The flaws in Dutch climate policy [Gas Transitions]

This issue of my Gas Transitions blog should be of interest, I hope, to anyone involved in climate and energy policy. I will take a close look this week at climate policy in my home country, the Netherlands, which I believe could well turn out to be a costly failure.

Why should the wisdom of Dutch climate policy be of concern to anyone besides Dutch taxpayers? At this moment all developed countries are entering a new phase in their climate policies. They are moving beyond broad reduction targets and temperature goals to the nitty-gritty of real climate measures and tough choices. The debate is not anymore about whether to reduce greenhouse gas emissions, or even by how much, but how.

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From this point on there are still many different roads into the future. The Dutch example is instructive because we are talking about a wealthy, urban, industrialised country – a self-proclaimed climate leader within the European Union. A country moreover that has decided to phase out the use of “unabated” natural gas for the sake of the climate. Yet its climate policies for cutting greenhouse gas emissions are full of flaws.

What prompted me to tackle the topic was the publication March 13 of two major reports by two prominent Dutch government agencies – PBL, the Netherlands Environment Assessment Agency and CPB, the Netherlands Bureau for Economic Policy Analysis. At the behest of the government, they have both analysed the effects of the draft national Climate Accord, which was signed December 21 last year and which may be regarded as the centrepiece of Dutch climate and energy policy.

The Climate Accord, the result of months of negotiations between labour unions, non-governmental organisations, business associations, local authorities and other civil society groups, which will serve as the basis for the Dutch National Energy and Climate Plan (NECP) that all EU member states have to submit to the European Commission at the end of this year, contains a large number of more or less concrete proposals to reduce greenhouse gas emissions.

PBL and CPB have analysed the effect these proposals are likely to have on emission reductions and at what likely cost. The PBL report and the CPB report are therefore key inputs in the political decision-making process, turning the Climate Accord into law.

What the two reports show – even though their authors don’t say so explicitly and even if the general media did not notice anything amiss – is that Dutch climate policies are full of contradictions, inefficiencies and question-marks that should serve as a warning to energy policy-makers and stakeholders everywhere.

Here are my own seven Troubling Takeaways from the PBL and CPB reports.

1. The cost of climate policies: anyone’s guess

 One would think that any society would care about the cost of climate policy, especially the frugal Dutch; yet the leading political parties and the media are studiously avoiding this question. This in turn gives (right-wing) opposition parties plenty of ammunition to scare the public about what the real costs might be.

The PBL report concludes that “national costs” – defined as net costs for “society as a whole, regardless of who has to pay for them” – will be between €1.6bn/yr and €1.9bn/yr by 2030. That reassuringly low figure was quoted widely in the press, but that is only the cost of the Climate Accord, on top of the costs that would have been incurred if there had been no Climate Accord: in other words, additional to a “reference scenario” (in Dutch “basispad”). That reference scenario, says PBL, is described in another PBL publication, called Nationale Energieverkenning 2017 (not available in English, unfortunately, but which can be translated as National Energy Exploration 2017). The problem is that this report does not mention any costs.

PBL did publish a report in April 2017, and an update in April 2018, about the “National costs of the climate and energy transition”. The first mentions costs of €3.5bn/yr to €5.5bn/yr, the second “over €3bn a year”, but again those are costs additional to the costs in the Nationale Energieverkenning 2017, which are not known.

Robert Koelemeijer, researcher at PBL and one of the authors of the new report, says in a telephone interview: “It has proved to be very difficult to distinguish between the costs of the energy system as such, and the additional costs as a result of past climate and energy policies. But it is a question we get more often and one that we do want to take a look at this year.”

Earlier this year, a group of critics – Theo Wolters, Stijn Santen, Hans Keuken, Evert van der Pol and Marcel Crok – published a report, “De kosten van het Energieakkoord” (“The costs of the Energy Accord”), which attempts to calculate the costs of the measures decided on in an earlier piece of climate legislation, called the Energy Accord, in 2013.

Wolters, one of the authors, tells me it is reasonable to assume that this Energy Accord, which was actually adopted by the government and is being implemented, represents the major part of the “reference scenario” that PBL refers to.

According to Wolters et al., the Energy Accord will cost Dutch society over €100bn, measured over a period of 35 years, to which the costs of the Climate Accord must now be added. Their report has been criticised by various experts. Koelemeijer says: “There are some aspects about it that we don’t agree with. We are planning to analyse it in more detail.”

On the other hand, €100bn, over 35 years, does not seem so incredible. Thus, for example, the Dutch General Accounting Office (“Algemene Rekenkamer”), again an official government institution, calculated in April 2015 that the costs of renewable energy subsidies alone could amount to some €80bn by 2030. (You can find the GAO report by following this link, click on the download, see page 15-16. Again, all in Dutch, I’m afraid.)

Renewable energy subsidies are of course only part of the total costs of climate policy – according to the critics roughly half of the total.

