**3. Policy**

The global response to climate change started with the so called Rio Earth Summit in 1992: governments realized the need to work together for an environmental and sustainable economic development. The Summit was a first move towards an environmental policy at global level, by setting emission reduction targets for developed countries and establishing a framework of wider reduction for the future from a sustainable development point of view. Its weak point was that the Summit promised a lot at little costs, since it was an agreement without stringent measures (Helm, 2008). The Summit has been followed by several discussions with the purpose of finding optimal shared environmental policy for facing climate change.

**Origin 2000 2001 2002 2003 2004 2005 2006 2007 Share 2007(%)** Russia 112.4 136.8 154.7 170.8 188.9 188.0 189.6 185.3 33.9 Norway 115.9 108.1 103.1 106.4 108.6 97.5 89.1 84.3 15.5 Libya 45.5 43.8 39.1 45.9 49.9 50.6 53.1 55.5 10.2 Saudi Arabia 65.1 57.5 53.1 61.5 64.5 60.7 51.1 39.4 7.2 Other, Middle East 54.7 48.2 43.2 27.8 28.5 29.9 32.5 34.4 6.3 Iran 33.5 31.4 25.9 34.7 35.9 35.3 36.3 34.1 6.3 Kazahkhstan 9.9 9.1 13.4 15.9 22.2 26.4 26.8 18.3 3.4 Nigeria 22.4 25.7 18.4 23.2 14.9 18.6 20.2 15.5 2.8 Other Origin 58.2 62.3 64.2 56.6 56.6 66.2 65.9 78.1 14.4 Total Imports 519.8 522.9 515.3 542.9 570.2 573.4 564.7 545.1 100

**Origin 2000 2001 2002 2003 2004 2005 2006 2007 Share 2007(%)** Russia 4539709 4421515 4554744 4895252 4951044 4952879 4937711 4685365 40.8 Norway 1985231 2136379 2601569 2699473 2801723 2671779 2844237 3061751 16.7 Algeria 2203075 1957181 2132477 2158803 2042137 2256826 2132236 1943976 16.9 Nigeria 172020 216120 217882 335929 410260 436319 563905 588317 5.1 Libya 33442 33216 25536 30390 47809 209499 321150 383615 3.3 Qatar 12443 27463 87952 80414 160170 195713 232721 275496 2.4 Egypt 202419 327394 221305 1.9 Trinidad and Tobago 36334 24498 19120 1365 29673 163233 104917 0.9 Other Origin 112810 199256 125425 100023 313245 409387 227147 213995 12.0 Total Imports 9095064 9015628 9764705 10301649 10726388 11364494 11749734 11478737 100

**2000 2001 2002 2003 2004 2005 2006 2007 Share 2007 (%)**

Total EU-27 151575 173041 171629 180360 196062 197043 213809 214358 100 Russia 14976 20875 23033 26545 40382 48304 55544 56117 26.2 South Africa 40177 49273 53961 56932 54190 51698 53080 46121 21.5 Australia 28600 29450 29337 31004 30838 27013 27147 29069 13.6 Colombia 23132 22633 21398 22908 24224 24147 26068 29018 13.5 United States 20447 20119 14082 12619 15416 15673 17370 20833 9.7 Indonesia 9097 10254 11540 13004 13980 14704 21092 17594 8.2 Other 15146 20437 18278 17348 17032 15504 13508 15606 7.3

The global response to climate change started with the so called Rio Earth Summit in 1992: governments realized the need to work together for an environmental and sustainable economic development. The Summit was a first move towards an environmental policy at global level, by setting emission reduction targets for developed countries and establishing a framework of wider reduction for the future from a sustainable development point of view. Its weak point was that the Summit promised a lot at little costs, since it was an agreement without stringent measures (Helm, 2008). The Summit has been followed by several discussions with the

Table 3. Crude oil imports in the EU27 (in Mt) in 2007. Source: Eurostat (2009)

Table 4. Gas imports in the EU27 (in TJ) in 2007. Source: Eurostat (2009)

Table 5. Coal imports in the EU27 (in kT) in 2007. Sources: Eurostat (2009)

purpose of finding optimal shared environmental policy for facing climate change.

**3. Policy** 

Afterwards, the Kyoto Protocol, an international agreement adopted in Kyoto on December 1997, has committed (instead of encouraging) 37 industrialized countries and the European Union (EU) to reduce a basket of six greenhouse gases. The Kyoto Protocol entered into force in February by committing contracting parties as a group to achieve an overall reduction in polluting emissions of 5% in the period 2008-12 with respect to 1990 levels(IEA, 2010). The Protocol has helped sensitive public awareness of problems related to climate change. Despite the Protocol has detailed commitment for each country member in terms of GHG reductions, it is limited in its potential to climate change mitigation since not all major emitters as United States were included in reduction commitments. In March 2001, the United States explicitly declared their non-participation in the Kyoto Protocol, because of the too high potential compliance costs and the domestic voters' low willingness to pay (Böhringer and Vogt, 2004).

