CLIMATE SOLUTIONS IN TERMS OF DECISION EFFECTIVENESS EFFECTIVENESS

The effectiveness and quality of decision-making can be evaluated from two angles, i.e. by evaluating the quality of the decision and the quality of the outcome:

DECISION QUALITY = The process leading up to the decision-making moment.

OUTCOME QUALITY = The effectiveness and consequences of the decision.

Decision quality involves the questions how the decision was made, whether there was an appropriate process, was it based on high-quality and up-to-date data etc. Based on these criteria decision-making can be evaluated before the outcome is known.

Outcome quality deals with the questions around intentional and unintentional consequences, the time spent and costs that were generated. A good decision is not excellent if it requires the investment of a disproportionate amount of time and resources.

For learning purposes some key questions follow: Would you recommend this decision to a colleague in a similar situation? What are the lessons learned as soon as the effectiveness of the decision starts to be evident, and how does the decision appear today? Why did the decision fail, based on the present-day knowledge we have? How were the possible opponents silenced? It is also good to ponder, based on our current knowledge, what should have been done differently and what could have been the alternative scenario.

Based on the aforementioned I will go through the most important decisions of EU climate policy, which were made in the March 2007 summit meeting, i.e. the so-called triple 20 decision. In addition to these, I will present the decision that preceded them, i.e. the first Emissions Trading Directive. The legislation in question is presented in more detail in Chapter 8; in the present chapter I am only looking at the decisions from a usefulness and decision-making point of view.

For the purpose of decision-making it is key to understand the original goal or idea, the decision based on it and who advocated it, who supported it and who was against it, as well as the consequences and unintended consequences. This implies acknowledging the beneficiaries and losers of the decision and the corrections made based on it. I would like to emphasise that these assessments are my own and subjective, but they will hopefully open up discussions on what climate decisions have led to and what we can learn from it.

The Directive establishing a scheme for greenhouse gas emission allowance trading (Emissions Trading Directive, 2003/87/EC)

Commission proposal given in October 2001, passed in October 2003

Purpose: Realising the community greenhouse gas emission trading system for the reduction of greenhouse emissions. Scope: energy production, oil refineries, and most of the energy-intensive production industries.

Supporters: EU electricity producers, the Greens, environmental organisations Opponents: The EU’s energy-intensive industries

Outcome of the decision: Emissions trading commenced in accordance with the Directive in 2005, the emissions of the participating industries were reduced between 2005 and 2007 in line with the target by ca 100 million CO₂ tn. The free allocation of emission allowances to industries was based on historical decisions.

Consequences of the decision:

- The emission allowance prices varied largely (c.a. 0,1–32 €/CO₂ tn) because of the system’s novelty and structure. This led to the pressure to cheat on the electricity market.

- The electricity price on Europe’s wholesale electricity market went up by 10 €/MWh on average as a consequence of emissions trading.

- Electricity producers reaped immense profits because of the Windfall phenomenon, and the energy-intensive industries paid the bill. Windfall made nuclear energy and (suurvesivoima) very profitable.

- The threat of ‘carbon leakage’ came about when non-EU energy

producers were given a competitive advantage: cutting emissions became transferring emissions.

- Tying the system with CDM credits was taken advantage of in China.

- Cheating with the VAT of emission allowances came to daylight.

- Selling hot air and a distortion of competition: when emission allowances were distributed from national quotas, the producers from different countries received allowances based on what was offered. As the national delivery criteria were often based on historical emissions, the largest emitters received the most emission allowances.

- Companies’ administrative costs rose because of the emission allowance reporting system.

Major beneficiaries: All electricity producers, nuclear and hydraulic power owners, non-EU energy-intensive industries, which were given a competitive advantage as the costs of their EU competitors went up. Emission allowance traders and the emission allowance staggers.

Major losers: Energy-intensive industries within the EU. Households and the service sectors who also paid the costs of the surged energy costs. An income transfer from customers to producers came about.

