The EU's climate change response is facing failure in several key areas. Meantime the EU institutions have suddenly woken up to the extent of the damage which current plans will do to the EU's already-lagging competitiveness.

Damage to competitiveness : Virtually all proposals for reducing or capping emissions will have the effect, directly or indirectly, of raising energy prices. As energy prices are a fundamental component of almost all production processes, any country or group of countries which adopts a strong stance on emissions will automatically reduce its competitiveness, unless other countries adopt similar measures.

Over coming years and decades, the EU will face intensifying competition from low-wage developing countries, especially China and India , who are showing little inclination to apply similar constraints to their burgeoning industries.

At last, the penny seems to have dropped in the Berlaymont Building . In November, Commission Vice-President Gunter Verheugen, responsible for the Industry and Enterprise portfolios, wrote to Commission President Barroso: "We have to recognise that ... our environmental leadership (sic!) could significantly undermine the international competitiveness of part of Europe 's energy-intensive industries, and worsen global environmental performance by redirecting production to parts of the world with lower environmental standards".

(Indeed the same comment about driving business, investment and jobs offshore could apply to a wide range of EU directives).

Sceptics (of both the euro and climate change varieties) have been pointing this out for some time, but it is a key breakthrough for an insider of Verheugen's stature to agree.

Knee-jerk protectionist response : So what policy prescriptions does Verheugen advocate? A relaxation of state aid rules for the energy sector, plus an import-levy on products from countries with lower environmental standards. Here we see the EU's statist, protectionist instincts given full rein. A return to massive subsidies, bureaucrats picking winners, new tariffs against the rest of the world.

And Verheugen is by no means the only voice calling for protectionism. French Prime Minister de Villepin has also done so, as has Jacques Delpla, an economist advising French Presidential hopeful Nicolas Sarkozy. He spoke up on BBC World Service radio on Dec 19th to call for exactly these protectionist measures, and gave a broad hint that they would feature in Sarkozy's Presidential campaign. "Of course I am absolutely committed to free trade" he said, "But in these special circumstances....".

It is interesting to consider the likely effect of such measures. To his credit, Commissioner Peter Mandelson has pointed out that such import restric­tions would breach WTO rules and be illegal (FT Europe, Dec 18th). But suppose they happened anyway? And suppose the EU weathered the storm of retaliatory measures that would surely result? The long-term effect of additional protectionism would be reduced trade, and further decline in the EU's relative economic performance and competitiveness.

The EU, already instinctively isolationist and protectionist, and with its share of world trade projected to halve in the next three decades, would experience even more rapid decline, until its impoverished nations became functionally irrelevant to the global economy, and –– bitter irony –– equally irrelevant to any future debate or activity related to climate change. The key decisions would be taken by others.

The Failure of the EU's Emissions Trading System (ETS): Systems of this kind create a dilemma for the conservative commentator. On the one hand, we know beyond doubt that market mechanisms, Adam Smith's invisible hand, is the best way we know of to allocate resources within an economy, so the concept of emissions trading is intrinsically attractive.

On the other hand, the EU's ETS is failing on a spectacular scale, as demonstrated by an excellent Open Europe study "The High Price of Hot Air", published in September. It shows that massive anomalies in initial allocations of carbon credits have created vast and unjust imbalances. Because Germany and other continental countries were generous with allocations, British companies will be spending £500 million a year for the next three years merely to buy permits from the continent -- without any probable impact on emissions.

To bring a macro issue down to a more homely scale, they calculate that NHS trusts will spend around £5 million over that period to buy credits, while both Shell and BP can each expect to make around £50 million by selling permits. As Neil O'Brien of Open Europe remarked "Only an EU environment scheme could have the effect of taking money from the NHS and giving it to big oil companies".

Most critically of all, they calculate that the exercise, with all the massive bureaucratic costs that it entails, will not actually reduce emissions at all, because total EU allocations were actually set higher than current emissions. This may reflect a commendable concern for the economic impact of the ETS, or simply a failure of political will, but either way it will nullify the objectives of the scheme. Report at http://www.openeurope.org.uk/research/ets.pdf

This resolves our dilemma: real markets work, and they work from the bottom up. Artificial markets, built from the top down on the whim of bureaucrats and legislators, may not work. This one certainly does not.

EU failing to achieve Kyoto targets : Astonishingly, only two EU countries of the EU 15 are set to meet their Kyoto emissions targets, including the UK which has achieved the objective only as a result of a one-off switch from coal to gas in the 90s. Even more amazing, the Commission is still, after sixteen years, massaging the 1990 base-line figures in a desperate attempt to spin the outcome and reduce the Kyoto penalties that will be incurred.

False comparisons with the USA : The Europeans are given to moral posturing. They're the good guys. They signed Kyoto . The Americans are the bad guys. They signed Kyoto , but failed to ratify.