The European Community has taken part in the Kyoto Protocol through positive measures. Between 2008 and 2012, countries that were already EU members, have to cut 8% off GHG emissions. Countries that have joined EU later undertake to cut emissions for the same amount, apart from Poland and Hungary (6%). Kyoto Protocol suggests tools of action:


During the period 1990-2007 the European Commission has recorded emission reductions as follows:


The EU results should be interpreted not only in the light of Kyoto and all following agreements. The emission reductions are likely to be attributed to two factors as well: the global economic and financial crisis that has reduced industrial production, and the new member States entered in the European Union that have decreased on average the EU level of emissions because of their less productive economies.

### **3.1 The European climate and energy package**

Actually, the European environmental and energy policy is represented by the so-called "20- 20-20 Climate and Energy Package", through which the EU is showing to be ready to assume the global leadership to face climate change, tackle the challenges of energy security, making Europe a model of sustainable development for the 21st Century. The EU aims to achieve by 2020:


EU Energy Policies and Sustainable Growth 11

The 20-20-20 Package, introduced in 2008 through the Communication (COM(2008)30), answers to the call made by the European Parliament about real measures for the transition toward a sustainable development. The Package includes a number of important policy

 a proposal on the allocation of efforts by member states in order to reduce GHG emissions in sectors not covered by the EU ETS (as transport, building, services, small

a directive on the promotion of renewable energy to achieve the goals of GHG emission

The EU ETS scheme has been a pioneering instrument prior to the 20-20-20 Climate and Energy Package. It is a market instrument that has been already implanted in the US quite successfully, and it has been introduced in Europe in 2003 in order to find market solutions to encourage firms cutting GHG emissions. The Cap and Trade system sets a maximum amount of emissions per period (2005-07 and 2008-12) per country. Then, each country establishes a national emission scheme and it allocates to firms the emission allowances which could be traded between the companies covered by the scheme. Once the emission permits are allocated, firms can trade them within the EU according to their criteria of economic efficiency. In the first and

second ETS trading periods (2005-2012), mostly of the EU permits are allocated for free.

The importance of the EU ETS scheme is that is has been able to create a market and an artificial price for a public good as clean air. Thus, firms covered by the EU ETS have to face costs when emitting CO2 emissions: on the one hand, a firm that needs for its activity more permits than those at its disposal faces the cost of purchasing them. On the other hand, opportunity costs arise because permits could be sold in case of non-production. The 20-20- 20 Climate and Energy Package has modified the Emission Trading Scheme through the Directive 2009/29/EC and it will enter into force from 2013 to 2020, in order to overcome the application problems that rose during the first few years of its application. The first problem is related to the EU allocation mechanisms that have been used so far. Emission permits have been allocated for free, the allocation could be done on the basis of historic emissions, that is grandfathering. This mechanism may create vicious circle since it does not spur adoption of new technologies with a low environmental impact. Moreover, it favors large firms that at the first stage receive many permits to preserve their activity level over

Another problem is related to the inconsistencies between the emission permits and the National Allocation Plan: governments have created too many emission permits to protect the welfare of the firms operating in the country who wanted to receive as more permits as

Finally, the large and persistent fluctuations of market price have created havoc in the

In this direction, a research carried out by Hesmondhalgh et al. (2009) shows how different

 the use of credits from the Clean Development Mechanisms and Joint Implementation is limited to 50% of the overall EU emission reductions in the period 2008-2020;

market and uncertainty on the goodness of the environmental policy.

inclusion of new sector as aviation and aluminium sector;

factors may influence CO2 prices, as it is shown in the following table 7. The main elements of the reformed Emission trading Scheme are:

a new emission cap set at 20% below with respect to the 2005 levels by 2020;

a revised directive on the EU Emission Trading System (EU ETS);

industrial plants, agriculture and food sectors);

proposals closely interlinked:

reductions.

the small firms.

possible.


Table 6. World CO2 emissions from fuel combustion **(in Mt)** and Kyoto targets. Source: IEA, 2010

**Kyoto Parties with targets 8 858.3 7 980.1 -9.2% -4.7%**

Canada 432.3 550.9 27.4% -6%

 Austria 56.5 69.3 22.7% -13% Belgium 107.9 111.0 2.8% -7.5% Denmark 50.4 48.4 -4.0% -21% Finland 54.4 56.6 4.0% 0% France 352.3 368.2 4.5% 0% Germany 950.4 803.9 -15.4% -21% Greece 70.1 93.4 33.2% +25% Iceland 1.9 2.2 17.0% +10% Ireland 29.8 43.8 46.7% +13% Italy 397.4 430.1 8.2% -6.5% Luxembourg 10.5 10.4 -0.6% -28% Netherlands 155.8 177.9 14.1% -6% Norway 28.3 37.6 33.0% +1% Portugal 39.3 52.4 33.5% +27% Spain 205.8 317.6 54.3% +15% Sweden 52.8 45.9 -13.0% +4% Switzerland 40.7 43.7 7.4% -8% United Kingdom 549.3 510.6 -7.0% -12.5%

