Date of Speech : 17-04-2005

Place : Luxembourg

Speaker : Dieter Ewringmann, Finanzwissenschaftliches Forschungsinstitut an der Universität zu Köln

Policy area : Competitiveness (Internal market, Industry and Research) Competitiveness (Internal market, Industry and Research)

Event : Competitiveness Council

Mr President,

Mr Vice-President of the Commission,

Dear Ministers,

Ladies and Gentlemen,

First of all, let me thank you for the chance – and the honour – to present a few thoughts on the future developments of European competitiveness in the light of global climate policy after the completion of the Kyoto-Process. Due to time con-straints, I will simplify matters – hopefully without becoming simplistic. In particular, I am going to speak only about CO2-emissions, not about the reduction of other greenhouse gases. Moreover, I restrict myself to the period up to the year 2020. I do this, because on the 22nd / 23rd of March this year, the European Council envisaged a CO2-reduction of 15 to 30 percent up to 2020. So we Europeans have a clear objective. Finally, I won’t elaborate on the necessity and usefulness of climate protection. Nothing on its cost-benefits-relations. No climate models. No forecasts of world temperatures.

So now, I guess, you all have a rather clear idea, what I am not going to talk about. …Let’s see what we have left.

1. Thirteen years ago, the Rio Framework Convention gave rise to hopes that the global emission of greenhouse gases could eventually be driven down to a level that keeps global heating within tolerable limits. Rio also brought about a wide political consensus that CO2-emissions must not grow, but must be drasti-cally reduced if we want global temperatures to rise no more than 2ºC com-pared to the pre-industrial area. Since that time, we have seen some progress — at least, when we look at the establishment of institutions that help pursuing this goal and try to implement it. The city of Kyoto gives the name for this new paradigm: A reduction of greenhouse gas emissions in absolute terms. Though it is limited only to a part of the community of states, Kyoto raised great expectations.

2. Yet in 2012, the first Kyoto-period will almost certainly end in a disastrous record for climate protection. Definitely, we will see no reduction of global emis-sions. In contrast, we expect worldwide CO2-emssions in 2012 to exceed those of the benchmark-year 1990 by roughly 40 percent. According to the recent OECD World Energy Outlook, emissions will continue to grow afterwards: By 2020, the global carbon dioxide emissions will amount to 33 billion tons. Com-pared to the 20 billion tons in 1990, we will see no emission reduction, but a 65 percent increase!

Of course, the European Union will not be the one to blame for this growth of emissions. In the last decade, the steepest increase in the use of fossil fuels and the subsequent CO2-emissions has taken place outside Europe. And this trend will continue: By 2020, emissions in the rest of the world will have grown between 58% percent (in the alternative scenario) and 77% percent (in the ref-erence scenario) compared to the benchmark 1990-level.

3. But also the EU will not be able to accomplish its own, self-set goals — at least not because of own policy steps taken within the Union. Instead of the planned 8% reduction, we can expect a slight absolute increase of emissions compared to 1990. The alternative OECD scenario on this issue is based on a higher growth rate of real GDP – 2.4% on average – and on the assumption, that some additional measures of climate policy will be taken. These calcula-tions show a further growth of CO2-emissions, leading to a 4% increase in the year 2020 compared to the benchmark year 1990. Here, the better economic growth dynamics that we all wish for unfortunately also result in higher emis-sions of the European Union.

4. Despite of this kind of problems already within the Kyoto-period (2008-2012), the heads of government of EU Member States have followed propositions made by their ministers of environment and took a first tentative step into the post-Kyoto phase. The European Council believes that reduction pathways for the developed countries in the order of 15-30% by 2020, compared to the base-line envisaged in the Kyoto Protocol, should be considered.

This is, of course, by no means a binding agreement. This may not be a very new objective. But still – seen from the current situation and in the light of the Lisbon process – it is a remarkable and, from my point of view, deserving per-spective. Europe must lead the way if climate protection is to make any further progress. European initiatives are necessary. Whether they are sufficient, is another question. Still another question is, whether there are good chances of successfully implementing this policy in Europe.

