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EU Energy Efficiency and Climate Policies – To What Extent Are They in Conflict?

14 Feb 2013

As the debate over how to reform the EU Emissions Trading Scheme continues, the European Parliament’s ITRE Committee has recently published a report on Energy Efficiency and the ETS prepared on its behalf by a team of authors from the Ludwig-Bölkow-Systemtechnik (LBST) and the Centre for European Policy Studies (CEPS).

The report examines the interactions between the EU’s energy efficiency and greenhouse gas reduction policies, looking at whether these policies are overlapping in a way that is undermining the ETS (see here for a previous blog). The EU 2020 Climate and Energy Package has a tripartite structure – a 20% energy efficiency target, a 20% renewable energy target and a 20% greenhouse gas reduction target. Many stakeholders have argued that overlap and conflict between these three policy instruments has been a central driver of the turmoil in the EU’s carbon market, where the price of carbon has plummeted due to a surplus of allowances.

Theoretically, if the demand for allowances were reduced through efficiency measures (either by reducing overall emissions or by shifting emissions between sectors) this could lead to oversupply in the ETS and consequently a drop in the carbon price. At first glance, the 20% drop in the price of carbon immediately following agreement on the EU’s Energy Efficiency Directive in 2012 appears to bear out the logic of this argument.

However, the new report finds that, in reality, energy efficiency policies are not a significant driver of the ETS crisis. It argues that the low price is due only in a limited way to the interactions between the Energy Efficiency Directive and the ETS. The interplay between the two is restricted because they both aim at different sectors of the economy (the Energy Efficiency Directive in principle targets the 60% of emissions not covered by the ETS). By contrast, the report finds important interactions between the EU’s renewable energy targets and the oversupply of allowances in the ETS and, even more importantly, between the low price and the economic crisis.

However, the report also maintains that the problems in the ETS stem primarily from issues directly related to the scheme itself (such as access to international credits) rather than overlap or conflict with renewables or energy efficiency policies. It also finds that the carbon price is more reflective of market perceptions of how willing politicians and regulators are to intervene in the market, rather than to the real effect of interventions, because the EU’s carbon market is very much a creature of politics.

The interplay between the carbon price and political willingness to intervene was starkly illustrated recently, following a vote in the European Parliament’s ITRE Committee on 24 January 2013 rejecting the European Commission’s backloading proposal. This vote, which was merely advisory (ENVI is the responsible committee for ETS reform), led to new lows for carbon of below €3/tonne. The price drop was described as "the final wake-up call both to governments and to the European Parliament" by EU Climate Action Commissioner, Connie Hedegaard. All eyes will therefore be on the more decisive ENVI vote on the ETS backloading proposal, set to take place on 19 February 2013. The rapporteur’s report  by ENVI Committee Chairman, Matthias Groote (S&D, Germany) gives an indication of where this debate is going (see here.)


This content forms part of the Environment Nexus project, which is co-financed bDG Communication of the European Parliament.

As an independent forum, the Institute does not express any opinions of its own. The views expressed in the article are the sole responsibility of the author.

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