A plea for a pragmatic approach to global climate policy

Posted by Eberhard Rhein on 14/07/14

During the last 50 years global energy demand has risen at an unprecedented pace and is expected to continue rising further in the wake of growing world population and prosperity.

These trends are not sustainable. The energy resources (coal, oil, gas, uranium) are finite and burning them is bound to accelerate climate change to a point of no return destroying the basis of human livelihood.

Climate scientists and almost all governments on earth share this basic assessment. But while scientists urge for action to be taken politicians are wavering in the face of powerful fossil energy lobbies and industry pressing for low energy prices.

Fortunately, tenuous signs for a change are appearing in the two most polluting countries, China and USA, on which the success of any international action hinges.

China has placed the fight against energy waste, air pollution and climate change among the top priorities of its Five Year Plan 2011-15. It is determined to increase its overall energy efficiency; and it envisages stepping up research and pilot projects for carbon capture and storage which is vital for continuing to burn coal with which it is amply endowed. But though the government is to be congratulated for finally acknowledging the seriousness of climate change its actions continue to fall far short of what is needed. Chinese green house gas emissions will therefore keep rising for at least 20 more years.

USA, the second biggest emitter of GHG has made great strides under the Obama Administration, thanks to circumventing a hostile Congress by executive action in the form of technical standards. CO2 emissions have begun to fall from exorbitant levels of 17 tons/per capita, due to increasing switch from coal to gas as the major fuel in power generation and stringent fuel consumption standards for passenger cars.

Driven by concerns about their security of supply, both countries will press for higher energy efficiency, in particular in buildings, and more power generation through renewables – wind, sun, hydro and biomass. But neither is ambitious enough and postulate largely C02 free energy by the middle of the century.

Only the EU, the third biggest energy consumer and CO2 emitter, can so far boast of an established record against climate change. Until 2020 its CO2 emissions will be down by 20 per cent over 1990; and it is set to reduce them by 80-95 per cent until the middle of the century. No other country has so far announced similar ambitions. But with a share of only some 12 per cent of global emissions it does not carry enough weight for preserving the climate.

Both USA and EU owe their relative success to the setting of medium and long-term targets and taking concrete measures. That distinguishes their approach from the UN-directed efforts which continue to lack precision of the targets and fail to prescribe concrete measures. Moreover, there is no political drive without which policies cannot be conceived and implemented. This is normal for assemblies grouping some 200 states with totally different levels of energy consumption and representing fundamentally different views on the future.

In order to achieve a positive outcome from the decisive Paris Climate Conference in November 2015 participant countries need to change the modus operandi of their future negotiations. UN Secretary General Ban Ki Moon might have made a beginning by calling a restricted high-level meeting of heads of government from the main polluter countries at the margin of the September 2014 General Assembly.

To ensure a successful result in Paris the leaders of the countries responsible for 80 per cent of global emissions must agree on a cooperative strategy to keep global temperatures within a two degree Celsius rise over pre-industrial levels.

A group of climate and energy research institutes from 15 major emitter countries has translated the “two centigrade target” into the necessary reductions of green house gas emissions. The result will come as a shock for policy makers: average per capita green house gas emissions must not exceed 1.6 ton by the middle of the century. Only the poor, mostly African, countries can still indulge in rising emissions. Most other countries including EU, Japan, China and Russia will need to reduce them by around three quarters and some 20 countries like United Arab Emirates Canada, Australia, USA with very high per capita emissions by even 90 per cent until 2050.

This will be a huge challenge for every country and Humanity. It is therefore crucial to provide for an equitable burden sharing among Humanity, which per capita green house emissions, reflect better than any other yardstick.

At the Paris conference, the parties should focus on two conclusions:

  • All countries will reduce their green house gas emissions by 2050 to 1.6 tons per capita by 2050.
  • Countries emitting already more than seven tons per capita will present their strategy for implementation to the UN Secretary General for approval before 2020. Countries with per capita emissions of less than one ton can wait with presenting their climate strategy until 2030 or until exceeding a level of emissions of more than one ton.

The UN Secretary General will appoint a special representative for the preparations.