5. Let me take up the European suggestion for the post-Kyoto phase and ex-plore its implications against the background of the Lisbon strategy. For this purpose, let us that assume we confine ourselves to the lower third of the Council’s perspective. So we are talking about a 20%-reduction of carbon diox-ide in 2020 compared to the level of emissions in 1990. And let us also assume that solely the European Union accomplishes these cutbacks.

A reduction of emissions by 20% means that, from 2020 onwards, we must face an emissions budget of scarcely 3 billion tons CO2 per year – regardless of the scale and speed of economic development. We may have slight structural ef-fects because of the increased utilisation of natural gas, which contains less carbon per energy unit. Still it is fair to assume that all economic growth from now to 2020 must be realised with a proportionally lower use of fossil fuels: In the next 15 years, we must decrease the use of fossil energies by almost 20 percent.

This may be easier to accomplish when economic growth is relatively slow, as it has been in the last decade. Yet with better growth dynamics, we should be-come more aware of the bottlenecks that start appearing.

6. Here we have the connection from post-Kyoto to Lisbon. If the European Un-ion wants to become "the most dynamic and competitive economy in the world," which is – among other objectives – capable of sustaining a social net that can face the demographic challenges of the future, then it must attain real annual growth rates between 3 and 4 percent, at least. With 4% growth, potential out-put, or GDP respectively, will almost double by 2020. A real growth rate of 3.5% still would result in a cumulative rise of approximately 70 percent by the year 2020. I will base my further deliberations on the assumption of 3.5% growth – in my view, the minimum rate we should strive for.

7. So here we have our question for the evening: How can we safeguard the energy supply needed for these "Lisbon growth rates", when, at the same time, the use of fossil fuels must decrease by 20% in order to reach the post-Kyoto objective?

In other words: How does the EU manage to cover an energy demand that grows by nearly 50% to almost 2000 megatons of oil equivalents by 2020 with a simultaneous 20% decline of fossil energies?

8. At the moment, 20 % of the primary energy demand of the EU is covered with non-fossil fuels. The remaining 80% come from coal, oil and natural gas – the fossil fuels. If the utilisation of fossil energies is to be reduced by 20% in abso-lute terms till 2020, the simultaneously growing energy demand would have to be covered with non-fossil energies by almost 50%. Since a sizeable growth of nuclear power generation by 2020 is no realistic option, the increase of non-fossils would have to be solely built on the expansion of renewable energies. This would mean that the production of renewable energies would have to be multiplied by 5 times within the next 15 years!

9. Within a period of 15 years, this is as unrealistic as the nuclear option. Thus, we must face an energy mix which will be more or less stable in relative terms. In its recent World Energy Outlook 2004, the OECD estimates, that nuclear power and renewable energies together can grow by 25% till 2020 at best. Nu-clear energy cannot contribute much to this increase. Thus, in this scenario, the use of renewable energies must "only" double. 

10. Under these circumstances, Europe’s energy demand in 2020 can be met with up to 1070 megatons oil equivalents from fossil sources if it is to meet the post-Kyoto climate protection goal. Additional 375 megatons may come from non-fossil sources. Consequently, there will be a gap, that will be – depending on which Scenario you refer to – 375 to 500 megatons big. This huge gap can only be closed by massively increased energy efficiency.

11. Let us continue with our thought experiment and assume that the OECD’s more cautious alternative scenario is the one that counts. Beyond all improve-ments of efficiency and decreases of energy intensity, which are already incor-porated in this scenario, an additional amount of 375 megatons would have to be compensated by further efficiency improvements. In 2020, the European Union needs to achieve a GDP almost double the size of today’s produc-tion with an energy-input 20% smaller! This goes far beyond all current as-sumptions and findings for the development of energy intensity. And it would certainly be a major challenge for the EU. Remember, the sluggish growth of the last 15 years has been accompanied by a sizeable increase of energy con-sumption.

