Copenhagen notwithstanding, the world’s transition to a low carbon economy is now well under way; global revenues of companies whose goods and services relate to climate change already exceed those of the aerospace and defence sectors, and are on course to reach nearly €1.35 trillion by 2020. And because Europe has long recognised the benefits of the low carbon transformation, it has played an international leadership role by adopting commitments to reduce its emissions ahead of any other major economy.
And now it is time to accelerate the pace of the European low carbon transformation. With massive investments to be made in the coming years to upgrade and create infrastructure that will operate for several decades, a critical question is how these investments can move Europe toward a low carbon pathway in the long-term. If Europe delays the pace of its decarbonisation agenda, it will miss the most cost-effective opportunity in a generation to clean up its infrastructure.
The present economic recession adds new impetus for accelerating low carbon transformation in Europe; lower emissions due to the downturn are creating an historic opportunity to step-up the pace of decarbonisation. Recent analysis shows that the fall in emissions caused by the recession has reduced the cost of achieving the 30% target well below the estimates for reaching 20% when that target was agreed as EU policy in December 2008. And science, too, is calling for faster action; mankind has about five years to begin the low carbon industrial transformation needed to move to a 2°C world. The International Energy Agency (IEA) estimates that every year of delay in climate action will add an extra €336bn to the clean investment needed in the energy sector globally between 2010 and 2030.
The low carbon economy will, on balance, increase employment and economic activity in Europe as imports of fossil fuels are replaced by domestic investment in new technology and in highly efficient infrastructures. But as with any transition, it will also create winners and losers. To maintain public support, a just transition must ensure that jobs are protected and industry losses minimised. The best way to manage this transition is to put the right policies in place quickly to capture the full benefits of the transformation.
The main pillar of the EU’s present policy for combating climate change and accelerating the transition to a clean energy economy is the Climate Package that was adopted in December 2008. The EU’s member governments agreed to reduce their collective greenhouse gas (GHG) emissions by 2020 by 20% from 1990 levels, and to derive 20% of Europe’s final energy consumption from renewable sources. The intention is that this emissions reduction target will rise to 30% in the context of a global agreement where other developed countries take on comparable targets and major developing countries contribute “adequately”.
The EU has already committed to reducing emissions by 80-90% by 2050, and assuming a linear trajectory this would mean at least a 40% reduction by 2020. But right now the EU has no real roadmap for moving beyond its current 2020 target apart from hazy statements that an additional 5% could come from international offsets generated in developing countries and a further 3% from land-use changes.
A credible policy strategy is needed for speeding up Europe’s low carbon transformation. The EU’s Emissions Trading Scheme (ETS) remains the main tool for achieving emission reductions, but unfortunately the current debate has centred solely on reducing the short-term cost of compliance with the ETS, with a heavy focus on the use of international offsets. Although offsets reduce immediate compliance costs, they lower the incentives for transformational change in Europe. The UK’s Climate Change Committee has built its assessment of Britain’s long-term carbon budget on the assumption that net flows of offsets will cease in large quantities by 2030, by when all major economies will have binding reduction caps. Yet relying on a future stream of low-cost offsets to reach the EU’s increasingly stringent targets carries the risk of high costs in the future.
Transformational change requires innovative policies that scale-up investments in energy efficiency, low carbon infrastructure and transport. In the short-term, a strong focus must be placed on achieving domestic energy efficiency targets. Adopting more rigorous efficiency standards for buildings and appliances will help both companies and consumers achieve immediate cost-efficiency gains. In the medium and longer-term, a fundamental challenge is to ramp up investment in smart grids, low carbon infrastructures, buildings and transport.
Because the geography of Europe has placed its major renewable energy resources on the periphery – North Sea wind, Mediterranean solar power and Eastern European biomass – a pan-European electricity grid will be needed if it is to efficiently decarbonise its power sector and meet the increased demand for clean power from electric cars.
Emissions from transport are growing rapidly and contributing a steadily greater share of the total. Tougher standards and more government support are going to be needed to boost R&D programmes on greener vehicles, advanced engine technologies, hybridisation and electric cars, high-speed rail networks and other public transport systems. Policies for promoting innovation will play a pivotal role in consolidating the first-mover advantage of Europe’s low carbon industries, and in maintaining a market share lead in clean technology.
