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Why EU's carbon policy discourages subsidies for energy savings and renewables

28/01/2015 12:58 GMT | Updated 30/03/2015 10:59 BST

This article was coauthored with Jörn Richstein who is a doctoral candidate at Delft University of Technology

Brussels has just launched a major policy diplomatic offensive aimed at securing a global climate treaty by year end. The EU plan, endorsed by member states on January 20, will see a major lobbying effort from a reported 90,000 European diplomats, over 3,000 missions, to raise the EU's profile and strengthen international alliances by winning new pledges for greenhouse gas cuts.

Yet, at the same time Brussels is engaging in this global soft power offensive, it is struggling with its own climate policy. Remarkably, the EU's carbon system actually appears to be discouraging renewable energy and energy efficiency savings, which are meant to be at the heart of attempts to reduce carbon dioxide emissions.

Take the example of the Netherlands, which a generation ago was a forerunner in environmental policy, but is now is lagging in the development of renewable energy. Last year, an ambitious energy plan was launched to meet the EU's climate goals. Part of this is a very rapid acceleration of offshore wind which has now come under fire.

The controversy has been generated because of a recent cost-benefit analysis under which the social value ascribed to the current Dutch offshore wind plans is estimated at around minus 5 billion Euros. The Dutch government had commissioned this study to compare different options, but the large negative value of offshore wind was what caught most attention. This negative result is partly due to the fact that the climate benefits of wind energy were valued at zero.

This is remarkable and certainly contradictory in terms of EU policy objectives. How is that possible, given that the whole point of wind energy is that it is climate-neutral, and therefore sustainable? If wind energy does not emit any carbon dioxide, why is it not considered to reduce the climate impact of the energy sector?

The answer lies in the way that the EU regulates the carbon dioxide emissions from the energy sector (and several other industrial sectors). This is done via a market for tradeable emission permits.

In this market, the EU caps the total volume of carbon dioxide emissions that it allows. Every year, a volume of emissions credits equal to this 'cap' is allocated to market parties.

Market parties are allowed to trade emission credits among each other, so they can choose whether to reduce emissions or buy emission credits. This should, theoretically, result in the market finding the cheapest way to keep the emissions below the cap.

However, it also means that if one party emits less carbon dioxide, for instance an energy producer who has invested in wind energy, someone else can emit more. After all, the wind energy producer does not need to buy credits, so these become available for others.

As the emissions cap is not changed, the total volume of emissions remains the same. As a consequence, investment in renewable energy does not reduce the total volume of carbon dioxide emissions in the EU.

A side effect is that the demand for carbon dioxide credits is reduced, as a result of which the price of the credits drop and polluters like coal plants have to pay less. So in effect, the public support for wind energy also benefits the most polluting plants in the system!

The consequence of this scheme is that the apparent climate benefits of investment in renewable energy are zero. This is not the case, of course: substantial investment in renewable energy is the only way to produce sufficient electricity in a sustainable manner in the long run.

And a similar logic applies to energy savings. Mark Rutte, the Dutch Prime Minister, recently warned for instance not to set the ambitions for energy conservation too high, as that might "ruin" the EU carbon dioxide market!

This is 'upside down' logic, as it is widely agreed upon that energy conservation is a key aspect of a sustainable energy system. And we surely should not cut back on it merely to improve the apparent effectiveness of a failing policy instrument!

One solution would be to reduce the carbon dioxide emission cap with an amount equivalent to the volume of publicly supported renewable energy that is generated. Then investment in renewable energy would have an immediate and measurable climate benefit.

Alternatively, the medium-term policy goals for renewable energy could be incorporated in a lower cap from the start. In case the renewable goals are surpassed, the cap could be lowered to account for the unexpected additional generation by subsidised renewable energy, rewarding these extra efforts with concrete emission reductions.

In this way the carbon dioxide price can be held more stable, even when EU states' policies over-achieve targets. If, on the other hand, governments do not reach their renewable targets, the carbon dioxide cap should not be adjusted so as to maintain the minimum goal for carbon dioxide reduction.

Taken overall, these remedies are necessary to help the EU's carbon policy accomplish the renewable and energy savings goals for which it was originally designed. So far, it's not even close.