Europe must have the courage to stay the course

One of the most heartening developments over recent years is the political leadership shown by the EU in the climate change debate. Equally reassuring is the prominence given to this important issue by member states, producing a convergence of views and policy initiatives that not only focus on domestic action but in some cases encourage action in developing countries.

It is also important that European society, on the whole, has accepted that we have to take responsibility for reducing our carbon footprint on the environment. There are of course differences in opinion on the best way to achieve progress in reducing carbon and other greenhouse gas emissions. Some believe that a combination of energy efficiency and renewables is the only way forward while others believe that all near-zero options, including nuclear and fossil fuels with carbon capture and sequestration, will be needed.

Whatever the view, governments have been left with exploring which policy options can deliver a variety of desirable outcomes including a gradual shift to near-zero carbon technologies, and a change in consumer behaviour.

With this in mind, an important decision has been to establish The EU Emissions Trading Scheme (EU ETS) with our European partners. This is industry’s preferred option because it is a market-based instrument offering a flexible, lower-cost method of reducing carbon emissions than, for example, a carbon tax. Experience with such schemes elsewhere, most notably in addressing sulphur emissions in the USA, has shown that it can incentivise the desired outcomes.

Importantly, the Scheme addresses emissions not covered by other economic instruments and stakeholders that have not as yet been engaged in emissions reductions. Crucially, the power sector is participating in the Scheme and this is important for a number of reasons, not least that all electricity consumers are part of the process.

Implementation of the Scheme has been a complex and difficult journey for member states; it has also been difficult for the European Commission to act as policeman. It has been necessary to make the majority of the carbon allowances freely available to participants in an attempt to minimise the cost to the industries involved, at least in the early years.

The cost of carbon rose steadily in the early months of the Scheme because a shortage of allowances was anticipated due to greater than expected coal use. As member states reported their emissions for the first year of the Scheme, unfortunately in a somewhat chaotic and uncoordinated manner, it became apparent that most countries had over allocated, and that most sectors were in surplus; however, the power sector was an important exception in some countries, including the UK. The cost of carbon collapsed to about a third of its peak value in a very short period of time, shaking the confidence of all involved with the Scheme.

However, we are in the very early stages of this initiative and there are important lessons to be learnt. Member state and EC officials will be better prepared in the delivery and vetting of the National Allocation Plans for Phase 2 respectively. There will also take lessons learned into discussions on Phase 3 of the Scheme in the post-Kyoto period.

A key question is whether the EU ETS can incentivise the shift from high carbon technologies to near-zero technologies such as renewables, nuclear, and fossil fuels with carbon capture and sequestration. There are three important aspects: confirmation that the EU ETS will continue post 2012, the length of Phase 3 (and subsequent phases) and the cost of carbon. The first of these is taken as read by officials but not necessarily by industry - it requires confirmation at the highest political level, and at the earliest opportunity. Phase 3 should last at least ten years, which is a significant component of a project’s lifetime.

The cost of carbon is an important consideration when assessing whether there is sufficient incentive for new near-zero carbon technologies to enter the market. In practice the Scheme must bridge the gap in cost between near-zero carbon solutions and the prevailing benchmark technology, most likely gas. Analysis suggests that onshore wind and nuclear are the cheapest near-zero carbon technologies, but the nuclear option delivers much larger cumulative savings over the lifetime of the plant. Other options such as offshore wind projects or fossil fuels fitted with carbon capture and sequestration require a much higher cost for carbon.

The level of cap set across member states will translate to a market price for carbon — the tighter the cap the more likely a cost of carbon will be maintained at the level required to encourage investment. On the other hand governments will not wish to disrupt the effective working of the power sector for security-of-supply reasons. In the UK, government will have to balance its priorities and it may have to consider additional measures to maintain a minimum cost of carbon to encourage the near-zero technology options into the market.

Establishing the EU ETS has been a major achievement by politicians and officials. Teething problems in the early years were to be expected, but we should remember that the alternatives would have been more onerous for industry and the consumer - and almost certainly less effective. What is needed now is the courage to stick with and develop the Scheme in the knowledge that used correctly it will do what it is designed to do - to incentivise the shift from carbon intensive to low and near-zero carbon technologies.

Dr Chris Anastasi is Senior Environmental Advisor, British Energy Group plc.