TODAY’S STUDY: WHAT EUROPE (AND OTHERS COMMITTED TO NEW ENERGY) CAN DO

Misguided and malicious talking heads continue to parade across the world’s television screens contending there is no reason to doubt nuclear energy’s safety while sensible viewers wonder whether to laugh, cry or scream.

In Germany, there has been a moratorium on the building of nuclear power plants since 2000 but in France, right next door, there has since the 1970s been an enthusiasm for building nuclear power plants unmatched anywhere else in the world.

Despite the utterly profound impacts of the 20th century world wars sparked by French-German antipathies, triumph in the debate about nuclear energy could have an even more profound impact on world history.

The report outlined below does not take a position in the nuclear energy debate but simply sets an ambitious target for European Union greenhouse gas emissions reductions and demonstrates the EU can achieve it with New Energy. Germany will pursue it with an emphasis on solar energy and wind power. What France will do is a little more interesting.

U.S. pro-nuclear advocates always cite France as the poster-child for the technology’s viability and safety but there are several little-mentioned caveats: (1) Quickly hushed minor contamination incidents occur in France frequently; (2) France pays off the UK to put its radioactive waste into storage, to the dissatisfaction of many Brits; and (3) the French nuclear industry still cannot endure financially without significant government support.

Germany, meanwhile, continues to perfect its mastery of applying incentives like the feed-in tariff (FiT) to drive the growth of its New Energies. And in the last two years, the Sarkozy government has seemed more and more inclined to use such incentives to expand France's New Energy capacity.

There was some question about which way the rest of the EU would go until this past weekend. The most overt indication of how the terrifying incidents at Japan’s Fukushima nuclear plants impacted public perception in Europe was Switzerland’s announcement that it was suspending the licensing of nuclear power stations.

Then Germany put a 3-month moratorium on the relicensing of older nuclear power stations, reversing a recent inclination to be lenient. The EU called an emergency meeting of energy ministers. Austria’s environment minister called for continent-wide safety testing of nuclear facilities. The UK’s chief nuclear inspector was asked for a new safety accounting.

As one 40-minute period saw Japan’s radiation levels climb 8 times over the ANNUAL legal limit and a press report likened the radioactivity to 40,000 chest X-rays in a year, media outlets were reporting public hardening of anti-nuclear sentiment around the European continent despite the considerable efforts of nuclear industry propagandists to convince the world nothing serious is happening.

It seems the EU is leaning toward Germany’s New Energy and away from French terror, horror and contamination. And, as the report below makes clear, New Energy can get the job done while healing the continent’s economy at the same time.

A New Growth Path for Europe; Generating Prosperity and Jobs in the Low-Carbon Economy Synthesis Report
Carlo C. Jaeger, Leonidas Paroussos, Diana Mangalagiu, Roland Kupers, Antoine Mandel, Joan David Tàbara, et. al., February 2011 (German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety)

Executive Summary

Post-crisis Europe can revitalize its economy by tackling the climate challenge. Raising the European climate target from 20% to 30% emissions reductions can open the way towards higher growth and increased employment. The financial crisis has reduced European GDP by several percentage points; if business as usual prevails, the EU growth path will proceed at a lower level than before the crisis. What is more, under business as usual it will be hard to even maintain the growth rate of the pre-crisis times. As a result, unemployment across Europe is likely to stay high, with major disparities between different regions. Sticking to the 20% target in a situation where this target has become too weak to mobilize innovations and to stabilize political will is the equivalent of digging deeper while being stuck in a hole.

It is time for boldness. Clear policies associated with a decisive move to a 30% target, can be doubly beneficial for the climate and the EU economy. The climate target must not be pursued in isolation, but be embedded in a comprehensive range of measures, setting expectations for growth of the European economy at a more ambitious level. What matters is to explicitly declare an ambitious growth target in the aftermath of the financial crisis and to pursue this target on a variety of fronts – including incentives for additional investment, growth-oriented fiscal policy, public procurement, and, of course, climate policy. With this strategy, Europe can define its role in the global economy by focusing on high-quality products where stable unit costs do not depend on low wages but on continuous learning-by-doing. European industry can then maintain and enhance its competitiveness by developing the low carbon materials and technologies that will shape the future.

click to enlarge

In the coming decade, Europe will need to accept the challenge of increasing economic growth while reducing both unemployment and greenhouse gas emissions. New model results show that these three goals can actually reinforce one another. Over the coming decade raising the EU’s climate target from 20% to 30% can foster the following outcomes by 2020:

• increase the growth rate of the European economy by up to 0.6% per year

• create up to 6 million additional jobs Europe-wide

• boost European investments from 18% to up to 22% of GDP

• increase European GDP by up to $2004842 bn

• increase GDP by up to 6% both in the old (EU15) and new (EU12) member states.

The economic opportunities of a European 30% reduction scenario are available independently of an international post-2012 climate agreement. The simulations performed for the present study assume domestic reductions of 30% and no international climate agreement that would go beyond the modest pledges made in the Copenhagen Agreement of 2009. If more ambitious goals should be pursued in the future by major economies, the positive impacts for Europe would be even larger.

