Rhein on Energy and Climate

For two decades US government authorities have indulged in an unbelievable negligence of the banking sector: Banks could place very risky new financial instruments into the market without being called to order by fragmented banking authorities.
Similarly, the US government, followed by others, allowed car makers to seduce consumers into buying the most perverse gas guzzlers ever seen on the roads, the infamous SUVs, thereby causing already unsustainable levels of C02 emissions to surge further and, as a by-product – leading to the near collapse of the US automobile industry in 2008.

The lesson to learn from these two examples is simple. Governments can no longer afford to sit back and let business invent and sell anything it wants to, whatever the risks for the financial system, human health or the sustainability of the planet.

Today, it has become commonplace to call for the end of deregulation.
But how far should state intervention go when it comes to the preservation of the earth’s climate?

This is a topical question for the EU when defining its climate strategy for the coming decade. The obvious answer is that the EU should impose an effective reduction of C02 emissions on its economic actors.

The EU has taken the first step to that end by fixing an overall reduction target of 20 percent to be implemented by 2020. To reach it, it is in the process of imposing caps, being reduced year by year, upon the major C02 emitting industries – power, steel, cement, refineries, fertiliser, pulp and paper. To facilitate the adjustment, it offers companies the option of making the physical cuts or buying emission rights in the market. It also leaves it up to each operator to decide upon the most appropriate technology for bringing down its emissions, whether by going into wind, nuclear or solar power or investing in carbon capture and storage.

The automobile industry will be subject to a parallel discipline. As of 2013 the average new car must not emit more than 130g/km, with car makers being free on how to comply with this mandatory technical standard. Luxury car makers, which may find it technically impossible to comply, will have to pay a “penalty”, calculated on the basis of the estimated market price of C02, no different from the purchase of emission rights by a power company or an oil refinery.

Governments need not hand out subsidies for developing the necessary technologies or changing the production process. Business has to learn to respect “public goods” – health, environment or a functioning credit market. That must go without saying and not justify any recompense. Of course, governments have to give business a reasonable delay for complying and make sure that business in other parts of the earth will be subjected to similar constraints. The proposals presently on the table offer sufficient time for adjusting. Industry had been given an advance warning since March 2007, when the Heads of government have formally endorsed the climate targets for 2020.

The present EU climate package is the most comprehensive legislative proposal ever presented. Still, it is far from being perfect.

The 20 percent reduction target for 2020 is not ambitious enough considering the necessity for the EU and all other developed countries to cut their emissions by as much as 80 percent before 2050.
The EU will therefore have to formulate more ambitious targets beyond the horizon of 2020. Economic operators need a long-term guidance for their energy-related investments.

The EU has, for the very first time, subjected airlines to emission caps and trading. But in view of fierce opposition from the industry and the USA, it has been extremely timid. Latest by 2030, airlines must be subject to the same caps, say 30 percent, as all other C02 emitters.

This goes also for the building sector, which is a very big emitter. The EU will have to tackle emissions from public and private buildings. In a first stage, member states should engage in a full-scale renovation of public buildings, with the aim of making these essentially emission-free by 2025. Major private companies in France, Germany and Belgium demonstrate that this is possible. In a second stage, governments must take the courage to impose on all private house owners an obligation to renovate their houses within 10-15 years so as to meet strict energetic standards. Such an initiative will be considered as an encroachment on property rights. It is, indeed, but the preservation of a basic public good, the earth’s climate, justifies overriding individual property rights. If governments are entitled to expropriate house owners for the construction of a road, they should also be able to impose strict insulation standards, which, incidentally, will boost the value of the property. Governments might offer appropriate inducements – subsidised loans or extra depreciation allowances- for accelerating the transformation process.

In conclusion, citizens throughout the world will have to learn that the preservation of the earth’s climate will require dramatic changes in our way to use energy. The ultimate objective, for 2080 or so must be a carbon-free energy system. Human beings will resist these changes. Governments therefore have the responsibility to impose, in time, the necessary mandatory regulations that will progressively change our energy consumption habits.

This is a global challenge; but those countries with the highest per capita emissions have the moral obligation to go ahead. The EU is marching on uncharted ground: That is what makes the ongoing legislative process so difficult and unique.

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