EU leaders meeting in Brussels yesterday (11 December) closed in on an agreement that would give Europe's big polluters more CO2 emission permits free of charge, as the bloc's major economies slip further into economic recession.
In January 2008, the European Commission presented a series of proposals designed to transform into law the political commitments made by EU member states in March 2007 to reduce the EU's emissions of CO2 and related greenhouse gases (GHGs) by 20% by 2020, while boosting the bloc's share of renewable energy use to 20% over the same period.
A proposal to revise and strengthen the EU's Emissions Trading Scheme (EU ETS; see EurActiv LinksDossier), the 'flagship' EU policy to tackle climate change, as well as a proposal that outlines how member states should divide the 'effort' of sharing CO2 reductions in sectors not affected by the ETS between themselves, is the mainstay of the so-called 'climate and energy package'.
A proposal on a legal framework to regulate the geological storage of CO2 captured during power generation is also part of the package, which EU member states hope to finalise during their annual end-of-year summit, scheduled for 11-12 December 2008.
Details of the compromise were filtering through at the summit on Thursday (11 December), where EU leaders were also discussing a proposed 200 billion euro recovery plan to fight off the economic recession.
Italian Prime Minster Silvio Berlusconi initially threatened to veto the climate accord, but finally retreated. "We are heading for a compromise," Berlusconi told reporters at the summit. "Italy is on the way to getting all it wants," he added, according to AFP.
EU solidarity fund
Under the compromise, 10% of emission quotas delivered under the EU's emissions trading scheme for carbon dioxide (EU ETS) are to be reserved for a "solidarity fund" designed to help poorer countries from Central and Eastern Europe in their transition to cleaner energy production. An additional 2% are to be redistributed among those nine countries, with the bulk going to Romania (29%), Poland (27%) and Bulgaria (15%).
EU states also agreed to "use at least half" of revenues generated from the auctioning of allowances in the EU emissions trading system to invest in low-carbon technologies.
More 'windfall profits' for the power sector?
Europe's electricity giants, including E.ON of Germany and the coal-dependent Polish power sector, were also on the way to receiving softer treatment.
Under the draft agreement, power companies would need to buy only 30% of their CO2 emissions quotas at auction from 2013, with the share gradually raised to 100% by 2020. Regular reviews are foreseen every two years to evaluate progress, with precise intermediate targets defined for each year.
Under the Commission's initial proposal, the power sector would have had to buy 100% of its emission permit at auction from 2013.
The Greens in Parliament were outraged. "Based on the current drafts, outmoded power sectors could potentially get exemptions from the auctioning of permits throughout the term of the scheme until 2020," said Caroline Lucas, a Green MEP from the UK.
Stavros Dimas, the EU environment commissioner, also expressed doubts about the wisdom of handing too much free pollution credits to the power sector. "With free permits, [electrical utilities] can make windfall profits. With auctioning, they money goes to the public sector, which can spend it on good causes," he told the Financial Times newspaper. "When people realise this, they will ask where is the money going," he added.
Evaluating the risk of 'carbon leakage'
A major part of the Brussels talks focused on heavy industries, such as cement, chemicals and glass, which warned they would flee outside Europe under the EU's planned tightening of the emissions trading scheme (EU-ETS).
In one of the most complex aspects of the compromise, EU leaders agreed on a calculation method to determine which industries are most at risk of delocalising their factories, jobs and CO2 emissions to other parts of the world – a process dubbed 'carbon leakage'.
Under the agreement, industries would be considered "at risk" if the additional costs induced by the EU scheme led to an increase in cost of "at least 5%" of Gross Value Added. In addition, to qualify, any given sector would have to prove it is exposed to international competition for more than 10% of its exports and imports.
Sectors considered at "significant risk" of carbon leakage will be granted up to 100% of their CO2 allocations for free if they meet an agreed benchmark considered as the best available technology in the sector. Industrial installations which do not meet the benchmark would have to pay for their emissions rights, penalising the most polluting factories. This benchmark system had been supported notably by the European chemical industry.
The Commission is being asked to submit a legislative proposal on how the free CO2 credits will be distributed by June 2010, after a key UN meeting in Copenhagen in December 2009 which is due to agree on a successor to the Kyoto Protocol.
For sectors which are not exposed to the risk of carbon leakage, the share of CO2 allocations to be put to auction is set at 20% for 2013. By 2020, 70% of allocations will have to be bought via auctions, a retreat from the earlier 100% figure.
The Greens in Parliament called the draft compromise a "dramatic retreat" from earlier commitments. "The proposals on ETS currently being considered risk creating a monster. Allocating such a large proportion of emissions permits for free […] would turn the ETS into a windfall profit machine for Europe's most polluting industries," they said in a statement.