Chapter 3some form of energy systems transformation.This has two important consequences. First, becauseof the variation in national energy markets, summarizedin figure 1, the importance of each externality varies bymember state. Spain and Portugal are energy islands dueto the isolation of the Iberian peninsula; most of easternEurope remains dependent on fossil fuels, either domesticcoal or gas imported from Russia; Denmark is, at least forthe near term, a net energy exporter that has decoupledGDP growth from energy consumption; France has alreadydecarbonized 80% of its electricity supply throughreliance on nuclear energy. These national differences inthe structure of energy production, distribution, and usealter the importance that each member state attaches tothe goals of competitiveness, energy security, and emissionsreduction.Second, isolated solutions to one externality may wellexacerbate the others. Thus pursuing individual solutionsto each of these externalities could well fracture thecoalition required to maintain policy at all. The climatepolicy mix, therefore, should be viewed not as an attemptto resolve the emissions externality alone, but to optimizepolicy within the constraints imposed by these three energy-relatedexternalities.Those constraints come in two parts. Politically, eachexternality has its own constituency inside the EU. Energysecurity is most salient for the new member states,whose exposure to Russian influence through their dependenceon energy was made clear by the 2005-2006,2007-2008, and 2009 Ukraine gas crises. The westernEuropean states, who depend less on Russian energy,are correspondingly less concerned (though balanceof-paymentsconcerns over imported fossil fuels remainsalient). Emissions reduction is most important to somestates with strong green parties, and to those who viewEuropean climate leadership internationally as vital. Butstates with relatively high carbon energy shares viewemissions reduction as a potential drag on economiccompetitiveness. Competitiveness, of course, is a universalconcern: but states with strong renewable energytechnology industries (like Denmark or Germany) standto benefit substantially from EU-wide emissons reductionprograms, while other states may become net importersof these technologies. Thus each policy domainhas separate, though sometimes overlapping, memberstate constituencies.Optimizing along any one externality would risk fracturingthe coalition along these lines. Pursuing emissionsreduction through a high emissions price would havetwo immediate effects: first, it would substitute Russiangas for domestic coal in electricity generation, at an immediate40% reduction in carbon per unit energy. Second,it would raise retail electricity prices substantially,and disproportionately in high-carbon-share economies.These developments might lead to defection by memberstates concerned about energy security and reduced economiccompetitiveness.Likewise, pursuit of energy security alone would leadto significantly greater use of domestic EU coal. Muchof the remaining coal in Europe, such as that around Si-Emissions and energy intensityEU MembershipEU−12EU−15EU−25EU−270.6Tons carbon emissions per EUR 1000 GDPKg oil equivalent per EUR 1000 GDP10000.58000.46000.30.24000.12002008200720062005200420032002200120001999199819971996199519941993199219911990200720062005200420032002200120001999199819971996199519941993199219911990Figure 2: Emissions and energy intensity of economic activity in the EU across enlargements. Emissions data are expressed as MMTcarbon per constant 2005 €. Energy data are taken from Eurostat and are expressed as kg. oil equivalent per real €1000.Source: Emissions data are taken from the Carbon Dioxide Information Analysis center and are expressed in MMT Carbon.26
Chapter 317 This, of course, is limited tothe case in which each memberstate had binding targets withouttradeable certificates. In that case,member states could not satisfytheir domestic targets throughpurchases of excess renewableenergy production from abroad.As of 2011, the EU renewableenergy goals permit only limitedtradeability in renewable energy.18 Huberty et al. (2011) analogizeenergy systems transformation toearlier technological transformationslike information and communicationstechnology (ICT). Cognizantof the differences betweenICT and energy, the breakup ofvertically-integrated energy systemsbears some relationship tothe United States government’santitrust actions against the AT&Ttelecom monopoly. In both cases,policy action has attempted to facilitateinnovation on the networkby separating control of the networkfrom control of the devicesand services that operate on it.Whether this will work for energythe way it did for ICT remains tobe seen.19 Note that this will persist evenafter the move to auctioned permits.Auctioning will only controlinitial allocation within memberstates, not between them. Burdensharingwill still govern memberstate quotas under the ETS, andthe member states retain the rightsto use auction revenues howeverthey see fit.lesia in Poland, is of the soft brown ligniteWorld EnergyCouncil (2010) variety, which in addition to its carbonemissions carries a much higher share of other pollutantscompared to the hard coal of earlier generations. Thiswould alienate member states more committed to emissionsand pollution reduction, and frustrate EU attemptsto achieve its commitments under the Kyoto protocols.Furthermore, a renewables target alone would generatesignficant benefits for member states with strongwind