Europe: Draining Energy

by Steve Kingshott 27 Jun 2013 Europe was fast out of the blocks with its carbon emissions schemes but the financial downturn and the emergence of Asia and Latin America is threatening its future, Steve Kingshott writes. The number of countries and regions proposing cap-and-trade carbon emissions schemes is growing. Australia, India, the US and China are among those who have established or proposed plans to rival Europe. Yet while the EU Emissions Trading Scheme was the first to be established, its long-term future is in jeopardy. The start of the financial crisis has lowered industrial production, resulting in a significant oversupply of carbon allowances. This has caused the price of carbon to plummet and served to question the viability of the trading scheme. This uncertainty is threatening Europe’s ambition to become a world leader in renewable energy. Falling prices From a high point of €30 a tonne, the carbon price fell to the all-time low of €2.75 the day after the European Parliament voted to reject a plan to “backload” allowances. This would have involved withholding 900 million allowances from the market over the next two years in an attempt to boost the carbon price. Since that setback, energy and environment ministers from nine EU states – including the UK, France and Germany – have published a joint statement calling for a new timetable for ETS reform. These calls need urgently to be heeded. The EU should work quickly to address the surplus of ETS allowances and send a clear signal that Europe is committed to a low-carbon economy. “This uncertainty is threatening Europe’s ambition to become a world leader in renewable energy.” The EU’s vision for the ETS extends as far as 2020 but not beyond. Without a defined carbon incentive, investors are understandably wary of making appropriate commitments. Large-scale projects such as offshore wind farms can take up to ten years from planning to operation and so are dependent upon long-term stability. For the insurance industry, this uncertainty and lack of investment will mean lower insurance premium revenues from the renewable energy sector. An increase in carbon emissions is also likely to mean insurers will more frequently have to take account of climate change risk factors such as major weather events and flooding. Significant investment Focused properly, the ETS has the potential to drive significant investment in low-carbon energy and renewables. This would help to stimulate economic growth as well as enable Europe to achieve security of supply and meet its carbon-reduction targets. Extending the scheme beyond 2020 would send positive market signals while a strategic Europe-wide approach to support energy-intensive industries will prevent carbon leakage to less regulated parts of the world. However, as long as the glut of carbon permits continues to depress the price and while MEPs stall on the issue of backloading, the viability of many projects will be in doubt. With the European Commission estimating the renewables sector could create five million jobs across the region by 2020, it is clear that action is needed now to ensure we do not miss out on opportunities for green growth. Investment in renewables can have significant economic impacts, both directly and indirectly through the supply chain. For example, it is estimated that the UK onshore-wind sector alone could contribute £1.2bn through the supply chain by 2020. “For the insurance industry, this uncertainty and lack of investment will mean lower insurance premium revenues from the renewable energy sector.” New jobs are being created in the insurance industry itself, and firms are recruiting and training underwriters specialised in renewable energy. By taking the initiative to insure renewables in the early stages of development, the industry can build a cluster of expertise and established market-leading positions across the globe including in offshore wind. However, continued job creation and growth will only be realised if there is a stable regulatory and policy environment to support investment in the transition to a low-carbon economy. If we don’t keep up with the rest of the world, then competitors will grow in emerging markets and capitalise on this opportunity. Not enough The UK Government, for its part, has introduced a carbon floor price. This move is very welcome, but unilateral action is not enough. We need politicians across Europe to see the opportunities that exist and realise that any further delay and uncertainty is bad news for business, investors and most of all for consumers. With rapid reform, the ETS can return to being a flagship scheme for carbon trading around the world and help put more economies on a shared low-carbon pathway. Ministers need to work quickly to address existing problems with the ETS while also setting out a vision for the scheme beyond 2020. That is the right way to go and UK Energy Secretary Ed Davey should be supported in this ambition. “UK Energy Secretary Ed Davey should be supported in this ambition.” Ministers need to work quickly to address existing problems with the ETS while also setting out a vision for the scheme beyond 2020. If they do not, investment in renewables will increasingly flow to other territories, including Asia and Latin America, and the UK and Europe will miss out on the significant benefits this can bring. Steve Kingshott, global director for renewables, RSA Taylor Scott International