An animated overview of the EU's climate and energy policy architecture, and how to optimise it.

The EU aims to achieve 3 climate and energy policy goals by 2020[1]:

• A 20% reduction in greenhouse gas emissions
• 20% of all energy consumed to come from renewable sources
• A 20% reduction in energy use

These three short-term targets exist within the wider context of the EU aiming to reduce greenhouse gas emissions by 80-95% below 1990 levels, by 2050[2].

Current projections show that the EU is on track to achieve goals 1 and 2, but will achieve only half of its energy savings goal[3].

The dilemma

When these individual goals are looked at together, it becomes clear that we are faced with a dilemma.

Increasing energy efficiency to achieve the 20% energy savings target will reduce energy consumption, which in turn will reduce emissions by at least 25%[4]. Reducing emissions by 25% is a good thing, but it also reduces demand for emissions permits from the Emissions Trading Scheme. Reduced demand for emission permits puts downward pressure on the price of those permits. That reduces the incentive for low-carbon investments.

The dilemma therefore is how to achieve the energy savings target without undermining the price of emission permits in the Emissions Trading Scheme[5].

Comparing policy scenarios

A good way of solving this dilemma is to look at the possible climate and energy policy scenarios for 2020 and compare their impact on CO2 prices and the economy-wide cost of achieving both the 2020 and 2050 emissions reduction targets.

The 3 possible policy scenarios for 2020 are the business as usual scenario, the enhanced energy efficiency scenario, and the increased ambition scenario.

In the business as usual scenario, the 20% emissions reduction target is achieved but the energy savings target is missed by half. In this scenario:

• The carbon price remains stable and within the range of between 15 and 30 euros per ton needed to encourage low-carbon investments.
• The cost of achieving the short-term 20% emissions reduction target is medium, because not all cost-effective energy savings options are being tapped into.
• But the overall cost of achieving the long term 80-95% emissions reduction objective is high, because aggressive emissions reductions will have to be achieved post-2020[6].

In the enhanced energy efficiency scenario, the existing Climate and Energy goals for 2020 are met (including the 20% energy savings target). In this scenario:

• Carbon prices decline, falling below the current range, and risk collapsing[7].
• The cost of achieving the short term 20% emissions reduction target is low because it is achieved through cost effective energy savings.
• But, the overall cost of achieving the long term 80-95% emissions reduction objective is high as there is less incentive for low-carbon investments that will enable continued emissions reductions post-2020.

This scenario has a substantial carbon lock-in risk because there is little short-term incentive for low-carbon investments.

In the increased ambition scenario, the 20% energy savings target is achieved and the 20% emissions reduction target increased. In this scenario:

• Carbon prices remain stable and within an acceptable range.
• The cost of achieving the increased short-term emissions reduction target is medium, because the cost of raising the target is offset by tapping into cost effective energy savings.
• The overall cost of achieving the long term 80-95% emissions reduction objective is low, because the cost-effective energy savings are tapped into, and less aggressive emissions reductions will have to be achieved post-2020.

Scenario I incurs a high long-term mitigation cost.

Scenario II fails to generate a stable and acceptable carbon price

Scenario III on the other hand generates a stable carbon price and incurs the same short-term mitigation cost as the business-as-usual scenario but with a low long-term mitigation cost. In this scenario, the additional investment costs of tapping into the energy savings potential and switching to renewables would be compensated for because the amount the EU spends on fuel would fall[8].

The solution

Therefore to optimize the short term EU climate and energy policy mix:

• The 20% energy savings target must be binding and achieved, which will lead to at least 25% emissions reduction, generate financial savings of up to € 1 000 per household every year, and create up to 2 million jobs[9].
• And the ambition of the emissions reduction target, including key policy instruments such as the Emissions Trading Scheme, must be aligned with the energy savings target.