12. So the European Union needs an efficiency–boost that brings about a de-coupling of economic growth from energy inputs and CO2-emissions. In my view, this seems to be the only way to arrive at a sort of harmony between the post-Kyoto-process and the Lisbon strategy. This perspective does not seem to be out of bounds because in the preceding 15 years, we have not done much for the improvement of energy efficiency and against energy intensity. From 1990 onwards, energy intensity decreased only by 30%. There is still a lot of room for further steps.

13. Efficiency must become the keyword of the post-Kyoto-period also for other reasons: All the necessary strategies and measures that the EU embarks on to meet its climate objectives must also comply with the principle of cost effi-ciency. Efficiency will be the driving force of the Lisbon-process. Efficiency must play a bigger role in climate protection, too. Otherwise, the Lisbon-Agenda has to face avoidable cost-burdens. Inefficiency always means: It is too expen-sive.

14. The incentive- and sanction-system that is currently employed in climate policy in Europe, is not prepared for a post-Kyoto goal of reducing CO2-emissions to 80% of the 1990 level. These instruments display too much ineffi-ciency and produce unnecessary high costs. This is also true for the community CO2-emissions trading mechanism. Under the current circumstances, this  trad-ing system can act as a cost-effective instrument to realise the cumulative European emissions cap. It also offers an excellent instrumental basis to pursuit more ambitious post-Kyoto objectives. The trading mechanism can translate these objectives directly into true scarcity prices for CO2 which leads to market-driven and efficient adaptation of the most competitive options of emissions re-duction. This is the beneficial consequence of a market-mechanism with "institu-tional backing" – a market mechanism that "fits" to the Lisbon-process because it opens a way to band together economic policy and environmental policy.

Yet, so far only the energy sector and a part of industry have been subject to the ‘cap and trade’-rules of the European emissions trading system. The poten-tials for reductions in other areas, which often can be utilised at much lower costs, are not subject to comparably strict rules – if they are subject to any re-strictions at all. As a result, we have no unitary price for emitting one ton CO2, which could serve as a yardstick of efficiency. Because of this, the efficiency gains in those sectors that participate in the emissions trading are undone by the inefficiencies in other sectors. This goes hand in hand with an underutilisa-tion of growth potentials in the economic sphere.

15. The highest potentials for increasing the energy-efficiency und reducing CO2-emissions efficiently can be identified in private households, in buildings and in the transport sector. Here, we find many “low hanging fruits“, which can be picked easily and cheaply. Especially in motoring as well as in the heating and power consumption of residential buildings, we often need no more than simple changes of behaviour or minimal investments with extremely short pay-back periods. These are the very sectors that represent an ever growing share of CO2-emissions. Nevertheless, they are not subject to quantitative restrictions and consequently lack adequate signals of scarcity and market selection.

16. Regardless of the particular size of a mandatory post-Kyoto reduction goal, the cap-system should be extended in an adequate design to these sectors to secure efficiency gains and to cut down macroeconomic costs. Yet in doing so, the current blockade to further efficiency improvements, the grandfathering mechanism, should be abandoned. Grandfathering results in extremely high transaction costs. What is more, the efficiency and innovation-oriented world of the Lisbon-process, which strongly favours deregulation, certainly is no longer a place for Byzantine administrative devices like grandfathering. Instead, the post-Kyoto period should be a time, when the inherent efficiency-advantages of the trading system are utilised for the Lisbon-process via increased auctioning and lower transaction costs.

17. In close connection to this agenda, the practise of public subsidies for the energy sector should be reconsidered. More than today, it must be subject to criterions like energy efficiency and CO2-efficiency. If at all, public money should be spent where it yields the highest contribution to European climate protection. Indiscriminate spending – what we call the ''watering-can principle'' in German – won’t help to cope with the post-Kyoto tasks.

18. When talking about the efficiency of climate protection in the post-Kyoto pe-riod, the flexible mechanisms established in Kyoto must not be ignored. In order to avoid one ton of CO2-emissions in a developing country can – of course – be a lot cheaper than in Europe. With a view to static efficiency, we should utilise flexible mechanisms as often as possible. Yet, considering as-pects of dynamic efficiency, we should be a little more cautious – also in our own European interest. Flexible mechanisms usually entail the employment of technical standard solutions in places, where they previously were not "stan-dard." Since the post-Kyoto-objectives call for very high dynamics of innovation, this kind of policy can easily prove counterproductive. Thus, the question how to use Clean Development Mechanisms in the future cannot be discussed without looking at the upcoming role of the EU in the post-Kyoto process.

