MURRAY/CALZADA/STAGNARO: Lessons from Europe

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By Iain Murray, Gabriel Calzada, Carlo Stagnaro

COMMENTARY:

The recent European Union climate agreement provides a useful warning to incoming President Obama and his team when they consider what to do about global warming. The rhetoric from the EU may sound nice, but when it comes to translating words into action, Europe has shown that the job is harder than it looks. EU member states have found it very difficult to reduce emissions, meet renewable energy targets or create lasting green jobs.

The European Union has had a cap-and-trade scheme for greenhouse gas emissions in place for several years now, but has failed to make much dent in emissions. This is important to America, because a cap-and-trade scheme is President Obama's preferred policy vehicle for delivering emissions reductions. Yet the European experience with cap-and-trade should sound alarm bells.

The scheme has been repeatedly gamed and manipulated by industry and governments so that emissions have actually increased faster than the those of the United States, with none of the big reductions promised materializing. Industries have enjoyed windfall profits from emission credit trading, and some U.S. firms also have hoped to cash in - Enron and more recently Lehman Brothers were major proponents of American adoption of cap-and-trade policies.

For everyone else, however, results have not been so happy. European households have seen electricity bills rise. Europe has become more dependent on Russian gas. And a recent study by the British think tank Open Europe found the scheme's major costs accrued to essential public service facilities like schools and hospitals.

Meeting renewable energy targets has been no walk in the park, either. Leaked British government documents reveal how meeting the target of 20 percent of all energy being from renewable sources by 2020 is next to impossible.

In addition, the massive conglomerate of subsidies and mandates necessary for such an energy supply transformation would create large distortions that would severely hamper sound functioning of the market. Indeed, former Business Secretary John Hutton hinted that Prime Minister Gordon Brown should join with more skeptical European countries, such as Poland, to lobby for a reduction in the targets.

Spain, meanwhile, faces the prospect of government-induced "green" unemployment. Spain's renewable energy sector expanded very quickly due to large government incentives - which the government has since realized are unsustainable, so the industry is now cutting back. While Spanish taxpayers and consumers will pay higher bills for years, the stock value of green energy firms has crashed more than the stock market index, even in these troubled times. Up to 40,000 jobs could be lost in 2009 as the number of "green jobs" contracts.

Moreover, most of these "green jobs" were transitory, anyhow, mostly connected with construction, not operation. A study funded by the German Environment Ministry shows the net effect on job creation - the number of green jobs created minus the number of jobs lost because of higher energy prices - can be positive only insofar as the country remains a net technology exporter. Thus, the net effect on net European job creation can easily be negative.

Considering all this, it should not be surprising that the recent negotiations proved difficult - and yielded results that environmental pressure groups described as "embarrassing." Those "embarrassing" results are due to a confused, self-contradictory policy that sets unrealistic targets, while it creates a way out of those targets.

The European Commission called for introducing tough rules to cut emissions and promote renewables, but a coalition of countries - including Italy, the Eastern member states, and, albeit less vocally, Germany and Spain - asked for and got exceptions to reduce the economic impact of the climate deal.

This means emission allowances will be auctioned, but most will be distributed for free by governments to the economic sectors most effective in lobbying. This all comes at a very high price - not just great economic costs but major regulatory uncertainty.

Hence, a greater degree of political interventionism is likely to come. National governments will be able to spend the revenues from auctions in subsidizing further green energy projects, adding to existing market distortions.

Given the huge amount of money that will be doled out directly or indirectly - by EU decisions over whether a sector can be exempted from buying allowances - one might expect the commission's efforts will boost not just the green industry, but also the industries that can provide gifts and junkets for officials in Brussels.

And what is the upshot of all these huge costs and market distortions? A minuscule cut in emissions - 4 percent by 2020, far below the ambitious 20 percent target. As the Romans said, the mountains went into labor, and gave birth to a ridiculous mouse.

It is often said American Democratic politicians are more eager than their Republican counterparts to learn from Europe. In the case of global warming policy, such learning would be welcome, because the lessons from Europe are clear: Rhetoric can outpace action, and the action itself can be much more painful than rhetoric suggests.

Iain Murray, Carlo Stagnaro and Gabriel Calzada are policy institute fellows in the United States, Italy and Spain, respectively, and are founding members of the Prague Network, an international coalition on energy issues chaired by Vaclav Klaus, president of the Czech Republic.