Thursday, January 16, 2014

Climate policies are more important than targets

The European Commission is due to publish its proposals for a 2030 climate and energy framework on 22 January. The European Council will discuss the Commission’s proposals in March. European institutions should be commended for focussing on climate policy at a time when the Eurozone crisis is not over, MEPs face elections and the commissioners are in their last year. However, there is too much focus on targets – whether there should be one or three, how ambitious the they should be, and whether they should be legally binding. Well-constructed targets can play a useful role in guiding subsequent policy making.  But effective policies are more important, and could be crafted even without targets.

The 2030 framework will replace the 20-20-20 targets: that there must be a 20 per cent reduction in greenhouse gas emissions, 20 per cent of total energy must be from renewables and there should be a 20 per cent improvement in energy efficiency, all by 2020. For 2030, the Commission favours three targets, again on greenhouse gases, renewables and energy efficiency. The European Parliament also supports three. The Czech Republic, Poland and the UK argue for one, on greenhouse gas reductions. Commission officials say that it is the pro-nuclear member-states which oppose a renewables target.  But Paris has joined seven other governments in calling for a 2030 renewables target, proving that it is quite possible to be pro-nuclear and pro-renewables.

London and Prague say, rightly, that greenhouse gas reduction is the most important climate issue. So, they argue, there should be just one, technology-neutral target. Poland, which gets most of its energy from coal, would prefer no climate targets at all, but does not take this line in public. Some other Central and East European member-states would privately prefer no further renewables target, because they and their publics dislike Brussels ‘interference’ in their energy mix. A greenhouse gas reduction target alone would not be a disaster for climate policy, as long as it was sufficiently ambitious, for example, to cut greenhouse gas emissions in half by 2030. But the Parliament voted for a 40 per cent reduction target, and energy commissioner G√ľnther Oettinger is arguing for only 35 per cent. Neither of these would be strong enough to propel the European economy towards reliance on clean energy. 35 or 40 per cent greenhouse gas reduction by 2030 could essentially be delivered through business as usual. If there is to be only a greenhouse gas reduction target, it must be 50 per cent.

However a 50 per cent greenhouse gas reduction target would work better if combined with a renewable energy target. The flaw in the British/Czech argument for a single target is that climate change is not the only issue that matters when deciding energy policy. Affordability and energy security matter, too. So do other types of pollution, and the problems of nuclear waste and proliferation. Taking all these issues into account, technologies are not neutral, so a technology-neutral target is insufficient. The ‘best’ form of energy is energy which is not used, so efficiency should be top of the energy policy agenda, rather than forgotten or near the bottom, as it too often is in member-states.

Renewables are the best form of energy supply.  They will never run out, produce very little pollution and are widely spread across Europe – wind in the north, wind and sun in the south. Most renewables are expensive at present, but the cost is falling fast. Europe could eventually get all of its energy from renewables: electricity, renewable gas (for heating) and biofuels (for aviation and heavy goods vehicles). Energy policy should therefore promote renewable energy above other energy sources.

But the move from the current level of renewable energy in the EU – around 13 per cent – to close to 100 per cent will take many decades. Widespread installation cannot be done overnight. Advances in technology for electricity storage and aviation biofuels are needed. Denmark has set itself a target to get all of its energy from renewable sources by 2050. There is no guarantee that this will be met, and other member-states will take longer. The EU should set a target to obtain 40 per cent of energy from renewables by 2030, 60 per cent by 2040, 80 per cent by 2050 and 100 per cent by 2060. This clear timetable would provide greater certainty to the renewable industry and investors. It would also underline to the public that the move to a renewable energy economy cannot be achieved overnight. This would help people understand that low-carbon energy sources are needed as “bridge technologies” – the phrase used by German Chancellor Angela Merkel before her post-Fukushima nuclear u-turn. The two options are nuclear power and carbon capture and storage (CCS). In parts of Europe, notably Germany, the public opposes both nuclear and CCS. German greens argue that gas is a low-carbon bridge technology. Gas is lower carbon than coal, but without CCS is much more climate-damaging than renewables or nuclear are.

To help expand renewable energy, the Commission must give priority to the improvement and extension of electricity grids, including North Sea and Mediterranean grids. To help reduce greenhouse gas emissions, the Commission should also propose to strengthen the 2010 ‘industrial emissions directive’ by including an emissions performance standard for power stations. This would limit the amount of greenhouse gas that a power station can emit per unit of electricity generated. California introduced such a standard in 2007, and the Obama administration is now introducing one across the US. Canada has also introduced an emissions performance standard. In Europe, the UK is the only member-state to have introduced one, though this only applies to new power stations. Obama’s policy will also apply to existing power stations. The EU should follow his lead.

Should there be a 2030 energy efficiency target alongside the greenhouse gas and renewables targets? The case for this is less clear, not because energy efficiency is less important (as argued above, energy efficiency is the best form of energy), but because the value of a target as opposed to stronger policies is less obvious for energy efficiency. The 2020 energy efficiency target is not legally binding. “Legally-binding” has become a mantra for campaigners in the UN global negotiations (even though the UN has no means of enforcing anything that is agreed) and in the EU. The Commission has tools to enforce legal targets, but they are not strong enough to ensure compliance. To take one example: the UK will not meet its 2020 legally-binding renewable energy target. Nobody will go to prison. Whoever is in power will blame previous governments for the failure.