19. So, which role is the EU going to play? Naturally, I can only give a rough sketch of the surrounding conditions: In the next 15 years, two thirds of the additional energy demand in the world will come from the developing countries. 85% of the concurrent additional energy supply will be covered with fossil fuels. According to the OECD’s reference scenario, today’s CO2-emissions will have increased by 40% till 2020 and by 60% till 2030. In 2020, the European Union will account for only 15% of global energy consumption and for 13% of worldwide emissions.

20. These few figures clearly show that Europe’s future role in climate policy cannot not be confined to "getting Europe clean." At the same time that Europe spends to reduce its emissions by 20% till 2020 – that is by 800 million tons CO2 –, China’s emissions will increase by 1.6 billion tons, and the emissions of the developing countries all together by 4 billion tons. Even the United States alone will – depending on the scenario – nullify the European reduction with own additional CO2 -emissions.

21. Ambitious European measures to reduce own CO2-emissions will be, as long as they are undertaken alone, little more than the famous drop in a bucket. Thus, Europe cannot restrict itself to fulfilling its own climate objectives. It must also act as a precursor for international policy in a political and in a technical sense.

• The prime political task is to integrate all industrial and all developing coun-tries into the quantity-.cap of the emissions trading system. Otherwise, the post-Kyoto phase will have no considerable impact on the climate protection in this era. The EU can give decisive new impulses for the turnaround. These impulses produce, at the same time, new chances for the revitalisa-tion of the Lisbon-Process.
  
  
• In economic and technical perspective, Europe should define its role in de-veloping the technologies that are necessary for a decoupling of global growth and greenhouse gas emissions. This is Europe’s way ahead. By that, Europe will not only contribute to successful climate protection and its own energy efficiency. But, Europe will also secure a good share of the gigantic global market for the modernisations of energy suppliers. Additionally, some important developing countries show marked interest for energy efficient so-lutions and for non-fossil sources of fuels, although they are not subject to any binding emissions cap. The enormous economic growth in China, in In-dia and in other Countries seem to have provoked a new thoughtfulness. It has led to reflections on the precautionary principle and on the concept of "quality-finance." Other countries are planning to refurbish all of their energy generating. By this, European chances for further market shares grow. Moreover, the chances for a global energy partnership grow. In this sense, the comprehensive and finally successful negotiations between Europe and Russia in the run-up to Russia’s ratification of the Kyoto-protocol left us posi-tively surprised.
  
  

Let me sum up briefly: Post-Kyoto is a big challenge for European policy. Yet it also opens many chances to support the Lisbon-process.

• The challenge for Europe will be to mobilise innovations dynamics, to utilise all efficiency reserves and to get the prices right by the use of market-like mechanisms. Europe still has much potential for further reductions of CO2-emissions and for increasing energy productivity, which can be realised at low costs. If Europe pushes for an expansion of renewable energies accord-ing to strict criteria of cost-effectiveness, and if the efficiency of energy use is strengthened at the same time, then the push for climate protection will also result in an endorsement of the Lisbon-process.
  
  
• This implies that market-like incentive mechanisms can act via real costs and prices based on European technical potentials and on the willingness to pay. These mechanisms must be protected against subsidies that obstruct competition. This strategy also implies, that environmental problems that cannot be subject to a trading mechanism, are tackled with other market-like techniques of internalisation. 
  
  
• Without the outlined efficiency–initiative directed at the internal market and at the remaining world, the post-Kyoto process will not be of much help for climate protection. Without the outlined efficiency–initiative, the Lisbon-process will fail too. The success of Lisbon critically depends on the break-ing up of old economic and energy structures with the help of market-conforming incentives that unleash the dynamics of innovation and effi-ciency.
  
  

Thank you for your kind attention.