This procedure will replace the annual climate conferences, from which the necessary policy changes cannot emerge, due to increasing level of bureaucratisation, too many participants and lack of political commitment.

Future climate policy will be more differentiated by countries, and the UN should be empowered to fix policy guidelines and monitor implementation.

The following guidelines might inspire national and global policy makers:

  • All countries subsidising fossil fuels must phase these out by 2020. That process has started under the pressure from IEA and others.
  • All countries will have to invest heavily in much higher energy efficiency:
    • Thanks to perfect thermal insulation buildings must become autonomous from fossil energy.
    • The internal combustion engine must be replaced by battery-propelled electric engines, fed from renewable sources.
  • All countries must step up their recycling efforts, following the lead the by European Union
  • To slow down population growth and global energy demand developing countries must take appropriate measures and thereby contribute to the fight against climate change.
  • Countries with large forest areas must preserve these, which is vital for stabilising global environment and climate.
  • Countries in the solar belt must fully exploit their solar potential for electricity generation.
  • Countries like China, Russia, Australia and Canada that want to continue exploiting their huge coal or gas reserves must invest in carbon capture and storage.
  • Countries situated along the Seas must exploit their wind power potential and develop technologies for “harvesting” wave energies.

The World Bank, in conjunction with regional Development Banks must become the global financing and technical assistance agent for implementing the challenging structural changes towards a non-fossil society. To that end it should be in charge of managing the $ 100 billion annual International Climate Fund that the developed countries have pledged to establish by 2020.

Eberhard Rhein, Brussels, 12/7/2014

Germany must be stopped from introducing highway user fees

Posted by Eberhard Rhein on 10/07/14

For years Bavarian politicians have been pushing for highway user fees for non-German cars. Now they may have come closer their goal. On 7 July, the German transport minister (CSU) has presented his plans, which should be turned into legislation before the beginning of 2016.

They foresee the introduction of mandatory vignettes for passenger cars (€10 for 10 days, €20 for two months, €100 for one year) for using the complete German 600,000 km road network.

Though non-German cars are the target of the operation German cars will also be formally subject to the fee. But de facto they will not pay for the vignette as its price of some €100 will be deducted from the annual vehicle tax, which might be a violation of the EU non-discrimination principle.

Independent from the EU implications, highway user fees are not an optimal method of financing the construction and maintenance of highways.

Unless it is done electronically, which will be possible only on the main highway axes, the collection is expensive, especially when applied and differentiated to millions of cars. In Germany the government expects to raise some €600 million of fees the collection of which may cost up to €200 million, a huge amount.

The most cost-effective way of charging highway users the cost of road construction/maintenance is through fuel taxes. They charge vehicles according to the wear and tear including air/noise pollution they cause.

It is by far the cheapest and most productive method of financing the road infrastructure. Germany raises fifty times more (€40 billion per year) through through fuel taxes than through the planned highway user fees. It would only have to increase the average tax rate per litre fuel by 5% to obtain the extra fiscal revenues the government hopes to achieve by putting in place a new bureaucratic machinery.

A substantial share of non-Germany road users would also pay fuel taxes during their stop-overs in Germany and thus contribute to what the German transport minister has unfortunately called the “equity gap”.

In conclusion, Germany will not become more popular with its neighbours by this absurd proposal, which will at best create a few thousand unproductive administrative jobs.

If it were to pass the many obstacles of the German political and legislative machinery the EU competition guardians should prevent it from ever becoming a European reality.

Eberhard Rhein, Brussels, 8/7/2014

Egypt starts putting its house in order

Posted by Eberhard Rhein on 09/07/14

The new Egyptian President, Fattah el-Sissi, has inherited a country in political, social and economic disarray.

Starting with demographic growth of 1.7%, all major data indicate unsustainable trends: a budget deficit of 10% of the GDP, a public debt close to 100% of GDP, a 9% inflation rate and an explosive balance of payment gap.

Courageously, he has launched his reforms by cutting the exorbitant state subsidies on electricity and fuel, something the IMF and the International Energy Agency had urged the country to do for years.

As of 6 July prices for gasoline and diesel went up by 78% to 3 US cents, less than one tenth of European prices. This can only be the beginning of a long process. A poor country like Egypt cannot afford to subsidise individual transport, which benefits wealthy car owners and helps creating unbearable congestion and air pollution in Cairo and other cities.

