EU and the Future of the Energy Efficiency

By: Marian Mraz, Senior Economist at CASE

An important vote is imminent in the European Parliament on 28 November, a vote whose result will largely determine the Parliament’s position in negotiating upcoming amendments of the Energy Efficiency Directive (EED). The European Commission (EC) proposed a revised objective of a 30% binding European Union (EU) energy efficiency target, aiming to align EU energy legislation with its 2030 energy and climate policy goals. The ambition of the European Commission, however, falls far short of the European Parliament ‘s expectations.

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Source: Pixabay

For the European Commission, energy efficiency became one of the five pillars of the 2015 Energy Union strategy with “energy efficiency first” as its key element (simply put, higher energy efficiency means producing the same output using less energy). The framework established by the Energy Efficiency Directive requires Member States to set indicative national energy efficiency targets, ensuring that the EU reaches its overall headline target of saving 20% of primary and final energy consumption by 2020 compared to baseline projections. Moreover, it includes a set of binding measures such as a number of product and building performance standards.

Growing concerns regarding the scale of local air pollution or projected effects of climate change have played an important roles behind the rising interest in energy efficiency from policymakers; however, recently, pursuing energy efficiency has become a priority not only for governments, but also for firms and households. Households can reach substantial savings focusing on their building insulation, lighting and heating practices, or use of electric appliances. In energy-intensive industries, such as iron, steel or cement production, new technologies and better manufacturing processes can decrease the use of energy. Reduced energy use can in turn contribute to better air quality with reduced health impacts, as well as more sustainable use of natural resources. Incentives for improvements in energy efficiency are being translated into the rising demand for new technologies spurring innovation and creating new jobs including for the highly qualified labor force. A study conducted by Cambridge Econometrics confirmed that, according to their estimates, in 2010 alone, the supply of energy-efficient goods and services generated around 900,000 jobs across the EU28.

On the other hand, the environmental implications of rising energy efficiency have a degree of uncertainty depending on actual consumer behavior. Efficiency savings might eventually lead to an increase in energy consumed, causing the so-called ‘rebound effect’. For example, insulating a house can make it for cheaper for its residents to maintain a higher temperature. This would increase the residential comfort but reduce energy savings and reductions of CO2 emissions. Research based on EU data suggested that eleven EU Member States have experienced rebound effects of over 50%, with six additional Member States seeing effects of over 100%.

Increasing energy efficiency is also linked with high up-front costs and several other market barriers, a reality that is used as justification for regulatory intervention to transfer the needed finances. However, despite the binding legal instruments on EU firms, it appears that even they are insufficient to meet the ambitious 2020 energy efficiency target. The implementation of the EED has garnered criticism, with the European Parliament noting that current energy efficiency legislation obliges the EU Member States to save an equivalent of 1.5% of energy sold to consumers every year. But due to several gaps in the legislation, the savings achieved across the EU could be reduced to just 0.75%.

The views on the way forward differ. A number of proposals have been shared for circulation prior to the upcoming vote of the members of the industry committee (ITRE) of the European Parliament. They all differ in terms of overall ambition (27%, 30% or 40% reduction of the demand for energy) and degree of binding force (while several EU Member States require indicative targets, the European Commission and the Parliament have pushed for binding reduction commitments at the national level). Remaining differences in the proposals on the table include the way several loopholes in the original Directive should be addressed. The vote of the members of industry committee (ITRE) of the European Parliament will be crucial for further dialogue on the new shape of the framework for energy efficiency policy.

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