Strong structure, weak numbers

The final agreement on the EU climate package retains the goal to reduce emissions by 20 per cent. Together with a 20-per-cent share of renewables and 20-per-cent energy savings, this creates the triple goal of 20-20-20 by 2020.

The EU climate package was finally agreed in December, despite some lastminute drama, mostly in accordance with the Commission’s January proposal. It means that the EU now has a strong climate policy framework. However, the agreed limits are inadequate to reliably achieve the 2ºC climate target, according to the environmentalists, who also believe that measures in other countries, mainly through the CDM, have been given too big a role.

If the press is to be believed, the entire climate package was at risk of crumbling under pressure from the new Member States and from Italy. Th is never came about and the EU’s unconditional goal to reduce emissions by 20 per cent was retained. Together with a 20-per-cent share of renewables and 20-per-cent energy savings, this creates the triple goal of 20-20-20 by 2020.

The promise to make reductions of 30 per cent if other nations make similar undertakings was also retained. Th e allocation of emission targets between the member states has been agreed. (see map). Member states have additional binding targets for renewable energy sources and energy efficiency measures. For many big companies the regulations governing emissions trading set clear requirements to reduce emissions by emissions trading. Th e car industry faces demands to reduce the emissions of new cars. Th e package also provides regulation for the storage of carbon dioxide and some funding for CCS (Carbon Capture and Storage) demo plants.

The package, which was first adopted by the Council and then by Parliament in December, consists of four sets of legislation:

  • Trading in emissions rights for greenhouse gases1.
  • Common initiatives to reduce greenhouse gas emissions2.
  • Geological storage of carbon dioxide3.
  • Emission standards for new passenger cars4.

One of the most important elements of the package (under Common initiatives…) is the use of eff ort sharing to achieve a 20-per-cent reduction. If the EU is to cut emissions by 30 per cent the entire package will have to be renegotiated in spring 2010.

Emissions trading accounts for two billion tonnes of EU emissions, which total around 5.1 billion tonnes of CO2 equivalents. Some progress has already been made towards the 20-per-cent cut from 1990 levels, and a further 14-percent reduction is required from 2005. Th e trading sector must make cuts of 21 per cent or 457 megatonnes from 2005 emission figures, while the non-trading sector must make reductions of 10 per cent or 310 megatonnes. Th e Member States cannot infl uence emissions in the trading sector. Eff ort sharing applies to the non-trading sector. Th e reductions must be achieved either in the EU or partly through projects in other countries, corresponding to a maximum of three percent of 2005 emissions from the non-trading sector. Th is nevertheless represents a large share, roughly half of the reduction required by 2020. In addition, most countries can use a further one per cent for projects, but only in the poorest countries or poor island states and subject to a string of conditions. It therefore seems doubtful whether this percentage will actually be used to any great extent. It does however open the possibility that the EU could achieve more than half its undertaking in other countries.

Energy efficiency must be improved by 20 per cent “compared with forecasts for 2020”, according to the hardly crystal-clear explanation given under “Common initiatives”. The Commission will get back with an evaluation of the national energy efficiency plans and new proposals by 2012.
This does not mean that everything is on hold. In autumn 2008 the Council urged the Commission to propose a ban on incandescent bulbs under the framework of the Eco-Design directive. The national experts gave their backing to this requirement.

Environmental movement:
-Shame on EU leaders

The environmental movement was extremely critical of the package. In a joint press release by Climate Action Network, WWF, Greenpeace, Friends of the Earth and Oxfam, entitled “Shame on ‘EU leaders’” they asserted that 20 per cent, and even 30 per cent, is too little to meet the 2ºC target. They also stated that an unacceptably high share of the reduction – “around two thirds” – could be achieved by using CDM credits.
Greenpeace commented in a press release on 17 December that the legislation on car emission standards had been watered down as a result of lobbying by car manufacturers. The deadline (2015 compared to 2012 under the original proposal), the level of fines and the reduction target (130 rather than 120 grams) have all been changed.
WWF said the climate package was “poisoned by the large amount of carbon credits allowed from non-European countries,” focusing actions away from Europe and giving a bad example to the rest of the world.
Greenpeace warned that the package could not be taken as a basis for the EU’s negotiation position in Copenhagen in 2009, as it did not even guarantee the achievement of the EU’s emissions reduction target of 20 per cent, let alone 30 per cent, which it said was generally recognised as the bare minimum to combat global warming.

