EU climate policy is facing a conundrum. On the one hand, it has been massively successful; latest data show an 18 per cent reduction in CO2 emissions from 1990 levels. On the other hand, decision makers’ reluctance to go further is threatening to destroy the EU’s flagship instrument, the Emissions Trading System (ETS).
With few explicit supporters for going beyond Europe’s current 20 per cent emission reduction target, beyond the UK, Sweden and Denmark, and vocal opponents of any additional efforts, such as Poland, there has been stalemate in Brussels for some time now. Champions of further cuts have looked to Germany for help, assuming the formerly outspoken advocate of strong EU climate policy would be on their side. However, for the past two years Berlin has largely kept quiet on the matter or, at least, the chancellor has.
Angela Merkel’s curious silence
There are reasons for Angela Merkel’s silence. First, the euro crisis has dominated her visits to Brussels. Second, she has had to deal with an intense energy and climate policy agenda at home following the Fukushima nuclear incident in Japan in March 2011. Backed by German public opinion, she led a multi-party consensus to phase out nuclear reactors. This move away from traditional energy sources, combined with ambitious long term goals for greenhouse gas emission reductions, renewable energy deployment and efficiency improvements, constitutes Germany’s Energiewende, (energy transformation, or energy turnaround).
However, the ink on the agreement was barely dry before conservative forces in Merkel’s conservative party, the CDU, and her coalition partners began chipping away at it, and inter-ministerial squabbling broke out. Subsequent environment ministers Norbert Röttgen and Peter Altmaier supported doing more in Europe, while economics minister Philipp Rösler reassured his Polish counterparts and industry representatives that nothing was going to happen.
The perceived and actual cost of the Energiewende, and in particular the implications of Germany’s record growth in renewable energy, became the focus of a public debate that has dominated climate policy discussions in Germany for over a year now.
With Merkel refusing to take sides, a common German government position at the EU level became impossible. In April, when the European Parliament narrowly voted against a proposal by the European Commission to prop up the ETS allowance price by temporarily taking permits out of the market, a decision that was overturned this week, the vast majority of Merkel’s own party members were among those who voted against it.
Germany must get its house in order first, says Merkel
Angela Merkel emerged from her silence in early May, when she publically addressed climate policy three times within a space of just a few days. She said she favoured adopting a 2030 climate target soon, made the case for adjusting the broken ETS, though she admitted that German businesses were not yet convinced, and described the 25 per cent renewables in Germany’s energy mix as an “achievement”. But she also spoke of the problems associated with Germany’s rapid increase in renewables, notably the spike in retail electricity prices due to fixed renewables tariffs.
However, the chancellor’s speeches deviated from internally agreed government lines, and she seems to have added specific formulations on her own accord. In essence, what she said was: we need to fix our own national renewable energy law (EEG), before we can get back to strengthening the EU ETS.
The chancellor is correct that the two policy instruments are inherently linked, in their impact on electricity prices. Germany’s massive investment in renewables has created so much generation capacity that it is reducing spot prices, driving traditional sources out of the market. On a recent Sunday, renewable production alone almost matched demand. Traditional baseload power plants ended up having to pay customers to buy their electricity.
Absurdly, this is happening at the same time that retail prices for individual private customers are rising because the payments needed for guaranteed renewables tariffs go up when spot electricity prices fall.
Salvation could lie in Brussels
The key to tackling this vexed issue could lie in Brussels, not in tinkering with the renewables law in Berlin. What the EU ETS could and should do is give Europe a clearly visible carbon price signal. At current rock bottom prices of between €4 and €5 per tonne, it does not deliver that function. Amplifying that carbon price signal could alleviate Germany’s renewables dilemma by closing the gap between spot price and support tariffs.
So, it appears that Merkel has understood the interaction between German and EU policies, but come to the wrong conclusion. What Germany needs is a fixed ETS first and a reform of the renewables law later, or in parallel. Since Merkel understands both instruments, we must blame politics for this inversion of policy priorities. She sees the bigger picture but doesn’t connect the dots, for fear of conflict with the anti-climate action audience in her own ranks and parts of business, ahead of crucial elections in September.
German politics are in a holding pattern and Europe should not hold its breath for decisive words or action from Berlin on 2030 targets or adjustments to the EU ETS until after 22 September. Only a new government, even one headed by the same chancellor, will have the political space to clarify its own position towards Europe and speak out more decisively, in one direction or another.