*North America* 432.3 550.9 27.4%

*Europe* 3 153.6 3 222.9 2.2%

*Pacific* 1 346.6 1 582.0 17.5%

China 2 244.4 6 550.5 191.9%

**WORLD 20 964.8 29 381.4 40.1%**

*Other Countries (non-*

*participating)*

2010

 Australia 260.1 397.5 52.9% +8% Japan 1 064.4 1 151.1 8.2% -6% New Zealand 22.0 33.3 51.5% 0% *Economic in Transition* 3 852.9 2 624.3 -31.9% -6%

United States 4 868.7 5 595.9 14.9% -7%

 Latin America 869.5 1 476.5 69.8% none Africa 545.6 889.9 63.1% none Middle East 592.5 1 492.3 151.8% none Non-OECD Europe 106.1 92.2 -13.1% none Asia (excl. China) 1 510.1 3 521.1 133.4% none

Table 6. World CO2 emissions from fuel combustion **(in Mt)** and Kyoto targets. Source: IEA,

**11 566.6 20 368.2 76.1%**

**1990 2008 % change** 

**90-08**

**Kyoto Target**

The 20-20-20 Package, introduced in 2008 through the Communication (COM(2008)30), answers to the call made by the European Parliament about real measures for the transition toward a sustainable development. The Package includes a number of important policy proposals closely interlinked:


The EU ETS scheme has been a pioneering instrument prior to the 20-20-20 Climate and Energy Package. It is a market instrument that has been already implanted in the US quite successfully, and it has been introduced in Europe in 2003 in order to find market solutions to encourage firms cutting GHG emissions. The Cap and Trade system sets a maximum amount of emissions per period (2005-07 and 2008-12) per country. Then, each country establishes a national emission scheme and it allocates to firms the emission allowances which could be traded between the companies covered by the scheme. Once the emission permits are allocated, firms can trade them within the EU according to their criteria of economic efficiency. In the first and second ETS trading periods (2005-2012), mostly of the EU permits are allocated for free.

The importance of the EU ETS scheme is that is has been able to create a market and an artificial price for a public good as clean air. Thus, firms covered by the EU ETS have to face costs when emitting CO2 emissions: on the one hand, a firm that needs for its activity more permits than those at its disposal faces the cost of purchasing them. On the other hand, opportunity costs arise because permits could be sold in case of non-production. The 20-20- 20 Climate and Energy Package has modified the Emission Trading Scheme through the Directive 2009/29/EC and it will enter into force from 2013 to 2020, in order to overcome the application problems that rose during the first few years of its application. The first problem is related to the EU allocation mechanisms that have been used so far. Emission permits have been allocated for free, the allocation could be done on the basis of historic emissions, that is grandfathering. This mechanism may create vicious circle since it does not spur adoption of new technologies with a low environmental impact. Moreover, it favors large firms that at the first stage receive many permits to preserve their activity level over the small firms.

Another problem is related to the inconsistencies between the emission permits and the National Allocation Plan: governments have created too many emission permits to protect the welfare of the firms operating in the country who wanted to receive as more permits as possible.

Finally, the large and persistent fluctuations of market price have created havoc in the market and uncertainty on the goodness of the environmental policy.

In this direction, a research carried out by Hesmondhalgh et al. (2009) shows how different factors may influence CO2 prices, as it is shown in the following table 7.

The main elements of the reformed Emission trading Scheme are:


EU Energy Policies and Sustainable Growth 13

Fig. 4. Share of electricity from renewable energy sources in total electricity consumption

On the basis of the experience from electricity liberalization around the world, the goal of the European Union is to achieve higher efficiency and lower consumption prices by introducing conditions of intensified commercial competition, but it is quite hard for firms that produce energy from renewable resources to compete within the energy industry that

Governments in EU countries use a large variety of instruments to stimulate the adoption of renewable energies; there are different schemes implemented by the European Union in order to use renewable energies and make them competitive on the energy market (Espey, 2001). The fundamental distinction that can be made among the European support mechanisms is between direct and indirect policy instruments. Basically, direct instruments stimulate the installation of energy from renewable resources immediately, while indirect policy measures focus on improving long-term framework conditions. There exist also voluntary approaches; this type of strategy is based on the consumers' willingness to pay premium rates for renewable energy, like donation projects and share-holder programs. The important classification criteria are whether policy instruments are price-oriented or

With the regulatory price-driven strategies, financial support is given by investment subsidies, soft loans or tax credits. Economic support is also given as a fixed regulated feedin tariff (FIT) or a fixed premium that governments or utilities are legally obliged to pay for renewable energy produced by eligible firms. Among the price-oriented policy, the most used within the European members is the Feed-in Tariff. The Feed-in Tariff is a price-driven incentive in which the supplier or grid operators are obliged to buy electricity produced from renewable sources at a higher price compared to the price they pay for energy from fossil fuel. The criticisms made to the feed-in tariff scheme underline that a system of fixed price level is not compatible with a free market. Moreover, these favorable tariffs generally do not decrease with the improvements of the efficiency of the technologies that produce green energy (Fouquet and Johannson, 2008). A particular kind of feed-in tariff model used in Spain consist in a fixed premium, in addition to the market price for electricity, given to the producers relying on renewable energy sources. Also in this case, premiums should be

adjusted in accordance with the performance of different technologies.

