The Energy Efficiency Directive and Possible Implications on the EU ETS

At present, energy efficiency is considered one of the most crucial pillars to EU policy.  The more efficiently energy is consumed and produced, the higher the possibilities for cost reductions at consumer as well as at industry level.  Furthermore, savings can then lead to increased competitiveness of industry and the EU economy as a whole.  By 2008, the EU recognised that the 20-20-20 target of a 20% reduction in energy consumption would not be met.  Previously, energy efficiency targets were not transferred into binding legislation – this resulted in slippage and underperformance. In order to tackle this problem with a more fundamental approach, the EU agreed to put together an ambitious plan to meet this goal.   The result was the Energy Efficiency Directive (EED) of 2012.

The EED came into effect in December 2013 with all member states expected to enforce the required measures by the summer of 2014.  It aims to fill the gap between existing framework directives and national policies on energy efficiency.  The main objective of the directive is to ensure the implementation of additional measures that will enable the 2020 goal to be achieved. Measures, which focus on utilities and building, that are key to the EED include:

  • Renovation of 3% of the total floor areas of public sector buildings each year[1]
  • Energy audits and management plans for large companies[2]
  • The requirement of energy companies to reduce energy sales by 1.5% every year among their customers. To reach this target, improvements such as combined heat and power generation, fitting double-glazed windows and insulation for roofs have been proposed.

As with the introduction of any new policy, there has been discussion of how the EED will affect existing directives aimed at reducing emissions levels within the EU.  The impact of the EED on the EU ÊTS – the World’s leading emissions trading scheme – has been highlighted as a cause for concern.

As implementation of the EED is predicted to lead to overall reduced energy consumption, this will in turn cause a reduction in carbon emission levels (a similar scenario has already been experienced during recent economic downturn when overall output declined).  A reduction in emissions levels and demand in the market would have knock-on effect of reducing the scarcity and the price of allowances on the carbon market.  Model scenarios commissioned by the EC, have shown that in some cases carbon prices could drop to zero – causing the market to collapse and the savings made by the EED to be reversed.  This has led to calls for the EUs “business-as-usual” strategy to be examined more closely.

The EU has recognised the challenges that this poses and state that it is committed to monitor the situation carefully.  The EC has suggested lowering the cap at a higher rate (2.2%) from 2021 on a yearly basis as part of their 2030 targets, however this has been criticized for the time it would take to reduce the surplus. There have however been increasing calls for direct action and for adjustments to be made to the ETS in order to allow it to adequately accommodate the EED in both the medium and long term.  Many have called for the strengthening of the ETS cap to counterbalance the effect of increased allowances being issued through EED based initiatives. Others have called for permits to be withheld from the next ETS phase.  The UK based carbon think-tank “Sandbag” has recommended that the ETS set aside 1.4 billion tonnes of permits rather than “backload” from phase three to increase competitiveness within the market.  To date, the EU has

In order to accelerate the EUs energy efficiency drive, the EED would appear to be an appropriate device – energy efficiency measures can be made relatively inexpensively and have a positive economic impact. As the supply of allowances is fixed years in advance, it is difficult to calculate the exact impact and prepare for unknown variables such as EED on the ETS.  However, evidence suggests that that the ETS will need to adapt in order to maintain a buoyant market.


[1] Article 5, Understanding the energy efficiency directive http://www.eceee.org/policy-areas/EE-directive

[2] Article 7, Understanding the energy efficiency directive http://www.eceee.org/policy-areas/EE-directive

 


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