OPINION: Christian Kjaer in Brussels

The EU’s leaders have given themselves about half a year to agree on a climate and energy policy framework for 2030.

They should use some of that time to give the public an answer to a fundamental question: do you want an internal market for energy, or are you happy continuing to pretend that you want it, leaving it to the next government to blame the EU for failing to achieve it?

Meeting in Brussels in March to discuss Ukraine, climate, energy and competitiveness policies, the continent’s heads of state or government again confirmed that completing the internal energy market by 2014 remains a priority. But although some progress is being made, a well-functioning European market for energy remains an illusion.

The products operating in the internal energy market are subsidised beyond imagination, directly or indirectly; downstream supplies are characterised by cartels, environmental free-riders, political influence and more subsidies; the nature of the infrastructure that carries the products is a natural monopoly, increasingly owned by private companies. Still, everybody insists on calling it a market. It is a market of make-believe, politically designed by make-believers.

Europe has another market that will play an increasingly important role: the Emissions Trading Scheme (ETS). Member states, as well as the European Commission (EC), are confused about whether they want the system to reduce carbon at the lowest cost, or drive investments in clean energy — or do both.

Because they have not made that basic choice, they are forced to intervene in what was supposed to be a market. The system is so flawed by incoherent compromises and bad initial design that intervention is indeed needed if the ETS is ever to gain economic relevance beyond accountants, academics and consultants.

The ETS has its origins in the late 1990s with a discussion about whether to allocate free allowances or use auctions. We went for free allocation, thereby applying a “polluter benefits” principle in which carbon emitters earned large windfall profits. This design flaw has now largely been addressed.

Europe also had a discussion about whether to dictate prices (a carbon tax) or dictate quantities (a cap-and-trade system) to regulate emissions. We decided on dictating quantities.  When we got the quantity wrong, we considered dictating the price too (floor price). And in January this year, the EC proposed legislation for a “stability reserve” in which we dictate quantities and control prices by managing the supply of allowances.

While the commission deserves credit for proposing a CO2 target that excludes the use of external credits, after 2020 it starts looking suspiciously like the Common Agricultural Policy or Opec’s supply interventions in the oil market to control prices. I wonder how much market there will be left on the other side of all the political interventions in the ETS seven years from now.

There will still be two billion excess emissions allowances in 2030, creating a need for intervention unless more effective structural measures are applied to the ETS.

Meanwhile, the removal of renewables subsidies is high on the political agenda, while little attention is paid to ending fossil-fuel and nuclear subsidies.

National leaders are fond of praising the virtues of the internal energy market and the importance of its rapid completion at their meetings in Brussels. Afterwards, they go home and undermine the very same market with national energy policies that are incompatible with the internal market and that reach far beyond 2020 — in some cases even beyond 2050.

We are coming from an EU energy policy approach in which subsidies were provided to develop new renewables technologies, justified by the market’s inability to factor in environmental externalities. Some of those supported technologies — particularly onshore wind and PV — are now undermining the profitability of fossil-fuel operators. Policymakers increasingly respond by seeking to compensate the technologies that are being outcompeted by those that were initially compensated. It is a subsidy spiral without end.

Europe must decide whether it wants a European energy market or continue allowing the gradual renationalisation of energy policy. If it decides to have an EU policy, it must start making the necessary decisions. For the power sector, the starting point is to reduce CO2 emissions by 99% in 2050, as the heads of government have already implicitly agreed.

The energy and climate policy proposals that are currently on the negotiating table seem far from being able to deliver on that commitment.

Christian Kjær is a former chief executive of the European Wind Energy Association and founder of Faraday Consult. He is also a member of the Recharge board.