The European Union´s Climate Policies: The effects of the global financial crisis and

other realities

Dr. Gabriel CalzadaAssociate Professor of Economics, King Juan Carlos University

President, Instituto Juan de Mariana13th November 2008. Washington D.C.

Two different types of climate policy

• The EU way: – Kyoto: Cap and trade scheme– Economic regulation– “Renewable” energies subsidies

• The US way:– Promote growth and push technology (no caps,

no big-scale regulation)

EU´s/Kyoto´s cap and trade scheme

The claims

• “Will reduce warming”

• “Will reduce CO2 emissions”

• “Will be done at low cost”

• “Will create jobs”

EU´s/Kyoto´s cap and trade schemeReality: the “benefits”

• Reduction of 0.07 degrees Celsius if every country meet its target

• No EU has not reduced emissions since Kyoto was signed– EU (15): increased (not decreased) since kyoto– Spain: 50.4% increase (about 40 since Kyoto)

• Comparative performance– EU doubles US rate of increase– Kyoto countries vs US

95%

100%

105%

110%

115%

120%

125%

U.S. World Kyoto

GHG Emissions from 1997-2004

1997-2004

EU´s/Kyoto´s cap and trade schemeReality: “low cost”

• Narbona´s promise: “The government has designed a gradual process to change the tendency […] and the bill that companies will have to pay starting next year in the emission market will collectively cost a maximum amount of 85 million euros per year.” [10/2004]

• IJM estimated between 4 and 7 billion Euros (10-16 times what Narbona claimed)

• PWC estimated 15 billion (35 times)

• Government finally gives up: could be more than 3 billion Euros

• Lesson: policymakers can determinate cap or cost

EU´s/Kyoto´s cap and trade schemeReality: jobs

• Loss of competitiveness and job exportation Companies are closing down

e.g., Valencia: The Valencia regional administration ordered the shutdown of three companies for violating the Kyoto protocol, as they tried to begin new production without greenhouse gas allocations, of which there were no more

Other companies are moving away e.g., Acerinox S.A.: Acerinox, second largest stainless steel

company in the world decided to severely reduce investments in its Spanish factory and increase the investment in its Kentucky plant expressly because of the ETS burden and related blackouts

for the same reasons Acerinox bought factory in South Africa and is looking to move part of its Spanish capacity to Eastern Europe.

Acerinox ex president (now retired), Victoriano Muñoz, had repeatedly warned that Kyoto CO2 rationing scheme “would place Spanish industries in a very grave situation”.

Regulating to comply The Electricity and Gas Sectors Planning. Transport Net Development 2002-2011 Strategy for Energy Savings and Efficiency in Spain 2004-2012 Plan for Developing Renewable Energies 2000-2010 New Renewable Energies Plan 2005-2010 Law of Integrated Control and Pollution Prevention Efficiency and energetic savings in buildings Measures:

• Regulation for Thermal Installations of Buildings• Technical Code of Buildings• Energetic Certification of Buildings

Updating Plan for agricultural equipments The Spanish Forest Plan Hydroforestry restoration Plan Plan for complementary aid for forest development and organization Subsidies Plan for sustainable management of public forests National Plan against Desertification The first National Plan for Municipal Solid Wastes 2000-2006 National Plan for Dangerous Waste National Plan for Polluted Lands National Plan for the modernization of vehicles Strategic Plan for Infrastructure and Transport Another key element is the distribution of those allowances among the owners of those installations whose

activity produce CO2 National Allocation Plan National Registry for Greenhouse Gas Emission Allowances

Renewable energy subsidiesReasons

– Global warming policy

– Green job creation

– Economic stimulus

Renewable energy subsidiesA Spanish story

• The EU wants 12% in 2010 and 20% in 2010• Spain has been a leader in promoting “renewable

energy”– Wind subsidies: 90% over market price for 15

years then 80% over (This has varied from 136 to 209% since 2007)

– Solar subsidies: 575% over market for 25 years then 460%

• 12 to 20% return on investment

Renewable bubble

• Spanish companies become world leaders• 25,965 MW installed in “special regime”• Wind energy has largest share: 14,577 MW

