European Union Agrees to First-Ever Energy Efficiency Law

June 19, 2012

On June 18, 2012, the European Union (EU) approved and signed a landmark Energy Efficiency Directive that seeks to ensure the EU delivers a 17 percent energy consumption reduction by 2020. The new law was proposed by the European Commission in 2011 to fill an identified gap in a 20 percent voluntary energy efficiency target set by the EU in 2007. The EE Directive will accelerate efficiency gains through the establishment of binding targets, controls and standards, and the creation of pioneering building-based carbon markets.

The directive sets ambitious energy consumption reduction and efficiency targets for both public and private sectors; additional proposals improving transport energy use and efficiency are expected in the near future. The new law charges the public sector with large-scale renovation of public buildings and use of sustainability metrics in public procurement rules. EU member states will have to “purchase only goods, services and buildings with high energy-efficiency performance,” taking into consideration cost-effectiveness, economic feasibility, technical suitability and sustainability goals. EU governments must also retrofit and upgrade at least 3 percent of the total floor area of buildings larger than 500 square meters (250 square meters as of July 2015), or meet equivalent energy savings through other qualifying means, and develop a roadmap to make the entire building sector more energy efficient by 2050.

The new law also mandates that EU member states’ energy and industrial sectors reduce energy consumption by 1.5 percent annually between 2014 and 2020, but a variety of options will be available to meet the obligation. Industries covered by the existing EU Emissions Trading Scheme (EU ETS) for greenhouse gases may be exempted or have some portion of existing efficiency gains by covered entities counted as early actions toward the member states’ goals, for example. In some instances, likely “future” energy savings from industrial sectors will be able to be counted toward a country’s goals. A key take-away is that the EE Directive will accelerate further development of clean energy and sustainability business models based on helping customers reduce energy use at every point in the energy supply chain.

Finally, the EE Directive includes dedicated energy efficiency financing mechanisms and seeks to leverage existing market-driven approaches to sustainable development. The law enables development of a first-of-its-kind intergovernmental carbon market based on the energy efficiency savings achieved by buildings. Under the new program, EU governments will be allowed to develop markets for the purchase and sale of state-held greenhouse gas reduction permits (i.e., “carbon credits”) that reflect the carbon-equivalent benefits achieved by certain energy savings achieved in high-efficiency public buildings. Creation of this energy efficiency commodity market, if it emerges, could replicate and potentially replace portions of the EU ETS. The revenues generated are to then be reinvested into further efficiency improvements.

Proponents of the directive pointed to the high cost of energy imports, which increased sixfold since 1999 – from €84 billion to €488 billion in 2009 – arguing that the directive will create cost savings, energy independence, economic growth and emissions reductions. The last-minute deal that was struck to allow approval was far from assured, as an EU-wide stalemate had almost defeated the measure entirely. The Danish government, which currently holds the EU Council presidency, championed the directive and its long-term economic benefits, arguing that increased efficiency will save €330 billion ($415 billion) in energy costs on a €24 billion ($30 billion) investment. The directive has been projected to create 400,000 new jobs and increase European GDP €34 billion ($43 billion) by 2020.