Thursday, December 22, 2011

The Commission’s energy roadmap is a missed opportunity

by Stephen Tindale

The European Commission recently published its 'Energy Roadmap 2050'. The paper begins by repeating the EU's commitment to reduce greenhouse gas emissions by 80-95 per cent (against 1990 levels) by 2050, and highlights the 2020 greenhouse gas, renewable and energy efficiency targets. It then acknowledges that "there is inadequate direction as to what should follow the 2020 agenda. This creates uncertainty among investors, governments and citizens".

The Commission is right to accept the need to set policies beyond 2020, since energy investments are inherently expensive and long term. But the rest of the paper does not propose a clear direction. It simply outlines seven possible scenarios: a reference scenario; current policy initiatives; and five different scenarios involving decarbonisation. The roadmap ends by acknowledging that "the next step is to define the 2030 policy framework" and promising proposals next year on the internal market, renewable energy and nuclear safety.

This is a missed opportunity. The Commission's role is to make policy proposals and it should have spent 2011 preparing these. It should also have published a list of measures which it considers to be the key priorities for 2012.

The Commission's energy roadmap follows the low-carbon roadmap and a transport roadmap that it published last March. All these roadmaps are descriptions of various possible scenarios. Scenario planning and modeling are important, but it is not clear why the Commission thinks it should do these exercises itself; when it does so, it inevitably has to manage the different views of its own directorates-general, and the member-states, in drafting the text. The International Energy Agency publishes valuable and well-respected roadmaps. The European Climate Foundation has also published an excellent 2050 energy roadmap and 2030 electricity roadmap.

To be fair to the Commission, it did publish one significant energy policy proposal in June, the draft 'energy efficiency directive'. Adopting this should be the top EU energy priority for 2012. If Europe produced and used energy more efficiently, its economic recovery and the climate would benefit. But there is substantial member-state opposition to this Commission proposal – some on grounds of subsidiarity, and some on grounds of cost (though investment in energy efficiency will almost always be cheaper than investment in new energy supply). For example, many energy companies do not support the Commission plan to make combined heat and power mandatory on most new power stations – and energy companies have substantial influence over their host governments.

The second EU energy and climate policy priority for 2012 should be to rescue the Emissions Trading System (ETS). In 2007, so before the recession, allowances were trading at €25/tonne. They are now trading at less than €7, making the ETS irrelevant to investment decisions. All the roadmap's decarbonisation scenarios assume major increases in carbon prices. Many energy companies want the Commission to take steps to push up carbon prices. For example, the EU Corporate Leaders Group on Climate Change, whose members include Shell, Alstom, Philips and Dong Energy, has written to the Commission calling for "decisive action now".

The best way to ensure long-term ETS price stability would be to set a Europe-wide reserve auction price: governments could announce that no allowances would be sold for less than, say, €15/tonne. This could be achieved formally through an EU-wide agreement, or informally by member-states with sufficient numbers of allowances creating a 'coalition of the willing'. Such a coalition would need to include all the big economies which use large quantities of fossil fuels for electricity generation – which means all the large European economies except France.

There would be substantial opposition from Poland and Spain, because of the amount of coal these countries use for power generation, and support from the UK, where the government is already introducing a de facto carbon floor price. The view of the German government is harder to predict. Chancellor Merkel's retreat from nuclear power means that Germany will burn more fossil fuel. But Merkel's CDU is less close to the coal industry than the opposition SPD, and Merkel will be actively seeking green votes in the run up to Germany's 2013 elections.

The EU has already agreed arrangements for how the ETS will operate until 2020, and total numbers of carbon allowances for each year until then, so some policy-makers and businesses are arguing that it would be wrong to intervene in the market. But the number of allowances were set against a 'business as usual' scenario – and business is anything but usual at present. To rescue the ETS from irrelevance, intervention is essential.

