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Is energy efficiency policy being used to undermine the carbon market? It sounds like a foolish suggestion – surely energy efficiency can only be a good thing, and contribute to cutting carbon emissions?

Nevertheless, that is the implication of suggestions in a recent article by Reuters.

Europe’s Energy Efficiency Directive is one of the three key policies for energy and climate change, the other two being renewable energy targets and the Emissions Trading System (ETS).

The risks of poor coordination between these policies has become apparent with the Commission raising the prospect in its Roadmap (see [9th Mar blog](http://www.sandbag.org.uk/blog/2011/mar/9/EURoadmap/ “Blog on Roadmap”)), that the targets for renewables and energy savings do not align with the overall cap on emissions, set through the ETS, and could lead to an oversupply of allowances.

The result has been in some senses to set up a conflict between efficiency targets and a successful carbon price.

By including industry already covered by the ETS in the efficiency targets, the Commission has perhaps put the success of one policy(efficiency) on course to undermine that of another (ETS carbon price). This was the implication [reported this week](http://uk.reuters.com/article/2011/05/30/us-eu-energy-climate-idUKTRE74T23C20110530 “EU energy plan threatens carbon billions”):

“But an overlying mandate for energy efficiency will reduce demand for permits — by about 400 million tonnes in 2013-2020, one EU source said — leaving them swilling around in the market, and exerting downward pressure on prices.”One leaked study seen by Reuters foresees carbon prices falling to 14 euros per tonne, compared to a business-as-usual price of 25 euros. Another sees the price dropping to zero.”

It should be remembered that this would not effect the overall emissions cuts achieved within the capped sector, but it could imply that they had not been made as cost effectively. The whole purpose of emissions trading is to set the limit and allow the market to decide how they are reached. By mandating a big portion of cuts through energy efficiency, it could be argued that this principle is undermined.

The article suggests the possibility that this is a deliberate attempt by Energy Commissioner Oettinger to undermine the ETS, and keep the carbon price low in order to satisfy the demands of heavy industry. If this were the case it would amount to using energy efficiency policy to push costs from heavy industry onto other parts of the economy. Such a distortion of the carbon market would make all of us pay more for the same result and be a clear example of narrow interests trumping the wider good.

Yet mandated efficiency measures may be a helpful correction, rather than a distortion. There is a very strong argument that even if the ETS provides a backbone, it needs additional policies to help it work effectively – especially policies to overcome hurdles to energy efficiency savings.

The upshot is this: the energy saving directive may take a more ‘command and control’ approach, but this may be justified – there are great opportunities for energy savings that will not happen through the ETS/carbon price and need to be mandated. If well planned, energy efficiency regulation can support rather than undermine the carbon market.

And if these savings mean that fewer permits will be needed, then we can afford to create fewer permits. The cap on emissions needs to be tightened, perhaps through removing a volume of permits through a ‘set aside’.

Rather than undermine the effort for energy saving, lets hope that this gives greater political weight to the set aside. One reason to be hopeful is that Treasuries across Europe could be in favour: they aren’t keen on seeing revenues from ETS allowance auctions be slashed by a carbon price crash.

The ideal outcome is that the savings from energy efficiency prompt more ambition in our overall carbon reductions. To allow them to undermine the cap and trade scheme and carbon price would a high a price to pay.