Along the new growth path, all broad economic sectors – agriculture, energy, industry, construction, and services – increase production, with the largest increase in construction. The new growth path implies a major effort to retrofit buildings and enhance the built environment. This is advantageous in view of employment because people with very different vocational skills can operate in these sectors after a few months of on-the-job training (in construction, as in the industry, nowadays the majority of jobs are not centered around manual work - and there too, on-the-job training can be very effective).

click to enlarge

Emissions are reduced by increasing energy efficiency and shifting from coal to renewables and gas. Energy efficiency is mainly, but not only, a matter of buildings. Over the next decade, renewables will be mainly wind, both on- and offshore. Carbon capture, photovoltaics, and nuclear cannot make much of a difference over this time span. Nevertheless, it will be important to prepare for the longer term too. The shift towards gas can raise concerns about energy security. European imports of natural gas, however, are reasonably diversified. The largest supplier, i.e. Russia, delivers just one third of total imports. Due to the expansion of shale gas in the USA and the Chinese determination to limit dependency on energy imports, Europe is a vital customer for Russia. However, Eastern European countries need improved transport and infrastructure for gas imported into Western Europe, and storage facilities need to be improved across Europe.

The key for this revitalization is a substantial increase of investment in Europe. Building wind turbines, implementing cogeneration of heat and electricity, insulating houses, modernizing the power grid, etc., all require substantial investment. If this green investment simply displaced investment in other sectors – tool-making, health, education, etc. – growth would not speed up and employment would only be re-allocated between sectors, without reducing the number of unemployed. However, in the coming years green investment can be part of a broader surge of investment. After the global crisis of 1929, such a surge of investment in Europe as elsewhere was initiated by the perspective of military armament. Nowadays, this is obviously not an option. However, after the financial crisis of 2007–08, the perspective of sustainable development can mobilize investment in a similar way for a worthier purpose. The new model results show that it is possible to increase the EU climate target to 30% while achieving investments 25% higher than in business as usual. The share of investment in GDP, which under business as usual would be 18%, will then be up to 4 percentage points higher.

click to enlarge

The basic mechanism creating this opportunity for a new growth path is the mobilization of a virtuous circle of additional investment, learning-by-doing and expectation formation. It works as follows:

• If the EU announces and implements a new growth strategy including an ambitious target for emissions reduction, it can trigger additional investments that increase the share of gross investment in GDP by up to 4%.

• This substantial additional investment induces learning-by-doing across the economy as a whole, and at an even higher rate when it comes to new technologies like advanced construction materials, renewable energy and more.

• Learning-by-doing in turn increases competitiveness and thus spurs economic growth, thereby improving the expectations of investors.

• If the EU stabilizes the enhanced expectations of investors by policies consistently oriented to increasing sustainability, it can stabilize the new investment behavior and lead the European economy to a superior growth path.

click to enlarge

The experience of the global financial crisis shows that the existing economic models were seriously limited. Against this background, a fundamental overhaul of European climate policy models is required. To identify and assess options for climate policy we need models that meet the challenges exposed by the financial crisis. For example, the models that were state-of-the-art before the crisis assumed that economic systems have a single stable equilibrium. Studies based on this kind of models imply that reducing greenhouse gas emissions creates extra costs in the coming years in order to avoid damages in the distant future – thereby win-win strategies are excluded by construction. A key problem of climate policy is, however, to balance the short-term view of businesses with the much longer-term view required from policy-makers aware of climate change. The financial crisis has exposed the fact that different expectations can lead to different investment behaviors, turning those expectations into self-fulfilling prophecies. Research has now started to take this into account in models used for policy advice.

click to enlarge

For the first time in the academic climate modeling field, the present study has taken a state-of-the-art model of climate economics and enhanced it along those lines. The enhanced model includes:

• the fact that investments depend on subjective expectations, not on correct previsions of whatever future possibilities may arise

• the fact that higher investments trigger higher learning-by-doing, thereby reducing unit costs

• the resulting existence of different possible equilibria with different growth paths.

The new simulations show that 30% is achievable and can be economically beneficial by shifting the European Economy into a new, more advantageous equilibrium – a path of low-carbon growth. This result is consistent with upper bound green growth scenarios of previous studies. However, Europe is in danger of falling prey to a self-fulfilling prophecy of low growth. The 30% reduction target offers the opportunity to break out of this predicament. This phenomenon is well known: a new challenge can mobilise capabilities that could not be tapped without it. Similarly, economic systems have different possible regimes that can be activated in the face of different challenges.

click to enlarge

To realise the win-win opportunity that comes with the 30% reduction target requires consistent policies and measures that reframe expectations in a broader framework of low-carbon growth. In addition to existing or proposed EU policies and measures, the present study considers that the move to 30% requires the following macro- and microeconomic measures:

• Macro-economic measures, e.g.:

– Using part of the ETS auctioning revenue and resources from the structural funds to support mitigation efforts in Eastern European countries.

– Incentivising entrepreneurial investment by tax relief balanced with marginal tax increases on capital incomes used for other purposes.

– Building in low-carbon growth expectations in public procurement.

– Managing growth expectations along the lines central banks manage inflation expectations.

click to enlarge

• Micro-economic measures e.g.:

– Enhancing building codes to foster investment in energy efficiency; enhancing standards for energy efficiency in transport.

– Using part of the ETS auctioning revenue to foster energy efficiency and renewable energies.

– Standardising smart grid infrastructures and smart household appliances.

– Creating learning networks of businesses developing innovative solutions across Europe.