Costs of climate remedies

July 23, 2012
Residents of countries aggressively trying to cut emissions of greenhouse gases (GHG) pay more for energy than they would if their governments had more modest ambitions for mitigating climate change.

Residents of countries aggressively trying to cut emissions of greenhouse gases (GHG) pay more for energy than they would if their governments had more modest ambitions for mitigating climate change. This relationship is inescapable. To lower national emissions of the main GHG target, carbon dioxide, countries must lower the combustion of hydrocarbons, which means cutting consumption of fossil energy. To do this they must displace fossil energy with costlier substitutes, cut energy use overall, or both. Usually, they do both. And energy costs rise above levels that otherwise would prevail.

Because Europe decided to lead the world in cutting GHG, Europeans pay extra for energy, the British most of all. In a new study by a unit of the British government, the UK leads a list of countries in the incremental price of electricity attributable to policies on energy and climate change. Among 11 countries covered by the study, members of the European Union hold the top five positions in projected incremental costs in 2020.

Future costs

The UK Department for Business Innovation & Skills commissioned ICF International, London, to assess the effects on energy-intensive industries of energy and climate change policies, country by country. The government wanted to know how the consequences for British industries of its policies compared with those for comparable industries elsewhere.

It can't have been surprised that future costs attributable to its policies exceed those of other countries' programs. UK energy and climate change policies are tougher than others. The European Union has challenging targets: GHG emissions 21% below 2005 levels in 2020, cuts in energy use, and energy-share goals for renewable energy and biofuels. The UK pursues those goals and its own, seeking to lower carbon emissions by 80% from a 1990 baseline by 2050.

Stretched goals mean stretched exertions. So British industries needing lots of electricity to produce materials like iron and steel, aluminum, cement, and chemicals face stretched energy costs in the next 8 years. According to ICF, UK energy and climate-change policies will add £28.3/Mw-hr to electricity prices in 2020. Among other EU countries in the study, the incremental prices are £22/Mw-hr for Italy, £17.3/Mw-hr for Germany, £15.7/Mw-hr for Denmark, and £15.2/Mw-hr for France. Outside the EU, the next-highest incremental electricity price is China's: £10.3/Mw-hr. The incremental electricity price resulting from the US program, which mainly encourages the use of nonfossil energy via tax credits without setting nationwide emission limits, is -£0.2/Mw-hr in 2020.

These values, which vary because governments' climate-change policies vary, supplement base electricity prices that also vary among countries. UK electricity prices won't be highest among the 11 countries because its incremental prices are highest. The country's base electricity prices for energy-intensive industries fall within the range of EU members in the study—higher than those of France and Germany and lower than base prices in Italy and Denmark. In comparison with non-EU members, the UK base electricity price is much higher than those of Russia and the US, similar to prices in China and India, slightly lower than those in Turkey, and much lower than prices in Japan.

What policies cost

The incremental electricity prices show what energy and climate change policies cost. In this, the ICF projections confirm intuition: The tougher the policy, the greater the cost. The UK has the study group's toughest climate-change policy, with its beyond-EU emission-reduction targets, energy levies related to climate change, incentives for renewable energy, and subsidies. Its incremental electricity price attributable to that program last year, at £14.2/Mw-hr, was £4.3/Mw-hr more than that of EU runner-up Italy. And it will double, according to the ICF study, by 2020.

That EU policies are only marginally less stringent explains why EU incremental electricity prices are high. They represent measurable burdens imposed on struggling economies by governments determined to be seen as leaders in climate-change mitigation. The burdens yield no compensating effect on global average temperature now. It's uncertain they'll yield meaningful effect in 2020—or ever.

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