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Climate change: European disunion

Consensus across the continent on energy and emissions policy is severely lacking

The EU remains a global leader on carbon emissions reductions: renewables use is growing and the bloc should easily meet its 2020 target, while both governments and EU-based car makers have big plans to hasten the switch away from gasoline and diesel to electric vehicles. That's the good news. The bad news is that policy remains bitty and regional biases prevail.

At June's G20 meeting in Hamburg, European leaders, along with those of China and other leading economies, put up what looked like a united front against US president Donald Trump's rejection of the Paris climate change accord.

But not all is rosy in the gardenand not everyone in European capitals rejects Trump's thinking, at least behind closed doors.

Like Trump's US, the Polish governmentwhich played host to him just before the G20 meetingis also reluctant to phase out its coal-power generation, which provides large numbers of jobs in state-owned mines and cheap electricity, as well as offering a buffer against dependence on Russian gas.

Polish deputy energy minister Grzegorz Tobiszowski said in July that the country planned to produce almost 60% of its energy from bituminous coal and lignite in 2030. That's down from over 80% now, but hardly marks a move towards the end of the coal era.

Later in the month, the Polish environment ministry put out a statement saying it could not afford to meet a proposed target (assigned by the EU) to cut emissions by 7% by 2030compared to 2005. These are emissions not covered by the bloc's trading system and include road transport, buildings and agriculture. Instead, Poland would do what was "fair and feasible" without "unduly burdening" the economy, the ministry said.

By comparison, the EU proposed cuts of greater than 30% for countries such as Germany, France and the (wantaway) UK and fewer than 10% for a number of Eastern European countries. Bulgaria isn't even required to make any reductions.

A lukewarm attitude to rapid adoption of clean energy is also evident in the Czech Republicanother big coal burner, which has similar fears that cutting emissions will also cut economic growth. The country was the last EU state to ratify the Paris agreementits lower house of parliament finally voted in favour only in July. Bulgaria and some other Eastern European countries, all burning the black stuff at will, have similar qualms.

A higher carbon price would affect the oil and gas sector, but other factors, already having an effect now, could prove more important

The varying degree of enthusiasm towards climate-change measures was highlighted by an "EU Climate Leader Board," compiled by two campaigning groupsTransport and Environment, and Carbon Market Watchand backed by a European Commission grant.

Published in March, the survey analysed country positions in negotiations to define the EU's Effort Sharing Regulation, a law which will set binding national emissions-reduction targets for the 2021-30 period for sectors such as transport, buildings, agriculture and waste: areas that cover around 60% of the bloc's greenhouse gas emissions. The ranking was based on criteria such as ambition, governance and determination to remove "loopholes" involving carbon offsets in the forestry sector and the continent's carbon-market mechanism, the EU Emissions Trading Scheme (EU ETS).

The authors concluded that only three countries were pushing hard enough to deliver on the objectives of the Paris climate agreement: Sweden, Germany and France. A string of Eastern European countries brought up the rear, along with a couple of less obvious candidates for poor performance.

"At the other end, Poland, Italy, Spain and the Czech Republic push to weaken the Commission proposal, countering Europe's efforts to comply with the Paris Agreement," they said.

Such nuances in approach to climate-change measures tend to be masked by data showing falling carbon emissions across the block. These indicate that the EU will achieve its 2020 carbon targets comfortably. A look at the extent of cuts achieved by European countries over the decade to 2014 shows all but a handful managed to lower emissions by more than 10%.

Emissions bounce-back

But the global economic downturn contributed to those reductions by restricting industrial activity. As European economies recover, so too does the risk of emissions increases.

Meanwhile, the EU's relatively modest 2020 emissions targets were only the precursor to the measures needed in the following decade, the details of which are being hammered out now. These will need to be a lot tougher if Europe is to do its bit to keep man-made global warming down to safe levels. And they will need to be better integrated across economies than they have been if they are to work properly.

The measures under discussion include reform of the EU ETS, and a so-called Clean Energy Package to boost renewable energy and energy efficiency.

