**EU Energy Policies and Sustainable Growth**

Carlo Andrea Bollino and Silvia Micheli

*Department of Economics, Finance and Statistics, University of Perugia Italy* 

## **1. Introduction**

The concentration of greenhouse gases (GHG) in the atmosphere was at 438 parts per million (ppm) of CO2 equivalent in 2008, that is almost twice the pre-Industrial Revolution level (IEA, 2010). Such an increase is mainly caused by fossil fuel combustion for energy purposes in the power, industry, building and transport sectors (Stern, 2007). In the Reference Scenario, which gives economic and environmental assessments of a world in which the economy continues on its current course without polluting emission reductions policies, fossil fuel use is projected to grow, and the dirtiest fuel, i.e. coal, is expanding its share to face rising energy demand driven by emerging countries such as China and India.

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 the 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 cost, 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.

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 GHG emissions through national measures. The EU has undoubtedly made a big effort in developing a progressive environmental policy, but many of its own policies are still far from making a difference to climate change. Following the ratification of the Kyoto Protocol in 2002, the EU committed itself to reduce emissions to 8% below 1990 levels by 2008-2012, allowing different national emissions target within the EU accounting for different income level, country size and environmental attitude (Borghesi, 2010).

The current policy action toward green Europe is the so-called 20-20-20 Climate and Energy Package. The EU aims to limit its 2020 greenhouse gas emissions to 20% below 1990 levels and to meet a 20% renewables target of total energy supply by 2020. The Package includes a 20% energy efficiency target and a biofuel target of 10% by 2020 (Hepburn et al., 2006). To meet these targets, governments in EU countries use a large variety of support instruments.

EU Energy Policies and Sustainable Growth 5

Renewable energies, including hydroelectric, geothermal, biomass, solar energy and wind energy, grow at a fast pace relative to electricity production, but their share in energy

**Country Solids Oil Gas Nuclear Hydro Biomass Other** United States 23.7 38.9 23.0 9.3 0.9 3.5 0.7 EU-27 \*\* 18.3 36.4 23,9 13.4 1.5 5.4 1.1 Japan 22.3 44.8 16.2 13.4 1.2 1.4 0.7 Russia 15.2 19.7 54.4 6.3 2.3 1.0 1.2 China \* 65.6 18.2 3.1 0.8 2.1 9.9 0.2 India 40.8 23.7 5.6 0.7 1.8 27.2 0.3 Korea 25.3 42.5 14.0 16.8 0.1 1.2 0.0 Brazil 5.8 39.3 7.5 1.4 13.7 30.7 1.7 Canada 11.2 35.1 29.3 9.0 11.8 4.3 - 0.7 Mexico 4.9 56.9 27.4 1.5 1.3 4.5 3.5 Others 13.5 39.6 25.7 1.6 2.4 16.5 0.8 **World 26.5 34.0 20.9 5.9 2.2 9.8 0.7**

Table 1. Gross income consumption by country in 2007. Source: Eurostat (2009)

Almost 18% of total electricity in 2007 was generated by renewable energy and, according to the Reference Scenario, it is supposed to rise to 22% in 2030. Actually energy production from renewables is more expensive than fossil fuel based technologies, and the reasons for

Fig. 1. Gross Inland Consumption in 2007. Source: Eurostat (2009).

consumption is still low.

The first part of the chapter is then devoted to a critical review of the main international agreements to reduce climate change and their implementation in the EU environmental policy. The search for a consensus among EU governments is tricky since energy policies advocated by EU members differ. Some of them urge on the implementation of nuclear power, while others advocate the use of renewables instead of nuclear technologies; anyway, all of them are convinced that the economy cannot rely on fossil fuels anymore (Nordhaus, 2006).

The second part of the chapter evaluates the range of strategies implemented in different EU countries to tackle climate change. The primary objective of these strategies is to increase the use of renewable energy in order to enjoy the environmental benefits and for energy security reasons (Held et al., 2006). The analysis reviews the EU climate-change package and the main policy instruments contained in it. We categorize policy instruments through the most frequently used typology, i.e. price-oriented or quantityoriented (Dinica, 2006). Some of them are claimed to be more market friendly than others, while other schemes are claimed to be more efficient in promoting the development of renewable energy (Meyer, 2003). Currently, there is no general agreement on the effectiveness of each scheme. By analyzing the different schemes that have been used in EU Member States in order to achieve the 20-20-20 targets, the research takes into account the extent of financial support given by each EU member region by considering some exogenous factors, as the availability and distribution of renewable resources, and the institutional context. The strategies planned by governments imply different costs that might be prohibitive if other countries are not making comparable efforts.

Finally, the research highlights the problem of coordination among policy makers that undermines the achievement of the 20-20-20 Climate and Energy Package targets, using a theoretic model of Nordhaus (2009). It is well-known that EU countries should take complementary and coordinated actions to green themselves by implementing their own national plan (Böhringer et al., 2009). Every country would want to spur new activities, new investment, more employment in its own territory, by using an appropriate mix of local taxation and subsidies, in conjunction with other command and control instruments. However, EU countries have the incentive to free-ride, or to impose as few costs as possible on their home economy while enjoying the benefits created at the other countries' cost (Barrett, 1994). So, the research highlight the formidable problems of opportunistic behavior and inefficient outcomes.