What Egypt needs is a modern mass transport system, starting with a more extensive subway network in Cairo, for which its public finance needs improvement.

In parallel, taxes on property and cigarettes were raised and export subsidies reduced.

The decade-old subsidies on wheat had already undergone an overdue reform in April. In order to prevent large numbers of well-to-do citizens from buying subsidised loaves of bread and abusing a system meant for those living on less than $2 daily, the government has distributed smart electronic cards to the poor that allow them to buy their subsidised bread. Through this measure the government hopes to save about half of the $3 billion it used to pay for wheat subsidies.

In conclusion, the government deserves praise for having begun to tackle overdue reforms in Egypt. And the President has done well to explain to his people the rationale for his action in a 30 minute TV declaration.

But these measures cannot be more than the beginning of thorough reform process which must encompass all areas of economic, social and political life, above all the restoration of basic freedoms of expression.

Eberhard Rhein, Brussels, 9/7/2014

European companies are becoming more continental

Posted by Eberhard Rhein on 08/07/14

One of the strange phenomena of the European integration process is the slowness with which transnational business has replaced traditional structures. Business, whatever sector, has stayed for a long time where it had been before 1958. While intra-European trade has flourished companies did not feel much need to join hands with neighbouring competitors and prepare for global competition.

There have been, of course, examples of big EU mergers.

Airbus has been the most shining and successful case, after many difficulties and quarrels about company leadership. Sanofi, a French pharmaceutical giant born 1999 from a merger between Hoechst and Rhone-Poulenc, is also one of the success stories. Arcelor-Mittal may serve as an example of restructuring fledgling national steel companies into one of the world leaders.

Recently, cross-border cooperation and mergers multiply, driven by the need to achieve higher efficiency and improve global competitiveness. Increasingly, managers realise that their companies have become too small to survive and need to specialise on their most successful activities.

The forms in which cooperation takes place vary according to the type of business.

In the automobile industry rising costs of developing new models are propelling companies into ad hoc cooperation that would have been inconceivable a few decades ago. This goes in particular for new technologies like electric or fuel cell engines. In parallel, mergers take place to achieve economies of scale that are crucial for manufacturing trucks, buses or passenger cars. This global process is far from being completed.

The defence industry which has been a long been cherished by national protection and government control is also discovering the need for European cooperation. An effort to form a joint venture between Airbus and British Aerospace failed in 2013 because of German objections. Now, a Franco-German liaison for manufacturing tanks, artillery and other ground weapons is being formed. The market has become too small for two European companies producing similar equipment.

This merger should hopefully reactivate sluggish efforts to establish a common European defence, which should cover common standards, purchases and export licences for weapons.

The telecommunication business is also finally emerging from its origins of government owned telephone monopolies. Thanks to the EU, the national monopolies are progressively being replaced by multi-national groups operating in a European market with fewer players. The last merger is taking place in Germany, whose market will then be divided among three multi-national companies, the biggest with 40 million subscribers, tiny in US or Chinese dimensions. The European market consolidation is far from being completed, with France being a next target.

The trend toward European mergers will have a positive regulatory by-effect: the EU Commission will gradually replace national authorities as the major guardian of European competition.

Eberhard Rhein, Brussels, 4/7/2014

Europe should enjoy its low inflation level

Posted by Eberhard Rhein on 07/07/14

Europe is enjoying a level of price stability and low interest rates rarely seen since the end of World War II.

Wages, pensions, rents etc. do not require permanent adjustments to rising prices, an advantage we are not fully appreciating.

Citizens are no longer deceived by monetary illusions. The Euro has lost very little of its value during the past 10 years. Citizens can therefore keep their savings in liquidity without being afraid of a hidden depreciation, while house owners should no longer be deceived by inflationary rises in value.

The only ones not content with price stability are those who benefit from inflation, like heavily indebted governments and companies which see the relative weight of their debt shrink when prices rise, though they too benefit from price stability because of the low interest rates that go along with.

So why are the ECB and most monetary economists so afraid of low inflation? Why does the ECB keep reminding us of its medium-term inflation target below but close to 2%?

