Europe is falling short with spending plans to finance the transition to a low-carbon economy

They’re all at it. Governments across the world are responding to economic and financial problems by throwing money at them in the form of stimulus packages – short-term spending boosts designed to get economic activity motoring again.

This money is meant to represent a “green new deal” that will pave the way to a low-carbon economy. Priorities should be energy efficiency, less carbon-intensive technologies, and research and development to produce better and greener products. The European commission, for example, will subsidise carbon capture and storage (CCS), and €180m of European money will be dedicated to piloting this experimental technology at the controversial Kingsnorth coal-fired power station and three other UK sites.

Governments have also helped carmakers, after sales declined steeply in 2008. The British government has directed grants for research into more fuel-efficient and electric vehicles to Jaguar Land Rover and Nissan, while car-scrapping schemes have been put in place in at least 11 EU countries, including the biggest economies: Britain, France, Germany, Italy and Spain.

Achim Steiner, executive director of the United Nations Environment Programme, recently emphasised the need for a green new deal in the run-up to a major chemicals conference in Helsinki. Because of the scale of the environmental problems that lay ahead, it would be a “tragic missed opportunity” if stimulus spending was not directed towards investments in energy efficiency, renewable power, cleaner transport, improved water resources, biodiversity and sustainable agriculture, Steiner said. He added that the right investments and regulatory changes could create “millions of [green] jobs within 12 to 16 months”.

But is green stimulus spending going in the right direction? Evidence so far shows that governments have tended to favour short-term tax breaks or subsidies for struggling industries, and traditional infrastructure projects such as roads and bridges, rather than longer-term programmes for energy efficiency or new, cleaner power sources.

The first thorough assessment of the green stimulus was carried out by HSBC Global Research in a report published in February this year. It found that stimulus spending was approaching $3tn worldwide, but only 16% of this could be considered green.

The greenest spender, according to HSBC, is South Korea, which is dedicating 81% of its $38.1bn boost to river and forest restoration, energy efficiency (for example retrofitting of public buildings to cut down on wasted power), and low-carbon rail networks and other public transport infrastructure.

Other stimulus packages are less green-tinted. HSBC assessed China as dedicating about 38% of its $586bn fund to green causes, in particular to renewables and improving the power grid. But in the United States only about 12% of the huge $1tn package can be said to be green, with a focus on renewables and energy efficiency of buildings. The European Union is managing slightly better, with its “green fund” equalling 17% of its $325.5bn stimulus, according to the HSBC research.

Coordinated stimulus

The EU’s economic crisis response is divided into two parts: national spending by EU member states, and EU-wide spending by the European commission. The commission wanted EU stimulus spending to be coordinated, to avoid spending in one country that might harm another. The spending plans would also be boosted by €15bn in extra lending over two years from the European Investment Bank.

Commission president José Manuel Barroso said in May to the World Business Summit on Climate Change in Copenhagen that stimulus spends should be in line with the EU’s goal of building a low-carbon society. “We will not miss this chance,” Barroso said.

But his words do not seem to be matched by deeds. The commission published an assessment of member states’ stimulus spending ahead of a June summit of EU leaders in Brussels. According to this “only a few measures” in member states deal with environmental infrastructure, such as water supply networks or energy grids, and “more is needed” to promote energy efficiency and to encourage the take-up of cleaner technologies.

One problem, the European commission notes, is that green research money in the short term has a “rather small” impact, whereas EU countries are looking for a quick fix. The commission is particularly concerned about the EU’s smaller economies, which for green research and development “have announced no measures – some of them even scaling back their R&D budgets in the face of balance-of-payment problems”.

HSBC’s research findings back up the commission’s assessment. According to HSBC, 21% of the French stimulus is green, while in Germany it is 13%, in the UK 7% and in Italy a measly 1.3%, where the main green spend will be on rail infrastructure. The commission’s own package – centralised EU spending – is a more respectable 60% green. It is the combination of these figures that led HSBC to rate EU stimulus spending at 17% green overall.

Unstimulating

Reinhilde Veugelers, a fellow specialising in environmental innovation at Brussels thinktank Bruegel, says EU member states’ stimulus spending was uncoordinated and not notably supportive of green goals. “Analysis doesn’t seem to suggest there is any real strategic vision,” she says, suggesting that the commission has failed to coordinate a comprehensive round of green spending on the continent.

The commission’s centralised stimulus is all about energy. It will direct €1.6bn to CCS and large-scale wind power projects, with a further €2.4bn spent on making the gas and electricity supply infrastructure more efficient.

The commission has also rejigged its research and development budget, channelling cash to three initiatives: energy-efficient buildings, “factories of the future” and green cars. In each case, EU grants totalling €500-600m will be handed out if member states and the private sector commit to similar levels of investment, once calls for proposals are published in July. The green cars initiative is also being supported by €4bn in extra loans from the European Investment Bank (see below).

The European commission has its critics. Claude Turmes, a Green member of the European parliament from Luxembourg, speaking when the commission’s stimulus was finalised, dismissed it as “turgid, old-fashioned state aid” providing funds to large energy companies. The benefits of the spending could have been spread much wider and more effectively by investing in renovation of public buildings or upgrading of public transport, Turmes said.

However, Folker Franz from industry federation BusinessEurope says it was unrealistic to expect the commission to manage a host of smaller projects from Brussels, although “stimulating energy efficiency should always be the priority”. As the commission’s stimulus is a one-off, “it was not the worst idea to use this money for bigger projects”, Franz adds.

