Research and Discussion Papers

The Trade Policy Research Centre is concerned with realistic solutions to the UK's trading relationships with other entities, especially the European Union.

The EU, Energy and Climate Change

Please click here to download our paper 'The EU, Energy and Climate Change' as a PDF document

EXECUTIVE SUMMARY 

 

·         There are over 160 EU legislative instruments covering energy policy. Most of this legislation aims to establish internal markets for different types of energy (oil, gas etc.)

·         The EU has two main ‘Energy targets’ which it aims to reach by 2020, known as the 20-20-20 targets:

 

o   The first target is a 20 per cent reduction in greenhouse gas emissions below 1990 levels across the EU.

 

o   The second target is for 20 per cent of the EU’s energy to come from renewable sources. Each EU country has its own renewables target, known as its “Renewables Obligation”, with some countries having targets higher than 20 per cent and some less, with the aim of achieving an overall EU average of 20 per cent by 2020. The UK’s Renewables Obligation is 15 per cent.

 

o   The UK has already met its first EU target of reducing its greenhouse gas emissions by 20 per cent by 2020. But it has no realistic prospect of meeting its 15 per cent Renewables Obligation.

 

·         UK legislation sets tougher carbon emissions reduction targets than EU law. Under the 2008 Climate Change Act, the UK must reduce its greenhouse gas emissions by 34 per cent below 1990 levels by 2020 and by 80 per cent by 2050. The UK seems to have a reasonable chance of meeting the former target but the latter looks unrealistic.

 

·         The EU’s main tool for reducing carbon emissions is the Emissions Trading Scheme (ETS), which sets carbon targets and allows participating industries to buy and sell carbon permits for emissions. It currently covers power stations, combustion plants and various production industries. But it has recently been expanded to cover airline emissions, which has provoked a hostile response from China and India.

 

·         The Government estimates that EU climate change policies, primarily the ETS and the Renewables Obligation, will add 26 per cent to the cost of domestic electricity prices in real terms by 2015, and 10 per cent to domestic gas prices over the same period. It also expects similar rises in commercial prices, damaging the competitiveness of energy intensive industries and inflating prices across the board as businesses pass on higher energy prices.

 

·         The EU Large Combustion Plant Directive will mean nine UK power stations having to close early, years before they need have done.

 

·         The UK Government wanted EU energy policy to focus on deepening the single market and improving competition in the EU energy market, in order to reduce consumer prices. But unfortunately EU policy measures are causing energy prices to rise faster than they would otherwise have done and are damaging the competitiveness of industrial users.

 

·         The future of nuclear energy in the UK looks very uncertain following the decision in March 2012 by RWE and E.ON to pull out of their Horizon joint venture to construct two new nuclear plants at Hinkley Point and Sizewell.

 

·         The UK will be increasingly reliant on imported natural gas. Its main source of liquefied natural gas (LNG), Qatar, may be vulnerable to political instability in the Gulf region.

 

·         Fracking of shale gas formations could provide a stable new domestic source of natural gas for the UK which could substantially reduce its energy costs. In the USA the shale-gas industry has been growing at 45 per cent per annum whilst gas prices have more than halved since the 2009 recession. By contrast, over the same period, gas prices have doubled in the UK and more than trebled in Japan.

·         The UK has a number of policy options which it either is pursuing or is free to pursue which would not breach its EU treaty obligations such as:

o   Prepare plans to extend life of the two AGR nuclear plants now planned for closure in 2016

o   Find new contractors for the two new nuclear plants which RWE and E.ON will no longer be constructing

o   Plan construction of new gas-fired plants on a contingency basis

o   Ensure full exploitation of domestic potential for extracting natural gas by fracking

o   Negotiate contracts to enable the UK to benefit at favourable prices from growing availability of LNG derived from fracking in USA and rest of world

o   Campaign much more effectively to get other EU member states to fully implement the EU’s Third Energy Package

o   Commission independent cost benefit analysis of alternative strategies to address climate change as called for by Peter Lilley in his new paper “What is wrong with Stern?”

o   Prepare plan to “mothball” the Kingsnorth coal-fired power plant scheduled to close in March 2013 and the eight other coal-fired plants planned for closure in 2015, compensating the operators as appropriate

o   Publicly announce that UK will refuse to make any further EU energy target commitments after current 20-20-20 targets expire

o   Repeal Climate Change Act 2008

·         The UK could dramatically improve its freedom of action on energy policy if it were willing to take measures in breach of its EU treaty obligations such as:

o   Cancel plans to close the Kingsnorth coal-fired plant in 2013 and eight other coal-fired plants in 2015 and renounce the Large Combustion Plant Directive

o   Abandon its unrealistic EU 15 per cent Renewables Obligation commitment

o   Withdraw from the EU Emissions Trading Scheme 

·         If the UK ceased to be a full EU member it would of course no longer be in the position of having to defy the EU if it wished to pursue any of the above policy options which would now put it in breach of its EU treaty obligations.

 

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