The U.S. subprime mortgage crisis has, together with other factors, plunged the world into financial chaos. Bank lending has dropped to a minimum as financial institutions scramble to procure desperately needed liquidity. Western governments have swiftly responded, turning taxpayers’ monies into ‘rescue packages’ that amount to several hundred billion euros.
The financial crisis is threatening to downgrade the climate crisis
Nevertheless, the problems do not seem to go away as the losses on Wall Street spill over into Main Street. Current, rather optimistic forecasts for 2009 are foreseeing recessions for the United Kingdom, Estonia, and Latvia, while countries such as Germany, France, and Italy, are expecting zero growth. In turn, the EU’s unemployment rate is expected to rise.
Under these conditions, policies to avert the adverse effects of climate change are under increasing strain. Opposition towards the EU’s proposed energy and climate change package is growing louder and starting to spread beyond the borders of the coal-based economies of Central and Eastern Europe.
There is clearly a tremendous need to act and stabilise the global financial system. Nevertheless, now is not the time to back away from necessary climate change measures as envisioned under the EU’s package. This is not only due to the urgency of climate change and the need to rein in emissions, but also because of clear institutional and economic factors.
Postponing climate change legislation will cost us in the future
Should the French Presidency fail to reach an agreement in December, the future of the energy and climate change package will be extremely bleak. The Czech Presidency, already unenthusiastic about the package, has indicated its disinterest in taking up any unfinished business on this matter. The European Parliament elections in summer 2009, combined with a new Commission and subsequent new configuration of forces, could also significantly obstruct its adoption.
While certain states would welcome such a development, as measures such as the Emissions Trading System (EU-ETS) would increase their industries’ financial burden by internalising the costs of emitting CO2, such a view is short-sighted and fails to account for future sustainable economic development.
The Stern Report on Climate Change has clearly illustrated that the costs of mitigating climate change today are significantly lower than those we will have to bear in the future if no action is taken. Subsequently, postponing or watering down crucial climate change legislation now will end up costing us more in the long-term.
The need to provide investment security while avoiding carbon lock-in
The legal limbo surrounding the EU’s energy and climate package is also bound to have adverse effects on investment security. This is particularly important as a large number of European power plants are nearing the end of their operating lifetime. In this context, investors, already constrained by reduced bank lending, need clear political signals that their investments today will pay off in the future. At the same time, European policymakers need to ensure that these new investments avoid a so-called ‘carbon lock-in’, that is to say, avoid building new high-emission power plants as these will last for the next 30 to 50 years. This financial-environmental tandem of providing investment security while simultaneously avoiding carbon lock-in can be reached with the right political and economic instruments.
The EU-ETS with the planned auctioning of emissions permits for all power generators by 2013 can be such an instrument as it puts a monetary value on CO2 emissions, which investors can take into account, and while this value does fluctuate, it will eventually rise in line with the need to lower emissions in the future. Such a scheme provides the opportunity to cut emissions through innovation and sell unnecessary emission permits, thereby rewarding innovative, forward-looking companies.
Legislation, such as the European Parliament Environment Committee’s proposition of setting a ceiling on carbon emissions for new power plants at 500 g/KWh (similar to legislation in California), can also avoid carbon lock-in more directly, while support schemes such as feed-in tariffs for renewables can provide investment security.
Energy efficiency to play a crucial role
One of the most relevant tools, however, is energy efficiency, which simultaneously cuts costs and emissions. It is therefore regrettable that the European Council still refuses to make its 2020 20% efficiency target mandatory.
The International Energy Agency (IEA), for example, estimates that on average every additional $1 spent on more efficient electrical equipment, appliances, and buildings avoids more than $2 in investment in electricity supply. A study by the McKinsey Global Institute (MGI) has calculated that an annual global investment of $170 billion in energy efficiency improvements over the next 13 years, a figure far lower than the size of the current rescue package, would yield up to $900 billion annually by 2020. Following in this vein, raising the average global level of efficiency just for power plants to Spain’s level, which has a 46% efficiency level, would alone remove 2.4 Gt of CO2 and save 770 mtoe (million tonnes oil equivalent), or up to 17% of annual global oil demand, thereby significantly reducing fuel costs.
Energy efficiency measures would not only improve Europe’s international competitiveness; they could also play an important and innovative role in the long-term stability of financial markets. A robust financial framework for trading in energy efficiency certificates and the creation of energy efficiency funds, for example, could provide the requisite security for those institutions that need assets to match their long-term liabilities, such as insurance companies, pension funds or even sovereign wealth funds.
Financial and climate change measures are complementary
Policy responses to the financial and climate crises should not be perceived as diametrically opposed. In fact, they are in many ways interdependent and should be tackled in a complementary manner. We need strong financial systems with sufficient regulation if we want to ensure the smooth functioning of an emissions trading system and the financing of green technology. Such technologies can provide immense opportunities for financial markets and jolt us out of the economic doldrums. A green ‘New Deal’ based on renewable energy and energy efficiency, with vast investments in job-intensive infrastructures, could revive our economy and replace our 19th century carbon-based energy model with one firmly placed in the 21st century. The auctioning of emissions permits may become particularly interesting for its ability to raise revenue for cash-strapped governments.
Furthermore, this crisis is also an opportunity to bring about the end of the nuclear energy age, the so-called ‘renaissance’. Due to the cost-intensive nature of nuclear energy it will not be able to survive in such a capital-constrained environment without financial support from governments.
Policymakers must ensure that the restructuring of the financial system and the stimulus packages prepare the ground for an ecological transformation, which in itself will stimulate our economy. Europe needs to work on retaining its leadership role and not falling behind in efficiency increases, technological innovation, and the global shift to ‘green’ collar jobs if it wants to secure its international competitiveness and influence.
We must use this opportunity to put into place the foundations that will create wealth for our society and coming generations rather than protect the industries of yesterday.
Roderick Kefferpütz* is responsible for Energy Policy at the EU Regional Office of the Heinrich Böll Foundation. He is a regular commentator on energy security, climate change, and EU-Russian relations in the international and German media, and has authored and edited a number of publications on these issues. Roderick has a degree in International Relations and an MPhil with distinction in Russian and Eastern European Studies from the University of Oxford.
*The views expressed in this paper do not necessarily represent the views of the Heinrich Böll Foundation.