EU seeks agreement on climate package by end-2008

15 December 2008

European Union leaders remain under pressure to secure a final deal on the proposed energy and climate package before the end of the year.

While European governments and the European Parliament earlier this week reached agreement on plans to increase the use of renewable energy in the region, major sticking points continue to hold up progress on legislation designed to reduce greenhouse gas emissions.

The European Commission is keen to conclude negotiations on its energy and climate proposals – the so-called ‘20-20-20 package’ – by the end of the year in order to provide momentum for international climate negotiations in 2009. France is also keen to reach a deal on the package before handing over the EU Presidency to the Czech Republic at the beginning of 2009.

Key areas that Member States continue to debate include the details of the revised EU Emissions Trading Scheme (ETS) and the handling of ‘carbon leakage’ – the transfer of industrial operations to non-EU countries where environmental legislation is weaker. A breakthrough in talks is likely to come at the European Council meeting in Brussels on 11-12 December, according to market intelligence firm Point Carbon.

“The Member States and the EU Parliament agree on 90 per cent of the package,” said Stig Schjølset, senior analyst at Point Carbon. “It is already clear that the EU emissions trading scheme will be tighter and deliver large emission cuts by 2020. In addition, import of credits from third countries will be limited.”

Earlier this week EU lawmaker agreed on the renewable energy element of the European Commission’s proposed legislation, which sets a target of generating at least 20 per cent of energy in the EU from renewable energy by 2020. Agreement was reached after calls for a review clause from Italy was fought off, and the green credentials required for biofuel production were increased.

The current financial turmoil may make it hard for Member States to reach the renewable targets, according to law firm Eversheds.

“This development is important but it is not necessarily going to bring about certainty in the market,” said Michelle Thomas, head of the Clean Energy and Sustainability Group at Eversheds. “It is clear that within our clients there are competing demands for capital and renewable development is likely to suffer. … The EC progress needs to be understood in the cold light of reality.”

Objections to the rest of the climate and energy package continue to be raised by Poland and other East European countries that are heavily dependent on coal in the power generation sectors. They fear that the proposal for full auctioning of emission allowances from 2013 will result in large increases in electricity prices.

Italy has also raised objections to the proposals based on the impact that the legislation could have on its economy.

The objections may give rise to compromise deals from France, which is presiding over the European Council, although European electricity association Eurelectric has called on EU heads of state to create a robust and fair ETS.

Point Carbon says that giving a share of free allocations to power producers will be necessary to get reluctant countries such as those in Eastern Europe to accept a deal.

“Taking an environmental perspective it doesn’t really matter whether the allowances are auctioned or given away for free,” said Kjersti Ulset, head of EU emissions trading at Point Carbon. “In the 2013-2020 period, the total allocation will be much lower than the expected emissions in the same period.”

How to protect European industry competing in global markets – and thus prevent carbon leakage – is another key issue yet to be solved. Sectors like aluminium and steel will not be able to account for carbon costs in their prices and will thus get a free allocation of allowances, at least until other regions implement similar policies as those in Europe.

But Eurelectric says that the latest proposals from France to obtain free allowances for carbon leakage from Member State auctioning quotas will severely reduce the number of allowances available for auctioning, and have a serious impact on the functioning of the electricity sector.

“Eurelectric is calling on the heads of government to reject short-sighted adjustments to the emissions trading system that will undermine its workings and lead to greater overall problems in the provision of a secure electricity supply to both industry, commerce and households,” said the organization in a statement.

If the EU heads of state and government are able to reach an agreement on the climate package this week, it will be up to the EU Parliament to close the deal when they meet at a plenary session in Strasbourg from December 16. If no agreement between the institutions is reached this year, the negotiations will continue into next year.

However, with the upcoming elections to the EU Parliament in spring 2009, EU politicians are under an increasing pressure to seal the final agreement as soon as possible.

“Unless the internal EU climate policy is decided ahead of the Parliamentary elections, it will be more difficult for the EU to take a leading role in the international climate talks which are supposed to lead to a new global agreement at the climate summit in Copenhagen in December 2009,” noted Schjølset.

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