Note, incidentally, that the figure of €1.6bn-€1.9bn does not tell the whole story, since PBL has excluded the costs of measures in the Climate Accord that are “insufficiently concrete” at this point. PBL notes there are “uncertainties” in other measures, concerning their implementation. Koelemeijer, however, says this does not impact the final outcome materially.

2. The poor will pay

 Unlike the PBL report, which looks at “national costs”, the CPB report investigates the financial “burdens” climate policies will put on households and companies. The CPB estimates do refer to total costs of climate policies, i.e. not just the policies in the Climate Accord, but also existing policies. It estimates (p. 5) total financial burdens of €6.8bn/yr of which the Climate Accord contributes only €1.6bn.

However, this figure, notes CPB (p. 22) does not include the investments needed to bring down emission reductions from energy use in houses nor investments needed to reduce emissions from transport. This means that, for example, costs incurred to disconnect houses from the gas grid and install heat pumps, or to buy an electric car, are not included in the figures. Costs could also go down, however, if people adjust their behaviour, CPB notes.

More important perhaps is that CPB concludes that lower income groups (especially lower middle income groups) have to pay relatively more as a result of current climate policies than higher income groups. Welfare recipients and pensioners, says CPB, are hit hardest of all.

On average, households will see their income reduced by 1.3% as a result of all climate measures together, notes CPB, ranging from 0.8% for the highest income groups to 1.8% for the lowest income groups. To this should be added another 0.4% income loss on average as a result of climate policies in other EU countries and of companies charging their climate costs to consumers.

3. The built environment: minimal results

One of the most complex and controversial elements in Dutch climate policy is the goal to disconnect all houses and buildings from the gas grid by 2050. Currently 98% of all buildings are connected to the gas grid. The Climate Accord envisions that roughly half of the houses will be connected to a district heating network fed with industrial waste heat, geothermal energy or perhaps hydrogen, and the other half will opt for a combination of insulation and electric heat pumps to replace natural gas. A third option is hybrid heat pumps, that is to say, an electric heat pump combined with a gas-fired boiler that would be using biogas or possibly green hydrogen.

Of the more than 7mn buildings that will be affected, 1.5mn should be “off gas” by 2030, according to the Climate Accord. As noted above, CPB does not calculate the costs of this gigantic operation. PBL does this however and concludes (on p. 67) that with the measures in the Climate Accord some 250,000 to 1,070,000 buildings could be made “gas-free” (rather than 1.5mn). The net “national costs” of this operation would only be €75mn to €90mn, according to PB.

That’s a very low number, which PBL explains with the argument that “the costs of investment will be mostly compensated by savings on natural gas use.” In addition, Koelemeijer points out the number does not include the cost of building new district heating networks.

Theo Wolters, one of the authors of the critical report, notes that according to a 2018 study of the independent think tank EIB (“Economisch Instituut voor de Bouw” – Economic Institute for the Building Sector), the average cost of going off gas will be €32,638/house. This will save on average €623/yr in gas use. That adds up to much higher national costs.

Troubling me much more, the PBL study shows that the measures taken in the built environment do only very little to reduce CO2 emissions. The Climate Accord is split up into five sectors: electricity generation, industry, transport, agriculture and environment. If it is carried out, PBL calculates, total emissions will go down between 31 and 52 megatons (Mt). Of this total, the electricity sector will contribute 18.3-21.0 Mt, industry between 6 and 13.9 Mt, mobility 4.2-8.0 Mt, agriculture 1.8-4.6 Mt and the built environment a paltry 0.8-3.7 Mt.

In other words, the Netherlands is contemplating a complete overhaul of the existing building stock with only a modest effect on its greenhouse gas emissions.

4. Waterbed effects: cutting carbon emissions in one place means they can rise elsewhere, unless the cap comes down.

In the executive summary of its report, PBL dryly notes (on p. 12) that “interactions with international policy could partly cancel out the effects [i.e. the emission reductions in the Climate Accord].”

This caveat has received scant attention in the press or in parliament. Yet its implications are shocking.

According to Koelemeijer, the effects of emission reductions in industry (6-14 Mt) and in electricity generation (18-21 Mt in the Netherlands) all fall within the EU Emission Trading System (ETS) and run the risk of being cancelled out by the waterbed effect in the ETS.

That’s more than half of total emission reductions achieved by the Climate Accord (31-52 Mt).

And that’s not all. Similar “waterbed effects” occur in transport and agriculture, notes PBL, but they are not quantified in the report as far as I am able to tell. In transport, for example, PBL notes that an increase in EVs in the Netherlands can make it possible for European carmakers to sell fewer low-emission vehicles in other EU countries, since the carmakers have to meet EU-wide targets.

Wolters and his co-authors, in their critical report, provide a withering analysis of the waterbed effects of Dutch climate policy. They calculate that of 32 Mt of emission reductions which the Netherlands wants to achieve by 2020, 79% fall under the ETS system. The non-ETS part is almost all based on the use of biomass, a questionable method (see below). Just 0.6 Mt of the 32 Mt falls outside of the ETS and is not related to biomass.