To date, the ETS has been infamously ineffective as a spur to adopting climate change measures. A combination of widespread exemptions or special treatment for polluting economically or politically important industriessuch as refined oil products, cement and iron and steelas well as falling carbon emissions, has resulted in an over-abundance of permits, known as emission allowances, on the market.

Oversupply amounts to almost the equivalent of a year's worth of allowances at present. This has ensured the carbon price remains too low to be punitive for polluters. Allowances currently trade at around €5/tonne ($5.93/t) of CO2, compared with roughly €30/t in 2008.

The introduction of a Market Stability Reserve (MSR) to control the supply of allowances should begin to push the price higher; incentivising a switch from coal to gas for power production. The MSR is due to start holding allowances in 2019.

A July report written by consultancy FTI-Compass Lexecon, at the behest of corporate lobby group Business Europe, estimates that the MSR and other policies would push the price of allowances up to around €33-36/t by 2030.

The EU's own studies show the lingering danger that even an overhauled ETS might still face oversupply problems in the 2020s, as renewables' growing share of the energy mix and improved energy efficiency lower carbon emissions further.

The European Commission (EC), the EU's civil service, set a 20% energy-savings target by 2020, compared to the projected use of energy in that year. As the Commission notes, this is roughly equivalent to turning off 400 power stations. A target of 27% savings was then put in place for 2030, but in November 2016, the EC proposed that measures should be implemented to raise that to a 30% target.

Moving from a 27% to a 30% efficiency target would lower the 2030 carbon price by 36%, according to an EC impact assessment published in 2016. The assessment suggested a 30% efficiency target could produce a carbon price of €27/t in 2030, compared with one of €42/t with a 27% target efficiency, assuming climate-change targets remained the same.

But a fortified MSR-backed by the Business Europe lobby group-should give the commission much more sway over the carbon price through greater control of the number of allowances in circulation from year to year. In fact, just the knowledge that the system is set to be introduced could start to push up the carbon price before 2019 due to speculative buying of allowances, potentially permitting a re-balancing of the market as early as this year, according to FTI.

Policy push

A higher carbon price will obviously have consequences for the oil and gas sectors, but it may well be that the other factors in the mix, which are already having an effect now, will still prove to be more important.

For oil, policy decisions such as those made by the UK and French governments to prohibit sales of new petrol and diesel cars by 2040 and Norway's decision to do it even earlier, by 2025, could have profound effects for oil demand. The 23 years until 2040 may seem like a long time, but such deadlines will be affecting the long-term investment decisions being made now by car makers, oil importers and refiners. Virtually all European car manufacturers are beefing up their electric-vehicle (EV) ranges. Chinese-owned, Swedish-based Volvo has already said that it plans to make all its new car models electric or hybrid from 2019.

How this affects European oil demand over the next decade or so will depend on the speed of uptake for EVs. In its last World Energy Outlook, the International Energy Agency (IEA) forecast that EU total oil demand would fall by almost 12% between 2020 and 2030, just based on climate-change policies already in place. If the tougher measures needed to keep global warming below 2°Celsius were implemented—the IEA's 450 Scenariothen the decline would be almost 30%.

Demand for gas is likely to be supported by its role as a bridging fuel, providing a reliable back up for intermittent renewables such as solar and wind—at least for now. The IEA forecasts a 14% rise in the decade to 2030 with current policies and a 7% decline with tougher climate change measures.

But even with this broad range there are caveats. If grid-scale energy storage technology continues to improve then European countries can be expected to be in the vanguard of those installing it to store power and replace fossil fuels. This would probably hurt gas demand towards the end of next decade.

Energy-security urges may also play a role. Current ill-feeling among Middle Eastern countries to their neighbour Qatar, a leading LNG supplier to the UK and other European countries, highlights the risks of over-reliance on imported energy, which will be exacerbated by falling gas production within Europe. In the continent's east, Russia's gassy presence looms ever in the background, a strategic rationale for countries on its border to favour coal.

Still, there are signs Eastern European countries are starting to fall into line with sentiment across the EU as whole. The Czechs are signing the Paris agreement and it would not be surprising if Poland, which is the largest net beneficiary from EU coffers in absolute terms, eventually bowed to the will of the EC and curtailed its use of coal faster than it would like.

Source: Petroleum Economist
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