(%) – EU27 in 2007. Source: Eurostat (2009)

produce energy mainly from fossil fuel.

quantity-oriented.


Table 7. Potential influences on CO2 prices. Source: Hesmondhalgh et al., (2009)

 firms operating in the electricity sector are obliged to acquire 88% of emissions allocated to each installation through the auction mechanism; 10% of permits is redistributed from countries with higher per capita income to the one with lower per capita income and the remaining 2% is given to member States that successfully reached the 20% GHG reduction target in 2005 (i.e. the East European Countries).

The adoption of the auction mechanism in the EU ETS means a better distributional effect compared to grandfathering, because government entries generated by auctioning may be used both to reduce distortionary taxes and to promote research and development (R&D) activities in clean technologies.

The Directive on renewable energies to reach the target of 20% on energy consumption by 2020 shares the burden between Member States. In particular, 50% of this effort has to be shared equally between Member States, while the other 50% is modulated according to GDP per capita. Moreover, the objectives are modified to take into account a proportion of the efforts already made by Member States which have increased the share of renewable energy fuels in recent years.

The promotion in the European Union of electricity production based on renewable energy sources takes place in an energy market that is more and more competitive, since 1996 when the Council of Ministers reached an agreement on the Directive specifying rules for electricity liberalization in EU.

Higher than expected economic growth *Upward* - increased demand for

Coal prices fall relative to gas prices *Upward* - increased demand for

International agreement on abatement post-2012 *Upward* — EU will tighten cap on

Economic downturn *Downward*— reduced demand for

Coal prices rise relative to gas prices *Downward*— reduced demand for

 firms operating in the electricity sector are obliged to acquire 88% of emissions allocated to each installation through the auction mechanism; 10% of permits is redistributed from countries with higher per capita income to the one with lower per capita income and the remaining 2% is given to member States that successfully reached the 20% GHG

The adoption of the auction mechanism in the EU ETS means a better distributional effect compared to grandfathering, because government entries generated by auctioning may be used both to reduce distortionary taxes and to promote research and development (R&D)

The Directive on renewable energies to reach the target of 20% on energy consumption by 2020 shares the burden between Member States. In particular, 50% of this effort has to be shared equally between Member States, while the other 50% is modulated according to GDP per capita. Moreover, the objectives are modified to take into account a proportion of the efforts already made by Member States which have increased the share of renewable energy

The promotion in the European Union of electricity production based on renewable energy sources takes place in an energy market that is more and more competitive, since 1996 when the Council of Ministers reached an agreement on the Directive specifying rules for

Table 7. Potential influences on CO2 prices. Source: Hesmondhalgh et al., (2009)

reduction target in 2005 (i.e. the East European Countries).

Failure to meet renewables and/or energy

efficiency targets

Overall fuel prices

activities in clean technologies.

electricity liberalization in EU.

fuels in recent years.

**Factor Effect on CO2 prices** 

allowances

allowances

emissions

allowances

allowances

allowances

*Upward* — increased demand for

vice versa for higher prices

*Uncertain*— lower prices may increase energy demand but will mitigate effect of fuel price differentials and

Fig. 4. Share of electricity from renewable energy sources in total electricity consumption (%) – EU27 in 2007. Source: Eurostat (2009)

On the basis of the experience from electricity liberalization around the world, the goal of the European Union is to achieve higher efficiency and lower consumption prices by introducing conditions of intensified commercial competition, but it is quite hard for firms that produce energy from renewable resources to compete within the energy industry that produce energy mainly from fossil fuel.

Governments in EU countries use a large variety of instruments to stimulate the adoption of renewable energies; there are different schemes implemented by the European Union in order to use renewable energies and make them competitive on the energy market (Espey, 2001). The fundamental distinction that can be made among the European support mechanisms is between direct and indirect policy instruments. Basically, direct instruments stimulate the installation of energy from renewable resources immediately, while indirect policy measures focus on improving long-term framework conditions. There exist also voluntary approaches; this type of strategy is based on the consumers' willingness to pay premium rates for renewable energy, like donation projects and share-holder programs.

The important classification criteria are whether policy instruments are price-oriented or quantity-oriented.

With the regulatory price-driven strategies, financial support is given by investment subsidies, soft loans or tax credits. Economic support is also given as a fixed regulated feedin tariff (FIT) or a fixed premium that governments or utilities are legally obliged to pay for renewable energy produced by eligible firms. Among the price-oriented policy, the most used within the European members is the Feed-in Tariff. The Feed-in Tariff is a price-driven incentive in which the supplier or grid operators are obliged to buy electricity produced from renewable sources at a higher price compared to the price they pay for energy from fossil fuel. The criticisms made to the feed-in tariff scheme underline that a system of fixed price level is not compatible with a free market. Moreover, these favorable tariffs generally do not decrease with the improvements of the efficiency of the technologies that produce green energy (Fouquet and Johannson, 2008). A particular kind of feed-in tariff model used in Spain consist in a fixed premium, in addition to the market price for electricity, given to the producers relying on renewable energy sources. Also in this case, premiums should be adjusted in accordance with the performance of different technologies.

