Article > It’s the right carbon price that’ll turn green promises into projects

SUSTAINABLE EUROPE

It’s the right carbon price that’ll turn green promises into projects

Autumn 2010

by Allan Larson / Måns Lönnroth

The shape of a climate investment framework that could kick-start a determined investment drive in low-carbon technologies is outlined by Allan Larsson and Måns Lönnroth

Commentary:

by Mohammed Mostafa El-Khayat

by Andris Piebalgs

by Nick Mabey

by Jim Skea

When Norbert Röttgen, Jean-Louis Borloo and Chris Huhne, the German, French and British environment ministers, committed to a 30% rather than 20% emissions reduction target in a Financial Times article mid-July, they effectively re-focussed Europe’s climate policy debate on the technologies and financial spending needed to turn rhetoric into reality.

Their article said the current 20% target seems insufficient to drive the low-carbon transition: “Moving to a 30% target would provide greater certainty and predictability for investors”, they said, adding that “early action will provide our industries with a vital head start”.

EW BACKGROUND BRIEFING

Now a European carbon tax
is back on the EU agenda

Taxing CO2 emissions has been hailed by economists and environmentalists as a constructive way to give industries an incentive to invest in green technologies. But the high-profile failure of the idea has since called into question its feasibility. The proposed 1994 carbon tax that was to have been implemented at EU level was blocked by member governments, most notably the United Kingdom, despite the fact that a European deal would have reduced the tax's potential economic costs and its impact on intra-EU trade.

More recently, France seemed set to become the first major European economy to tax carbon emissions while subsidising consumer investment in fuel-saving appliances. But that sparked fears of competitive disadvantage if the tax was to be introduced only in France, with the result of fierce lobbying along with public sector strikes ensuring that in March of this year France’s carbon tax plan fell through.

Yet carbon taxes have not provoked the same problems everywhere. In Sweden, a tax on carbon has been in place since 1991. It's been significantly reformed over those 19 years, for the original rate of €27 per metric ton of CO2 is now €108. Although many key industries receive tax relief or are exempted, the tax has had a significant impact on heating and is credited with encouraging a significant move from fossil fuels to biomass. Between 1990 and 2006, Sweden cut its carbon emissions by 9%, largely exceeding the Kyoto Protocol’s target, while enjoying overall economic growth of 44%. Sweden's environment minister Andreas Carlgren says that carbon emissions would have been 20% higher there without the carbon tax.

Sweden has proved that a tax on carbon can be a success, but that raises the question why it hasn't been achieved at European level? Nearly 10 years after its failure, the plan for a European-wide carbon tax has made it back onto the agenda of Algirdas Semeta, the EU Commissioner for Taxes. But many obstacles must still be overcome, because although France, Belgium and Scandinavian countries may support the project, others like the UK are staunchly opposed to it, perhaps as part of their long resistance to any EU-wide taxes.

The benefits of an EU-wide tax on CO2 emissions now need to be clearly explained along with the limitations and such issues as its effect on low income households. There also needs to be a debate on which industries would be exempted.

Earlier this year, the European Commission had declared in May that “we should be ready to act whenever the conditions are right to take this decision”. It now remains to be seen whether the European Council, as the EU’s ultimate decisionmaker, will stick to the earlier commitment to a 20% reduction target, or follow these three key ministers and their more ambitious goal.

The key question in all this is, of course, how can Europe convert political statements into business investments? The Stockholm-based think-tank Global Challenge (Global Utmaning) that we are both associated with has three recommendations to put forward. The first is that we shouldn’t waste any more time on waiting for a global, legally binding agreement. There are no indications whatsoever that the resistance en¬countered in Copenhagen at last December’s Climate negotiations against a legally binding global climate agreement can be overcome in time for the COP 16 successor meeting at Cancún in Mexico. There is instead a growing understanding that reaching a legally binding global agreement is a complex proc¬ess that will probably take many years.

At the same time there is an urgent need to give clear sig¬nals to business that around the world society must embrace a new era of climate responsibility. The EU has so far assumed that a legally binding treaty is both necessary and suffi¬cient to stimulate investments, but since that treaty now looks a long way off, the EU must reverse this approach and instead initiate a parallel negotiation process whose aim is to establish a Climate Investment Framework.

The EU must clearly identify climate strategy not as a burden but as one of the key driving forces for economic modernisation, improved productivity and more sustainable growth. The focus should be on new technologies and investment, a strategy that was outlined in “Roadmap 2050” by the European Climate Foundation.

The EU should make a climate investment framework a top priority both internally and in its negotiations with other countries. The aim should be a political rather than a legally binding agreement giving guidance to policymakers and investors on how to build sus¬tainable energy systems for the future. This simple agreement should focus on just a few strategic issues.

In the first place, it should establish a technology neutral CO2 price to serve as a driver for the modernisation of energy systems. The centrepiece of a climate investment framework is a CO2 price that doesn’t favour any one technology over others. The carbon price in the EU’s emissions trading system is now around €15 per ton, which should be compared to the €40 per ton needed if low-carbon technologies are to compete long-term with fossil tech¬nologies. Fossil technology is thus being “subsidised” by around €25 a ton, even though this will have to be paid by future generations in the form of climate change costs. This has to be corrected by internalising climate impact in the CO2 price. Based on a McKinsey study of abatement costs we calculate a CO2 price trajec¬tory to 2020 that will reach at least €40 per ton within a number of years. In this way, the EU could create a level play¬ing field that would be free from fossil fuel subsidies.

The basic idea behind our proposal for a technology neutral CO2 price is to send a clear signal to business and to consum¬ers that fossil-based technologies will become unprofitable, while low-carbon technologies will be profitable. To create and maintain a floor for this technologically neutral carbon price, reform of the EU’s emission trading scheme (ETS) should be used to stabilise the price along a pre¬determined trajectory, with the availability of emission rights being adjusted more frequently than at present. EU member states would also have to use complementary CO2 taxation for sectors not covered by the ETS. The money generated by higher pricing should be used by member states to invest in en¬ergy intensive infrastructure and in technology transfers.

Energy efficiency is a vital element because it’s the quickest and most cost-effective way of achieving emission reductions, and also rep¬resents roughly half the abatement potential. Many oppor¬tunities in this field are already profitable, but are not being fully leveraged because of conservative practices and ill-functioning markets, the lack of both adequate skills and information. So it’s now time to review the EU’s energy efficiency direc¬tives in the light of its commitment to emissions re¬ductions by 2020. A concert¬ed effort also needs to be made to overcome resistance from special interest groups so a political commitment to strengthening the tools for en¬ergy efficiency should be included in the climate investment framework.

Europe now should start building a global “Climate Investment Community”. The UNFCCC process will have to continue and should be supported by the EU, but there is a clear need for new political initiatives. The UK government’s commitment to a CO2 price floor and the German, French and UK ministerial commitments to a more ambitious reduction target could serve as building blocks for a climate investment framework, with two core elements. First, a technologically neutral CO2 price trajectory, that would have an immediate impact on new investment planning and garner political support for worldwide “a coalition of the willing”.

The second is that countries and groups of countries can create their own climate investment frameworks. Policy harmonisation is not necessary so long as the technologically neutral CO2 price trajectory is roughly the same. Of course, the situation of energy intensive industries will have to be addressed, but extensive carbon leakage is not an option. The policy mix for implementing a higher carbon price in the form of mar¬ket mechanisms, taxes or legislation may differ from country to country, but in both devel¬oped and developing countries, intensive co-operation and discussion needs to be launched with all governments that have shown a clear commitment to tackling climate issues.

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