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COLUMN-EU weighs competitiveness and climate policy: Kemp

Source: Reuters - Tue, 4 Feb 2014 10:21 GMT
Author: Reuters
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(Repeats column published late on Monday, with no changes to text.)

By John Kemp

LONDON, Feb 3 (Reuters) - "I don't want us to be the only people out there in front of the rest of the world," Britain's finance minister George Osborne said last September, speaking about the country's role in tackling climate change.

"I certainly don't think we should be further ahead of our partners in Europe," Osborne went on, in comments that were seized on by the government's critics to question its commitment to reducing greenhouse emissions and be "the greenest government ever."

The finance minister infuriated environment campaigners, climate scientists and the clean tech industry by daring to imply there might be a trade off between economic competitiveness and weaning the country off fossil fuels.

In doing so, Osborne was breaking the taboo that insists being an early adopter in clean energy confers a competitive advantage: countries can become richer by doing the right thing.

Osborne is an intensely polarising figure. But he is also one of Britain's shrewdest politicians. And his comments reflect growing doubts among some politicians in the United Kingdom and elsewhere in the EU about how far to go unilaterally in adopting policies to tackle climate change if the rest of the world shows no sign of following.

GREEN ENERGY RACE

Most senior politicians frame talk about climate change and clean energy in terms of "leadership" or a "race," knowing that their hearers want to be leaders rather than followers, and that no one wants to be left behind in a race.

Framing energy and climate change issues this way is meant to imply that adopting early and aggressive targets for switching to wind, solar and even nuclear, while making more efficient use of energy, will confer a competitive advantage over countries that move more slowly and continue to rely on polluting fossil fuels.

The Obama administration is particularly fond of framing issues in terms of leadership. President Barack Obama used the word leader or leadership 16 times in various contexts in his speech to Congress last month.

"It's not just (American) oil and natural gas that's booming; we're becoming a global leader in solar too," Obama told Congress in his annual State of the Union address on January 28.

This was his only reference to leadership in the context of clean energy this year. But in the past the president has discussed at much more length how he wants the country to be a clean tech leader.

In 2013, Obama told Congress: "The good news is that we can make meaningful progress on (climate change) while driving strong economic growth."

"Four years ago, other countries dominated the clean energy market and the jobs that came with it. And we've begun to change that," the president went on. "As long as countries like China keep going all in on clean energy, so must we."

The president's "Blueprint for a secure energy future," published in 2011, promised the United States would "win the future through clean energy research and development."

"Maintaining our leadership in research and development is critical to winning the future and deploying innovative technologies that will create quality jobs and move towards clean energy economy that reduces our reliance on oil," it emphasised.

"A global race is underway to develop and manufacture clean energy technologies, and China and other countries are playing to win," the president's blueprint warned.

America invented the photovoltaic solar panel and installed the first megawatt-sized wind turbine. "Yet today, China has moved past us in wind capacity, while Germany leads the world in solar."

20 YEARS OF PAIN

The concept of a race is not confined to the United States. EU politicians, too, have often spoken about the bloc's ambitious emissions targets and deployment of renewables as a source of economic advantage. If anything, the EU has been an even more ardent user of the leadership and race metaphors.

But doubts are starting to creep in. EU politicians have begun to express concern about high energy costs and the damage it is doing to competitiveness, especially in energy-intensive sectors like iron, steel and petrochemicals.

Much of the problem stems from differences in the price of gas as a result of the U.S. shale revolution and the EU's continued dependence on importing gas from Russia and other suppliers on long-term contracts at oil-linked prices.

But the cost of subsidies to support wind and solar power generation, most of which are added to customers' energy bills, is also a growing source of anxiety for European industrialists and policymakers.

Even the International Energy Agency (IEA), which has strongly supported the EU's action to tackle climate change, has started to sound a more cautious note.

While being careful not to pin the blame on the high cost of renewables, the IEA's chief economist Fatih Birol has warned the EU could face an energy price gap for at least 20 years.

"Too much of the blame for Europe's high energy prices is being directed at its ambitions on climate change while the main factor - the high cost of imported energy - is being all but ignored," Birol complained at a conference at Imperial College, London.

Nonetheless, he acknowledged the EU didn't realise the seriousness of the competitive challenge. "Europe needs to pay more attention to the competitiveness agenda while keeping the climate agenda alive," Birol said ("Energy price gap with U.S. to hurt Europe for at least 20 years," Financial Times, Jan 29).

The relationship between competitiveness, gas prices and climate policy is closer than Birol admitted. One of the reasons the EU has fallen behind the United States in developing more local gas is strong opposition from environmental groups, which fear cheaper gas would slow the transition to renewables.

FOSSIL FUEL PRICES

In the first decade of the 21st century, U.S. and EU policymakers were successfully convinced renewables would provide a cheaper, less volatile alternative to burning fossil fuels like oil, gas and coal, as well as being better for the environment.

But that prediction assumed oil and gas prices would continue rising inexorably as reserves ran out, and all countries would put an extra cost on burning fossil fuels through carbon taxes or emissions trading to limit greenhouse gases.

In practice, trading programmes have failed to generate sufficiently high carbon prices; an international agreement has not been concluded; taxes remain deeply unpopular; and the shale revolution has upended assumptions about the exhaustion of gas and oil reserves.

Official projections, such as those drawn up by Britain's Department of Energy and Climate Change, continue to show fossil-fuel prices rising in the medium and long term. But in the real world, renewables and nuclear generation are struggling to compete against cheaper gas and coal.

Commitments to renewables have not produced the hoped for boom in manufacturing and employment either. Wind and solar technologies are fairly simple to build. Most of the manufacturing has already shifted to low cost factories in China.

Clean tech firms in the United States and the EU have responded by filing complaints about dumping and subsidies in China. The reality, however, is that neither economy has a durable comparative advantage in making photovoltaic cells or wind turbines.

At the same time, integrating renewables onto power networks requires a lot of expensive investment in transmission systems, spare generation capacity and grid control technology, all of which are pushing up the cost of electricity.

Unsurprisingly, some EU policymakers are starting to question whether the region's leadership on climate issues is creating a sustainable source of economic advantage, or holding the EU economy back.

If the cost of relying on fossil fuels does rise in the medium and long term countries that switch to wind, solar and nuclear will get an enormous boost. But if fossil fuel prices stay low, renewables could start to look like an expensive disadvantage.

Britain's Osborne is right. There are risks from getting too far ahead of the pack on clean technology and climate issues if the rest of the world does not follow. (Editing by William Hardy)

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