When pressed to make the 2020 energy efficiency target legally-binding, Commission officials argued, rightly, that legally-binding measures were more important than targets. The Commission proposed one such measure for the ‘energy efficiency directive’ – that new power stations should have combined heat and power (CHP) technology. Unfortunately this proposal was not accepted by the Council. The Commission should propose this again, as an amendment to the 2012 ‘energy efficiency directive’. It should also propose a strengthening of the 2002 ‘energy performance of buildings directive’. This currently requires that buildings should meet high energy efficiency standards when they are substantially renovated. It should be strengthened to require buildings to be energy efficient when they are sold or rented out, as is already the case in Sweden.

So the Commission should propose a combination of targets and policies in its 2030 climate and energy framework. It should propose a 50 per cent greenhouse gas reduction target and a 40 per cent renewable energy target. To help deliver these targets, the Commission should propose that CCS becomes mandatory on new coal-fired power stations, that CHP becomes mandatory on all new power stations that involve combustion, and that buildings are required to be made more energy efficient whenever they are sold or rented out. And the Council should accept these proposals in March. Otherwise climate and energy policy will be on hold for the rest of 2014. The need for investor certainty beyond 2020, and the need for rapid emissions reduction, mean that such a gap would be extremely costly.

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

Monday, January 13, 2014

Gas on troubled waters?

The discovery of natural gas resources beneath Cypriot waters is complicating the region’s politics. If poorly managed, the development of Cypriot gas could harden political divisions on the island and increase tensions with Turkey. But, if well-managed, it presents a rare opportunity to improve relations on the island, advance the region’s diplomatic and economic outlook and produce a foreign policy victory for Europe. The central question is how Cyprus should bring its natural gas to market. The EU has mainly focused on the contribution that eastern Mediterranean hydrocarbons can make towards meeting its energy objectives, but it should push for a Cypriot export option that favours regional stability and promotes reconciliation on the island. A tricky diplomatic chess-game waits.

The partition of Cyprus is a stain on the idea of a Europe that is ‘whole and free’, and is a huge irritant in the EU’s relations with Turkey, an increasingly important partner on energy and foreign policy matters. A solution to the Cypriot stalemate could unblock EU-NATO relations: Turkey and Cyprus have been preventing the two organisations discussing strategic issues together or making full use of each other’s assets. The EU and NATO co-operate with one hand tied behind their backs, harming Europe’s security.

In 2011, US-based Noble Energy announced the discovery of a natural gas field, dubbed Aphrodite, in Cyprus’ south-eastern maritime zone. Initially its size was assessed at around 5 to 8 trillion cubic feet (tcf), but a second appraisal drilling in 2013 corrected this estimate downward to 4.1 tcf. (By way of  comparison, Europe consumes nearly 18 tcf annually.) Nicosia wants to export much of its gas to attract foreign capital and alleviate the burden of the €10 billion IMF-EU bailout it received in March 2013 (and an earlier Russian loan of €2.5 billion). The Cypriots desperately need economic growth: the recession-hit economy is expected to contract by nearly 8 per cent in 2013 and unemployment stands at 20 per cent.

Cyprus must find a way of bringing its gas to market. Among the possible options, the cheapest, a short pipeline from Cyprus to Turkey, is unrealistic. Although a gas pipeline could theoretically be part of any political negotiation between Ankara and Nicosia, the two sides are not talking, trust is absent and Nicosia would be unlikely to cede any control over its crown jewels to Ankara.

Relations between the two sides are very poor. Turkey and the unrecognised Turkish Republic of Northern Cyprus have staked claims on parts of the waters surrounding the island, including areas suspected to be gas-rich (for a map of the overlapping claims,
see page 7 of this publication from the Oxford Institute for Energy Studies). Exploration is proceeding, however, with France's Total and Italy's ENI among those involved. Without an agreement on maritime boundaries, this will increase tensions with Turkey. Ankara does not recognise the government in Nicosia and has threatened military force if Cyprus allows drilling in the disputed maritime zone. Until now, no discoveries have been made in contested waters. But ENI (in a consortium with South Korea’s KOGAS) expects to start drilling this year in areas which the Turkish Cypriots claim. The sale of several other areas has been delayed because Ankara claims parts of them. To underline its seriousness, in early 2013 Turkey suspended some of ENI’s Turkish operations in retaliation for its Cypriot move. Turkish grandstanding is unlikely to lead to a military conflict, but Cyprus has taken precautions and is strengthening its defence relationships, including with Israel and Italy, and is set to procure two French naval vessels. So for the time being a pipeline to Turkey is impossible.

