The European Commission has this week published its Green Paper on a 2030 framework for climate and energy policies, launching the debate on a package of measures for 2030, a kin to the 20:20:20 package agreed more than five years ago.

We recognise and support the need for a 2030 carbon emissions target for Europe; this is not surprising as we support the UK’s longer term goal, through the climate change act, to reduce emissions by 2050, which staging posts along the way. However, this draws out two distinct points; should Europe’s timeframe not be much longer than simply a 2030 package. Then is a more focused emissions reduction target, the best way of achieving this 2030 and 2050 goal, rather than other conflicting targets?

In terms of the focus on the 2030 timeframe, we must be mindful that although it seems a long way off, even to 2050 represents only one or two investment cycles for some sectors. If these sectors are to meet the significant challenge of decarbonizing, immature technologies and technical solutions must be developed, demonstrated and made commercially available. The endeavor for technological innovation and break-through technologies is at a critical juncture, and a focus on 2030 may be too short for many sectors.

On the second point, it is clear that many in the Commission and indeed Connie Hedegaard herself will be pushing for another renewables target; we simply do not support this. Policies must be designed, which aim to provide the outcome and not prescribe the route. A strong decarbonisation target for Europe will be sufficient to provide the incentive to invest in the most cost effective decarbonisation strategy for each Member State and assist the transition from high carbon, through to low carbon on to no carbon.

The paper also highlights the option for a new energy saving target in the guise of an energy efficiency target, but again we have our reservations. Although the paper does suggest that this could be a relative target, matched to GDP, policy makers should be mindful of overestimating the benefits of energy efficiency by conflating it with energy reduction. Raising energy efficiency is an important policy objective which can help reduce the pressure that rising energy prices place on business competitiveness. However, there is little or no historical evidence to suggest that increasing energy efficiency will significantly reduce energy consumption.

Arguably, the reverse, that improvements in efficiency will stimulate demand for energy, is more likely. Improving efficiency makes using energy less expensive and encourages much needed economic growth, both of which tend to encourage energy consumption.

The paper also asks for views on the current policies, including EU Emissions Trading System. While many may agree that EU ETS is broken, views are divided on what the fix needs to be. Our view is that the significant structural problems with the EU ETS are best fixed in a full review that looks to Phase IV (post 2020), rather than short term fixes. A robust, global means of pricing carbon would be of significant benefit; however the EU ETS is in our view, no longer fit for purpose. This is particularly true for internationally traded sectors, such as steel. The EU ETS, in isolation, restricts growth in carbon efficient countries, inversely incentivising production in countries with no carbon standards and hence has little or no impact on global emissions.

We would call on the Commission to considering the case for moving trade-exposed, energy-intensive sectors to a single trading bubble under the EU ETS, where the cap is adjusted in line with the emergence of cost-effective abatement opportunities, particularly in the continued absence of a global deal on climate change.

There is also a question of what to do with the revenues from EU ETS we have recommended that the Commission adopt a technology-neutral approach when allocating further project finance through NER300. Currently it is solely focused on CCS and renewable energy projects. For consistency, it should adopt the same criteria for innovation investment as Horizon 2020.

Finally the debate on the future of climate change policy is likely to be a fractious one, with industry on one side and the Commission on the other. It is a shame that European politics is still dominated by this stark division. At a recent meeting between industry and Hedegraard, the Commissioner warned industry not to try and “water down” the Commission’s proposals. In the UK, we have an open and honest debate with government which is firmly grounded in evidence, and increasingly, we seek to find our common ground and discuss the areas where we have less agreement. This constructive, evidence based debate, has led to a number of significant policy changes such as the Energy Intensive Industry package, and Brussels should take note.

As we highlighted in our recent report, Tech for Growth, we know what the prize (the clean tech sector value) is, £880bn between now and 2050 for the UK, and we need to work together with the UK government and the Commission to avoid policies which create the market, but ensure that EU manufacturers are unable to compete in that market. What we need from the Commission and the UK, is a strong focus on innovation and the technologies which will deliver the solutions to climate change, both in Europe and beyond. With this in mind, we must understand what Europe’s vision for manufacturing is, not just what the top line climate policy will be. We need to imbed competitiveness at the heart of European policy making.  

ENDS

Chief amongst the proposals are new targets for 2030. The 20:20:20 package set a target for 2020 to reduce European emissions by 20% relative to 1990, to achieve a share of 20% for renewable energy sources in energy consumption, and a saving of 20% in energy consumption.

Whilst the negotiations on an international agreement might be up in the air at the moment, there seems to be some progress in other forum.

