Punishing the Good for Being Good

I write the column Punishing the Good for Being Good in TCS Daily on 1 July 2003.

One problem with emissions trading.

Commissioner Margot Wallström has long worked to color the EU’s environmental policy much greener, even if it hits her native Sweden quite hard.

By signing the Kyoto treaty in 1997, the EU committed itself to reducing its emissions of greenhouse gases by 8 percent in the years 2008-2012 compared to emissions in the year 1990 (mainly carbon dioxide, CO2). Since then the EU has not been able to fulfil those goals. Economic growth, real and projected, combined with Germany’s decision to phase out nuclear energy and greater than projected coal use among member countries will likely leave the EU about 10 percent short of its Kyoto target. In fact, ten out of 15 EU member states have failed to reach their goals so far.

EU policy argues that since the energy sector contributes the most to global warming, the level of energy consumed must be reduced through structural changes. The European Commission wants to achieve this through several ways, including taxation, improving the efficiency of production, improving the effectiveness of consumption, and supplanting old sources of energy with alternatives like wind power.

Of course, the strategy of taxing energy in order to make it more expensive for people and industries to use it simply raises the costs for production, and decreases EU corporations’ competitiveness on world markets. The European Emissions Trading Directive was approved in order to make this process as cost efficient and cheap as possible. It is scheduled to come into effect in 2005 and allows companies to sell surplus allowances of emissions.

But emissions trading poses problems of its own. The scheme creates an artificial scarcity, a roof on emissions through a quota of CO2 that each company is allowed to emit per year. Any surpluses may then be traded inside the EU. This system actually makes it quite hard for innovative companies to expand their activities and it particularly penalizes those industries that have already reduced their CO2 emissions.

A good example is my native country. Sweden reduced its emissions of CO2 quite a long time ago. Since the energy crisis of 1973 Sweden has tried to reduce its dependence on fossil fuels. Sweden has produced energy through hydroelectric and nuclear power. Major emitters in Sweden, like the steel, mining and petrochemical industries, have also benefited from a highly developed product range and for a long time invested in advanced technologies for cleaning and reducing emissions of CO2. The high quality of Swedish iron ore has also helped the steel industry to reduce its emissions. There is a marked difference between Swedish levels of emission and those of EU-countries that still rely on coal and oil for energy production.

This month the Swedish Ministry of Industry, Employment and Communications published their first suggestions on how the directive would be implemented in Sweden. The final decision is due on 15 August, and Sweden’s industries are worried. It has been calculated that the suggested implementation would require further improvements and new renovations of industrial plants, in order to meet quotas, adding an extra cost of approximately 30 euro per emitted ton in the steel industry. This may seem like a small amount, but actually it is staggering considering the huge number of tons in question. This added to the already quite high costs of production present in Sweden.

When renovations are due in Swedish industrial plants, investors will have to carefully balance the pros and cons of whether to pay for additional improvements to their already clean (but rather costly) Swedish plant or to move production to plants elsewhere, in countries where production is less costly, but where they will almost certainly emit more CO2. Highly productive and low-emitting Swedish steel mills could be exchanged for production in high-emitting steel mills in south or east of Europe, with often a lower level of productivity.

Since Kyoto is an international treaty, it will be very difficult for Sweden to demand exceptions and higher quotas of emission. What would happen to the plans if a low emitter of CO2 like Sweden started to ask for exceptions? Other countries would follow suit. Plus it would be a great loss of prestige for the current government and its commissioner in Brussels.

Sweden is an example on how the directive on emissions trading does not reduce greenhouse gases, while it does reduce the competitiveness of European industries. And may cost some Swedes their jobs.