The EU has agreed that the total number of allowances will reduce by 1.74 per cent each year. This annual reduction will continue after 2020. Apart from this, nothing has been agreed about how the ETS will operate after 2020.

Caps for the years 2021 to 2030 need to be set soon, and the annual rate of reduction increased above 1.74 per cent. But given the track record of ETS price fluctuations, even a greatly improved ETS is unlikely to provide an adequate post-2020 policy framework to give businesses and investors confidence.

So the third priority for EU climate and energy policy in 2012 should be to set out a strategy for 2020-30. At the press conference launching the Energy Roadmap 2015, energy commissioner G√ľnther Oettinger called for an immediate discussion on targets for renewables by 2030, with a decision in two years' time. Targets are less important than policies, but can play a useful role. The roadmap states, correctly, that the 2020 renewables target has given investors greater confidence.

So the EU should give priority to three steps in 2012: adopting the energy efficiency directive, operating a reserve price for ETS auctions and setting a 2030 renewable energy target. Given the eurozone crisis, there is a danger that climate and energy issues will slip down the EU's agenda. But the Danish government, which holds the EU presidency in the first half of 2012, has made clear its intention to prevent this happening. It believes that strong climate and energy policies will boost 'green growth'.

The Danish climate and energy minister, Martin Lidegaard, has said that "every euro spent on energy efficiency will go to ensuring European jobs. Every euro spent on oil imports will go out of Europe". He has acknowledged that the current ETS price is "not sustainable" but not said what he will do about it.

Denmark has an excellent story to tell on climate and energy policy. Since the late 1970s, in response to the oil shocks of that decade, it has vigorously pursued energy efficiency and renewable energy. Denmark has the lowest energy intensity (energy used per unit of GDP) of any member-state. Over 20 per cent of its electricity comes from wind farms. There is a cross-party consensus on climate and energy issues.

Before she became commissioner for climate action, Connie Hedegaard was Danish minister for climate and energy. So despite the eurozone crisis, the treaty negotiations and the inevitable arguments over the multiannual financial framework, we can expect the Danish presidency to remind EU institutions not to neglect climate and energy policies.

Stephen Tindale is an associate fellow at the Centre for European Reform.

Tuesday, December 13, 2011

The UK-EU split: The impact on Central Europe

By Tomas Valasek

The UK decision to boycott the new EU treaty removed an important liberal economic voice from the centre of European decision-making. This has left like-minded EU countries, including most of the Central European states, in a far weaker position to resist the etatist tendencies of France and (to a lesser extent) Germany - all the more so because Britain's actions have also shifted power in the EU from small to big states.

I spent the weekend at a Central European ‘strategy forum’ organised by the Slovak Atlantic Commission and attended by senior officials from the Czech Republic, Hungary and Slovakia. The economic crisis and last week's summit dominated the debates. The prevailing sentiment was one of disappointment that the new 'fiscal union' will operate on an intergovernmental basis: because the UK vetoed a new EU treaty the rest of the member-states will now set up a club outside existing EU rules. This weakens the role of common institutions such as the European Commission (in which each country has one member). The smaller countries prefer strong European institutions because they help balance the power of big member-states such as Germany and France. Germany wanted to work through the EU institutions too but France prefers a new club, seeing it as a way to undo the 2004 enlargement. The UK veto played into Nicolas Sarkozy’s hands, and cemented the dominant role of Germany and France in the new fiscal union, to the alarm of the Central Europeans. "We are being presented with decisions on which we have minimum influence", one official said at the event in Slovakia.

The new balance of power in Europe raises several worrying possibilities. The first is that the inner core will continue to shrink. This is because the perception of a Franco-German diktat is feeding a populist backlash in smaller countries. Voters in Central Europe but also in Finland or the Netherlands are alarmed by a lack of influence over their own affairs and turning to Eurosceptic parties. The Central Europeans worry that this might eventually cost them membership in the fiscal union: "The more excluded we are, the more difficult we find it to pursue sensible policies, and this in turn gives France more reasons to kick us out altogether", one participant observed.