Corrective actions: The rules for the allocation of the emission allowances were later revisited in multiple ways. The biggest reason for the volatility of EUA prices was that the delivery of emission allowances only concerned he years 2005–2007 and the allowances could not be transferred. This allowed for speculations. The mistake was corrected. The carbon leakage problem was remedied by creating a carbon leakage list: the sectors threatened by the phenomenon were defined. A plan for the reform of emissions trading was made, e.g. the change in the allocation criteria of emission allowances from the earlier historical emissions to a benchmarking system and the auctioning as well as withdrawal of the national targets. Some started to make plans for an anti-nuclear energy Windfall tax.

Directive amending the Emissions Trading Directive to ‘improve and extend’ the greenhouse gas emission allowance trading scheme (2009/29/EC)

Commission proposal given in January 2008, passed in December 2008.

Purpose: Reforming, improving and expanding the greenhouse gas emissions trading scheme of the Community in order to reduce greenhouse emissions to correspond with the tightening 2020 reduction goal for the years 2013–2020.

Scope: energy production, oil refineries and most of the energy-intensive production industries.

Supporters: Electricity producers, environmental organisations, the Greens Opponents: The EU’s energy-intensive industries. Some of the environmentalists opposed the directive at this stage suspecting its effectiveness as a control mechanism especially because of the competitive advantage given to nuclear power.

Outcome of the decision: Emissions trading transitioned to a new system in which, instead of national emission ceilings an EU emission ceiling was set. The key logic became auctioning, and a gradual transitioning towards it took place replacing the free allocation of emission allowances. Electricity producers no longer received free allowances from 2013 onwards and the basis for the industry’s free allocations became benchmarking (BAT), not historical emissions. The carbon leakage sectors were defined and they were given more free allowances than to other sectors. Emissions trading was extended to cover new sectors. 5% of the overall allocations was set aside for newcomers and in addition 300 million emission allowances were allocated to CCS programmes through the NER 300 programme.

Consequences of the decision: The benchmarking of the free allocation was a decisively important change for the entire system. It allowed for the most efficient actors to receive the most in accordance with their need and the emitter was not rewarded. The windfall of thermal power disappeared. On the one hand, the real carbon leakage vis-à-vis the competitors was only about to start, as no significant free allocations existed any longer. On the other hand, the overall control was slacked because of the economic stagnation and the renewable energy subsidies, and the significance of the system as a whole declined. Against the expectations electricity prices went down due to the recession (i.e. declined demand) and abundant renewable energy investments (i.e. increased supply). The price of emission allowances sank to a historical low. An oversupply of emission allowances came into existence. Cheap coal power increased because emissions trading did not send a price signal.

Major beneficiaries: Third-country competitors. In the short term coal plants and energy-intensive industries.

Major losers: Once again energy-intensive industries: even though the sectors suffering from carbon leakage received emission allowances free of charge and wholesale electricity was cheap, competitors outside the EU still had smaller costs.

Also electricity consumers and producers lost. The actors that had benefited from windfall profit did not benefit anymore; emission allowances were no longer free for energy companies, and low emission allowance prices did not reward the investments.

Corrective actions: Backloading, i.e. the plans of lifting the emission allowance prices by temporarily withdrawing emission allowances from the market.

Directive on the promotion of the use of energy from renewable sources (Renewable Energy Directive, 2009/28/EC)

Commission decision given in January 2008, passed in December 2008.

Purpose: The promotion of renewable energy forms in line with the EU’s 2020 targets. The Directive assigned national obligations to lift the share of renewable energy in such a way that the EU’s common share of renewable energy would reach 20% of all energy use. The target varied country by country from Malta’s 10% to Sweden’s 49%.

Supporters: The companies engaged in renewable energy business. Environmental organisations, the Greens and everyone supporting tight and ambitious climate targets.

Opponents: The EU’s energy-intensive industries anticipated a cost increase of the electricity price, and the pulp and paper producers also saw an increase in the raw material prices. In general, the overlapping nature of the legislation was criticised.

Electricity companies were afraid that renewable energy subsidies would pull down the price of electricity allowances.