Carbon capture controversy

One of the most controversial uses of the commission’s money is carbon capture and storage. Paul de Clerck of Friends of the Earth Europe says this is an “unproven technology” and that EU funds to test it would be given to companies that “continue to make billions of euros of profits each year and invest their own capital in dirty projects like oil sands that produce three times more emissions than conventional oil”.

The CCS subsidy of just over €1bn will be shared among 13 projects, including the four in the UK – Hatfield, Kingsnorth, Longannet and Tilbury (see box). These sites are run by different companies – Powerfuel, E.On, Scottish Power and RWE – that have prospered in the recession. E.On and RWE, for example, reported profits of €2.5bn and €1.7bn respectively for the first quarter of 2009. Nevertheless, as well as the upfront CCS subsidy for the UK of €180m, these companies also stand to benefit from a carbon allowance fund granting them up to 300m credits that can be sold on the carbon market for safely sequestered CO₂.

Chris Boothby of power industry federation Eurelectric says CCS involves “a very significant financial risk”, adding it is “unlikely that any one company would bear the risks of the pre-competitive work that needs to be done” to get sequestration up and running. Commission support was part of the “normal process of supporting research and development”, Boothby adds.

In any case, green technology is ultimately a question for the market, Boothby says. Eurelectric president, and chief executive of Swedish energy firm Vattenfall, Lars Joseffson, wrote in a May article for trade journal The Energy Industry Times that Europe’s entire network of power plants and grids is due for replacement by 2030, and this will mean investment of “around €1.8tn” from energy firms. To drive this investment, “we believe that an international carbon price is the best way forward”, Boothby says.

Back to the market

This is a view reflected across industry. Franz from BusinessEurope says: “We need massive investment in all kinds of low-carbon technologies.”

In particular, upfront auctioning of carbon credits to firms participating in the EU’s emissions trading system will raise an estimated €20bn annually after 2012. “This money needs to be employed wisely,” Franz says. EU countries will organise the auctions and will keep the proceeds, with no legally binding obligation to spend them on economic greening. Ensuring environmental spending of the money “will be a constant battle”, Franz says. “There is maybe a case for industry lining up with NGOs to keep up the pressure.”

Peter Löscher, chief executive of Siemens, recently told the Financial Times that the move towards a low-carbon economy could lead to the reindustrialisation of Europe. The need for leaner, greener products, from cars and trains to industrial machinery, could mean “more and not less industrialisation as a result of the current economic crisis”, Löscher said.

Siemens is one of a number of big firms already claiming to be driving this. It expects annual sales of $35bn by 2011 from its “environmental portfolio”, which ranges from power plants and wind turbines to trams, trains and computing systems. GE, which provides similar products through its Ecomagination portfolio, has a target of $25bn “green” revenue in 2010.

So the stage is set for money to pour into all things green, especially in support of new technologies. Stimulus spends may be short-lived but other cash will come from carbon markets, grants for green research and development, and private investment. But experts remain unconvinced that this will be enough to address global warming, or for the EU to meet its climate targets of a 20% emissions cut by 2020 compared with 1990, and for renewables to meet 20% of the EU’s power needs, also by 2020.

The relatively limited part of the stimulus spending that is green is largely directed either to improving the efficiency of current production and consumption processes and models, or to experiments with technological “quick fixes” such as CCS. But experts are starting to question if even these approaches can have an impact in time to deal with the main environmental threats.

The specialist from Bruegel, Reinhilde Veugelers, says: “There should be much more of a paradigm shift but it is clear that there is not yet a consensus over what the paradigm shift could be. Policy needs to intervene. We need policies to buy us time.”

Green research

The European commission announced in March details of research funding for energy-efficient buildings, “factories of the future” and green cars. The first calls for project proposals are due to be published in July.

Energy-efficient buildings will deal with “radically reducing” the energy consumption of, and emissions from, buildings. The commission will provide research funding of €500m, to be matched by industry.

Factories of the future will provide €600m in research grants, to be matched from private sources. Its priorities will be more efficient, ICT-based manufacturing technology, and sustainable tools, methodologies and processes.

Green cars will provide €500m in research subsidies, plus an equal amount from EU countries and the private sector, and up to €4bn in additional loans from the European Investment Bank. This money will be in addition to existing similar EU initiatives. Green cars will prioritise more efficient propulsion systems and alternative fuels.

More information: http://ec.europa.eu/research/industrial_technologies/lists/list_114_en.html

Energising the EU’s energy supply

The European commission published on May 18 a call for proposals for financial support for 18 specific carbon sequestration and offshore wind energy projects, to be funded from the EU economic stimulus package.

The eligible CCS projects are:

• France: steel plant at Florange, budget €50m.
• Germany: coal-fired power plants at Huerth and Jaenschwalde, budget €180m.
• Italy: coal-fired power plant at Porto Tolle, budget €100m.
• The Netherlands: coal-fired power plants at Eemshaven and two in Rotterdam, budget €180m.
• Poland: coal-fired power plant at Belchatow, budget €180m.
• Spain: coal-fired power plant at Compostilla, budget €180m.
• UK: coal-fired power plants at Hatfield, Kingsnorth, Longannet and Tilbury, budget €180m.

The eligible offshore wind projects are: Kriegers Flak (Baltic Sea, EU budget €150m); the North Sea grid (€165m); Borkum West/Bard/Nordsee Ost/Global Tech (Germany, €200m); Aberdeen European offshore wind testing centre (€50m); and Thornton Bank (Belgium, €10m).

In addition €2.4bn will be spent on gas and electricity infrastructure including pipelines and interconnectors, particularly focusing in central and eastern Europe.

More information: http://ec.europa.eu/energy/grants/2009_07_15_en.htm