and solar power industries. Those countries wouldstand to benefit from increased exports of capital goods,such as wind turbines and solar cells, to other memberstates lacking domestic production capacity.17 But thatwould come at large costs to technology-importingcountries, both in absolute terms and in the secondaryeffects on trade balances.Finally, linkage of security, competitiveness, and climatechange goals was made easier by energy marketreform. Adoption of significant volumes (> 20%) of nonhydroelectricrenewable energy–a cornerstone of energysecurity, emissions reduction, and policy competitiveness–posessignificant challenges to the power grid.Technologically, the intermittency of most renewableenergy sources can destabilize the power grid and lead tosupply disruption. Those problems can be offset throughgrid reinforcements and investments in new technologies.Making those investments, however, would not havebeen in the interest of older, vertically-integrated statepower moonopolies. Their control of both productionand transmission of electricity gave them large incentivesto favor their own energy production assets in makingnew grid investments and allocating grid capacity. As acorollary, it also gave them few incentives to invest innew transmissions connections for renewable energy resources,or to harden the power grid to effectively manageintermittent generation. In this context, the breakupof the power monopolies and the creation of independentmarkets for production, transmission, distribution,and use was a critical step in pushing for the adoption oflow-carbon energy sources.18Thus each policy problem carries with it unique interestsfor and against that would frustrate attempts to pursuethem in isolation. Instead, the EU energy and climatepolicy suite has evolved to yoke progress along any onepolicy dimension to progress along the others. The mixof costs and benefits to any one interest group varies bythe policy instrument, implicitly cross-subsidizing policycompliance. Finally, the ability to pursue all of these policieswas highly contingent on the market reforms thatenabled their implementation.4.2 Political economy as a rebuttal to pricefundamentalismThis analytic framework suggests that the arguments ofthe price fundamentalists miss the forest for the trees. Asemissions policy alone, the ETS may be inefficient andcumbersome compared to a pure carbon price. As energypolicy, the renewable energy mandates crowd out other,cheaper emissions-reducing fuels and efficiency investments.As market policy, energy market liberalizationmakes only partial sense in a world of massive, highlycentralized fossil fuel generation plants.But in practice, the policies manage the tradeoffsbetween each of the three externalities. The renewablesmandate accomplishes four ends: it provides emissionsreduction largely through renewable electricity adoption;it expands domestic renewable energy markets, generatingprofits for firms in renewable energy leaders likeDenmark and Germany; it provides indigenous energysubstitutes not subject to Russian influence; and it shiftsthe cost incidence of emissions reduction from retailelectricity prices to subsidies paid, at least partially, fromgeneral taxation."Thus the renewables mandate solves the security problemsof new energy sources, and generates significantincome for some member states"Absent some means of subsidization, the renewablesmandate might generate opposition among either thoseless concerned with emissions or those net renewableenergy technology importers. But the Emissions TradingScheme, together with reallocated EU StructuralAdjustment Funds, provides a political framework forimplicit cross-subsidization. As Zachmann (2011) hasshown, the new member states–for whom energy securityvia renewables is more expensive than via domesticcoal–receive relatively more permits than they shouldcompared with historic baselines. Conversely, countrieslike Germany and Denmark–who stand to benefit fromthe expansion of the renewable energy market–receiverelatively fewer.19 Since those permits have value on secondarymarkets, this represents an implicit subsidy to thesame member states who are most exposed to the costsof renewables-led emissions reduction. Thus the renewablesmandate solves the security problems of new energysources, and generates significant income for somemember states. But some of that income is recycled viathe ETS permit process, cross-subsidizing energy securityvia renewables rather than domestic coal.Finally, the pursuit of emissions reduction raises concernsabout European competitiveness in the face of highenergy prices. To offset these concerns, both the renewableenergy mandate and the ETS provide compensating incentives.First, renewable energy has become a significantarea of European comparative advantage. Maintenance ofthat advantage will require ongoing innovation. As a rangeof studies have shown, many aspects of energy innovationrespond better to learning by doing than by laboratory or“big science” research alone.(Heymann, 1998; Kamp et al.,2004; Meyer, 2007; Acemoglu et al., 2009) The renewablesmandates, by expanding the market for installation of newtechnology, provide the means for that kind of innovativeactivity. Meanwhile the emphasis on energy technologysupport in the SET-Plan and the Framework Programmesunderpins basic research. Economically, these programsintend, at least, to generate signficant innovation and jobGreen Growth: From religion to reality 27
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