The European Union’s carbon market, designed to save the environment, is being undercut by a patchwork of national subsidies for renewables and misaligned energy policies that have helped cut in half the volume of power being traded.
The bloc wasted a quarter of the $550 billion spent on renewable energy, according to analysis by consulting firm Bain & Co. presented last month at the World Economic Forum in Davos, Switzerland. Some energy-saving policies cost more than 18 times the price of the region’s carbon allowances, Bain said. Power-trading volume in 2014 was 46 percent that of three years previously, broker data show.
Overspending lowers the chance other nations will emulate the EU’s plans for emissions cuts as they prepare climate pledges under a United Nations process during the next six weeks, leading to a meeting in Paris in December, according to Bain. The International Energy Agency says the bloc, which failed to meet its own target for creating a united energy market by last year, risks losing investment in energy-intensive industries to those in the U.S.
“Driving climate actions using the EU emissions trading system will reduce costs. Any alternatives will be both less efficient and less transparent,” Daniele Agostini, head of low-carbon policies, carbon regulation at Enel SpA, Italy’s biggest utility, said Jan. 30 by phone from Rome. “A system that better integrates renewables into the power market will also greatly improve the efficiency” of the EU’s energy policy, he said.
Uncoordinated national incentives prodded investors to build too many wind farms in Spain and led to a surplus of solar panels in Germany. This wouldn’t have happened to such an extent had the bloc relied more on its carbon market, Julian Critchlow, partner at Bain, said by phone Jan. 23 from Davos.
EU benchmark carbon allowances dropped 2.6 percent last month, the most since September. Lawmakers haven’t yet agreed on rules of a reserve that’s designed to deal with a 12-month glut in the world’s biggest greenhouse gas market. Permits rose 0.1 percent Monday to close at 7.72 euros ($8.77) a metric ton on ICE Futures Europe in London, remaining at the highest level since Nov. 14, 2012.
Contending with Greece’s possible exit from the euro area, EU lawmakers are simultaneously seeking to redefine the bloc’s so-called “energy union” to make manufacturing more profitable and improve security of supply. EON SE, ThyssenKrupp AG and Dow Chemical Co. are among companies to have warned investment in the region is at risk.
Europe needs to rely more on the most cost-effective solutions to entice investment, Russel Mills, director of energy and climate policy at Dow Chemical, the biggest U.S. chemicals maker, said Feb. 6 by phone from Horgen, Switzerland. “At the end of last year, there was an emphasis to get a low-cost, low-carbon strategy for Europe, but now it’s back to mainly low-carbon,” he said.
The bloc will examine the cost of its policies as it proposes by Feb. 25 rules to improve the energy union, Anna-Kaisa Itkonen, spokeswoman for the European Commission in Brussels, said Feb. 4 by e-mail. It may offer new laws to improve uncoordinated national policies and state support of renewables, according to an EU document obtained by Bloomberg.
It’s difficult to be sure the bloc has overspent, according to Richard Sandor, who helped invent interest-rate futures more than 30 years ago and was the founder of Climate Exchange Plc in London before selling it to Intercontinental Exchange Inc.
European countries and U.S. states including California are acting as laboratories to inform federal government structures how to best regulate for larger, more efficient markets being set up to reduce climate change through 2050 and beyond, Sandor said Jan. 30 by phone from Chicago.
Claims of wasted money “might be true in the short term; it certainly might not be true in the long term,” he said.
Europe has used renewables to drive up the cost of climate protection, suppress carbon prices and “simply relocate emissions from one sector under the cap to another sector under the cap or from one geographic area to another under the cap, so they have no incremental climate benefits,” Robert Stavins, the director of the Harvard Environmental Economics Program, said Jan. 31 by e-mail.
The region has “deeply embedded differences” between member states, with some favoring markets while others prefer interventionist approaches, according to a report published in April and part-funded by the EU. That means reform, even after 2020, will be “difficult to achieve.”
About 10 percent of the installed power capacity in Germany, the region’s biggest market, is unprofitable, Sanford C. Bernstein Ltd. estimated in October. The nation produced 157 terrawatt hours of renewable power last year, 50 percent more than in 2010, according to Agora Energiewende, an energy researcher in Berlin.
Warring policies mean power-trading levels have been hurt because Europe’s investment in renewable resources “came on so fast that it left a lot of existing plant sitting silent before the end of its life,” said Bain’s Critchlow.
Nations in Europe need to move away from fixed subsidies for renewable power and instead offer premiums to electricity-market prices, while encouraging more cross-border trading in clean energy, said Peter Styles, chairman of the electricity committee of the European Federation of Energy Traders, an industry group. Such policy changes and investment in connections between national power and natural-gas grids would eventually cut costs and allow investors to be guided by markets, he said Feb. 10 by phone.
The volume of European power trades shrank 6 percent last year to a level equivalent to less than half of the 2011 amount, according to data from the London Energy Brokers’ Association.
Europe’s energy plan “is not the strategy a country would pursue if it was taking an optimal pathway,” Bain said. “It’s a depressing picture and one that can’t be continued if the bloc wants to avoid driving more jobs out of Europe.”