Carbon pricing -- useful policy tool or distraction?

EUROPE: Proposals for carbon pricing miss the point when it comes to moving towards increasing use of renewables.

New ideas from Europe add to around 40 existing carbon schemes set up around the world 1990-mid 2016 (pic: I4CE)
New ideas from Europe add to around 40 existing carbon schemes set up around the world 1990-mid 2016 (pic: I4CE)

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They are designed to generate income for policymakers, are unlikely to be high enough to curb fossil fuels and do nothing to help grid integration.

Many people think, and hope, that a higher price charged on CO2 emissions will increase prices for fossil-fuel generated electricity and must therefore be good for wind.

Recent proposals out of Europe on CO2 pricing have caused a flurry of interest, but whether the plans are more than a mere distraction for wind is questionable.

New French president Emmanuel Macron's plan, aired in May 2017, initially seemed to be about building a coalition, starting with France and Germany, around the idea of a €30/tonne carbon price floor, according to the French I4CE Institute for Climate Economics. It was widely interpreted as referring to the EU emissions trading scheme (ETS).

But when French minister for ecological transition Nicolas Hulot unveiled his climate plan on 6 July, it turned out that it referred not to the CO2 price set by the EU ETS but to the CO2 tax component, already added to each of the energy consumption taxes on oil, gas and coal charged to the household and commercial sector.

Known as contribution climat-energie; it was launched in 2014, starting at EUR7 per tonne of CO2. In 2015, a long-term trajectory to 2030 was included in the energy transition law for green growth, rising from €30.5/t in 2017 to €100/t in 2030 — the rate now freshly heralded by Hulot.

What's in it for wind? One possibility could be a boost for sector coupling, for example of wind energy to heat for the domestic or commercial sector.

Fizzling out in the UK

But what can happen to such trajectories is illustrated by the case of the UK, where a long-term carbon tax plan for the power-station sector lost all momentum within four years.

The carbon price floor introduced under the Climate Change Levy regulations in April 2013 affects the price of carbon in the UK's electricity-generation market by taxing the fossil fuels that are used to generate electricity applying a so-called carbon support price.

The government trajectory for the carbon floor price was set in 2013 at £24.62/t (€27.81/t) by 2017-2018, rising to £32/t (€36/t) in 2020 and £75/t (€85/t) in 2030.

But in November 2016, the rate for the top-up — the carbon support price — was frozen at £18/t to end-2021, with no indication of what is to follow.

Unless the ETS price rises significantly — it averaged around £4/t in 2016 — the target trajectory is unlikely to be met, and UK carbon prices will be lower than previously assumed, said a House of Commons library briefing paper in November 2016.

Economics over environment

While the French proposal has become clearer and UK intentions remain under wraps, CO2 plans aired by Gunther Oettinger, European commissioner for budget and human resources, and a former energy commissioner, are still at an early stage.

In his current role, Oettinger 's primary concern is finding fresh money for the EU budget rather than meeting emissions-reduction targets. The UK's departure from the EU will remove a net €10-11 billion a year, while demands on the budget are growing.

Carbon pricing — which could involve revenues from auctions under the ETS or a Europe-wide carbon tax — is one of 11 options for new revenue sources contained in a Reflection paper on the future of EU finances, released in June, which is unlikely to be finalised until 2019.

Despite the surge of interest triggered by each new CO2 proposal, the latest findings indicate that whatever actually happens with future carbon pricing is of ever dwindling relevance for the wind sector.

Wind-energy costs are widely expected to continue to fall. And a comparison of the levelised cost of energy of renewable, fossil-fuel and nuclear power plants over the coming years reveals that "by 2030, developers in G20 countries who intend to build fossil-fuel power plants are going to have difficulties justifying such decisions to investors and financiers, not on environmental grounds, but based purely on economic viability".

This was the conclusion of the "Comparing electricity production costs of renewables to fossil and nuclear power plants in G20 countries" study by Finland's Lappeenranta University of Technology for Greenpeace.

So as far as wind is concerned, can carbon pricing with all its complications be ditched in the electricity sector? "No, not really," argues Tobias Austrop, Greenpeace spokesman on Germany's Energiewende, the transition towards the increasing use of renewable energies.

"In principle, it's correct that the environmental burden of various types of generation should continue to be built into their electricity costs."

But Austrop concedes that carbon minimum prices being discussed are in the range of just €20-30/t, and this is "not enough, covering only a quarter to one third of the external environment costs of fossil fuels of around €80/t". The German environment ministry "recommends" that for 2030 the full costs of CO2 emissions should be estimated at €145/t.

To achieve reduction targets "we'll need a political coal phase-out plan; where each and every power station gets a closure date", Austrop says. This could help wind by opening up the market and raise electricity prices too.

Hans-Josef Fell, a veteran of the German renewables sector and former Green Party member of the German parliament (1999-2013), is wary of carbon instruments. "The EU CO2 emissions trading system, launched in 2005, was a bad idea right from the start," he says. "It has had no real impact in reducing CO2 emissions."

"Over the years, huge amounts of time and energy have been spent on trying to make the CO2 trading system effective. But this has diverted attention away from the really important areas of eliminating fossil-fuel subsidies and securing, updating and improving effective support instruments for renewables, like feed-in tariffs," Fell argues.

Instead of developing and improving support instruments to speed up expansion and integration of renewables, investments in renewables have been slowed by auctions and expansion caps, he points out.

In Germany alone, arrangements favouring fossil fuels add up to some €46 billion per year, Fell says. In comparison, the penalty gleaned from CO2 emissions from power stations and industry in the whole of the EU is tiny.

Auctioning of ETS allowances in 2015 generated €4.9 billion of revenues for the member states, according to the European Commission.

The research arriving at the German figure was conducted by Forum Okologisch-Soziale Marktwirtschaft for Greenpeace and published in June.

The German government's official subsidy report covers only about half the subsidy types identified, and totals €9.5 billion per year, says the study. But what fossil fuels receive in subsidies in Germany alone is still twice the EU-wide income from penalising fossil fuels for CO2 emissions in 2015.

Perhaps more galling, the EU ETS system itself provides support for coal generation. Power generators have had to buy all their allowances since 2013, but an exemption allows poorer member states to grant limited amounts of free allowances to existing power plants until 2019.

And the EU ETS revision for phase 4 (2021-2030) currently foresees free allowances continuing to be available "to modernise the power sector" in lower-income member states.

Three of the biggest beneficiaries of the exemption, accounting for 85% of the free allowances in phase 3 to 2020, "have largely used them to either modernise fossil-fuel capacity, support new fossil-fuel energy production or increase future coal consumption", according to a Carbon Market Watch study on fossil-fuel subsidies in Europe, released in April 2016.

Carbon tax

Like Austrop, Fell admits that a CO2 tax on fossil fuels to replace emission trading could make some sense if the tax is set high enough, and is reliable into the longer term so everyone can adjust to it.

But this would merely encourage the cheapest renewables, wind and solar. A CO2 tax would do nothing to integrate renewables, and could end up exacerbating electricity network problems, he warns.

A CO2 tax would not encourage investments in projects combining renewables with energy storage, he notes.

"We need a new incentive scheme for 100% renewable combined power solutions to trigger such investment," Fell says. "A CO2 tax is not a suitable alternative to the renewable feed-in tariff energy law."

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