EU Energy Policies and Sustainable Growth 15

In Denmark the support schemes are mainly related to the wind power sector. To implement renewable resources, the strategy adopted is price-driven, that is a premium feed-in tariff for on-shore wind, and fixed feed-in tariffs for the other renewable resources. In France, the strategy adopted is mainly price-oriented; the electricity support schemes are

Italy has not a significant experience in producing energy from renewable resources with the exception of large hydro. Several factors obstruct the development of renewables in Italy, as administrative constraints and high connection costs. During the 1990s, the energy sector in Italy was entirely restructured in order to introduce competition, as set by the EU Directive 96/02/EC (Lorenzoni, 2003). The promotion of electricity produced from renewables has taken place through support schemes as the quota obligation system and feed-in tariff. Concerning wind energy, in 2002 the Italian government abandoned the feedin-tariff, introducing the quota obligation system with tradable green certificates. Under this certificate system, electricity producers and importers are obliged to source an increasing proportion of their energy from renewable resources. Green certificates are used to fulfill this obligation. Italy has adopted a ministerial measure that balances supply and demand in

The recent literature argues that EU ETS mechanism and the promotion of renewable energies may lead to different results (Carraro et al., 2006). While the EU ETS could be interpreted in the light of the "polluter pays principle", which requires the cost of pollution to be borne by those who cause it, the implementation of renewable energies aims at eliminating GHG emissions (Borghesi, 2010). Keeping constant the supply of emission permits, the implementation of renewables may lead to a decrease in emission permits' demand and thus their price without generating a significant GHG emissions reduction. Assuming that to be true, the two instruments should be substitutes instead of

Government involvement is essential to spur use of renewable energies. The EU energy

order to tame speculative fluctuations on the value of green certificates.

complements, unless government reduce the supply of permits on the long run.

consumption is still heavily based on fossil fuels, as it is shown in figure 5.

Fig. 5. Final energy consumption by fuel in 2007. Source: Eurostat, 2009

feed-in tariffs plus tenders for large projects.

With regard to the regulatory quantity-driven strategies, the desired level of energy generated from renewable resources or market penetration is defined by governments. The most important are tender system and tradable certificate system. In the tender system, calls for tender for defined amounts of capacity are made at regular interval, and the contract is given to the provider that offer the lowest price. The winners of tenders are getting a fixed price per kWh for the period of the contract and the contract offers winner several favorable investment conditions; this system is in a sense quite close to the feed-in tariff model. In the tradable certificate system, firms that produce energy are obliged to supply or purchase a certain percentage of electricity from renewable resources. Then, at the date of settlement, they have to submit the required number of certificates to demonstrate compliance. The firms involved in the tradable certificate system can obtain certificate from their own renewable electricity generation; they may as well purchase renewable electricity and associated certificates from another generator, or they can purchase certificates that have been traded independently of the power itself.


Table 8. Classification of promotion strategies. Source: Held et al., 2006.

The economic incentives for renewable resources differ among the EU members. In Germany, the main electricity support scheme is represented by a price-driven incentive, the feed-in tariff. The main features of the German support mechanism are stated in the Renewable Energy Source Act of 2000. The Act establishes that the feed-in tariffs are not dependent on the market price of energy but are defined in the law and that feed-in tariffs are different for wind, biomass, photovoltaic etc. Moreover, the feed-in tariffs are decreased over the years in order to take into account the technological learning curves (Petrakis et al., 1997).

The United Kingdom was the first European country to pursue liberalization in the electricity market by the end of 1998. In UK, energy from renewable resources is supported by quantitative-driven strategies. Over the last decades, the scheme adopted by UK was the tender system, but, since 1999, the system in use is a quota obligation system with Tradable Green Certificates. The obligation (based in tradable green certificate) target increases during years, and electricity companies that do not comply with the obligation have to payout penalties.

With regard to the regulatory quantity-driven strategies, the desired level of energy generated from renewable resources or market penetration is defined by governments. The most important are tender system and tradable certificate system. In the tender system, calls for tender for defined amounts of capacity are made at regular interval, and the contract is given to the provider that offer the lowest price. The winners of tenders are getting a fixed price per kWh for the period of the contract and the contract offers winner several favorable investment conditions; this system is in a sense quite close to the feed-in tariff model. In the tradable certificate system, firms that produce energy are obliged to supply or purchase a certain percentage of electricity from renewable resources. Then, at the date of settlement, they have to submit the required number of certificates to demonstrate compliance. The firms involved in the tradable certificate system can obtain certificate from their own renewable electricity generation; they may as well purchase renewable electricity and associated certificates from another generator, or they can purchase certificates that have

**Price-driven Quantity-driven**

The economic incentives for renewable resources differ among the EU members. In Germany, the main electricity support scheme is represented by a price-driven incentive, the feed-in tariff. The main features of the German support mechanism are stated in the Renewable Energy Source Act of 2000. The Act establishes that the feed-in tariffs are not dependent on the market price of energy but are defined in the law and that feed-in tariffs are different for wind, biomass, photovoltaic etc. Moreover, the feed-in tariffs are decreased over the years in order to

