Costs, competitiveness and climate policy – distortions across Europe

Inside its 28-country energy market the European Union is permitting serious distortions. These arise out of the current patchy way whereby energy-intensive industries are relieved of the costs of ambitious, clean EU energy policies of capping carbon and promoting renewables.  This comment argues that the EU should adopt a common approach to such carbon cost relief, rather than leaving it to member states, of which only a few are able and willing to help their energy-intensive sectors.

Europe now has substantially higher energy prices than its main competitors. This gap is due partly to the shale revolution in the US; the EU can do little about that, although the European Commission has given a green light to environmentally-responsible exploitation of shale resources in Europe. The gap is also due to clean energy costs which stem from the EU pursuing a climate policy more ambitious than its competitors. There is no evidence yet that carbon costs (purchase of emission allowances + renewable energy subsidies) have led to ‘carbon leakage’ – energy-intensive industrial output leaking out of Europe to locations without carbon costs or constraints. But there is already some evidence that EU carbon costs are discouraging new investment in energy-intensive sectors in Europe. If Europe’s energy costs remain higher than those of its competitors for many years – which they are forecast to do – it is very likely that carbon leakage or investment leakage will occur.

This comment therefore accepts the need for some relief from clean energy costs. But only one form of this cost relief (that for the direct cost of Emission Trading System allowances) is provided in a harmonised manner across Europe. Compensation for the bulk of clean energy costs (indirect ETS costs + renewables costs) is left to member states, and only a few of them provide it. This is distorting competition in the EU energy market. The comment proposes two ways of removing this distortion.

By: David Buchan