The second key concern for the Central Europeans is that France and Germany may try to expand the remit of the core group beyond issues such as national budgets and deficits to include taxes or labour standards, as Nicolas Sarkozy's and Angela Merkel's joint letter from before the summit sets out. This presents a direct threat to the Central European economic model built on low taxes and investor-friendly laws. In particular, the French desire to harmonise some tax rates might remove one of the Central European economies' competitive advantages. I have heard a prime minister of one country in the region argue that "the freedom to set our own tax levels is an existential issue, for which we are willing to leave the core". If Paris and Berlin agree to unify tax rates, the EU's fiscal union could quickly lose more countries – as it is, the Czech and Hungarian governments asked for more time to assess whether they want to join in the first place.

In theory, the Central Europeans can veto any move to harmonise tax rates because it requires unanimity. In practice, smaller countries need the support of others to resist the pressure from the big countries. In the past, the UK could be counted on to fight alongside the Central Europeans to keep decisions on taxes and social issues in the hands of the capitals. But at the summit, London has managed to "drive itself towards the edges of European politics", one Central European ambassador said at the event in Slovakia. The remark was offered with regret, not glee. On social issues, taxation or the single market, the Visegrad countries are firmly in the UK, not Franco-German, camp. But they have little sympathy for David Cameron, who is seen as having brought the isolation on himself, and blamed for weakening common institutions and thus reducing the power of smaller states.

Another priority which the Central Europeans share with the UK is economic growth and a wish to rebalance Germany's one-sided insistence on fiscal austerity with measures to boost the European economies. At the Central European strategy forum, some think-tank participants argued that governments in the region should join forces with London to launch a drive to cut red tape and expand the EU's single market into new realms such as services and digital economy. The UK had proposed similar measures a few months ago, to little avail. A new joint initiative, in addition to boosting growth, would have the added benefit of underlining that decisions on issues such as single market, labour standards and tax rates are for the 27 to decide, not the core.

But the government officials present at the event showed little interest in the idea. Privately, they say that Britain has become toxic by association; that ideas which it sponsors will be resisted on principle, not on merit. And for governments that share London's liberal view on the economy, that is a depressing conclusion.

Friday, December 09, 2011

Britain on the edge of Europe

By Charles Grant

The outcome of the Brussels summit on December 8th and 9th is a disaster for the UK and also threatens the integrity of the single market. For more than 50 years, a fundamental principle of Britain’s foreign policy has been to be present when EU bodies take decisions, so that it can influence the outcome. David Cameron, the prime minister, has abandoned that policy. Britain will not take part in a new fiscal compact that most other EU countries will join.

France and Germany have persuaded the other eurozone countries that treaty changes are needed to enshrine stricter budget policies and closer economic policy co-ordination. The new procedures would apply only to countries in the euro. Most member-states wanted to enact those reforms through amending the existing EU treaties. That would ensure that countries in the euro, and those outside, would be subject to a single set of rules and institutions.

But Britain blocked that deal, pushing France, Germany and most other member-states to proceed with a new treaty, to sit alongside the EU treaties. The new treaty may face difficulties: the Irish may hold a referendum on it and could easily vote no. But Paris and Berlin are determined to press ahead with the fiscal compact and if the Irish vote against it they are likely to find themselves excluded.

Cameron blocked a treaty for all 27 because he could not obtain agreement on a protocol to protect the City of London. This protocol demanded a switch from majority voting to unanimous decision-making on a number of issues that matter for the City, including the extension of the powers of EU regulatory authorities, and rules that prevent national governments from imposing stricter requirements on bank capital.

Cameron was right to seek to protect the interests of Britain’s hugely important financial services industry. Most financial regulations are decided by qualified majority vote, and there is a risk that new EU rules could damage this vital national interest. However, Britain has never yet been outvoted on a significant piece of EU financial regulation. If Cameron had been prepared to compromise on his demands, he might have been able to secure a deal.

