Battle over EU energy efficiency targets ends in compromise 30 per cent goal

The EU should aim to cut its energy use 30 per cent by 2030, the European Commission said today, despite rumoured attempts to weaken the goal to 27 per cent.

Green NGOs are arguing that’s  still not very ambitious. They say a higher goal of 35 or 40 per cent would have been more beneficial in terms of reducing reliance on Russian gas, boosting growth, creating jobs and cutting consumer energy bills.

But if it’s such a good idea why has the commission gone for a lower target? In our analysis of the announcement we’ve dissected the competing explanations of what’s going on.

Energy saving goal for 2030

The commission is proposing that EU energy use in 2030 should be cut by 30 per cent compared with the level of energy use that was expected when the commission made projections back in 2007.

Making predictions about the future of energy is notoriously difficult. These 2007 projections were made before the financial crisis hit, for instance.

The crisis and the recession that followed put a massive dent in demand for energy as factories closed down and consumers turned down the thermostat to save money. This is one of the biggest reasons why the EU is in a position to meet a 2020 target to cut energy use by 20 per cent.

How ambitious is the 30 per cent goal?

Back in June we looked at a leaked draft impact assessment from the commission backing a binding 30 per cent target. It said such a target would mean “maintaining the momentum of energy efficiency policy at the current level”. A 35 per cent goal would increase ambition, it said.

A leaked draft of today’s announcement we saw several weeks ago said energy saving was “a powerful way” to reduce EU reliance on energy imports, and that a 30 or 35 per cent goal would save more gas than the EU imports from Russia each year. “Every additional 1 per cent in energy savings cuts gas imports by 2.3 per cent,” it said.

But a later draft completely changed tack. It said a target of 27 or 29 per cent would be “ambitious” and would “maintain the existing momentum of energy savings”. It said higher targets would have substantial costs ranging from an additional â?¬24 billion per year for a 30 per cent goal to â?¬116 billion for 40 per cent.

In the end, the Commission appears to have gone for a compromise of 30 per cent.

How was the final decision reached?

The competing drafts suggested there were arguments within the commission over how ambitious to be, a view confirmed when today’s announcement was delayed by two hours to allow a final decision to be reached.

There are several different ideas about why parts of the commission were pushing for lower targets.

One point of view is that a higher energy saving target would put the EU’s whole 2030 climate and energy package at risk, including its headline goal to cut carbon emissions by 40 per cent. Getting agreement on the 40 per cent emissions goal is expected to be difficult, the thinking goes. Adding an ambitious energy saving goal to the mix would make things even more challenging, with eastern member states such as Poland thought to be particularly resistant.

Another position was that a more ambitious energy saving target would make the overall 40 per cent carbon emissions cut easier to meet – implying more ambitious carbon cuts that member states simply wouldn’t be prepared to accept.

A higher energy saving target might also create problems for the EU’s flagship carbon cutting machinery, the emissions trading scheme (ETS) because it would reduce the amount of effort required from those sectors the ETS covers.

Commission modelling shows the ETS carbon price in 2030 would be â?¬40 per tonne without a specific energy saving goal, and fall to â?¬25 with the proposed 30 per cent target. A more ambitious 40 per cent goal would have pushed the 2030 price down to â?¬6 a tonne, the modelling suggests – the same as its current level.

That would obviously pose problems. But spokesman for the commission’s climate directorate Isaac Valero said this wasn’t the issue:

“It’s not about ETS complementarity concerns, it’s about worries by some that costs may be too high and that a higher target could derail the 2030 package.”

Cost or investment?

Commission figures suggest the proposed 30 per cent goal will cost â?¬22 billion a year more than a lower 25 per cent target. The increased costs come from the need for more up-front spending on insulating homes and other buildings as the energy saving ambition increases.

Some will argue that this isn’t a cost, it’s an investment. On this view, spending on insulation today to save money on fuel tomorrow is a really good idea.

It all depends on your economic world view. Interestingly, the commission used two economic models to estimate the impact of different energy saving targets on the economy of the EU.

One model – to use the jargon – is post-Keynesian while the other is neo-classical . This is the difference between those that believed in austerity – government belt-tightening – after the financial crisis and those that thought governments should borrow cheap money to provide jobs for the unemployed to do things like insulating homes.

In the post-Keynesian model, the higher the energy saving goal the bigger the boost to the economy, with GDP benefitting by as much as four per cent in 2030 with a 40 per cent target. In the neo-classical world the opposite is true – the higher the target the bigger the dent in GDP with a 1 per cent reduction under a 40 per cent goal.

This split approach may reflect the ideological differences within the commission that have turned this into such a public fight. The 30 per cent target announced today amounts to a compromise. Up front costs will be higher than they might have been, but so will the long-term benefits in terms of lower bills for energy imports.

What happens next?

The announcement today from the commission is just a proposal. Before it becomes official EU policy it must be agreed by the heads of EU member state governments when they meet in the EU Council in October.

The European Parliament of members elected from across the EU must also sign off on the proposals. Earlier this year the parliament said it wanted a 40 per cent energy saving goal, much higher than the proposal out today. Since then a new parliament has been elected.

The October council will also have to decide if the target should be binding at the level of member states, binding for the EU as a whole or not binding at all.

The president elect Jean-Claude Juncker said last week that “a binding 30% energy efficiency target is for me the minimum,” but he didn’t say what kind of binding he meant and he doesn’t take office until November. Juncker is at odds with current president Jose Manuel Barroso, who had been pushing for a lower 27 per cent non-binding goal.

What about those – like the NGOs – who wanted a 35 or 40 per cent target? They are pinning their hopes on a review that has been put in the diary for 2017. After all, it’s 16 years until 2030. That’s a long time in politics.

Main image: Industrial coal power station on sunset, Germany.  Credit: r.classen/Shutterstock.com.