Outcome of the decision: EU Member States were given national obligations for the promotion of renewable energy and were obliged to present the Commission with plans to reach them. Renewable energy capacity was significantly increased.

Consequences of the decision: Renewable energy investment programmes were heavily subsidised on national level by means of feed-in tariffs and investment support. Because of the abundant subsidies renewable energy investments became Europe’s most profitable business, which was taken advantage of especially by Chinese wind and solar energy production. This elevated the electricity prices of the consumer. The subsidies disturbed the energy market and kept emission allowance prices low. An oversupply of emission allowances was created. Even though the electricity prices went up for the consumer, they were too low for the investor, and investing was unprofitable without the renewable energy subsidies. Most of the energy investment programmes targeted renewable energy as anything else was risky. The controversy around the investments into wind energy accelerated. The increase in renewable energy created a need for balancing power and generated a demand for coal power as a reserve energy source. The topic of a separate capacity market entered the discussion in order to make reserve energy investments profitable. Energy prices fluctuated radically as the use of wind energy increased.

Major beneficiaries: The actors investing into renewable energy. Non-EU competitors.

Major losers: Energy-intensive industries: electricity prices increased their costs.

Corrective actions: As a consequence of the critique concerning overlapping legislation the Commission proposed renouncing the binding national renewable energy targets in January 2014 and instead to only preserve the EU-level target. The goal was to give more space to emissions trading and to reduce excessive subsidies for renewables, which disturbed the electricity market.

The Energy Efficiency Directive (2012/27/EU)

Commission proposal given in June 2011, passed in November 2012.

Purpose: The Directive obliges the EU to adopt national energy efficiency programmes in order to comply with the set 2020 targets. The Directive covers energy production and consumption in both the public and private sectors.

Supporters: All environmental organisations and the Greens, but especially the energy efficiency -related service providers and all those benefiting from the additional obligations to isolate, acquire new products, order energy audits, measure,

conduct major overhauls, etc.: part of the construction sector, consultants, sellers of measuring devices etc.

Opponents: The energy sector opposed a setting in which it is obliged by law to act on behalf of the consumer. Many municipalities opposed it in addition to the countries that had already gone far in applying voluntary measures. Industries wanted to ensure that the Directive was only limited to public authorities and energy companies. The industries were terrified by the thought of the use of energy ceilings, which would possibly prevent factory investments in small countries.

Outcome of the decision: Energy companies were obliged to find savings of 1,5% of their clients’ annual energy consumption. The percentage is calculated from the annual sales of the energy companies. The obligation does not concern transport fuels. Some flexibility is allowed by, for instance, by the increase in the efficiency of energy transfers.

Consequences of the decision: As a consequence of the recession the decisions are likely to be minor as savings are automatically generated. Significant additional costs could have been caused to especially the countries that had already reached high energy efficiency through voluntary agreements.

Major beneficiaries: Companies promoting energy efficiency, the construction and renovation sector, energy review consultants.

Major losers: It is difficult to name these because of the recession. In principle, at the beginning the countries that had gone far in voluntary energy efficiency measures were considered the losers.

Corrective actions: The Directive was pushed through by a short-cut procedure, i.e. a first reading agreement, and it was passed in a rush during the Danish presidency. The result was an unclear and incomplete Directive, and its content had to be specified in Commission working groups.

From the aforementioned examples we can discern several features typical to wicked problems as defined by Rittel (Chapter 6.3). For example, a wicked problem has no ending point: ”each solution level can additionally create losers whose situation will worsen even more”.

What is even more significant in this context, however, is to evaluate the quality of the decision in order for us to be able to learn from mistakes. Decision quality has been clearly weakened by the fact that significant decisions had been made appealing to a lack of time through a short-cut procedure undermining transparent democratic processes (more in Chapter 8.6). When evaluating outcome quality the abundance of unintended consequences and the elements that contradict the original goals directly are remarkable (e.g. the renewable energy target increases the demand of coal power as a reserve source, or the carbon leakage phenomenon in emissions trading). Measured by the invested resources and the costs, the outcome is weak.