Wolters notes that CPB and the University of Groningen have long ago warned about the waterbed effect of the ETS, with the recommendation to “put off building expensive offshore wind parks in the North Sea” as long as their emission reductions would benefit coal power producers in Poland and elsewhere. “The same ton of CO2 that we don’t emit and which costs us on average €88, can be bought by a coal power producer in eastern Europe for €5 to €25”, they write.The ETS carbon price is now much higher but nowhere near €88/mt.

Koelemeijer of PBL says waterbed effects deserve attention, but he does point out that it is not certain how they will work out. “There is a risk that some of the emission reductions achieved in the Netherlands lead to higher emissions elsewhere in the EU, but it is not necessarily the case for all of the reductions at risk. The EU also takes measures, such as the adoption of the market stability reserve, that counteract the waterbed effects.”

5. Biomass: what is it good for?

Neither the CPB nor the PBL report quantifies the contribution or the costs of biomass to Dutch emission reductions.

However, the above-mentioned critical report by Wolters et al. has an interesting table showing the costs of various climate measures as decided in the 2013 Energy Accord:  

Onshore wind                                     11.6

Offshore wind                                     12

Utility-scale solar                                0.785

Solar PV                                               7.9

Geothermal                                        1

Biomass for power production          18.2

Biomass for heat                                4.6

Biomass for transport                        6.3

Clean transport                                  7.6

Expansion electricity network            19.1

Energy savings                                    15.6

Other                                                  2.5

Total                                                   107.2

(Costs in €bn. Source: Kosten van het Energieakkoord, p. 18)

This table shows that biomass is the single most expensive measure – yet as PBL itself notes, its effectiveness is surrounded by “many uncertainties”.

By the way, in the Netherlands burning wood in wood stoves and fireplaces also counts as “renewable energy”. The Netherlands has a 14% renewable energy target for 2020, of which almost 1 percentage point will be reached by people using their wood stoves and fireplaces! 

6. Jobs: no effect

Renewable energy is often credited for providing jobs – a questionable defence in itself, since “providing jobs” is not the same thing as “contributing to economic growth”. On the contrary, if switching to renewable energy leads to many more people being employed in energy generation, this is a net economic loss to society, not a gain.

But not to worry: CPB concludes (on p. 11) that climate and energy policy in the Netherlands has “transition effects”, but “in the longer term the net effects on employment are marginal”. The renewable energy job machine simply does not exist.

7. In the end: coming up short

After all is said and done, and ignoring waterbed effects, biomass doubts and the like, what is also striking is that the measures in the Climate Accord don’t even deliver the official target of 48.7 Mt of reductions in 2030. PBL concludes (p. 9) that if all the proposed measures are carried out, emissions will be reduced by between 31 Mt and 52 Mt, adding that “the target of 48.7 Mt will most likely not be met”.

Indeed, there are other “uncertainties” which could even result in emission reductions outside of the 31-52 Mt range, notes PBL, for example, unexpected deviations in “economic growth, energy prices, technology developments and developments in other countries.”

Conclusions

What conclusions can we draw from all this? The most important one I think is that climate policy – any climate policy – is not a done deal. On the contrary, the real hard choices have only just arrived on our doorstep. There are many questions, such as, what are the most cost-effective and efficient measures. Not only in the Netherlands – other countries will face the same issues.

Nor is the role of natural gas in a climate neutral economy a foregone conclusion. The PBL report concludes for example that the Dutch Climate Accord will lead to carbon capture and storage (CCS) contributing 4-10 Mt of emission reductions out of the total 31-52 Mt in 2030. That’s more than the entire transport sector or the entire agricultural sector and significantly more than all the measures in the built environment put together. CCS is foreseen in particular in combination with natural gas to make so-called “blue” hydrogen.

And there are measures that are not even part of the official debate, such as nuclear energy, which could still enter into the picture when the full implications of climate policy become clear, as will inevitably be the case, whether established political parties like it or not.

Two key issues that need to receive a lot more attention are the effects of EU climate policy, which right now are an afterthought in the Netherlands and in other EU member states, whereas they clearly should be a starting point; and the wisdom of using renewable energy targets alongside CO2-targets. Wolters and the other critics of Dutch climate policy observe that the Dutch government initially wisely focused on CO2-targets, but then enthusiastically endorsed a new renewable energy target agreed upon by the EU of 32% in 2030. This, they say, means that CO2-reduction will be achieved “through relatively expensive options”.

 The climate policy debate? It has only just started. 

Gas Transitions

How will the gas industry evolve in the low-carbon world of the future? Will natural gas be a bridge or a destination? Could it become the foundation of a global hydrogen economy, in combination with CCS? How big will “green” hydrogen and biogas become? What will be the role of LNG and bio-LNG in transport?