Economic Survey of the European Union 2009: Energy policy and the transition to a low-carbon economy

 

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The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of the European Union published on 21 September 2009.

 

Contents

 

The transition to a low–carbon economy needs to occur in a cost–effective way

Europe is taking important steps towards a successful transition to a low–carbon economy and making an effective contribution to the world’s efforts to mitigate climate change. The goal of reducing Europe’s carbon footprint is underpinned by concrete targets for reducing greenhouse gas emissions by 20% by 2020, raising the share of renewable energy consumption to 20% by 2020 and reducing energy consumption by 20% by 2020. In addition to addressing the wedge between the social and private cost of greenhouse gas emissions, policy has to overcome other market failures, including, for instance, capital market imperfections, monitoring and enforcement costs or incentives for free–riding. It is essential that the instruments that are chosen are efficient, correct genuine market failures and are flexible to cope with future economic and technological changes. Policies that unnecessarily raise the cost of carbon abatement need to be avoided. For the most part the EU is doing this, but, there are ways to improve the current policy mix. It is widely acknowledged that emission trading schemes (ETS) are more efficient and equitable if they cover as many sectors of the economy as can be done cost effectively, and that allocating free emission allowances to installations should occur when the cost of such allowances cannot be passed on and when auctioning could therefore lead to an increase in greenhouse gas emissions in third countries where installations would not be subject to a comparable carbon constraint. In principle, incentives for abatement should be aligned across all sectors of the economy. The EU should seriously consider including all transport sectors in the ETS when practical and appropriate. The EU plans to improve the way that emission allowances are allocated partly by auctioning. However, only sectors rigorously identified as being at a significant risk of carbon leakage should continue to receive free allowances until 2020. Thresholds for determining which trade–exposed sectors should receive free allowances were determined without an impact assessment. However, the risk of carbon leakage is being assessed on the basis of quantitative and qualitative criteria laid down in the Directive and there will be a review following a comprehensive global agreement on future climate action.

 

Although additional support for the research, development and deployment of low–emission technologies may be necessary to counteract market failures, many member states already offer generous subsidies to the renewable energy sector. Such policies are likely to increase the overall cost of greenhouse gas abatement, particularly in the short run. There are a number of ways to ensure that the 20% renewable energy target is met in the most cost effective way, including the options implemented with the new directive on renewable energy sources. In the longer term, restrictions on importing renewable energy should be abolished and a single, harmonised European low–emission energy support mechanism should be considered when practical. It should be ensured that the development of renewable energy in the transport sector is achieved as sustainably and cost–effectively as possible, through a combination of European production and greater use of imported biofuels. Given the high cost of biofuel technologies, it will be important to ensure that the 10% renewable transport fuel target efficiently achieves its objectives of reducing greenhouse gas emissions, ensuring sustainability and increasing security of supply. At the very least, tariffs on imported biofuels should be reduced significantly. Funding for low–emission technology R&D should be stepped up as current levels of Community support are likely to fall short of what is necessary, particularly in an economic environment where firms are cutting back on non–essential investment. Moreover, it is essential that the social benefits of policies to reduce energy consumption exceed the costs. Mandatory labelling standards are an effective way of overcoming information failures, but mandatory performance standards need to be carefully designed so that they focus on performance rather than specific technologies and are re–assessed to ensure ongoing incentives for innovation.

 

Energy market reform and investment in cross–border capacity is necessary to deliver a single and secure energy market

Further liberalisation of EU electricity and gas markets is necessary to deliver efficient retail electricity and gas prices, increase incentives to innovate and invest in new generation and transmission capacity and improve energy security. A fully competitive single market for gas and electricity has been a long–time goal but liberalisation has progressed unsatisfactorily. The EU’s third liberalisation package forces more effective unbundling through the creation of independent Transmission System Operators (TSOs). They can remain part of vertically–integrated companies, but there will be detailed rules governing the autonomy, independence and investment of TSOs. Full ownership unbundling is also an option, even though voluntary. Another option is the creation of an independent system operator where the ownership of the TSO assets remains with the vertically–integrated company, but the system operation is effectively separated from the assets. It is important that the review of the independent TSO option that the Commission intends to undertake does take place as planned, and that if the expected improvement in competition does not occur, full ownership unbundling is required.

 

A well–functioning internal energy market also requires effective institutions for overseeing cross–border co–operation between national supervisors and managing cross–border investments. The EU proposal for an Agency for the Co–operation of Regulators (ACER) is welcome. ACER will have decision–making powers in specific cross–border matters in order to achieve a single, competitive market. In any case, it is essential that the strengthened national regulators co–operate within a harmonised European regulatory framework. ACER will also need to be adequately staffed, while the Commission should have binding oversight over the certification procedures for TSOs. Increasing investment in cross–border transmission networks is also critical; without sufficient interconnection capacity foreign suppliers cannot exert competitive pressure on national incumbents. The earlier approach of leaving member states to voluntarily develop joint schemes for congestion management has delivered insufficient progress. Under the third liberalisation package, operators of the main gas and electricity transportation networks will be obliged to co–operate and co–ordinate the operation of their networks through the European Networks of Transmission System Operators. The Commission will need to monitor cross–border investment and be prepared to take measures should investment be inadequate.

 

Security of supply is a key component of the Lisbon Strategy and a key objective of the EU integrated energy and climate change policy. The EU’s “20–20–20 by 2020” objectives and energy market liberalisation policies will improve security of supply by diversifying energy supply and increasing internal trade. The EU’s Energy Security and Solidarity Action Plan provides complementary measures focusing on: infrastructure needs and the diversification of energy supplies; external energy relations; oil and gas stocks and crisis response mechanisms; energy efficiency; and making the best use of the EU’s own energy sources. Increasing investment in gas pipelines and other energy infrastructure to diversify supply is critical, as illustrated by the recent stand–off between Russia and the Ukraine. Additional investment will help reduce countries’ exposure to energy supply shocks from individual supplier countries. A number of projects have been identified under the Trans–European Networks–Energy programme. However, as of 2008 only a small proportion of projects with a European interest have been finalised, in part because incentives for investors to guarantee security of supply are not always sufficient. Consequently, for implementation of such projects, obligatory minimum security of supply standards for gas and a fast implementation of the third internal market package, which will ensure greater independence of transmission and trading interests, are important. The Ukraine/Russia stand–off also highlighted the need for improved procedures for dealing with gas emergencies, and in particular, for co–ordinating emergency policies amongst member states. Regarding external energy policy it is essential that EU member states speak with a single voice. Although diversifying EU energy supply is an important policy goal, it is important that policies to achieve this do not unnecessarily raise the cost of energy inputs.

 

How to obtain this publication

 

The complete edition of the Economic Survey of the European Union is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

 

Additional information

For further information please contact the European Union Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat’s report was prepared by Nigel Pain and Jeremy Lawson under the supervision of Peter Hoeller. Research assistance was provided by Isabelle Duong.

 

 

 

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