Assessing the value of the EU's renewables and emissions reduction targets

11 March 2014

In January, the European Commission unveiled its 2030 Climate and Energy Framework, setting out a greenhouse gas (GHG) reduction target of 40 percent against 1990 levels and an EU-wide binding renewable energy target of at least 27 percent. The latter - unlike its 2020 counterpart - will not be translated into binding country-level targets. Renewable energy plays a key role in the transition towards a sustainable, secure, and competitive energy future. At the same time, it provides an opportunity to reduce the EU's energy trade deficit, as well as its exposure to supply disruptions and price volatility. On the one hand, the EU has made some progress in this area; in 2012 the EU's internal market renewable energy share had reached 13 percent. On the other hand, data from the Commission indicates that, for the same year, imports of oil and gas cost the EU over €400 billion - or 3.1 percent of its GDP. Experts agree that a substantial scale-up of renewables is required in order to successfully transition to a new energy paradigm, as part of a green growth model. But many remain divided over the ability of a binding renewables target to foster this evolution.

Renewables target counteracts ETS market dynamics
Critics of a renewables target include strong voices, including top Harvard academic Robert Stavins, clean energy entrepreneur Assaad Wajdi Razzouk, and The Economist. In a recent blog post, Stavins explained that a renewable energy target works against the market dynamics of the EU's Emissions Trading Scheme (ETS). A renewables target will lead to additional emissions reductions in the electricity sector and hence generate surplus allowances. Other sectors will buy these allowances and consequently emit more emissions than under a GHG-only approach, thereby offsetting the additional reductions from the electricity sector. Aggregate abatement costs are driven up, since reductions no longer take place where they are most cost-efficient, but rather where the target requires them to occur. The renewables target will decrease the total demand for allowances, but since the supply remains unchanged, allowance prices will be suppressed. This, in turn, reduces and delays investments in climate-friendly technologies. According to Stavins, a complementary renewable energy target will therefore achieve no additional emissions reductions, but increase abatement costs and delay technological change.

In an article penned in February for UK newspaper The Independent, Razzouk claimed that the 2020 framework has already sufficiently supported renewable energy, to the extent that - under a higher carbon price - it could now compete with and beat fossil fuel energy. Using renewables targets for the next decade, he argues, would lead to capacity being diverted to "the wrong place, at the wrong time," instead of building renewable energy capacity where it provides the highest returns. Put simply, forcing capital towards a solar plant in the UK may not be as productive as an equivalent investment in Spain. Instead, the EU needs to provide a stable long-term framework in which carbon has an increasing price. This, he reasons, will encourage efficient investments into renewables and enable a drastic shift towards clean energy.

Renewables target provides multiple benefits
Several organisations have, however, provided credible arguments in favour of a renewable energy target. These are succinctly summarised in a 2013 report by the European Renewable Energy Council. An oft-repeated stance is that a 2030 renewables target is necessary in order to send a signal to investors that renewable energy is a long-term priority. This view has some industry backing: 92 European companies and associations recently called for a binding 2030 renewables target, including multinationals like Ikea and 3M. The report also suggests that a renewables target would further preserve the EU's leadership in renewable technology innovation. While the EU has established itself as a front-runner, having installed some 44 percent of the world's renewable electricity, [Ref 1] countries such as South Korea, China, India, and the US are fast closing in on the bloc's lead. A renewables target also serves objectives beyond emissions reductions, including job creation, economic growth, and other environmental benefits like reduced air pollution. According to the European Commission's impact assessment of the 2030 framework, coupling a 40 percent GHG reduction target with a 30 percent renewables target could generate up to 1.25 million additional jobs.

A well-functioning ETS that encourages the development and deployment of low-carbon technologies could also achieve these benefits - at least in part. The main value of a renewables target, however, lies in its ability to enable the timely scale-up of a wide range of renewable energy technologies, thereby reducing decarbonisation costs in the long-term. [Ref 2] Many technologies hold promise of becoming more competitive in the mid- to long-term; a renewables target would encourage market actors to seize that opportunity in the present, despite the higher short-term costs. Even among the supporters of a renewables target, however, disagreement exists over whether to move to an EU-wide binding target without corresponding country-level targets. For some observers this is problematic, as it raises questions around enforceability. But others point to the virtue of a flexible target, drawing on the efficient allocation sentiments outlined above.

Renewables in the wider context
The renewables debate is not restricted to the EU. Recently, Australia announced a review of its renewable energy target, which has been blamed by the conservative coalition government for ascending energy prices. This comes amidst a process to repeal the country's carbon tax, which was to be transformed into an ETS in July 2015. Some actors in the EU have also criticised renewables policies for driving up energy costs, supposedly placing the continent's industry at a disadvantage on the world stage. But such views avoid the charge that energy prices have little bearing on the EU's competitiveness, as a recent report by NGO research centre Climate Strategies claimed.

On target: What future for EU renewables?
While Stavins' and Razzouk's arguments appear logically sound, both assume a well-functioning ETS with an increasing carbon price. The reality is that the EU currently has a low carbon price and high number of surplus allowances. As energy expert Cédric Philibert put it on his blog: a GHG-only approach may be the best solution in theory - but not in practice. Under the EU's current circumstances, a renewables target may indeed not be such a bad choice, particularly because of its ability to encourage investments into technologies that are crucial in the long-term, but more costly in the short-term.

The bodies that govern the EU remain divided over the virtue of a renewable energy target. The UK, Poland and Czech Republic support a GHG-only approach, whereas ministers from Austria, Belgium, Denmark, France, Germany, Ireland, Italy and Portugal have asked the Commission to set a "robust" renewables target. In early January, the Parliament voted for a binding renewables target of 30 percent. EU leaders will now likely discuss the overall 2030 framework at the March session of the European Council. Whatever the outcome, intense discussions are expected around the renewable target's policy impact as well as the merits and drawbacks of a flexible versus a nationally binding approach.

[Ref 1] European Commission, (2014), A policy framework for climate and energy in the period from 2020 to 2030, European Commission, COM (2014), 15 Final: 2.

[Ref 2] See, for example, Philibert C., (2011), Interactions of Policies for Renewable Energy and Climate, International Energy Agency.

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