Kyoto Sinks Europe

KYOTO SINKS EUROPE

Financial Post, 9 January 2007

http://www.canada.com/nationalpost/story.html?id=03445f57-0777-4554-ac7c-ec63cb073223

Kyoto sinks Europe: Billions in costs make it more and more unlikely that the EU can continue to go it alone slashing carbon emissions

By Benny Peiser

A political drama is unfolding in Europe over the future of its Kyoto strategy. Its outcome will shape the future of climate policy and international negotiations for years to come.

At the heart of the escalating confrontation lies Europe's Emissions Trading Scheme (ETS) and mounting concerns about its prospective failure. The crisis centres on a fundamental conflict between economic realism and environmental idealism, between national interest and green ideology. It has exposed the increasing tension between Europe's green enthusiasm and the realization that its unilateral framework comes at a hefty cost that is beginning to erode the economic stability of a waning continent.

Carbon trading is the EU's principal strategy for meeting its Kyoto target of reducing CO2 emissions by 8% by 2012. The scheme was launched two years ago in the hope that it would achieve what more than 10 years of political commandeering had failed: significant reductions in CO2 emissions. Instead, year after year, most EU countries continue to increase their greenhouse-gas emissions. Rather than proving its effectiveness, the trading system has pushed electricity prices even higher while energy-intensive companies are forced to close down, cut jobs, or pass on the costs to consumers.

As the reality of economic pain is felt all over Europe, deep cracks in its green foundations are beginning to become apparent. Guenter Verheugen, the EU's industry commissioner, has warned that by "going it alone" Europe is burdening its industries and consumers with soaring costs that are undermining Europe's international competitiveness. Instead of improving environmental conditions, Europe's policy threatens to redirect energy-intensive production to parts of the world that reject mandatory carbon cuts.

Verheugen's warning reaffirms what U.S. administrations have been saying for many years. It is aimed at the rapidly evolving challenges posed by Asian competitors such as China and India that are set to overtake Europe's sluggish economy within the next couple of decades. Indeed, Europe's imprudent unilateralism is not only constraining its trade and industry; worse still, it has led to a significant slowdown in European R&D budgets, a sliding trend that is hampering the development of low-carbon technologies.

The ETS's malfunctioning is partly due to an inherent flaw that allowed member states to allocate more emission permits than European industrial plants actually needed. Although Europe's energy utilities receive carbon permits free of charge, they have passed on the market price to industry and private consumers. In consequence, Germany's energy costs rose by almost €6-billion ($9.2-billion) in 2005, a price tag that is expected to double in the next couple of years. The cunning strategy ensured that power companies reaped billions in windfall profits. And yet without the massive sweetener, Brussels could not have gained the support of industry for this risky scheme.

The dodgy bargain ended in political fiasco: Last year, the trading scheme nearly collapsed as carbon prices crashed. In a desperate attempt to salvage an increasingly volatile system, Brussels has now slashed 7% from the National Allocation Plans recently submitted by EU member states from the second phase (2008-12).

The decision has been greeted with irritation and sheer anger in many European capitals as the damaging consequences become apparent. Germany's Economy Minister has called the cuts "totally unacceptable" and Berlin is threatening to challenge the decision in court.

As far as the imminent future is concerned, one thing is patently clear: After years of inflated promises that the Kyoto process would not upset their economy, European governments are beginning to realize that the era of cost-free climate hype is coming to an end. In its place, concern is growing that key industries and entire countries will pay a devastating price for Europe's reckless Kyoto craze.

The stakes are particularly high for Germany. Despite its customary role as environmental cheerleader, it has been hit hardest. Brussels bureaucrats have slashed more than 30 million tonnes from its annual carbon permit. It faces up to €3.5-billion in fines if it cannot bring down emissions by 2008.

Germany is extremely vulnerable to imposed energy caps. It is strongly opposed to plans for replacing its coal-fired power plants with gas-fired facilities, as such a move would only increase its already precarious dependency on Russian gas imports. Furthermore, successive governments have agreed to shut down all nuclear power plants, which account for a third of Germany's electricity generation. The Greens' anti-nuclear achievement has thus turned ideological triumph into an energy nightmare.

To make matters worse, Germany's industry bosses have warned that they will not proceed with billions in intended energy investments should the government lose the bitter dispute with the European Commission over slashed emission credits. The EU has made clear that it will not yield to German demands, as this would destabilize its fragile trading scheme. However, should German companies be forced to buy carbon credits at higher prices, it will simply remove funds and economic incentives that the government had hoped would be invested in alternative technologies.

As the price for electricity, goods and services continue to rise and Asian competitors catch up with Europe's lethargic economy, the public is beginning to question Brussel's unilateral climate policy. According to a recent EU poll, more than 60% of Europeans are unwilling to sacrifice their standard of living in the name of green causes. As long as advocates of Kyoto got away with claims that their policies would not inflict any significant costs, many people were tempted to believe in improbable promises. Now that the true cost of Kyoto is starting to hurt European pockets, the erstwhile green consensus is unravelling.

Oblivious to its deepening isolation, Europe is trying frantically to salvage the political capital it has invested in the Kyoto process. China and India have consistently ruled out participating in a global emissions trading scheme. It is unlikely that their booming economies and growing consumer demands would cope with energy restrictions on their development. Just the thought of allocating carbon credits for up to two billion potential middle-class consumers makes the mind boggle.

In recent weeks, even U.S. Democrats have cautiously started to lower expectations. They now concede that even under a Democratic administration, the United States is unlikely to join any international climate regime that would exclude Asia's looming superpowers and burden its economy with unilateral obligations.

Political realists have absorbed these sobering developments. There are signs that they are preparing the public for the EU's ultimate exit from Kyoto-type treaties. Hans Joachim Schellnhuber, Chancellor Angela Merkel's climate advisor during Germany's EU and G8 presidencies, has suggested that G8 countries as well as China and India should adopt their own, national climate goals and policies, a loose road map that could replace the fading Kyoto treaty after it runs out in 2012.

What then are the chances that Europe's flagging climate policy will survive? The prospects are rather bleak. It remains unclear, however, whether the disarray over Kyoto and its rickety emissions-trading scheme will discourage others from getting their own fingers burnt.

Benny Peiser is a researcher at Liverpool John Moores University in the U.K. and is the editor of CCNet.