The International Energy Agency (IEA) is one of the few institutions that fully grasps the dire predicament that climate change will have on energy generation and its subsequent impacts on economic growth and social stability. Fatih Birol, the IEA’s Chief Economist, has become one of the leading global figures stressing the urgency for action before capital-intensive investments lock-in greenhouse gas emissions beyond the 2 degrees Celsius threshold. In fact, we are currently on course for a rise of at least 3.6 degrees Celsius. At a recent seminar in Brussels organised by the ETUI he outlined the urgent need for prompt and decisive leadership from the EU. These are hardly features for which it is renown. Whilst the EU is on the brink of its third energy security crisis in the Ukraine this millennium it is also about to reverse key decisions that would have put it on a stable footing to meet the economic, social and competitive advantage solutions of today and tomorrow.

 

Four global trends that shape the EU’s future

The IEA identified these drivers as posing the most significant challenges to  future stability and growth in the region:

  • The era of cheap oil is over: Prices are not likely to remain below $100 a barrel and could rise as high as $200 if demand is not dramatically reduced. For a region that imports nearly XX% of its oil consumption this is a serious threat.
  • Renewable energies, which are not yet mature solutions require continuation of subsidies regimes. If these are cut back it will lead to an increase in the use of coal for power generation.
  • The threat of coal: China has put a substantial brake on coal consumption because of considerable social and political problems arising from the lack of clean air and excessive pollution. This estimated 14 million tonne reduction in coal consumption is far greater than the impact of unconventional gas in the US in reducing emissions. China is moving and moving fast towards addressing its greenhouse gas impacts.
  • Regional energy prices are diverging: The mass exploitation of unconventional gas in the US may give it short-term competitive advantage as energy feedstock prices will remain low. However, by 2035 the EU will be significantly dependent on natural gas imports whilst China and Japan will dramatically reduce their exposure to international gas prices (Figure 1 below). Birol stated the EU is likely to keep on using imported gas which is twice more expensive than the US and that this structural problem would dominate for the next two decades.

Figure 1: Energy price differentials to 2035

IEA gas price differentials (29 April)

The message is clear. The EU needs to invest heavily and quickly in diversifying energy sources and ensuring that they are low-carbon. Renewable energies combined with aggressive energy reduction measures will continue to keep the EU competitive today and tomorrow. Figure 2 highlights the impact that RES can make by 2035. This is however, dependent on strong and continued subsidy support for these solutions. These are the same subsidies that the EU is currently in the process of cutting on the grounds that they undermine investment in fossil fuel solutions such as  shale gas and conventional coal.

 

Figure 2: RES growth to 2035

IIEA RES (29 April)

Problems with current solutions proposed

The problem is that in setting inadequate climate targets and above all in controversially reversing its renewable energy framework as well as deliberately undermining the potential for energy savings, the EU is on course for increasing its risk towards high-cost and geopolitically unstable energy sources. Secret plans to increase LNG terminal capacity and imports from the US is not the answer though it seems that this might be the course of action taken. The only thing that can reset this confused conclusion is an aggressive bottom up push for energy savings and increased investment in renewables from voters and consumers working with local and regional government. Agreement of a new international treaty to address climate change, about which Birol is ‘not pessimistic’ at least keeps the door open for the EU to final set itself on the right course. The IEA estimates that an additional $44 trillion is needed to decarbonise the energy sector. This is peanuts considering that the estimated returns in fuel cost savings amount to $115 trillion, nearly three times as much. However, this $44 trillion is an increase of 22% on the cost two years ago. After all time is money. The financial penalty for delay is simple to see. On the bright side there is still time. The problem is that we don’t have too much to waste.

Reference documents

Fatih Birol presentation (29 April 2014, Brussels)