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The European Commission January 23 claimed it was reinforcing its global leadership in the fight against climate change with the announcement of a series of measures to cut emissions and steer energy policy towards a low-carbon future, writes Stephen Gardner. Central to the Commission's vision is the European Union's emissions trading scheme (ETS), which will be dramatically revised from 2013 according to the Commission's plans.

The EU ETS is the world's largest but it has spawned imitators, in some US states and in Australia, where a scheme is under development. EU officials have regularly described emissions trading as central to the global effort to reduce greenhouse gas output, and thus prevent dangerous levels of global warming.

EU environment commissioner Stavros Dimas reinforced this message January 23. The main importance of EU's climate and energy package, he said, was to “strengthen the EU's position in international negotiations” on a successor to the Kyoto Protocol, which will lapse in 2012. Negotiations started under United Nations auspices in Bali, Indonesia, in December 2007, and the EU hopes that an agreement can be finalised at the 2009 UN climate change conference in Copenhagen, Denmark.

Dimas added that the revised EU scheme has been planned so it is easily linkable with other trading systems across the world, potentially creating a global network.

Planned Changes

From 2013, the Commission will scrap EU member state national allocation plans, which have been the basis until now of emissions allowances given to companies covered by the ETS. Rather than continuing to distribute free allowances, the Commission wants to make auctioning the rule, with a plan to auction around 60 percent of allowances in 2013. In addition, emissions trading will be extended to some new industries, such as aluminium and ammonia producers, and to nitrous oxide and perfluorocarbons as well as carbon dioxide.

The total number of allowances issued by year from 2013 to 2020 will gradually reduce. In 2020, there will be 1.72 billion allowances, each representing one metric ton of carbon dioxide. This is a 21 percent reduction compared to 2005.

This is a “much stricter” target than has been seen so far, Henrik Hasselknippe, director of emissions trading analysis at Point Carbon, told Eurocorrespondent.com. Consequently, from 2013, the ETS “system will be tighter, and we expect [carbon] prices over time to increase,” though it is hard to forecast prices so far ahead because of other variables such as the weather and changes in energy demand, Hasselknippe added.

“All in all it is a very comprehensive package,” that will “drive investment to cleaner technologies,” Hasselknippe said.

Business is also broadly comfortable with the overall target. Philippe de Buck, Secretary General of BusinessEurope, the confederation of European industry, said “we have globally supported the policy,” of an emissions cut largely to be delivered by emissions trading. The proposals are “quite revolutionary” and have the potential to fundamentally alter business behaviour, de Buck told Eurocorrespondent.com.

However, he added, “the more we read the documents, the more we have concerns. It's nice to look at the broad view but we have to look at the technicalities.”

Auctioning is the top business concern. The Commission has been vague on the details, saying that precise mechanisms by which allowances will be given out – either for free or via auction – “will be developed later under a committee procedure.”

This, BusinessEurope said in a statement was “not satisfactory.” In addition, not all sectors will be treated equally. Electricity generators and other power companies will be subject to full auctioning from 2013 because, the Commission said, of “their ability to pass on the increased cost of emission allowances” – in other words, through electricity price hikes. BusinessEurope said these could be “significant” and will impact both industry and consumers.

However, Laura Schmidt of the Association of Electricity Producers (AEP), which represents firms such as British Energy, Centrica, EDF Energy and RWE npower, said the consensus among energy firms was that they are “not opposed” to full auctioning. This is because costs can be passed on, “as any business would” in the circumstances, Schmidt said. However, not all power generators will feel the same impact. Those with coal-fired power stations prominent in their portfolios will be required to buy through auction more emissions allowances than those producing energy from natural gas or renewables.

If auctioning is to be the rule for the power sector, it should be so across all EU countries, Schmidt said, adding that the AEP is waiting to see the details of how the auctioning proposals will be implemented.

Road to Copenhagen

Commission officials said final decisions about the balance of free and auctioned allowances depended on the final international climate change deal in Copenhagen in 2009.

A post-2012 international agreement is likely to rely on emissions trading as the main method of cutting carbon. If this happens, industry outside the EU will be subject to ETS-like constraints and Europe's relative competitive position will not be harmed. But if an international agreement fails, EU industry will find itself burdened with the extra cost of cutting emissions, while competitors elsewhere continue to pollute with impunity.

For this eventuality, the Commission outlined three options. First, it could require importers bringing carbon-intensive goods such as steel or paper products into the EU to participate in the ETS; second it could seek international sectoral agreements on emissions, which should lead to “substantial reductions” and include effective “compliance mechanisms” according to Dimas; or third, it could return to a system of free allowances, thus only imposing additional expense on EU firms that must buy additional allowances because of excess emissions.

But this is a backstop. One Commission official said “If there is no international agreement, we are going to be really disappointed.” The official added that in case international negotiations failed, re-introducing free allocations would be the quickest and easiest of the three options, because it could be done without seeking a joint decision from the European Parliament and member states in the EU Council.

The changes to the ETS proposed by the Commission must themselves be agreed by Parliament and Council, meaning much hard bargaining in the months ahead. But the ETS is meant to make a major contribution to a target the EU has already agreed: that greenhouse gas emissions should be cut by 20 percent by 2020 compared to 1990 levels. In case of an international agreement, this target increases to 30 percent.

The Commission also announced on January 23 national emission reduction targets for sectors not covered by the ETS, chiefly agriculture, construction and transport. The targets range from 20 percent cuts for Denmark, Ireland and Luxembourg, to a permitted increase for the EU's poorer countries, such as Bulgaria and Romania, which are to be given scope to catch up economically with their western neighbours. Commission president José Manuel Barroso gave an upbeat message. “These proposals will create jobs in Europe and not destroy jobs,” he said. “It is a package for protection of our planet and environment but also for promoting energy security.”

A version of this article was originally published by ClimateChangeCorp.com.

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