The International Chamber of Shipping (ICS) has proposed international sector agreements for shipping.  Recognising that shipping accounts for around 3% global emissions, there is a lot that can be done in reducing emissions in this sector.  However, at the same time acknowledging that without a global sector agreement, there is a great risk of carbon leakage.

The ICS is calling on governments to recognise the benefits of such an approach in avoiding dangerous climate change and fully support the implementation of a shipping sector agreement.

EEF has long argued, and most recently in our position paper on Durban, that sector agreements for certain sectors is an equitable and fair way to reduce emissions at the global level.  Taking the steel sector as an example, there would be great benefits to coming to such an agreement.  As we heard yesterday when EEF gave evidence to the DECC Select Committee, when many of the variables in production are the same, this gives a level playing field.  The issue for manufacturing in the UK and Europe however, is that these variables are skewed in part by the price increases caused by our climate change policies.  This risks pushing production out of these regions to less environmentally regulated regions, thus doing nothing to abate emissions at the global level.

In the absence of an imminent deal on climate change post-Kyoto, global sector agreements for certain sectors starts to make a lot more sense; allowing regional circumstances to be more easily taken into account whilst certain regions continue to develop.  It also has the potential draw wider participation from developed and developing nations and tackle emissions in more comparable way.

Indeed, taking the example of aviation, perhaps for some sectors, this is the only way to achieve reductions without a universal global commitment.  Europe is still pursuing including aviation in the EU ETS, but this has come up against very strong opposition from around the world, with concerns about equity and trade barriers.  Imposing regulations on countries outside of Europe are effectively poorly disguised trade barriers and as America argues against international law.  As Kuni Shimada, special adviser to the Japanese Environment Minister Goshi Hosono rightly put it:

“Domestic law shouldn't be applied to somebody who is not subscribing to that law.  It's ok for the 27 EU members to comply with it, but not for us, because we didn't decide it.”

This issue also raises issues about driving activity outside of Europe as it continues to plough blindly with a policy that no one else is following and is increasingly leaving the EU isolated.

Tensions are running so high in this sector that a Chinese airline is filing a law suit against the EU by the end of this year.  Perhaps it is time for Europe to look beyond their beloved cap and trade?

I attended a lunchtime seminar at the Royal Commonwealth Society yesterday.  Here Henry Bellingham, the Parliamentary Under-Secretary of State for the Foreign and Commonwealth Office, spoke to us about the unique position of the Commonwealth in tackling in climate change.  The Commonwealth has such a broad range of countries within its 54 country membership, from ‘every global interest’ but with a common mindset and a sense of unity.  This Bellingham says is what puts the Commonwealth in such a strong and unique position in international climate change negotiations.

32 of the countries most vulnerable to climate change are part of the Commonwealth and are already starting to feel the effects of climate change.

Bellingham went to argue this makes it even more important to ratify a global deal, but realistically acknowledging this is still a long way away.  He spoke of the need to lead through example, to say ‘follow me, instead of after you’.  However – EEF has long argued – is anyone actually following, or are we in Europe, with the EU ETS, just ploughing ahead blindly?

I believe that Bellingham actually gave a realistic alternative that still show leadership, but through a different approach:  the low carbon economy.

If we, in the in the developed economies can prove that decarbonising can still mean growth, this will act as an incentive for others to follow; the current system of cap and trade that adds unilateral costs to Europe production and simply outsources our carbon emissions is not attracting any takers and a different approach is needed.

The challenge then is to foster this new kind of environment, and for the Commonwealth to challenge us to show leadership here to prove that green can mean growth.

Connie Hedegaard is quoted as saying

"What is the point of extending our commitments if none of the other big economies say that they are willing to follow, if not today, then at least at some time tomorrow?"

It was very heartening to hear her talking common sense when asked about the future of the Kyoto Protocol after it comes to an end in December 2012.  There had been rumours that Connie and Chris Huhne would push for Europe to go it alone, which to me would be econmically damaging for Europe and won't achieve a global solution to climate change.

A global legally binding accord would in theory be the best approach, however, we have been trying to achieve this since 1992 and how far have we come?  Kyoto set in motion the framework for a global deal, but the most significant outcome has been the increasingly isolated EU ETS cap and trade scheme. 

It has become evident that for only Europe to have a cap and trade scheme is detrimental; it pushes up energy prices when many other countries’ energy remains low, thus pushing production to the emerging economies who are booming because of the increased demand to produce the goods demanded by European consumers.  This leads to a crucial point, are emissions actually going down, or are they just being moved to these less regulated, and cheaper to produce in countries?

As Connie stated, “Europe represents only 11% of global emissions.  What will the other 89% do?”  We need to stop thinking that other countries will follow our lead, they aren’t and they won’t, while the EU has such a complex and costly climate change policy landscape.