These policies in support of low carbon industries can catalyse a new generation of low carbon jobs and stimulate the re-tooling of Europe’s more traditional industries. Estimates vary, but most analysts agree that strong public policy support for low carbon industries can have a noticeable employment effect. EU estimates suggest that improving current policies so that the 20% target for renewables in final energy consumption can be achieved by 2020 will provide a net effect of about 410,000 additional jobs. And a 30% reduction target for Europe could potentially yield an increase of 1.1m jobs in 10 years’ time.
As well as putting in place much stronger decarbonisation policies, Europe’s governments are going to have to support the introduction of new skills into the European workforce. Without the right incentives for training and re-tooling, Europe risks a serious shortage in low carbon jobs. A recent UK study by the Aldersgate Group of companies has emphasised the need for rapid and accelerated investment in skills.
Most of the public discussion across Europe about the job creation potential of environmental policies has concentrated on clean energy jobs, but as the low carbon transformation deepens, more attention should be placed on investing in new skills in areas that span resource efficiency, energy efficiency, clean transportation, the de-materialisation of products and green buildings.
But public policy alone is not enough to catalyse change. Without an adequate finance strategy, low carbon industries will not flourish on the scale required. More aggressive investment is needed to lay the foundations for new global European industries. This in turn means more creative ways of mobilising funds from risk-averse investors and channelling them towards energy efficiency, low carbon infrastructures and transport.
In the UK, Germany and even the U.S., the idea is now growing of developing green infrastructure banks to help support the low carbon transition. A green infrastructure bank (GIB) could leverage private capital and scale-up the volume of low carbon investment in Europe. GIBs could put in place multiple public-private financing mechanisms to shift capital towards low carbon infrastructures. Green banks would probably become self-financing in the medium term, and would certainly deliver greater confidence and faster growth in low carbon markets.
Sector-specific banks are not new. The European Investment Bank (EIB) was launched in 1958 to facilitate the fledging European economic integration process. The Luxembourg-based bank is policy-driven, based on the priorities of its member state shareholders and raises its funds in the international capital markets and then uses these for loans to projects in Europe and elsewhere that further EU policy objectives. The EIB already directs large amounts of its portfolio towards low carbon activities, and is in effect already becoming a pan-European GIB. But national GIBs are also needed to undertake more complex and specifically national tasks, especially those concerned with energy efficiency and low carbon infrastructure. In many countries, a GIB could be based on an existing national development bank, although there also a strong argument for creating new and dedicated institutions that would have strongly focused expertise.
GIBs could provide opportunities for governments to boost low carbon investment by ensuring that guaranteed funds are earmarked for green infrastructures. They could act as loan guarantors on behalf of the government, while at the same time reporting on levels of success and syndicating low carbon investment programmes such as national energy efficiency schemes.
Advocates of the GIB approach are in little doubt that a specialised infrastructure bank is preferable to ad hoc financial mechanisms. In the first place, it would provide public sector expertise to deliver public good outcomes within a commercial environment, eliminating some of the conflicts of interest that can otherwise arise. It would also provide on-going innovative capacity to respond to the many, usually unexpected, demands that the low carbon transition will generate. And in the second place, a GIB could increase market confidence because national governments would be backing their own policies through direct investment, thus signalling private sector investors that low carbon investment is a solid proposition.
There is no low cost, high carbon future for Europe. Failure to lead the global transformation to a low carbon economy would leave the EU exposed to massive climate change damage and soaring fossil fuel prices as peak oil hits in the next few decades.
With a low carbon economy the only viable alternative, the question now is how quickly will Europe drive its transition? Delay often seems attractive as a least cost option, but not in this case. Europe in any case needs to replace much more of its ageing energy infrastructure in the coming two decades, and failure to make its new generation of power plants, buildings and factories low carbon will lock high costs into the future. The Chinese have a saying that you cannot cross a ravine by taking small steps, and now is the time for Europe to jump into its low carbon future.