The answers are simple though not fully convincing:

  • Price stability might turn into deflation and lead to economic stagnation.
  • A moderate inflation may facilitate the consolidation of excessive public debt.
  • Investment may be more stimulated by expectations of inflation than of deflation.

There is no serious reason to fear deflation in Europe or in the world.

  • The prices of energy and other basic materials are bound to rise under the impact of growing scarcities, rising populations and demand.
  • In Europe wages are coming under upward pressure due to ageing population and increasing shortages of qualified labour.

Economic growth will remain weak in Europe for two basic reasons:

  • The labour force is stagnating;
  • It will become more and more difficult to raise productivity by more than 1% per year.

The meagre 1.7% economic growth projected for 2015 is in line with what will be ahead of us in the future. Considering our exceptional level of prosperity we should be more than happy with annual economic growth of 1% to 2% and focus our efforts on

  • absorbing the unacceptably high numbers of young unemployed by better training and schooling;
  • reducing regional income disparities;
  • making Europe fitter for global competition.

Eberhard Rhein, Brussels, 10/7/2014

EU must prepare for membership Moldova, Ukraine, Georgia

Posted by Eberhard Rhein on 03/07/14

After very long, extensive and complicated negotiations the EU has finally signed the association and free trade agreements with three countries south of Russia on June 27th 2014. All the three consider this signature only as a step toward their final goal of joining the European Union.

This desire is perfectly logical. Experience tells them that only EU and even better NATO membership might give them enough protection against potential pressure from powerful Russia.

Even if many in the EU understand these fears, the EU as such is presently more preoccupied with internal consolidation and the challenge of integrating six potential candidate countries from the Western Balkans to which it had offered an accession perspective years ago. It is therefore not prepared to do the same to the newly associated three countries in the East which do not need it anyhow, as article 49 of the EUT clearly specifies their right to join the EU.

Even a political membership perspective would not guarantee their rapid accession, as Turkey demonstrates, which continues to be far from membership despite the perspective inserted into the 1964 Association Agreement.

The EU is anything but prepared for a major enlargement in the coming 10-20 years. Citizens do not want it as clearly reflected in opinion polls.

The EU governance has also reached its limits with 28 member states. Operating an EU with close to 40 member states effectively and democratically with the present constitutional rules seems very difficult to imagine.

But in a long-term perspective, a bigger Union is clearly in European interest. By the middle of the century Europe will account for less than five per cent of global population. Even jointly, it will be a dwarf lacking the leverage to weigh in world affairs, unless it will organise much more effectively.

There can therefore be no question for the EU to simply reject the desire of the newly associated countries to join the EU as soon as possible. As European countries they are entitled to membership provided they respect basic values like human dignity, freedom, democracy, equality and rule of law.

The EU should, above all , assist them in their efforts for internal reforms. That is what it has started to do. The faster the newly associated countries succeed in implementing EU standards the faster their desire for membership will become credible. As the EU has learned from the “premature membership” of Bulgaria and Romania which had not been sufficiently prepared in 2007 nothing would be worse for the EU than co-habitation with member countries that are not fully respecting EU values.

In parallel, the parties must work hard to reduce the huge prosperity and welfare gap. Prosperity differentials of 10 to 1 between the average and the poorest members are hardly compatible in a “Union of Equals”.

All being said, the likelihood of another Eastern enlargement has risen since June 27th 2014. The EU and the three associated countries should discreetly start preparing for it. For the EU, this implies elaborating functioning governance structures for almost 40 member states. Without major constitutional revisions prepared beforehand another big enlargement is hardly conceivable.

Eberhard Rhein, Brussels, 30/6/2014

A European labour market is slowly taking shape

Posted by Eberhard Rhein on 02/07/14

Among the four basic freedoms the EU offers its citizens free movement of labour has traditionally lagged behind, due to cultural and linguistic obstacles and, above all a natural of human longing to stay close to their home.

The economic crisis with its unprecedented high unemployment rates, especially among young people, and high income differentials between well-to-do and poor member countries has given a new push to intra-European migration.