But France’s president, Nicolas Sarkozy, was annoyed by Britain’s demand for special treatment, and had no desire to do the City favours; indeed, after the summit he said that a lack of regulation of financial markets was responsible for many of the current problems. Other heads of government found Britain’s demands and the way it presented them unreasonable. They also complained about the lack of British diplomacy: the British Treasury took its time to draft the protocol and did not present it to the Council of Ministers legal service until the day before the summit. The British made no effort to sell the protocol to most of the member-states. In short, there was little goodwill towards Cameron.

As far as I can gather, the UK government’s position stiffened between the morning of December 7th and the evening of December 8th. At the start of that period, Cameron seemed to want a deal, as his article in The Times indicated. But then loud rumblings from Conservative eurosceptic backbenchers – and calls for a referendum from two cabinet ministers and London Mayor Boris Johnson – made the Conservative leadership reluctant to show flexibility. Some senior Conservatives worried that if the government accepted a new EU treaty it would struggle to push it through Parliament. Many Tories would have rebelled and it probably would have passed – if at all – only with Labour’s support, thereby humiliating Cameron. That is why some senior figures in the government did not want a deal in Brussels.

But Britain’s so-called veto – which has not stopped anything from happening – seems likely to damage its interests. For a start, the government failed to achieve any sort of protection for the City. The countries taking part in the new arrangements (between 23 and 26 member-states are likely to adopt them) will meet regularly and discuss economic policy. They are also bound to talk about single market issues such as financial regulation. In theory, single market matters will still be settled by all 27. In practice, the countries in the new club are likely to caucus and pre-determine the results of EU votes on single market rules – whether they concern the City or other matters.

In the new arrangements, the Commission and the European Court of Justice will almost certainly play a diminished role. That is because France and Germany, the dominant countries in the fiscal compact, are hostile to the Commission and favour a more ‘inter-governmental’ Europe. To the extent that these institutions are weaker, they will be less able to do their job of defending the single market and ensuring that all member-states are treated fairly.

Some British eurosceptics seem to imagine that the new club will not be allowed to use EU institutions without Britain’s permission. There are likely to be complicated law-suits, but if most member-states want the Commission and the Court to play a role in the fiscal compact, these institutions will play a role. The institutions will have to try and reconcile two sets of rules and procedures, which will make it harder for them to do their job of policing the market.

What if the eurozone countries want to harmonise banking regulations, which they may need to do in order to ensure the success of the euro? Britain would not support a centralised system of banking regulation, but could easily be outvoted. Rules on banking regulation, like other single market issues, will remain subject to qualified majority voting among the 27. But if Britain wants to win votes, it will need allies.

I can never recall Britain being so friendless in the EU. Countries that might be sympathetic to the UK, such as Denmark, the Netherlands, Poland and Sweden, have grown impatient with the Cameron government. They have always wanted Britain to be influential in Europe, to balance the power of France and Germany. They would have much preferred all 27 countries to stay together. Britain’s self-exclusion has left them disappointed. Many of the smaller member-states are unhappy: when EU institutions weaken, they are more likely to be pushed around by France and Germany.

Since it joined the EU in 1973, Britain’s impact on the EU has been positive in many ways. It has pushed for legislation to bring about the single market. Together with France, it invented EU defence policy and it has contributed a lot to EU external policies, in areas such as the Balkans, Iran and climate diplomacy. It has helped to maintain the EU’s Atlanticist orientation. It has encouraged the EU to look outwards and see globalisation more as an opportunity than as a threat. With Britain’s voice diminished, the EU is less likely to deepen the single market and more likely to be inward-looking.

It is conceivable that a different British government could seek to reverse this disastrous opt-out. More likely, Britain will continue on a path towards isolation, perhaps even leaving the EU itself.