The United Kingdom was the first European country to pursue liberalization in the electricity market by the end of 1998. In UK, energy from renewable resources is supported by quantitative-driven strategies. Over the last decades, the scheme adopted by UK was the tender system, but, since 1999, the system in use is a quota obligation system with Tradable Green Certificates. The obligation (based in tradable green certificate) target increases during years, and electricity companies that do not comply with the obligation have to pay-

**Direct**

Tendering system

on TGCs

Tendering system and Quota obligation based **Indirect**

Environmental taxes

Voluntary agreements






Table 8. Classification of promotion strategies. Source: Held et al., 2006.

take into account the technological learning curves (Petrakis et al., 1997).

been traded independently of the power itself.

Generation based

Investment focussed

Generation based

Investment focussed

**Voluntary**

out penalties.

**Regulatory**

In Denmark the support schemes are mainly related to the wind power sector. To implement renewable resources, the strategy adopted is price-driven, that is a premium feed-in tariff for on-shore wind, and fixed feed-in tariffs for the other renewable resources.

In France, the strategy adopted is mainly price-oriented; the electricity support schemes are feed-in tariffs plus tenders for large projects.

Italy has not a significant experience in producing energy from renewable resources with the exception of large hydro. Several factors obstruct the development of renewables in Italy, as administrative constraints and high connection costs. During the 1990s, the energy sector in Italy was entirely restructured in order to introduce competition, as set by the EU Directive 96/02/EC (Lorenzoni, 2003). The promotion of electricity produced from renewables has taken place through support schemes as the quota obligation system and feed-in tariff. Concerning wind energy, in 2002 the Italian government abandoned the feedin-tariff, introducing the quota obligation system with tradable green certificates. Under this certificate system, electricity producers and importers are obliged to source an increasing proportion of their energy from renewable resources. Green certificates are used to fulfill this obligation. Italy has adopted a ministerial measure that balances supply and demand in order to tame speculative fluctuations on the value of green certificates.

The recent literature argues that EU ETS mechanism and the promotion of renewable energies may lead to different results (Carraro et al., 2006). While the EU ETS could be interpreted in the light of the "polluter pays principle", which requires the cost of pollution to be borne by those who cause it, the implementation of renewable energies aims at eliminating GHG emissions (Borghesi, 2010). Keeping constant the supply of emission permits, the implementation of renewables may lead to a decrease in emission permits' demand and thus their price without generating a significant GHG emissions reduction. Assuming that to be true, the two instruments should be substitutes instead of complements, unless government reduce the supply of permits on the long run.

Government involvement is essential to spur use of renewable energies. The EU energy consumption is still heavily based on fossil fuels, as it is shown in figure 5.

Fig. 5. Final energy consumption by fuel in 2007. Source: Eurostat, 2009

EU Energy Policies and Sustainable Growth 17

The implication of energy policy measures are thoughtful: economic efficiency and political interests may conflict in climate change policies, especially when there are costs imposed in

Within the bounds of the 20-20-20 Climate and Energy Package, each Member State should work to support competition in energy markets and harmonize shared rules at European level. From the Package it is clear that Member States could take different mechanisms to reduce GHG emissions and implement renewable energies in the portfolio energy mix. Most countries have chosen the feed-in tariff scheme, while the minority has implemented green certificates. Assessment that results both on the effectiveness and costs of different mechanisms are quite controversial (Dinica, 2006). The availability and quality of renewable energies differ among countries: two countries may offer the same support scheme but they face heterogeneous quality of the energy resource. It translates in different production costs incurred by renewable energies that lead to misleading evaluations of the support instruments. Moreover, support mechanisms are implemented in different economic context

During the last three years the estimated costs to reach the 20/20/20 target have been reduced: in 2007, before the economic and financial crisis started, costs to reach the Climate and Energy Package goals were estimated at around 70 billion euro; nowadays, by taking into account the economic recession, costs come to 48 billion euro (i.e. 0.32% of EU GDP in 2020). The lower costs are due to several factors, including the reduction of world energy

In the future, forecast costs of climate change will probably change upward according to the economic recovery, which should also serve as a stimulus to the global energy investment, essential to develop technologies with low environmental impact and increase energy

The implementation of less high carbon technologies, such as wind and solar energies furthers the time horizon of the target to 2020. The costs related to the 20-20-20 Climate and Energy Package have to be mainly supported by customers and taxpayers, and such costs are higher if not all Member States make comparable efforts (Böhringer et al. 2009). There exists the incentive to free-ride by EU regions, or to impose as few costs as possible on their home economy while enjoying the benefits created at the other countries' cost, as demonstrated by a fair chunk of literature (Helm, 2008; Kemfert, 2003; Haas et al., 2004). An interesting research made by Nordhaus (2009) analyzes the impact of non participation on the costs of slowing global warming. The Kyoto Protocol assigns different commitments to developed countries and developing countries. The 20-20-20 Climate and Energy Package involves coordination among all Member States; the implication for policy makers if not all countries participate to the Package are profound in term of costs. Nordhaus assesses the economic impact that arise when some countries do not participate in the agreement to mitigate climate change through a functional form for the cost function that allows to

It is quite straightforward that limiting participation produce inefficiencies by rising the costs for the participating countries. His research allows to calculate the cost penalty from nonparticipation (that is equal to the inverse of the square of the participation rate). Intuitively, if many countries do not participate in a treaty, the cost penalty is high, because

consumption due to economic and financial crisis and the rising in oil prices.

the future (Helm, 2008).

