EuroWire - August 2010

Inspiring People. Shaping the Future.

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EuroWire is a joint publication of the Bertelsmann Foundation offices in Washington, DC and Brussels. It connects Capitol Hill to European Union policy and politics, and contributes to a common trans-Atlantic political culture. EuroWire is an occasional publication that highlights issues, legislation and policymakers relevant to the Congressional legislative cycle. This publication looks at the European Union from the point of view of Capitol Hill staffers and offers timely operational analysis.

Disappointment and Lowered Expectations: EU Climate-Change Policy KEY POINTS • The EU is disappointed by the sub-optimal outcome of the UN Framework Convention on Climate Change (UNFCCC) in Copenhagen. The EU political class feels that it led international climate-change negotiations up to the meeting.

• Despite the EU’s unmatched unilateral commitments, some member-states favor raising their 2020 emissions-reduction target from 20 percent to 30 percent below 1990 levels.

• EU Climate Action Commissioner Connie Hedegaard has low expectations for the next UNFCCC gathering in Cancun, Mexico.

• Since 2005, the EU has had in place the Emissions Trading System (ETS), its version of cap and trade, as well as programs to develop clean technologies and carbon capture.

Although excluded from the final negotiations of the Copenhagen Accord, the EU has demonstrated its commitment to combating climate change.

Brussels sent a letter to the UNFCCC Secretariat to confirm its willingness to be associated with the agreement. In that note, the EU reiterated its commitment to negotiating a legally binding agreement on climate protection for the period beyond 2012. The letter also reaffirms the EU’s unilateral commitment to reduce by 2020 its overall emissions by 20 percent of its 1990 level – and offers to increase this reduction to 30 percent if other major emitters make comparable commitments (see table on next page).

The statement, however, has provoked considerable dissent. EU Commissioner for Climate Action Connie Hedegaard contends that a unilateral increased reductions target now would put EU industry at a competitive disadvantage. BUSINESSEUROPE, the European equivalent to the US Chamber of Commerce, opposes the proposal for the same reason. Many Central

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On July 15, however, environment ministers from the UK, France and Germany issued a joint call for the EU to raise its 2020 emissions-reduction target to 30

percent despite the absence of a similar commitment from other industrialized countries. The ministers claim that the 20-percent target is insufficient for Europe to drive green innovation and lead on clean technologies.

and Eastern European countries, such as Bulgaria, Poland, Hungary and Slovakia,

struggle to reach even the 20-percent reduction target by 2020. And, in its analysis of the 30-percent reduction option, the European Commission concluded that conditions are not yet right. The analysis reiterates the need to strengthen the work of international partners to help them achieve more ambitious CO2reduction targets first. In the meantime, the European Environment Agency (EEA) projects that many of the EU’s 27 member-states will meet the 20-percent reduction target by 2020.

The EU has, however, lowered its expectations for global progress in the nearer term by removing agreement on a legally binding treaty from its agenda for December’s UNFCCC meeting in Cancun, Mexico. This reflects EU leaders’ disappointment with last year’s Copenhagen conference and more recent talks in Bonn, which, according to Commissioner Hedegaard, represented a step “backwards” from the Copenhagen Accord.

One major point of contention in Bonn was developing countries’ claim of

inadequate climate finance from rich countries. The former want more than the US$100 billion per year by Inspiring People. Shaping the Future.

2020 in climate financing, as agreed in the Copenhagen Accord. But US Deputy Special Climate Envoy Jonathan Pershing insisted that some states were seeking “staggering sums out of line with reality”. EU memberstate commitments to climate finance have varied greatly, with France, Hungary and the UK, among others, issuing loans instead of direct aid. The lack of coordination among EU member-states on this issue BRUSSELS countries.

