 Indeed, it now appears thatmost of the 2020 emissions goals in the EU will be satisfiedthrough widespread deployment of renewable energy,even though many cost estimates (such as Enkvistet al. (2007)) show that energy efficiency improvementsare often much cheaper.This problem only compounds other issues of the designof the ETS itself: rights to emit are granted via themember states, rather than auctioned by the EU, leadingto all kinds of chicanery among the member states13;allocation is based on prior-period emissions, providingperverse incentives to over-emit and thus keep the baselinehigh; and the price of emissions permits on the secondarymarket has proven somewhat volatile and unpredictable.All of these institutional designs raise the priceof emissions and reduce the effectiveness of the ETS.14This gap between theory and policy implementationis puzzling in light of the political economy of climate7 This is true with one significantexception: unlike most goodsindustries, electricity does notpermit integration via mutual recognition.Rather, integrated electricitymarkets require commonstandards for operation of the electricalgrid. Some regions–notablythe Nordpool market in Scandinavia–hadaccomplished electricitymarket integration outside of theEuropean Union. Now that gridpolicy has become a Europeancompetence, the ENTSO-E bodyhas been tasked with this process.But the EU has relatively little experiencein standards-based marketintegration.8 The Kyoto Protocol’s carbonmarket mechanism was actuallysomething foreign to the EuropeanUnion. The EU memberstates had traditionally preferredtop-down regulatory instrumentsfor environmental policy. Theyagreed to the permit trading conceptat the insistence of the UnitedStates. Despite the latter’s withdrawalfrom the Kyoto Protocol, theEuropean Union continued withthe framework and its price andquantity instruments.9 The European Court of Justiceplayed a critical role in the evolutionof feed-in tariffs. Many of themember states had adopted feedintariffs in the 1990s, but doubtsremained as to whether theyconstituted illegal state aid underthe Common Market regulations.A 2001 ECJ decision (EuropeanCourt of Justice, 2001) confirmedthe legality of feed-in tariffs andpaved the way for their adoptionacross the EU.10 Timing here proved critical.2009 saw a rapid worsening ofthe European economic situationand financial crises in a series ofperipheral economies. Interviewswith a variety of EU and memberstate policymakers in late 2010and early 2011 confirmed thatthe Climate and Energy packagewould not have passed underthose circumstances. The decisionof the French Presidency to pushfor ratification at the end of itsterm played a critical role in institutionalizingthe Commission’swhite paper.11 This has developed into a selfstyled“carbon price fundamentalism.”Nordhaus (2010) notesthat “under limited conditions, anecessary and sufficient conditionfor an appropriate innovationalenvironment is a universal, credible,and durable price on carbonemissions.” The potentially infinitesimalintersection of the limitedeconomic conditions he refers to,and the limited political conditionsthat would lead to a “universal,credible, and durable” price, posesmajor problems.12 For public criticism of suchparallel efforts, see Schmalenseeand Stavins (2011). For attemptsto quantify the differential cost ofemissions reduction via renewableenergy incentives versus emissionspricing, see Palmer and Burtraw(2005).24