Migration is particularly popular among people with relatively low educational levels on the one hand, who migrate mostly for seasonal jobs in agriculture and hotel services, and for highly qualified business school and engineering school graduates who apply for well-paid jobs with top international companies like Google, Siemens or Accenture and do not mind to stay for good in another EU country.

Linguistic skills have improved enormously since 1958 when free labour movement was introduced among the original Six. College graduates naturally speak and work in English, French or German; and seasonal workers from Poland to Romania do not find it difficult to acquire basic elements of the language where they work.

Big salary differentials have become a new driving factor: On the average, young European engineers or IT experts can count on starting salaries of 28 000 per year; in Poland and Bulgaria, however, no more than €10 000 and in Switzerland, Denmark or Norway as much as € 60 000.

Though the numbers of migrants continue to be very low compared to total European labour force, except for Switzerland, Luxembourg and even the UK, the overall trend is upward. In the future, we should expect more movements, driven by increasing scarcity of skilled labour in the wealthier countries like Germany and Scandinavia. Hopefully, this will progressively lead to a change of mentalities and better understanding: when migrant “workers” return home after five to ten years they will take with them a huge pack of experience and maybe the wish to open a business of their own. Labour migration might turn thus into powerful catalyst for a “European society.”

Eberhard Rhein, Brussels, 30/6/2014

France is getting serious modernising its Energy Sector

Posted by Eberhard Rhein on 23/06/14

With the presentation on June 18th of a comprehensive energy transition programme the French energy minister has started to fulfil promises made during the 2012 Presidential election campaign.

The programme is a valuable contribution to the ongoing discussion on European energy and climate policy beyond 2020 and the preparation for the decisive international climate conference in Paris in the fall of 2015.

France wants to create a new “energy model” for the post-fossil era that should make it less dependent on fossil energy imports, create jobs and help develop new energy technologies. Energy efficiency and renewable energies enter the forefront, nuclear power loses its predominance.

Its overriding objective is to reduce energy consumption by half until 2050, an ambitious objective.

To that end, it defines energy targets and some 50 specific actions addressing energy efficiency, transport, renewable energies and administrative procedures.

Nuclear power will continue to remain the main pillar of French electricity supply, though its share in power generation is set to fall from 75% presently to 50% by 2025.

France is thus proceeding differently from Germany which – somewhat too hastily – envisages to shut down its last reactor by 2022. An adequate French nuclear capacity might supply Germany with electricity in periods without sunshine or wind and avoid it from having to install extra gas fired power plants for this eventuality. One more reason for the rapid completion of the single power and gas market!

In order to halve its energy consumption France intends to launch a campaign for more energy efficiency, especially in buildings, which account for 44% of C02 emissions (123 million tons). Many French citizens face high heating costs due to insufficient thermal insulation: while average households have to shoulder an annual bill of € 900, those with good insulation pay only € 250 and badly insulated houses as much as € 2500. The government therefore wants to renovate 0.5 million apartments annually in order to reduce the energy consumption of housing by half until 2050.

It will offer significant fiscal incentives and loan facilities to facilitate the necessary investments. It will also step up training for some 25.000 energy specialists annually, set up demonstration buildings that achieve a positive energy balance through the combination of perfect insulation and solar energy installations. Municipalities will provide one-stop desks to advise citizens about fiscal advantages and credit facilities.

Transport accounting for 27% of CO2 emissions and most of the oil consumption is the s second major axis of the programme.

Here France is much more ambitious than Germany, which has focused on “green electricity”. By 2030 the transport sector should obtain 15% (7% in 2012) of its fuel from renewable sources, above all biofuels and green electricity. The government will grant premiums for the purchase of e-vehicles indefinitely .

In addition, it will continue encouraging the use of bicycles as an alternative to cars, most of which are used for trips of less than two km.

Recycling will be the most innovate chapter of the new energy model. The more material, from metals to paper, is being recycled the less energy will be necessary. France already recycles some 50% of all materials. But it wants to do even better and progress toward the “circular economy” which will become the paradigm of the future.

To implement this ambitious programme the French bureaucracy will have to simplify and accelerate its procedures. This is the last and not least important aspect of the programme.