**3.2 Coordination between the EU member states** 

which can then bring dissimilar results.

estimate the costs of nonparticipation.

efficiency.

The main advantage of renewable sources with respect to fossil fuels is that they contribute to mitigate climate change. The liberalization of the electricity market may appear as a partial response to climate change since it allows consumers to purchase cleaner electricity directly from suppliers. Anyway, most consumers are not willing to pay higher prices for green electricity since they are burdened with higher prices to preserve a public good (i.e. clean air) which everyone benefits from. Consequently, the proportion of renewable sources in the energy portfolio is low, unless there are governments subsidies (Carraro and Siniscalco, 2003).

Actually, subsidies are needed because fossil fuel prices do not internalize environmental damages to society. In fact, polluting emissions create a damage to society; without a price system, firms face a suboptimal opportunity cost for pollution and this leads to a wrong amount of pollution (Grimaud and Rougé, 2008). Since the right level of pollution will not emerge in a spontaneous way, government must increase pollution cost by raising a tax, in order to reduce pollution generation. If the tax is set at the optimal level, it is called a Pigouvian tax. The optimal amount of pollution is the amount that minimizes total costs from producing one more unit of pollution and total damages from pollution. Thus, the condition that marginal cost (or marginal saving) equals to marginal damage leads to the generation of the right amount of emissions. This is the main idea of the Pigouvian tax: "A Pigouvian fee is a fee paid by the polluter per unit of pollution exactly equal to the aggregate marginal damage caused by the pollution when evaluated at the efficient level of pollution. The fee is generally paid to the government" (Kolstad, 2000). Note that the Pigouvian tax is also equal to the marginal cost from pollution generation at the optimal level of pollution. The difficulty for the government to levy a Pigouvian fee is that there are reasons why it is not feasible. First of all, it is not easy to quantify marginal damage. The number of activities and the number of people affected by pollution are so great that it is quite hard to came up with monetary estimation of damage from pollution. Moreover, the optimal tax level on polluting emissions is not equal to the marginal net damage that the polluting activity generates initially, but to the damage it would cause if the level of the activity had been adjusted to its optimal level (Baumol and Oates, 1971). If we are not at the optimum, the Pigouvian tax will be neither the marginal cost of pollution nor the marginal damage from pollution.

Basically we can say that in a perfect environment, like an economy in which there is perfect information and no constraints on government tax policy, the Pigouvian tax is only necessary to achieve efficiency. If there are other distortions in the economy or limitation for the social planner, then other taxes and subsidies are needed to achieve efficiency (Sandmo, 1976).

Incentive systems are needed to stimulate technical change so that renewable energies lower future production costs. The reasons often put forward are the learning by doing effects from the production of energy from renewable resources on the cost of future production. The main idea is that a critical mass of production has to be reached first, and then costs will be reduced thanks to research and development activities (Fundenberg and Tirole, 1983).

The reasons related to the implementation of renewable energy does not lie only in the mitigation of climate change. There are also political reasons related to energy security issue. Nowadays, energy security does not mean anymore protecting existing energy supplies. The political instability of the Organization of the Petroleum Exporting Countries (OPEC) countries has a strong impact on the global energy markets by leading to supply shortage in importing countries, as the recent conflict in Libya has shown.

The main advantage of renewable sources with respect to fossil fuels is that they contribute to mitigate climate change. The liberalization of the electricity market may appear as a partial response to climate change since it allows consumers to purchase cleaner electricity directly from suppliers. Anyway, most consumers are not willing to pay higher prices for green electricity since they are burdened with higher prices to preserve a public good (i.e. clean air) which everyone benefits from. Consequently, the proportion of renewable sources in the energy portfolio is low, unless there are governments subsidies (Carraro and

