Pragmatism works!

This is the logical conclusion when one looks at the outcome of the Energy & Climate Change Package – officially approved by the European Parliament on 18 December following a compromise between the European Council, the European Parliament and the European Commission, and to be adopted by the Council by mid 2009 at the latest.

With this package, the EU has clearly demonstrated commitment to its stated 20-20-20 targets by putting legal mechanisms in place with which to achieve them.

Noteworthy pieces of the package are the directive on the European Emissions Trading System (EU-ETS), which addresses the trading period 2013-2020 and the directive on geological storage of CO2 (CCS-directive), which has finally defined a legal framework for the storage of CO2.

Article 28 of the new EU-ETS directive envisages that the already ambitious targets will be further modified to achieve a 30% reduction, following a Commission report, in the event that international agreement is reached with mandatory reduction of GHG exceeding 20%. However, any Commission proposal would have to take into account the impact this further reduction would have on the EU, in particular on "carbon leakage" (ie, the driving of companies out of Europe due to high CO2 costs).

The main impact of the EU-ETS on the EU power sector will be the obligation to purchase all the credits it needs for CO2 emissions. No free allocation will be given to electricity generators, except for projects that are deemed to modernise electricity generation (Art. 10a Nr. 1) and for power plants in the, poorer, new member states, with high dependence on coal.

To incentivise large-scale CCS demos, the EU-ETS directive makes available up to 300 million allowances up until 31 December 2015, to help stimulate the construction and operation of up to 12 commercial demonstration plants.

However, the compromise required to get support for CCS was to make these allowances available also to projects demonstrating innovative renewable energy technologies. No single project may obtain more than 15% of the total 300 million allowances and grants will be complementary to substantial co-financing by the operator of the installation (Art. 10a, Nr. 6a) – which seems reasonable!

The only problem with this compromise, essentially intended to get Spain and some other southern members states on board, is that there is no clear definition as to what an "innovative renewable energy technology" is. During the negotiations it was mentioned that it must not currently exist and, as such, does not include conventional renewable energy technology ... so a very open definition! Another point open to interpretation is that it is not mentioned which sector (renewable or fossil) will get what share of the 300 million allowances.

A further possible source of financing for demonstration plants would be Article 10.3, which states that at least 50% of the revenues generated from the auctioning of allowances should be used for one or more of the following: "to reduce greenhouse gas emissions,...to fund research and development as well as demonstration projects for reducing emissions, including participation in initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms." As the wording implies, it is not particularly binding and it is therefore up to the member states whether they want to spend the money to support their pension fund or on the fight against climate change.

Article 10c is the significant new exception to the "no free allocation" policy. This article permits allocation of free allowances to installations in the new, poorer, member states, to reduce pressure on their economies. It is however limited to 70% of the annual average emissions and decreases to no free allocation in 2020. It was mainly Poland and some of the other new members who were pushing for this exception, which has not been well received elsewhere in Europe.

For a member state to benefit from Art. 10c, it must meet at least one of the following conditions: not interconnected, as of 2007, to the UCTE; only one line connecting to UCTE with max. capacity 400 MW; more than 30% of electricity produced from a single fossil fuel; 2006 GDP per capita did not exceed 50% of the average GDP per capita in the EU.

The member state concerned must also provide a plan to the Commission setting out investment plans for infrastructure and clean technologies. The investment plan must be, as far as practicable, up to the value of the free allocation. But essentially the would-be beneficiary only needs to provide a plan and has no other binding obligations.

Another effect of solidarity between member states is the earmarking of 2% of total allowances to be auctioned for distribution amongst those states whose GHG emissions in 2005 were at least 20% below the levels applicable under the Kyoto Protocol. This was another element of the compromise needed to get all the new member states on board. The 2% is to be taken from the member states whose income per capita is 20% higher than the EU average, provided that the total cost of the package does not exceed 0.7% of their GDP.

The burden on industry has been reduced by allowing member states to adopt financial measures in favour of sectors deemed to be exposed to a significant risk of carbon leakage due to the costs related to greenhouse gas emissions being reflected in their electricity prices (Art. 10a Nr. 4a) and to give 100% free allocations to these sectors. Art. 10c Nr. 9c defines which sector is exposed to carbon leakage, following a very good proposal by the French Presidency.

Turning to the CCS Directive, the most important point is that the Council rejected the Parliament's proposal for mandatory capture of CO2 from 2015 onwards, and no proof of storage capacity is required for new plants, contrary to what was announced by some newsletters!

Only combustion plants of 300 MW or more need to assess whether suitable storage sites are available, whether CO2 transport is technically and economically feasible and whether it is technically and economically feasible to retrofit CO2 capture (Art 32/Art. 9a Nr. 1). If these conditions are met, suitable space must set aside on the plant site for the equipment necessary to capture and compress CO2 (Art. 32/Art. 9a Nr. 2). But, interestingly, if your plant is in a position that does not allow economic retrofit of CCS, then no obligation is put on the plant operator to fit it.

The second tricky point in this CCS directive was the issue of the purity of the CO2 stream. This is not defined in terms of % (some in the European Parliament having asked for purity as high as 99.95%) but by exclusion: the stream must not contain waste and must not affect the integrity of the storage site or transport network (Art. 12).

The whole package had to balance the commitment of the EU leaders to reduce CO2 emissions, while taking into account the added costs this would place on European industry and, therefore, the issue of carbon leakage. With the Energy & Climate Change Package, as finally approved, the EU legislators have managed to integrate both: until 2020 the EU will reduce its CO2 emissions and bear the costs related to this, while sending a signal to the other CO2 emitters that if no deal is reached on a global scale, the EU will not be able to continue its efforts alone.

As a result it is clear that the EU has taken a bold step in the right direction and that we can now go to Copenhagen this December and ask the other members of the international community to do the same in a global Post Kyoto agreement.

•There is also now the possibility of more immediate funding for CCS demonstration, from unspent EU funds – see panel above.