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SPEECH/10/450

Janez Potočnik

European Commissioner for Environment

"Europe: Looking ahead on climate change"

GREEN ALLIANCE CONFERENCE

London, 15 September 2010

Ladies and Gentlemen

First I must say thanks to the Green Alliance for inviting me over to speak.

I believe there are lessons we can learn from climate change. I want to talk about two in particular: Inter-connectedness; and time.

For over a century we ran our economy as though it had no link to the natural world and its resources were infinite. The global changes we now witness are showing that assumption to be false. We can see how our economic activity affects the planet. Many of us also are much clearer about how much our economy depends on that which we took for granted for so long.

Let me give you a very current example. If the recent floods in Pakistan happen every 20 years and cause the same amount of damage, Pakistan will never be able to go beyond its current level of income. This is a chilling illustration of why one should not pretend that Nature and the economy are separate.

This year's current greenhouse gas emissions will be contributing to climate change in 2050 and beyond. There are significant lags before we see the effects of changes made now.

This is often the case with natural systems and economic systems. It is a particular problem, because we tend not to plan well for the future, and lags prevent us from reaching our goals unless we act early. We have path-dependency. For future success in almost any area, we have to incorporate future effects into our current decision policy making.

So, two lessons. The need for inter-connectedness and the need for bringing the future into our current decision making. These are my themes for today.

In the last Commission mandate, I was the Commissioner for Research. Much of my role then was about stimulating the activity that delivers on our future goals. And it was clear to me that long term sustainability should be our key goal for the future and this is where we directed our efforts. In designing polices that help breakthrough research finding new solutions, helping us to better understand the problems and in reinforcing innovative pathways for solving them. I knew this was important, but also knew that it was not sufficient.

When I look at the issues now facing our economy and environment wearing my 'new hat', I think the same. And I continue asking myself – and my colleagues - what is needed to stimulate the changes that will truly and fully deliver on our future goals.

I believe that the answer depends on how the future is going to look. We can be sure that it will not be the same as today. In the 20th Century we witnessed a 4 fold growth in global population and a 40 fold increase in economic output. We increased our fossil fuel use by 16 times, our fishing catches by 35, and our water use by 9. It has been called the great acceleration…you can see why. And we continue on the same trend, but on a very much greater scale. The world's population is expected to exceed 9 billion by 2050, and by 2030, there will be 1.2 billion with ‘middle class’ consumption levels in the now-developing world.

In many ways, this has been a triumph for generations of humans that have so successfully mastered many of the problems we were not capable of in the past. Yet the world is the same size. Most of its resources are finite. Some of those resources are already over-used. 80% of global fish stocks are now overfished.

Despite technological improvements, the future will be resource constrained. I include biodiversity, land and atmosphere in that definition of resource.

This is good news in probably only one respect. That we now recognise that both our economic and environmental success depend on us making a rapid transition to a resource-efficient, low-carbon economy.

This was recognized – up to a point - when Europe's economic strategy – the Europe 2020 Strategy – was agreed by the Heads of States of the EU earlier this year. This strategy will be an practical driver of policies that will help strengthen the ability of the EU’s member states to address the many challenges faced in today’s world, both individually and collectively through the EU.

Importantly, the new Europe 2020 strategy includes explicit goals for fighting climate change and the promotion of Resource Efficiency, both absent from its predecessor Lisbon Strategy of 2000.

I admit that despite these improvements, we are still at the beginning of the road and how we go about this in the future will be a true test of our individual and collective desire to deliver on lasting increases in growth, higher employment and higher quality of life. To achieve that Europe, will have to decouple economic growth from consumption of resources. In layman's terms, we will use declining amounts of natural resources to deliver ever greater quality of life.

This change comes out of recognition of the interconnections between our economy and our environment. It has profound implications for policy. Our policy response must also recognise that there are corresponding interconnections between our policies for the economy and the environment. In that I include, among others; energy, climate, transport, employment, innovation and taxation policy. And agriculture and fisheries; both closely linked to environmental issues.

Respecting the interconnections means that we must have much better alignment of our policies in these areas, if we are to deliver on our goals.

