Shortly before Easter, the European Commission presented a roadmap for its climate and energy policies up to 2030. It did so for the right reasons, stating that energy investors “need certainty and reduced regulatory risk”. I agree, wholeheartedly. The energy industry needs a transparent, rule-based and non-discriminatory policy framework, where investment decisions are taken by market players, not bureaucracies.
Unfortunately, this is not what we saw in the infrastructure rules recently adopted by the European Union. They imply that the Commission gets to pick ‘projects of common interest' and make them subject to fast-track procedures. All other projects will continue to face red tape. Such an approach reduces EU aspirations for smart regulation to absurdity; more importantly, it also sends the wrong message to investors.
Forecasts suggest that domestic gas production in Europe will fall sharply. The EU's Joint Research Centre estimates that in the best-case scenario, shale gas can partially compensate for this reduction. It is external suppliers and large importers who have the most incentive to help close this import gap. Often, they are also the only players that can afford to take large shares in such investments.
But Europe does not welcome investors, to put it mildly. Take the example of the OPAL pipeline, the extension of Nord Stream that brings Russian gas to Europe through the Baltic Sea. For years, it has stood half-empty because the Commission decided that 50% of the pipeline's capacity must be auctioned to third parties. The EU is sticking to this decision, even though no one has expressed an interest in acquiring this capacity. Given that Nord Stream was an EU priority project, this exemplifies how far away Europe is from reducing regulatory risks. This is a real issue, and it needs to be addressed before 2030. Gazprom nevertheless remains committed to helping meet Europe's needs. Its South Stream pipeline project – which is to deliver large quantities of gas through the Black Sea and on to Italy – proves this point. South Stream will be a privately financed investment that will comply with all relevant EU laws and regulations, including on the environment and energy. We are not asking for special treatment. But we do urge the Commission to apply existing rules in a way that allows market players to do their job: deliver energy, and not at half-speed.
The current re-emergence of coal as fuel of choice in Germany and the rest of Europe is a flipside of the US shale gas boom. American excess coal now gets dumped on the old continent. Yet, the coal boom is also a symptom of failing EU climate change policies. Large sums of public money are used to prop up some expensive technologies, while the very same policies set perverse incentives to burn heavily polluting coal.
In mid-April, the European Parliament rejected the proposal of the European Commission to delay the floating of new emission permits in a move to restore an “acceptable” carbon price. This episode not only sent carbon prices crashing, but also provoked gloomy commentaries about the future survival of the ETS. In my view, it revealed a deeper paradox of the ETS debate:
The ETS is a system with a clear division of labour: politics gets to set emission limits (cap), while markets get to define the price of permits (trade). Any political intervention in the carbon price formation – even if intended “to restore trust in the system” – must ultimately achieve the opposite result. It would be a red flag for investors that carbon prices are not a reliable signal, because they can and will be politically manipulated. If Europe is serious about the twin objective of building a competitive, low-carbon economy, it must finally put cost efficiency at the heart of its energy and climate-change policies.
Firstly, the EU should reduce the numbers of policy instruments. The complex interactions between quotas, subsidies, and market mechanisms lead to unexpected and unintended consequences. This is the opposite of clear investment signals, which everyone agrees we need. The European coal boom is a case in point.
Secondly, the EU should focus its efforts on putting the emissions trading scheme back on its feet, for a period way beyond 2020. This will not be easy. Instead of debating political ad hoc interventions into the carbon pricing mechanism, Europe should establish a modest carbon floor price.These measures would decrease pressure on already strained state coffers and leave the choice of energy technologies where it belongs: to the market.
Sergei Kuprianov is the Gazprom Spokesman in Moscow, Russia