On 12 October 2010 theEuropean Environment Agency announced: " A new report by the European Environment Agency (EEA) shows that a large drop in emissions seen in 2008 and 2009 gives EU15 a head start to reach and even overachieve its 8% reduction target under the Kyoto Protocol.[…] The EEA report also shows that EU27 is well on track towards achieving its 20% reduction target by 2020.” Thestudy indicates that CO2 production last year was down 6.9% from 2008, the steepest decline ever observed since emissions monitoring began.

There’s no denying that the main reason for the decline was the recession. What is surprising is the satisfied tone also found in theEuropean Commission communication of 26 May 2010: "The fact that 20 per cent is now closer than expected in 2008 is clearly a driver for the challenge of reaching the 30% target.”

France and Germany, distancing themselves from Commission

But these cautious words mask a rigorous rationale. The first drafts actually enthused about the impact of the crisis on carbon emissions, which sparked plenty of resistance, even in circles traditionally sympathetic to European-style environmental dirigisme.

An internal document from the BDA (Confederation of German Employers’ Associations), for example, says: "Slower growth shouldn’t be glorified into a climate protection tool." Industrial organisations in other countries took a similar and even more caustic stance.

The final draft of the communication was received with catcalls from the peanut gallery, including the likes ofBusiness Europe (confederation of European industrialists) andEurelectric (energy industry association). For the first time ever, two majority shareholders in the European Commission, France and Germany, distanced themselves from the Commission’s policy paper in a joint statement by their industry ministers. It appears that the most active opponent was the EU industry commissioner himself, the German Gunther Oettinger.

Credit crunch makes it harder to raise capital

The handling of the climate issue has been entrusted to the DanishConnie Hedegaard, who heads theDirectorate-General for Climate Action (DG CLIMA) created specially for her when the new Commission was put together in 2009. Hedegaard is deemed an "extremist": many remember her as the “Godmother” of theCopenhagen Summit [COP15], an event that was initially conceived as the moment of Barack Obama’s ecological beatification but turned into a huge fiasco when the pivotal players – the US, China and India – proved unwilling to accept binding post-Kyoto targets.

The recession cut the branch that Europe’s green industry was perched on. But above all, demand plummeted, bringing down with it the need for new productive capacity. Primary energy demand in the EU declined 3.4% from 2005 to 2010 – and won’t be returning to pre-crisis levels any time before 2020. According to the European Commission, the increase in total consumption from 2005 to 2030 will hardly come to 4%, a full 16% less than forecast in 2007.

Furthermore, it has grown harder for everyone to borrow – a phenomenon particularly detrimental to capital-intensive industries with high fixed and low variable costs, which is the case with new renewable energy sources. The credit crunch makes it harder to raise capital to build facilities, let alone do research and development

China’s aggressive market policy

Almost every European country has recently cut back on subsidies. In Italy, the government cut spending on the photovoltaic sector by an average 20%. In Spain, people are now talking openly about a “solar bubble”, now that subsidy cuts come to as much as 45% in some cases and several major solar panel factories have had to close up shop. Even Germany has gradually scaled down funding: first by 3%, then this January by 13%, and by 21% from 2012. Britain has announced a 10% trim from 2013.

Behind this change of course, however, lie deeper matters that have less to do with the state of the economy. It shouldn’t mystify anyone that various countries – particularly Germany, Spain and Denmark – view environmental policy through the prism of industrial policy: green, that’s great, but better yet green and rich. That experiment, however, now seems to have flopped. The evidence shows that, even in the best-case scenarios, wealth was transferred, not created, and that transfer probably ended up destroying it.

Though Europe initially led the green technology sector, its ascendancy is on the wane. Chinese manufacturers have come out with an aggressive market policy to slash production costs while boosting margins out of all proportion, which has moved green investment outside the confines of Europe. Even as plants are closing down in Europe, panel production in China – fuelled chiefly by our subsidies – will have jumped 50% in 2010.

The embers of a pipedream

Europa continues to be carried away by ideological inertia: at theCancún climate change summit, it will pound its fists on the table and throw its own virtue in the world’s teeth. But under the surface there is a groundswell of realism bent on redefining targets and strategies based on the realisation that not all energy sources are equal, and not all of them merit cost-blind incentives.

The green energy sector should react to the market signals and meet demand in a more structured way. Perhaps subsidies for biofuels should be recast, for example, to reward technologies capable of producing biofuels at competitive prices and using marginal land. We should probably confine wind farming to windy areas and give up on the pretence of the artificially sustainability of windmills that only run 1000 or 1500 hours a year.

As the gap gradually closes between conventional and so-called clean energy, pursuing non-economic objectives will become less costly and socially more acceptable. But we need to move away from the state-controlled model that has marked the European approach to date – with state-planned energy pricing and output – and espouse a competitive ethos that rewards which non-polluting sources of energy (e.g. by carbon-taxing the others). But the point is: emitting little or no CO2 will not guarantee our survival.

It may seem a paradox, but the end of easy money could turn the green caterpillar into a renewable butterfly.

Translated from the Italian by Eric Rosencrantz