For example, we cannot continue to forget that our choice of taxation affects prices and so the direction of innovation and growth. If we have higher taxes on labour than on resource and energy use, resources are relatively cheaper. In that case our tax system ends up promoting greater resource use in the economy, rather than greater employment.

I believe in markets. So much so that I doubt that our policy for a resource-efficient, low-carbon economy will deliver unless the markets are working in the same direction.

I also believe that markets are not good at planning for the long-term. The financial crisis was a clear pointer to the short-termism that can exist in market behaviour. Market activity also tends to be trapped in path-dependency, based on existing infrastructure, business models and technology paths.

This forces us towards the conclusion that we need to harness the power of the markets if we are to bring about the rapid transition to resource-efficiency we now need. In particular, we must:

  • Adjust the relative prices of resource and labour to reflect the true value of our resources. For example, in reforming subsidies that still promote the use of fossil fuel energy.

  • Promote investment to provide the infrastructure needed for a more efficient economy, to support new business models, for example, in transport and energy supply – and so avoid the current lock-in to existing patterns of activity. The need for networks of recharging points for electric cars is a clear example.

  • Create larger, more profitable markets for greener products and technologies, so that private investors can see the potential rewards. Here, we can use public procurement and more effective policy to work with consumer behaviour.

I am sorry not to have been able to join you earlier today to discuss the European Climate Foundation's excellent Roadmap for decarbonisation. I fully support such reports which challenge the assumptions that often block progress.

That Roadmap is clear that reducing energy demand is an essential part of the plan, as is reducing emissions from transport.

I entirely agree. We can not reach our goals for decarbonisation of our economies without energy efficiency across the economy. The International Energy Agency pathways point to energy efficiency being the biggest single contributor to carbon reductions – accounting for more than 50% of GHG reductions1

And I come back to inter-connectedness. The energy system is not separate from the economy, or the environment. Cost-effective reduction of energy demand requires looking at the whole economy and picking all the best policies to use less energy.

One reason why this is necessary is the economy wide rebound effect. For example - increasing energy efficiency allows more to be produced for a given amount of energy – so it makes energy more useful. This increases the attractiveness of using energy and so offsets some of the technological energy savings. The extent to which this negates energy efficiency is a matter of debate. For the economy as a whole it is estimated to be between 20% and 80% of the saving, depending on the source of the energy. I note that we have had great increases in energy efficiency over the last 60 years – and yet we are not using any less energy.

Secondly, we have to look at the drivers of energy use. It turns out that one of the most effective ways to reduce energy demand is to reduce material demand, because so much energy used in production and distribution of materials and the products made from them. This applies to metals, plastics and to all other products with embedded energy – including water, which is both processed and pumped.

Evidence from Germany and Finland indicates that manufacturing businesses can cost-effectively reduce their costs from resource consumption by between 6 and 20% through process changes. So you can see the great scope for resource reduction.

In another area, we estimate that proper implementation of current EU waste policy would deliver 30% of our current 20% Greenhouse Gas target – much of that from energy saved by more recycling of metals.

There is a third area. If we are to be cost-effective, we need a reduction in transport intensity of our economies to help us decarbonise our transport sector.

We can have a reduction in transport intensity when we use less material in our manufacturing and construction, and so move less around Europe.

This is what it means to have a decoupled economy – an economy where we have increased growth in the economy, quality of life and profits – with less material consumption. I believe this to be the "green" economy that we sometimes use in political jargon.

Creating such an economy will mean that we have to overturn the assumption that economic growth requires more consumption of resources – or more kilometres driven. Our economy grows when it delivers more value, not more material. Material use, energy use, transport: these are costs to the economy, to be made efficient, not to be seen as signs of good health. Our private sector has understood this for a long time. Now let us apply that business model to our economies, and shape them to cut the costs of these inputs, whilst delivering more output.

I have mentioned the inter-connection between the economy and the environment. It is wider than we sometimes think. We already know that air pollution damages the health of workers, with costs many hundreds of billions of euros in lost European productivity each year.

And we recently have come to know more about the value of biodiversity. Eco-system services are an essential input into our economy. They provide clean water, fish, genetic resources, protection from natural hazards, erosion control, fertile soils and recreation. One example: New York, Tokyo, Melbourne and Rio all rely on protected natural areas to provide their drinking water, as do one third of the hundred biggest cities in the world.