Nicosia says that economic decisions should not be stalled by politics and is pushing ahead with the development of its resources. It has an interest in marketing the gas as soon as possible; energy analysts expect that global gas prices may start to fall in the next decade as new sources, such as US shale gas, become globally available. Cyprus’ energy minister Yiorgos Lakkotrypis has estimated profits for Cyprus from the Aphrodite field to be between €8.8 and €13.2 billion.

The second export option is a pipeline to Greece via Crete. In October 2013, the European Commission designated the proposed EastMed pipeline a ‘project of common interest’, potentially making it eligible for EU funding. The European Commission is championing an agenda to diversify its energy imports away from Russia and considers gas from the eastern Mediterranean, including Cyprus, a welcome alternative. The EastMed pipeline would bypass Turkey, denying Ankara further influence over Europe’s energy supply as a transit country. (If the EU chooses to import gas from the Caspian, or from Iraq or Iran, Turkey is the transit corridor.) However, because of the depth of the Mediterranean, the EastMed pipeline raises engineering challenges which could make costs prohibitively high. Also, the pipeline would do little to reduce Cypriot-Turkish tensions.

Nicosia’s favoured option is to construct an LNG terminal at Vassiliko, in southern Cyprus. An LNG terminal would give Cyprus maximum export independence, allowing it to sell its gas globally – including to the lucrative Asian market – rather than tie itself by pipeline to one customer. An LNG terminal could turn Cyprus into a regional energy hub in the eastern Mediterranean; Israel (or even Lebanon and Syria) could eventually export gas through a Cypriot terminal. Extending a pipeline connecting the Aphrodite field and the LNG terminal to Israel’s neighbouring offshore gas fields would be relatively straightforward.

Much will depend on the amount of gas available. At a recent conference in Nicosia, energy experts from across Europe questioned the viability of the LNG terminal. Cypriot gas discoveries may be insufficient for the development of even a small-scale LNG plant. Noble Energy has admitted that 6 or 7 tcf would be needed to warrant the required investment of €8-€10 billion. Cyprus either needs to find more gas, or attract gas from its neighbours to feed into the LNG terminal.

One of those neighbours, Israel, has made the largest discoveries so far in the eastern Mediterranean, including the 18.9 tcf Leviathan field and the 10 tcf Tamar field. The Israeli High Court has decided that 40 per cent of Israel’s natural gas resources will be made available for export. 

For Israel, constructing a pipeline to Turkey is the cheapest option, but is geopolitically complex. Diplomatic relations between Ankara and Israel have slowly improved since Israel’s prime minister Benjamin Netanyahu apologised for the Gaza flotilla incident but Turkey still maintains that Israel must pay compensation to the victims. However, an Israeli-Turkish pipeline is in Ankara’s interest. Not only would Israel’s sizeable resources contribute to satisfying Turkey’s growing energy demands, but it would also strengthen Turkey’s role as a transit country.

A Israeli-Turkish deal would not preclude Israel from co-operating with Cyprus either, as the government of Israel has indicated that it favours a combination of export options. It is unlikely that Israel will opt to export all of its gas through a Cypriot LNG terminal, as this would make Israel’s exports vulnerable to Cypriot politics and security issues. But it may export some.

All this creates the possibility of a grand bargain between Turkey, Israel and Cyprus. Nicosia would receive a share of Israeli gas exports to process through its LNG terminal, making it economically viable, and in return Nicosia would acquiesce to an Israeli-Turkish pipeline crossing its exclusive economic zone. Turkey would secure more access to gas, and Israel would have diversified its export routes. This mutually beneficial deal could calm the waters between Ankara and Nicosia, and encourage reconciliation on the island. Although difficult, it is the option that would produce the best economic, political and strategic benefits for most parties concerned, including the EU.

Russia, however, might be a spoiler in such a triangular arrangement. The Russian government has a commercial and political interest in maximising the amount of Russian gas that reaches Europe and restricting the amount of non-Russian gas. Russian energy firms have been making inroads in the eastern Mediterranean, in particular by securing gas exploration rights in Syria and flirting with Lebanon. In early 2013 Gazprom signed a deal to export LNG from Israel’s Tamar field. So far no Russian energy company is active in Cyprus offshore, but Russia still has significant economic and political influence on the island. The EU should remain aware of Russian commercial and political efforts in the region.

Cyprus’ ability to export LNG greatly depends on Israeli choices. For if political obstacles continue to stand in the way of an Israeli-Turkish pipeline, Tel Aviv might simply develop an LNG terminal of its own (floating offshore or at an onshore location), making a Cypriot LNG plant obsolete. The EU should continue to engage with Israel, and energy companies like Noble Energy, throwing its weight behind regional co-operation around an LNG terminal in Cyprus. The EU’s foreign policy service should also work together with the United States to help improve political and economic relations between Israel and Turkey, in particular a possible pipeline.

The EU should think strategically about linking its energy and foreign policies. Brussels should use its leverage of being the most likely destination of natural gas from the region. When making its assessment of Cyprus’ gas export options, it must consider the impact on regional stability and the potential to achieve progress towards Cypriot reconciliation. If not, the story of Cypriot natural gas may become another tale of missed opportunities.

Rem Korteweg is a senior research fellow at the Centre for European Reform.