WASHINGTON, DC could deter cooperation from developing

Résidence Palace 1101 New York Avenue, NW Rue de la Loi 155 Suite 901 To secure progress on climate-change legislation at 1040 Brussels, Belgium Washington, DC 20005 USA the Cancun the EU willContact: encourage Thomasagreements Fischer Contact: Tyson summit, Barker E-mail: tyson.barker@bertelsmannE-mail: thomas.fischer@bertelsmannon forestry, adaptation, fast-start financing, and a foundation.org stiftung.de mechanism for monitoring, reporting and verification Tel: (+1) 202.384.1993 Tel: (+32 2) 280.2830 (MRV). www.bertelsmann-foundation.org www.bertelsmann-stiftung.de/brussels

EU Climate-Change Legislation and Initiatives The table below presents the structure of the EU ETS and several other programs that help the EU meet its emissions-reduction targets.

The EU approach to carbon trading and other climate-mitigating programs may help inform the US approach to the issue.

Emissions Targets

20-20-20 by 2020: Reduce emissions to at least 20 percent below 1990 levels by 2020, raise market share of renewable energy to 20 percent by 2020, and cut energy consumption across the EU by 2020. The EU also offered to commit to a 30-percent reduction in greenhouse emissions if other developed countries agreed to join in. (See EU’s ‘20/20/20’ objectives on greenhouse-gas-emission reductions and renewable energies.)

Allowance Allocation Under the ETS*, enacted in 2005 for Phase II**, the total amount of permits to be allocated by each member-state is defined in the Member State National Allocation Plan (NAP). The European Commission has oversight of the NAP process and decides if the NAP fulfills the 12 criteria set out in Annex III of the Emission Trading Directive (EU Directive 2003/87/EC). The first and foremost criterion is that the proposed total quantity is in line with a memberstate’s Kyoto target. During Phase III, there will be a single annual EU-wide cap. The Commission will publish final figures by September 30, 2010.

Under the ETS, there is limited borrowing and multi-year compliance. In Phase II, firms may use their allocations from the next year for current-year compliance. Unlimited banking of allowances is permitted from Phase II into subsequent periods. In Phase III, if, in more than six consecutive months, the allowance price is more than three times the average price of allowances during the two preceding years, the Commission may auction up to 25 percent of the New Entrant Reserve, or bring forward the auctioning schedule to reduce the price fluctuation.

Offsets

There is no domestic offset program. There are international offsets from the Clean Development Mechanism (CDM) and from Joint Implementation (JI) under Kyoto.*** Under the ETS, the Phase II limit on CDM/JI is 13 percent of the total annual EU ETS allocation. CDM offsets are allowed from 2005 onwards. JI offsets are allowed only during Phase II. Member-states have discretion to set their own limits on CDM/JI as part of their NAPs, albeit limited by the EU Commission. In Phase III, if no international climate-change agreement is reached, CDM and JI credits will come from pre-approved projects only. If there is an international agreement, additional credits will likely be allowed.

Technology

The European Commission has committed €1 billion per year for energy-technology research between 2007 and 2013 to the EU’s Strategic Energy Technology Plan (SET Plan), which accelerates the development and deployment of low-carbon technologies. The SET Plan includes development of second-generation bio-fuels; capture, transport and storage of carbon; integration of renewable energy sources into the electricity network; and energy efficiency in construction, transport and industry.

Competitiveness

The Competitiveness and Innovation Framework Program (CIP) has been adopted for 2007-2013. It comprises the Entrepreneurship and Innovation Program, the Information and Communication Technologies Policy Support Program and the Intelligent Energy-Europe Program. (See CIP Summary)

*See the Congressional Research Service Report for analysis of the structural issues of the ETS from which the US may draw lessons. **The European Union Emissions Trading System is divided into Phase II 2008-2012 and Phase III 2013-2020 ***All EU member states have ratified the Kyoto Protocol, so Phase II of the ETS has been designed to support the Kyoto mechanisms and compliance period. Thus, any organization trading through ETS should also meet the international standards under Kyoto.

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Cost Containment

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