In soil, we have one of the largest sinks for greenhouse gases under our control and under our feet. Europe's soils contain 75 billion tonnes of carbon. Yet we often neglect that. As a result, there is evidence that agricultural practices have led to a decline of organic carbon in soil of 0.6% - or 13 million tonnes – each year in the UK in recent decades. It’s a similar story in other EU countries.

We need to make sure our different policy areas all pull in the same direction. To point the way, the Commission will produce a Roadmap to a Resource Efficient, Low-Carbon Economy by the middle of next year. This will set out the short-term and long-term policy steps to achieve our objectives, taking forward the direction given in the Europe 2020 Strategy.

It will focus on the policy needed to drive much greater investment in innovation and work on the connections between areas of policy.

The UK has a very significant role in this area. I am very glad that the coalition government is choosing to engage actively in Europe. There is much that the EU can not achieve without the UK's driving force, just as there is much the UK can not achieve without EU action. This is a state of affairs that many a eurosceptic would feel uncomfortable about, but it is the truth.

I have mentioned the need for large, attractive markets for innovations. These are needed to stimulate sufficient investment in innovation. We can create these thanks to the EU single market and the EU energy and environment policy.

Secondly, on investment in infrastructure, the EU again has a key role. The cohesion funds have a particularly important role, as does the European Investment Bank. The shape of the future EU budget is currently under discussion. Europe needs a EU budget that funds investments for resource efficiency. It is equally important that future payments for rural development and infrastructure do not take us further away from that efficiency. The UK has a very important role in pushing for the required changes in priority. It is an excellent opportunity.

Thirdly, the matter of relative prices of resources, energy and labour is mainly a matter for the UK government. It is clearly for the UK to look at the incidence of its fiscal policy and to work out how to find new sources of revenue to reduce its budget deficit.

We look for the UK to demonstrate more leadership here. Any European country which is running excessive public budget deficits and cutting public services can not afford inefficient subsidies and tax distortions. This is again common sense. Our Europe 2020 Strategy is understandably clear about this.

Yet there are many subsidies in the world that are inefficient. Almost everyone agrees that energy efficiency is good for the economy and good for the environment. Yet the IEA estimates there are energy subsidies, worldwide of 550 billion US dollars a year.

This is why the G-20 leaders agreed in Pittsburgh last year to remove inefficient subsidies.

Subsidies and tax breaks are inefficient where their policy goals could be achieved in less-costly ways. Or where they contradict other policies.

Where there is a contradiction between policies, it is rather like paying one man to knock down your house whilst paying another to build it. Except with inefficient subsidies, you know that you are taking the money away from the taxpayer to pay each workman.

Like many countries, Germany has recently pushed through an austerity budget that makes some of these choices. I noticed that it has decided to raise 1.5 billion Euros a year extra by reducing the exemptions from manufacturing and farmers for the eco-tax on energy. It has decided to learn from the UK and impose a tax on air passengers that is estimated to help raise 1 billion Euros a year.

These are efficient ways to meet our environmental goals, stimulate innovation and avoid taxes on things that we do want more of. It does seem odd to me to see countries subsidising more carbon emissions from aviation whilst spending money in other areas to reduce carbon emissions and running budget deficits.

Reforming inefficient subsidies is difficult. Changing taxation is difficult. Yet these are difficult times, with great challenges. We know we need a different shape to growth. We must accept that we need a different shape to our policies. Every country can and needs to do something more. I hear that your Transport Select Committee calculated that removing the VAT exemption for aviation in the UK would raise 2.3 billion pounds a year.

What matters to me is not revenue. What matters to me is that we will not succeed in our goals of moving to a successful resource-efficient, low-carbon economy unless the prices in our economy match our policy goals.

I have spoken about inter-connectedness. All across Europe, we must connect our policy areas to achieve the transition we recognise we need. We can no longer ignore the impacts policy choices in one area have on another. Nor can we forget the future, when thinking of policy today.

As a European I would not welcome a system of government that maintained this kind of inefficiency. As a politician, you can be sure that I will do all that I can to bring an end to it. I know many of you are with me in this effort to bring change and hope all of us will leave this conference with renewed enthusiasm to achieve it.

1 :

(Source: IEA Technology Perspectives 2010).


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