The stringent targets set within Brussels' latest environmental proposals sound good but they could have disastrous consequences for the economy, says Tim Bennett
What is the EU doing?
"The boldest EU initiative since the launch of the euro in 1999" is how Time described the latest raft of environmental proposals from Brussels. At its heart is a set of stringent targets. Europe's carbon emissions are to be cut by 20%, one fifth of the EU's power must come from renewable sources (including wind, solar and hydroelectric power, but not nuclear) and 10% of all road fuel used in Europe must come from biofuels. All this is to be achieved by 2020.
How are these targets to be met?
The main weapons in the EU's fight to stem pollution from European industry are a series of new emission caps, combined with an overhaul of the carbon emissions trading market. The system, which forces polluting firms to pay for emissions permits, was launched in 2005. Now it will be widened to cover more sectors (ie, steel and paper industries will be joined by aluminium and chemicals firms) and overall carbon dioxide emissions allowances will be lowered by 11% on average from 2013.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Further, rather than carbon credits (effectively a "licence to belch") being sold by individual states, they will be auctioned from 2013 with the price determined on the open market, with heavy emitters buying extra credits from cleaner rivals.
Sounds pretty clever will it work?
It's clever on paper, but a nightmare to operate. The pig's ear that's been made of the existing scheme bodes ill for its successor. Since 2005, individual states have been selling carbon credits for next to nothing to shield favoured utility firms while still allowing them to pass the costs of a phantom "carbon tax" to consumers. William Echikson on Breakingviews estimates that as a result, under the existing system, the UK's utility firms alone are looking forward to a £9bn subsidy over the next five years at the expense of the taxpayer.
In the new, wider-ranging auction scheme, costs to polluters of competing for permits and/or developing expensive methods of carbon reduction, such as carbon capture and storage, will hurt European consumers even more (see box). And then there are the unknown bureaucratic costs of administering and policing the auction system.
But surely we need a cleaner environment?
For sure, but this scheme is a tortuous way to go about achieving it. For starters, the environmentalists, who should be its biggest advocates, are unhappy Tony Jupiter at Friends of the Earth called it a "disgrace" because Bali's 30% target for emissions reduction has already been dropped to 20% by the EU. Meanwhile, business leaders are worried that higher energy costs will tilt the balance firmly in favour of China and India (who have no equivalent emissions limits) at a time of rising oil prices and possible European recession. The Commission's solution to this seems to be tariffs on US and Chinese imports, a sure-fire road to international discord and higher costs.
Further, as Philippe Varin, president of the European Confederation observed, the EU underestimates the environmental impact of unhappy European companies relocating outside the EU, not to mention the loss of jobs and inward investment that an unpopular scheme could provoke.
Is even the 20% target for "renewables" achievable?
Even this target could, as Christopher Booker put it in The Daily Telegraph, "see our economy blown away". Only about 2% of our energy is renewable, meaning we face a minimum seven-fold increase in little more than a decade to achieve compliance. This fact led to the Government's pre-Christmas announcement that the UK will build up to 20,000 more wind turbines, including 7,000 offshore giants. These could cost anywhere up to £66bn plus £10bn to connect to our national grid, according to the Carbon Trust, to produce what Booker estimates is around 11 gigawatts of electricity. Such output could be achieved by just seven nuclear power stations, "at a quarter of the cost". And that's assuming that fresh concerns from the Ministry of Defence over wind turbines interfering with radar systems don't scupper the Government's ambitious building plans.
What of the biofuels target?
More madness. Even Friends of the Earth have called on the EU to abandon its love affair with biofuels, due to unwelcome side effects such as "biodiversity loss, soil degradation and water stress". The EU's own scientific experts concluded that at roughly £50bn, the "costs outweigh the benefits", as growing the crops required to hit the 10% target will put huge pressure on farmland just as food prices are soaring. In short, taken together these latest EU initiatives could represent "the longest economic suicide note in history".
How much will all this cost UK consumers?
"The time of a cheap-energy world is over," says Paul Golby of German utility EON. The Commission itself reckons electricity prices will need to rise by 10%-15% and puts the total cost of its scheme at "e3 per head per week". But for the UK that looks optimistic. The emissions trading scheme alone could raise e60bn a year by 2020, of which around £6.5bn (or £260 per household per year) is expected to come from the UK most likely in the form of higher energy bills. As for our renewable energy target, the £77bn capital commitment alone works out at around £3,000 per household.
Finally, the push for biofuels will drive food-price inflation beyond its current level of 7.4% already enough to add £750 a year to a typical family's food bill should the EU's 27 member governments ratify the Commission's proposals.
Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
The fallout from the war on landlords
Investors fleeing the market and the rise in rents are affecting us all.
By Charlie Ellingworth Published
Eight small-cap trusts to bet on
Funds investing in market minnows are out of favour, but the cycle will turn. Here are the best bets.
By Max King Published