EU summit: Enough to save the euro?

by Simon Tilford

The UK’s decision to marginalise itself by vetoing a new EU-27 treaty has dominated the post-summit media coverage. And for good reason – it could prove a big step towards UK withdrawal from the EU. However, the bigger question is whether the agreement reached at the summit will do anything to address the fundamentals of the euro crisis.

Unfortunately, the news on this point is just as bad. This summit will go down as yet another missed opportunity. Despite rhetoric to the contrary, the summit suggests that policy-makers have not yet taken on board the seriousness of the eurozone’s predicament. There was no agreement to close any of the institutional gaps in the eurozone, such as the lack of either a real fiscal union or a pan-eurozone backstop to the banking sector. There was no agreement to boost the firepower of the European Financial Stability Fund (EFSF), while the move to beef up the IMF’s finances fall far short of what is needed. As a result, there is little to prevent a further deepening of the crisis.

What has been agreed falls far short of a ‘fiscal union’. There will be no joint debt issuance, no shared budget, and no mechanism to transfer monies between the participating countries. Essentially, the agreement hard-wires pro-cyclical fiscal austerity into the institutional framework of the eurozone, with no quid quo pro in terms of a commitment to move gradually to debt mutualisation. It is little more than a revamped version of the EU’s existing Stability and Growth Pact. The market reaction has been less than euphoric – bond spreads have jumped sharply. Italian yields have risen back to close to 7 per cent.

This is unsurprising. Fiscal austerity alone will not solve the crisis. Indeed it has become part of the crisis. Such a strategy has already failed in Greece and Portugal and it threatens to make a bad situation in Spain and Italy even worse. What the eurozone needs is economic growth, and this agreement further worsens the outlook for that. The eurozone economy is facing a deep recession, and mounting signs of a credit crunch across much of its southern flank, as capital flight gains momentum. To adhere doggedly to a crisis strategy centred on the single pillar of fiscal austerity risks causing a further erosion of investor confidence.

But does the agreement at least give the Germans cover to back more substantive solutions to the crisis, such as debt mutualisation? So far, there is little indication of any thaw in the German opposition to debt mutualisation (‘eurobonds’), but a tough fiscal regime could potentially make it easier for the German government to accept, in principle, the case for eurobonds. The problem is that the longer the crisis goes on, the riskier eurobonds become for Germany economically and hence politically: the bigger the crisis, the larger the impact debt mutualisation would have on Germany’s own borrowing costs, and the larger the obstacles the government would face in trying to sell eurobonds to voters.

And does the agreement provide sufficient cover for the ECB to step up its buying of struggling eurozone countries’ government bonds?
The ECB has stepped up support for the eurozone’s battered banking sector. For example, the ECB has increased liquidity support for the banks: among other measures, banks will be able to borrow from the ECB on longer maturities. But there is no indication that the ECB will dramatically increase its bond buying or set targets for member-states’ borrowing costs. There was apparently strong opposition on the ECB’s governing council to the provision of additional support to the banking sector. For the time being it seems unlikely that the governing council will sanction the scale of bond-buying needed to dispel fears of default. The bank certainly could not intervene indefinitely, anyway. ECB action would need to be accompanied by institutional reforms, in particular a move to mutualise debt. In the absence of that, large-scale bond buying would quickly erode the ECB’s credibility.

The eurozone appears to be little nearer to striking the ‘grand bargain’ needed to secure the future of the single currency. Germany continues to believe that investor confidence can be won back through the imposition of legal regulations. But stability cannot be achieved through regulation. At a time when the European economy faces an acute risk of depression, the eurozone still has no economic growth strategy. Eurozone governments also failed to agree to set aside more money for the EFSF and all the indications are that the ECB will remain cautious.

So the summit has failed to bring any short-term reassurance to investors and done nothing to close any of the eurozone’s institutional gaps. It has set the scene for a new and even more dangerous phase of the crisis. Politics might still come to rescue of the single currency, but the omens are not good.