But first of all a legislative proposal needs to be presented to stake holders, civil society and, of course, parliament, for an intensive nation-wide debate, which should last until October/November. Implementation, which is crucial, will not start before the beginning of 2015.

If everything proceeds according to schedule, France can proudly present its comprehensive approach toward energy and climate to its EU partners and the international climate conference in Paris in November 2015 for inspiration.

Eberhard Rhein, Brussels, 22/6/2014

EU must be able to do without Russian gas

Posted by Eberhard Rhein on 16/06/14

Rising fears in Europe about a potential embargo of Russian oil and gas embargo seem exaggerated. In any case, they can only rely to gas, as the supply of oil is much more diversified.

In the short run, EU disposes of stored gas of close to 100 billion cubic meter that covers its demand for several months.

Rising gas prices will induce consumers to step up overdue efforts in energy efficiency, especially for heating.

In addition, it could substitute much of the shortfall of Russian gas by supplies of gas or electricity from Norway and LNG from Nigeria, GCC and Iraq on the one hand and more electricity from domestic nuclear and coal-fired power plants.

In the medium term, the EU should:

  • Increase its emergency stocks of gas.
  • Complete its gas pipeline network and increase its wind/solar capacity;
  • Turn to the USA to supply shale gas.

    The USA is busy building additional terminals for LNG exports. In a crisis situation, it will certainly be ready to help fill in whatever shortcomings may appear in Europe and grant the necessary export licences.

  • Negotiate gas contracts with Azerbaijan, Turkmenistan and other potential supplier countries within reach and constitute consortia to build the necessary pipe lines.

Russia would certainly have to pay at least as a high a price for a gas embargo on Europe. It will take several years before it can direct gas exports towards China and other Asian clients; in the meantime it is desperately dependent on the foreign exchange receipts it has been drawing from its gas exports to Europe. It will therefore think twice before cutting its gas exports to Europe.

All these solutions carry a price for European gas consumers. LNG is more costly than pipeline gas. Coal-fired power plants emit twice as much C02 as gas-fired ones. But the European consumer will have little choice but to pay an extra price for ensuring a reliable energy supply.

A cut-off would be a welcome challenge for pushing Europe with more determination toward independence from fossil energy, which it aims at for the middle of the century.

In any event the EU needs to urgently set up contingency planning for all eventualities, especially how to supply the few member countries which depend essentially on Russian gas.

In conclusion, there is little reason for the EU to be afraid of a Russian gas embargo.

Eberhard Rhein, Brussels, 20/6/2014

Lithuania will join monetary union in 2015

Posted by Eberhard Rhein on 11/06/14

After obtaining green light from the Commission and the ECB small Lithuania is almost certain to get confirmation by the EMU finance ministers and join the EMU next January.

This has been expected to happen for a long time. Lithuania has carefully prepared for it, especially by early tying its currency to the Euro and putting its financial house in order.

Estonia and Latvia having preceded it in 2011 and 2013 its decision to join was a logical consequence. After all, the three tiny robust Baltic economies have demonstrated an amazing capacity to adapt to economic stress. It would have been strange for one of them to stay outside the EMU and continue keeping its national currency.

Lithuania considers the adoption of the EU currency also as a demonstration of its strong ties to Europe.

The Lithuanian prime minister Butkevicius has therefore called the decision to join “one more step

toward deeper economic, financial and political security”.

Will other EU members follow in the next few years? All of them have to join one day under the terms of the Treaty, except for the UK and Denmark which have negotiated a derogation to stay outside”.

It is only a question of timing and political will. Joining the the Euro zone has not been very popular during the years of financial crisis. In many EU countries the Euro has suffered from often unjustified attacks. It has been made responsible for national economic difficulties and most recently for the admirable price stability. The increasing talk about the of deflationary threats by the Central Bank has not made the Euro more attractive.

Sweden, Poland, Hungary and the Czech Republic, confronted with domestic opposition, feel they can do without membership. Others are not yet ready economically.

We should therefore not expect a rush for membership in the coming few years. The EMU can very well do with only 19 members and should refrain from being pushy.

But the time will come when the countries on the side line that fulfill the conditions for membership like Sweden should discreetly be called to duty.

Eberhard Rhein, Brussels, 8/6/2014

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