But not only is the EU failing to meet its Kyoto commitments: since 1997 when the Kyoto commitments kicked in, the USA has actually done better on emissions than the EU: see 2.xls" target="_new">http://www.eia.doe.gov/pub/international/iealf/tableh1CO2.xls

EU-15 CO2 emissions are up by 7.97% since 1997, while US emissions are up by only 6.57% (despite faster economic growth in the USA ).

The international media, and especially the BBC, love to refer to the USA as "The world's biggest polluter" (though latest IEA estimates suggest that China may seize that accolade in as little as three years). But all that means is that the USA has the world's biggest economy. The real question is energy intensity. How much energy does the US use per unit of output in its economy? The answer is that the US is very comparable to the EU, better than many EU member-states, and (critically) is reducing energy intensity much more quickly than the EU is. So is it better to sign Kyoto , like the EU? Or to bear down on emissions, like the USA ?

EU leaders specifically quote the USA as one of the countries which should face environmental tariffs on exports to the EU. Yet on the numbers, the USA would be entitled to return the compliment.

Is the EU addressing the wrong problem?

Several years ago I was privileged to meet Bjorn Lomborg, who came to the world's attention as "The Sceptical Environmentalist"(www.lomborg.com). Starting out as a green, he set out to debunk the work of climate change sceptics -- and managed to convince himself that he'd been wrong, and that they were right. The key insight I took away from that meeting was this: it is estimated that if Kyoto were fully implemented (clearly it won't be), then the impact on average global temperatures in a century's time would be a mere 0.2°C -- almost too small to measure.

We are being asked to accept major damage to our economy in order to achieve a mitigation of climate change which is essentially trivial. So far I have not seen that conclusion disputed.

If we were to turn off the whole of the UK economy, totally, then the emissions saving would be overtaken by the increase in China 's emissions in just over twelve months. China is planning to open 500+ new coal-fired power stations in the next eight years -- that's well over one a week.

The climate change debate suggests several questions:

Is climate change happening? The world has got somewhat warmer in recent decades, though it is still cooler than it was in 1200 AD, in the Mediaeval Warm Period. It is not clear whether the warming is a long-term trend, or is in some respects cyclical, influenced by solar changes. Forty years ago, scientists were predicting an imminent ice-age.

Is warming anthropogenic (man-made)? It seems likely that industry-generated changes in atmospheric CO2 must have influenced climate, but there is still a debate as to the magnitude of any CO2 impact. Governments and agencies promoting the conventional alarmist position try to insist that the debate is over. It is not. As Nigel Lawson says in his thoughtful essay "An Appeal to Reason" (Centre for Policy Studies): "It is simply not true to say that the science is settled; and the recent attempt of the Royal Society, of all bodies, to prevent the funding of climate scientists who do not share its alarmist view of the matter is truly shocking".

Is global warming all bad? All the alarmist commentary focuses on the down-side of climate change. It is regarded as practically indecent to suggest an up-side. The recent Stern Report, widely quoted by Kyoto advocates, makes this error. First, it takes an economic model and builds in the conventional version of the science. Not surprisingly, this generates the conventional doomsday scenario. Then, it tots up every possible (and some rather implausible) negative consequences, and simply ignores the positives.

More people in Europe and America die of cold than of heat. Warming may lead to desertification in Southern France , but it will open huge areas to agriculture in northern Eurasia and Canada . We could be growing grapes in Scotland again, as we did 800 years ago. Some economists take the view that on balance the economic effects would be broadly neutral. If sea level rises, it would certainly be cheaper to relocate the population of the Mald­ives than to implement the sort of emissions reductions that are proposed.

What can we do about it? It is not good enough simply to assert that the danger is so great that any amount of cost in mitigation is worth it -- not least because the economic costs associated with Kyoto may leave us less able to afford the technological development and new investment we need in low carbon technologies.

As with any other human project, great or small, we have to ask whether any proposed action is cost-effective. If the proposed expenditure will have little or no effect, there is no point in undertaking it, be the problem never so great.

This attitude that we must try everything regardless of cost has led to grotesque initiatives such as wind power, which represents the economics of the madhouse. So I was struck by a recent report from the Renewable Energy Foundation -- no climate change sceptics they -- in which they said that we must regard wind turbines "as garden ornaments, not power stations". They're not wind farms at all. They're subsidy farms.

Let's worry instead about energy security

Climate change may or may not be a vital issue. Energy security certainly is, with most of our oil and gas coming from unstable regions of the world, and President Putin's hand on the gas-tap. Ironically, the policy measures we need to underpin energy security are rather similar to some of the prescriptions of the climate change lobby.

By all means let's develop renewable energy technologies, like tidal and solar and biomass (but please, not wind!). Let's look at distributed generation (wood-chip furnaces in apartment buildings, say) and combined heat and power generation. Many of these options have become viable at current oil prices, which in the medium-term are likely to keep going north. And if that makes the eco-warriors happy, well and good.

But there is only one low-carbon technology which can provide the reliable, continuous base-load power that we need to sustain our industry and our competitiveness. That technology is nuclear. Let no one urge that we respond to the threat of climate change, yet pretend that we can do so without major new investment in expanded nuclear generation capacity.