(10.2%)• Solar energy has 1000 MW (0.7%). The 2010

target was 371 MW• Big leverage: 80/20• Waiting lists

Renewable Bubble

• Big production means jobs: 27,000 only in the solar sector since 2004

• It also means big subsidies: the 0.7% of installed energy gets 800 million premiums

• Who pays? Energy distributors• “Deficit Tarifario” (DT): 15.7 billion• The green premiums represent 2/3 of the DT• Only in 2007 the renewable subsidies account

for 2.6 billion Euros

Unsustainable energy

• Miguel Sebastian declared renewable energies are “green and clean but very costly” .“Last year the premiums paid sum up 2000 millions while this year will be 3000”.

• The government had to reduce by 30% the subsidy to solar energy and placed a cap of 300 new solar MW (1/2 of what has been installed from January till May 2008)

• Now the Spanish green industry is falling down and going abroad to find more generous governments willing to give away taxpayers´ money

Unsustainable jobs

• The softening of the renewable support in 2007 brought about 10,000 job losses

• This year´s softening threatens to result in 40,000 new green unemployees

Subprime jobs

• The sector companies calculated they will have to fire over 40% of the workers

• The sector generates almost no stable jobs (installation and construction)

• The only way to generate jobs in this field is by creating artificially produced expectations

Unsustainable subsidies • The CNE has been unable to sell the DT in the auctions even

with government sponsorship• Companies have now to refinance over 15 billion Euros• This year the electricity had to be increased by 5.7% in order

to cover the renewable subsidies of 2008• According to CNE, under today´s system, the price of energy

would have to increase by 31% starting next year to stop the bleeding

• Opportunity cost: Spanish electricity companies have announced that due to DT they will have to cancel 4.5 b annual investment between 2007 and 2011

• Risk premium has jumped up

Unsustainable energy

• The reduction of the subsidies in September has reduced the market value to a fraction

The bubble bursts

Subprime energy

• Only 750 MW out of the 15,000 MW (5%) renewable energy installed counts to REE to calculate the total capacity of the system

Climate policy, energy and the crisis

• Spain has one of the largest trade deficits (10%)

• 2/3 energy deficit (oil)• EU Climate policy (Cap and trade scheme and

renewable subsidies) is largely responsible• Under the present credit-crunch Spain has

either to increase exports or diminish energy dependency to offer credit

The economics of expensive energy

• Expected incomes and costs are what drives investments

• To produce you have to combine resources• The cheaper some of them are, the more

possibilities exist to use them in different productive processes (offering interesting products at good prices to the consumer)

The economics of expensive energy

• Some factors, like wages in the US, are relatively high • But if combined with other cheaper and intensively

used factors of production, such as low energy cost, the unitary cost can be competitive

• Reducing the unitary costs will open new markets to layers of the population are not still marginal consumers

• Expanding the market will create new investment, thereby creating new jobs (despite high wages)

• This is the way jobs are created

Energy and the new economy• The total electricity consumed by major search engines in

2006 was 5 gigawatts (Las Vegas)• George Gilder: “The web machine is on track to be consuming

half of world´s output electricity by end of this decade.”• Microsoft´s power consumption has risen 10 times in the past

three years• At 15 cents per kilowatt-hour, power dominated Google´s

calculus of costs• James Snow: "We ran out of power before we ran out of

space"• Microsoft and Yahoo are building me-too data centers in

Quincy and Wenatchee, Washington

Energy and the new economy

• China plans to build 30 new nuclear plants• Comparative cost to establish data-centers

EU climate policies and the crisis

• Increases public spending when reductions are most needed

• Redirects scarce real savings to inefficient ways of producing energy, thereby increasing costs of production

• Makes it impossible to reduce trade deficit and restart credit markets

• Subprime jobs and unemployment source• Reduces competitiveness

EU climate Policy and the crisis

• “Will reduce warming”?

• “Will reduce CO2 emissions”?

• “Will be done at low cost”?

• “Will create jobs”?