Actually, subsidies are needed because fossil fuel prices do not internalize environmental damages to society. In fact, polluting emissions create a damage to society; without a price system, firms face a suboptimal opportunity cost for pollution and this leads to a wrong amount of pollution (Grimaud and Rougé, 2008). Since the right level of pollution will not emerge in a spontaneous way, government must increase pollution cost by raising a tax, in order to reduce pollution generation. If the tax is set at the optimal level, it is called a Pigouvian tax. The optimal amount of pollution is the amount that minimizes total costs from producing one more unit of pollution and total damages from pollution. Thus, the condition that marginal cost (or marginal saving) equals to marginal damage leads to the generation of the right amount of emissions. This is the main idea of the Pigouvian tax: "A Pigouvian fee is a fee paid by the polluter per unit of pollution exactly equal to the aggregate marginal damage caused by the pollution when evaluated at the efficient level of pollution. The fee is generally paid to the government" (Kolstad, 2000). Note that the Pigouvian tax is also equal to the marginal cost from pollution generation at the optimal level of pollution. The difficulty for the government to levy a Pigouvian fee is that there are reasons why it is not feasible. First of all, it is not easy to quantify marginal damage. The number of activities and the number of people affected by pollution are so great that it is quite hard to came up with monetary estimation of damage from pollution. Moreover, the optimal tax level on polluting emissions is not equal to the marginal net damage that the polluting activity generates initially, but to the damage it would cause if the level of the activity had been adjusted to its optimal level (Baumol and Oates, 1971). If we are not at the optimum, the Pigouvian tax will be neither the marginal cost

Basically we can say that in a perfect environment, like an economy in which there is perfect information and no constraints on government tax policy, the Pigouvian tax is only necessary to achieve efficiency. If there are other distortions in the economy or limitation for the social planner, then other taxes and subsidies are needed to achieve efficiency (Sandmo,

Incentive systems are needed to stimulate technical change so that renewable energies lower future production costs. The reasons often put forward are the learning by doing effects from the production of energy from renewable resources on the cost of future production. The main idea is that a critical mass of production has to be reached first, and then costs will be reduced thanks to research and development activities (Fundenberg and Tirole, 1983). The reasons related to the implementation of renewable energy does not lie only in the mitigation of climate change. There are also political reasons related to energy security issue. Nowadays, energy security does not mean anymore protecting existing energy supplies. The political instability of the Organization of the Petroleum Exporting Countries (OPEC) countries has a strong impact on the global energy markets by leading to supply shortage in

Siniscalco, 2003).

1976).

of pollution nor the marginal damage from pollution.

importing countries, as the recent conflict in Libya has shown.

The implication of energy policy measures are thoughtful: economic efficiency and political interests may conflict in climate change policies, especially when there are costs imposed in the future (Helm, 2008).

### **3.2 Coordination between the EU member states**

Within the bounds of the 20-20-20 Climate and Energy Package, each Member State should work to support competition in energy markets and harmonize shared rules at European level. From the Package it is clear that Member States could take different mechanisms to reduce GHG emissions and implement renewable energies in the portfolio energy mix. Most countries have chosen the feed-in tariff scheme, while the minority has implemented green certificates. Assessment that results both on the effectiveness and costs of different mechanisms are quite controversial (Dinica, 2006). The availability and quality of renewable energies differ among countries: two countries may offer the same support scheme but they face heterogeneous quality of the energy resource. It translates in different production costs incurred by renewable energies that lead to misleading evaluations of the support instruments. Moreover, support mechanisms are implemented in different economic context which can then bring dissimilar results.

During the last three years the estimated costs to reach the 20/20/20 target have been reduced: in 2007, before the economic and financial crisis started, costs to reach the Climate and Energy Package goals were estimated at around 70 billion euro; nowadays, by taking into account the economic recession, costs come to 48 billion euro (i.e. 0.32% of EU GDP in 2020). The lower costs are due to several factors, including the reduction of world energy consumption due to economic and financial crisis and the rising in oil prices.

In the future, forecast costs of climate change will probably change upward according to the economic recovery, which should also serve as a stimulus to the global energy investment, essential to develop technologies with low environmental impact and increase energy efficiency.

The implementation of less high carbon technologies, such as wind and solar energies furthers the time horizon of the target to 2020. The costs related to the 20-20-20 Climate and Energy Package have to be mainly supported by customers and taxpayers, and such costs are higher if not all Member States make comparable efforts (Böhringer et al. 2009). There exists the incentive to free-ride by EU regions, or to impose as few costs as possible on their home economy while enjoying the benefits created at the other countries' cost, as demonstrated by a fair chunk of literature (Helm, 2008; Kemfert, 2003; Haas et al., 2004).

An interesting research made by Nordhaus (2009) analyzes the impact of non participation on the costs of slowing global warming. The Kyoto Protocol assigns different commitments to developed countries and developing countries. The 20-20-20 Climate and Energy Package involves coordination among all Member States; the implication for policy makers if not all countries participate to the Package are profound in term of costs. Nordhaus assesses the economic impact that arise when some countries do not participate in the agreement to mitigate climate change through a functional form for the cost function that allows to estimate the costs of nonparticipation.

It is quite straightforward that limiting participation produce inefficiencies by rising the costs for the participating countries. His research allows to calculate the cost penalty from nonparticipation (that is equal to the inverse of the square of the participation rate). Intuitively, if many countries do not participate in a treaty, the cost penalty is high, because

EU Energy Policies and Sustainable Growth 19

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the emission reduction target hardly could be achieved. As Nordhaus says: "..there are lowhanging fruits all around the world, but a regimen that limits participation to the highincome countries passes up the low-hanging fruit in the developing world".

We think that European Member States must then take coordinated actions to reach the 20- 20-20 goals by implementing national policies at national level.
