Lessons from Europe

Lessons from Europe

Op-ed in The Washington Times
February 01, 2009

Lessons from Europe
Iain Murray, Gabriel Calzada, Carlo Stagnaro

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.