In a week that marks the on-going challenge of Climate Change, I am in Brussels making the case and drumming up support for the right climate change and energy policies until 2030. This will prepare the ground for when Europe’s leaders gather at the end of March to agree the best way to tackle one of the most challenging issues of our time and ensuring our energy security.
This is a once in a generation chance to ensure that ageing power stations across Europe are replaced with clean, efficient, reliable energy sources. A chance to drive the momentum to get a global deal on climate change in Paris, in November 2015. A chance to make sure that, as we rebuild economies across Europe after the deepest recession in our history, we are making sure that future growth is green.
That’s why Britain has been fighting for an ambitious 40% emissions reduction target by 2030 for the EU itself, and has agreed to support an EU-wide renewables target of 27% on the basis that this will not be binding on individual Member States. This will allow Member States to work flexibly to meet their greenhouse gas targets in the most cost effective way.
We must not allow these ambitious targets to be watered down. The economic, social and environmental costs of inaction are too great.
Yet we must also recognise and respond to the impact of high energy prices on consumers and industry and fashion our climate change policies for green growth.
We must in particular be alive to the significant gap that has opened between EU and US energy prices in recent years – and we must understand the causes of it. Today, an average US company will pay around half for electricity, and a third for gas, of what a European company will expect to pay.
For most sectors, this is a small proportion of production costs – around 3% on average for UK and German manufacturers, and the European Commission’s analysis has not found that the disparity has led to industrial relocation. But the impact on certain energy intensive industries, operating in a highly competitive international marketplace, is much more challenging.
There are two questions we need to address: what is causing this price disparity, and how should we respond?
Evidence from the International Energy Agency is clear – the vast majority of the price gap is due to Europe’s high gas import bill, pitched against a dramatic fall in energy costs in the US since their shale boom.
Right now, Europe imports 80 per cent of its oil and 60 per cent of its gas – an import bill of around £550 billion a year, at the mercy of volatile markets and decisions and events in foreign countries outside our control. This is a major cause of Europe’s global trade deficit. As our fossil fuel resources continue to decline, the EU is on course to be dependent on imports for 90 per cent of its oil and 80 per cent of its gas by 2035.
That’s why this is a chance we must grasp – the chance to rebuild our energy infrastructure in a way that protects the EU from price shocks and volatile markets, that dramatically reduces our reliance on foreign imports and that creates a sustainable supply of home-grown energy.
To water down the EU’s climate and energy policies on the basis of a price gap that is not caused by those policies would be disastrously short-sighted – particularly when we have better information than ever before about the economic costs of climate change to Europe.
At the same time, we must address the competitiveness challenge.
Some argue that the answer is a European shale gas boom – and shale will have a role to play as part of a wider strategy. But it’s no silver bullet. Our geology, our economics, our politics and our gas markets are very different – and we will not know until much more exploration has taken place exactly what contribution shale gas will make in Europe.
My firm view is that we have to work with industry to make sure we have policies that decarbonise Europe’s economy at the least cost, alongside a new industrial competitiveness strategy. We must support those energy intensive industries that are genuinely at risk of relocating outside Europe to ensure they can compete during the transition to a low-carbon economy. That includes freely-allocated Emission Trading System credits, and an EU state aid framework that enables this support.
And industrial competitiveness must be prioritised across Europe. Britain is leading the way on this, with our Industrial Strategy, supporting innovation and, in the energy sector, developing new low carbon and energy efficiency technologies.
Meanwhile the EU’s 2030 energy and climate policy framework must be designed to deliver the maximum economic and environmental benefits at the least cost to consumers. Only by giving the clear signals now can Europe stimulate the huge investments needed in our energy infrastructure and keep capital costs down, to develop a truly diversified lower carbon energy mix.
This should be combined with a renewed drive to unlock the full benefits from internal energy market integration and interconnection; an ambitious innovation and energy efficiency strategy to unlock the new technologies and huge savings possible; and a strengthened ETS to help drive cost-effective emission reductions and low carbon investments.
Energy and climate policy is often presented as a conflict between fundamentally contradictory competitiveness, security and environmental policy objectives. It’s a false conflict, not backed by analysis. Failure to address one will lead to inevitable failure of the others.
By setting out a smart, cost-efficient and ambitious 2030 package early, national leaders have a historic opportunity to harness the linkages between competitiveness, security and climate change, and meet Europe’s objectives in all three. They must seize it.