There is a need to re-evaluate the approach we take in tackling GHG emissions at the global level rather than keep hoping everyone will suddenly have a change of heart.  If the talks at Durban can recognise this, then I think the talks will start to move us out of the stalemate we are currently in.

EEF will be closely following the talks at Durban and calling for a move away from a Europe-only view.

Today UK MEPs defied David Cameron by voting against the proposed move to a -30% reduction target for EU ETS.  There are cries of heresy and betrayal, that these MEPs are throwing our future away and Europe will lose out to race to a ‘green economy’.  But let’s just take a step back and remember why this vote was even on the agenda.  EUROFER’s director general, Gordon Moffat stated in a press release recently that:

“After the Copenhagen failure, the EU would be foolish to again unilaterally increase its GHG objective.  Before Copenhagen, the Union affirmatively stated that it would only move to -30% if binding measures would be taken by other countries, comparable to the EU’s -20%. Clearly no other country has followed Europe. It cannot therefore credibly justify a move to -30%.”

It is very important to remember this point.  It was never on the agenda because Europe didn’t think we were not going far enough with our carbon reduction targets, but because it was meant to act as an incentive to entice other countries to set reduction targets.

When talking about this race to a green economy, I wonder if we have lost sight of the goal:  We, in Europe, are the only ones with such a scheme.  Our biggest competitors, China and the US, do not have carbon reduction targets.  How can we lose if we are the only ones in the race? 

If Europe continues to impose higher costs than other countries - unregulated countries – production will be pushed out of Europe and to our competitors.  This will in no way reduce carbon emissions; it will merely move it to these more unregulated areas and at the same time Europe loses the jobs and investment that a tighter target will supposedly bring.

Martin Callanan MEP was quoted in the Guardian as stating: "Conservative MEPs have always been sceptical of the EU unilaterally increasing its target to 30% without a worldwide agreement. I am in favour of increasing the EU target to 30%, or even higher, in the context of a global agreement where our competitor countries take similar action. Increasing our own targets while the rest of the world does nothing will have virtually no measurable effect on global emissions, because it will force large EU emitters to relocate to other countries outside the EU where they will continue to emit at a much lower cost.  We are also concerned that the higher carbon emission costs resulting from an increased target will feed through into energy price increases for domestic consumers"

It is also important to remember that this vote was not so narrowly lost as some would like to think, the vote was lost by more than a third.  So perhaps those voting against it are not just blindly doing so, maybe they are also looking at this from a common sense perspective?

There has been a lot of coverage in the last week about the theft of approximately 475,000 EU ETS permits from a Czech Carbon Trader. What is interesting about this case is of course how it could happen in the first place, given that each and every EUA (carbon allowance) has its own unique serial number. How are these dodgy allowances sold, one can almost imagine a sub market, conducted in the shadows, where EUA are traded for brown packages full of Euros.

What is more interesting is how holding these stolen allowances in different parts of Europe will have a greater or lesser degree of risk attached to possession. It is only in cases like this do we remember that possession of stolen property is treated very differently, depending on which Member State you are in. For example, in the UK if you are found to have any of these allowances in your registry account, they are stolen goods and although you believed they were legitimate when you bought them, they could be confiscated without compensation. However, in Belgium (and other Member States), if you purchased the EUA in good faith, at a reasonable price, they are legally yours and you would not stand to lose money over the transaction. Even if they were taken off you, I understand you would be compensated for your loss.

This might go some way to explain the motivation for the theft in the first place, apart from money. It begs the question, if you are based in the UK, how do you know the allowances you have recently purchased are legitimate and how do you know assess the risk.

Within all the debate surrounding free allocation to industrial sectors, seen as fully exposed to international competitiveness, under the EU Emissions Trading Scheme (ETS), there is an often forgotten, but important problem that needs to be addressed. That of electricity intensive sectors which will see their energy bills significantly increase as an indirect result of the EU ETS and the pass through of costs from electricity generators to their customers.

The ETS Directive makes provision for electricity-intensive companies to be compensated by their governments for the increases in electricity prices that will become steeper as the emissions ceiling begins to bite from 2013 onwards. There have however been fears that Brussels was back-tracking from this commitment to provide the overall mechanism for Member States to provide this essential support to these sectors.

We at UK Steel (a division of EEF) held a series of meetings with Commission and UK government officials in Brussels to press for early publication of draft proposals. More recently it has been learnt that the relevant Commissioner (Joaquín Almunia, DG Competition) has now decided that the Commission should proceed with drawing up the required rules, and a draft should be issued for consultation around Christmas. We will then be looking to the UK government to support such measures for UK sectors.