December 23, 2011
Feed-in Tariffs Levy Larger Price Incentive for Clean Energy than European Emissions Trading Scheme
Carbon-pricing advocates regularly point to European nations for examples of appropriate and effective clean energy deployment policies. Surging growth rates for solar and wind, coupled with regional declines in carbon emissions, are cited as clear vindications of Europe's Emissions Trading Scheme (ETS), the carbon-trading program that the European Union instituted in 2005.
Looking closer at the data, however, it's clear that Europe owes less of its emissions reduction progress to the ETS than is commonly advertised. What's more, the impressive growth rates clean energy technologies are experiencing in several European markets are the more the results of generous deployment subsidies than the carbon price signals established by the ETS. European feed-in tariffs establish price signals - effectively rewards for avoided carbon emissions - that are many times higher than the explicit carbon price levied by the ETS.
EU Emissions Declines Owe More to Historic Circumstance than ETS
EU-15 carbon emissions have fluctuated over the last two decades, with aggregate 2010 emissions 6.5 percent lower than emissions in 1990, the base year for Kyoto protocol emissions reductions goals. However, two nations, Germany and the United Kingdom, account for all of these emissions reductions. If Germany and the United Kingdom are removed from the calculations, then the emissions from the remaining 13 founding EU member nations actually saw a 1.9 percent increase in 2010 over the 1990 levels.
Furthermore, the majority of emissions declines in Germany and the UK were achieved prior to either the signing of the Kyoto Protocol or the implementation of the EU ETS. Of total absolute emissions reductions made over 1990-2010 in Germany, half were achieved before 1997, when the Kyoto Protocol was signed, and 80 percent were achieved before the 2005 institution of the ETS. The story is similar in the UK: half of total 1990-2010 emissions reductions were achieved before 1997; emissions then rose through 2005, and then decreased again in the latter half of last decade.
In short, deindustrialization following the end of the Cold War and sectoral changes in the British and German economies have driven EU-15 emissions levels down even as other nations have made insignificant or often backwards progress.
Feed-in Tariffs Create Stronger Incentive for Clean Tech than ETS
Meanwhile, it's clear that the EU ETS is not the principal driver of the rapid expansion of European clean tech segments. On the contrary, robust and generous state deployment subsidies given to solar, wind, and other low-carbon energy sources, in the form of feed-in tariffs, reliably impose a higher implicit carbon price than that levied directly by the ETS.
The per-metric tonne price of carbon dioxide emissions during Phase II of the ETS, which lasted from 2008 to 2012, fluctuated from around €8/tonne to €32/tonne ($10.64/tonne-$42.56/tonne). The average 2010 price of carbon dioxide in the ETS was €13.99/tonne ($18.62/tonne).
In comparison, German feed-in tariffs range from $114/megawatt-hour (MWh) for landfill gas to $333/MWh for geothermal (see data below). These preferences for zero-carbon power act as implicit penalties against carbon fuels like natural gas and coal. The average spot price for electricity in Germany in 2010 was €44/MWh or $58.52/MWh. If we assume average CO2 emissions from coal are 0.8 tonnes/MWh, then a $1/MWh feed-in tariff is approximately equivalent to a $1.25/tonne price on carbon dioxide emissions . The implicit carbon price levied by German feed-in tariffs, therefore, ranges from $69/tonne to $342/tonne, between three- and eighteen-times as high as the average ETS carbon price in 2010.
Average carbon-dioxide emissions from natural gas are about 0.39 tonnes/MWh, or about half the marginal emissions from coal, so a $1/MWh feed-in tariff is approximately equivalent to a $2.56/tonne price on carbon emissions. As such, the implicit carbon price levied by German feed-in tariffs when clean technologies are competing against natural gas generation ranges from $143/tonne to $702/tonne, or between ten- and forty-times as high as the explicit ETS price.
Offshore wind and solar generation benefit from some of the highest feed-in tariffs in the country, at $200/MWh and $325/MWh respectively. These translate into implicit carbon prices of $361/tonne and $683/tonne when competing against marginal natural gas generation.
As the data makes clear, European feed-in tariffs have been much bolder than the ETS. Not surprisingly, it is the nations with these generous subsidies, such as Germany, that have seen the most robust growth in clean energy, while nations like Romania and Finland - which lack such policies, but are members of the ETS system - have seen shares of electricity from renewables stagnant or even declining. Neither carbon prices nor blunt feed-in tariff subsidies are perfect deployment policies, but it is clear that direct government investment in technology provides a more powerful and effective market signal for clean energy investment than the more modest and fluctuating carbon prices established by an Emissions Trading Scheme or cap-and-trade system.