As concerns emissions trading the revised directive on emissions trading states that the majority of rights must be auctioned instead of being allocated free of charge, as in the past. The Commission is also to take a decision on the criteria for free distribution , particularly to some sectors of high-carbon industry where competition is strong.

This means that the emissions trading system will in theory become a very strong incentive, but it remains to be seen just how effective it is in practice. During the first trading period of 2005–2007 the first priority was to get the machinery in place. This led to overly generous allocation and eventually to a collapse in prices. In the run-up to the second trading period, 2008–2012, the Commission examined the plans much more actively and cut back allocations in most countries, but retained the national allocation plans. In the third period the energy sector will have to buy all its rights at auction, with a few exceptions. The exceptions apply to Poland, Estonia, Latvia and Lithuania, for whom free allocations will be ramped down and disappear completely by 2020.

Harmonized rules will apply to the whole of manufacturing industry, including steel, cement, lime, and aluminium producers.
Opportunities for Member States to look after “their own” industries are thus greatly reduced. This also increases the collective ability of the EU to deliver large reductions in emissions.

The difficulty lies with the numbers. To achieve a 20-per-cent reduction in greenhouse gas emissions over the period 1990–2020, trading in emissions rights must deliver a reduction of 21 per cent between 2005 and 2020.

National targets for emission reductions and renewable energy according to the new EU climate package.

Problems have quickly surfaced. The price of emission rights plummeted from 20–30 euro per tonne for most of 2008 to 8–10 euro in February 2009. This not only applies to spot prices but also futures. This is to some extent due to the economic crisis, but naturally means less incentive for change. Because surplus emission rights can be saved until 2020 at least, today’s prices also say something about the way the market expects things to turn out in the longer term.

Investments in low-carbon technology require a higher and more stable price for emission rights. One of the methods in which many EU governments are putting a lot of faith is Carbon Capture and Storage (CCS). One common estimate is that CCS will not become profitable until the price of emissions rights reaches 30–35 euro/tonne. It is even difficult for many forms of renewable energy to compete with fossil fuels when the price of emission rights is so low.

Emission credits from projects may also be used in the trading sector. This represents roughly half of the reduction, in other words around 130 million tonnes per year, or a total of roughly 1.6 billion tonnes for the period 2008–2020. The CDM will also apply to new participants and new sectors, although its effect is unclear.

The package does not rely entirely on emissions trading and national undertakings for the non-trading sector.
In the case of renewable energy the EU must achieve at least a 20-per-cent share by 2020. Each country will be given a binding target, expressed as a percentage of total energy use. This means drastic changes for many countries (see map).
The action plans of the member countries must be complete by 30 June 2010. The Commission will specify the information the plans must provide on 30 June 2009.

There are opportunities to meet part of the undertaking through common initiatives within the EU and by building power plants in countries outside the EU, but only if the electricity is used in the EU. In other words constructing a wind farm in China will not count under this directive, but the construction of a wind farm in Norway or solar power plant in Algeria would, assuming that power could be transmitted satisfactorily.

The directive also establishes that renewable electricity must be given guaranteed or priority access to the grid.

The EU does not take any position on whether the increased share of renewables should be achieved through feed-in tariffs, as in Germany, Spain and other countries, or by a quota system, as used in Sweden and Great Britain, for example.

Each member state must also have a renewable energy share of at least 10 per cent in the transport sector. It is clear however that the EU has taken note of the criticism levelled against biofuels.

Extensive sustainability requirements are set out for biofuels, regardless of whether they are grown in the EU or imported. The Commission will report to Parliament on compliance with these sustainability criteria every alternate year from 2012.

Biofuels may not be counted as fully renewable if they give rise to greenhouse gas emissions during their lifecycle. As a standard value, it is assumed that biofuels reduce greenhouse gas emissions by 35 per cent, unless better values can be proven.

Electric vehicles and hydrogen vehicles are particularly encouraged, since electricity that is used for this purpose may be multiplied by a factor of 2.5. This is based on a conventional coal power plant having an efficiency of roughly 40 per cent, which makes it more profitable to replace fossil fuel with renewable power than to replace petrol with ethanol.

The main purpose of the CCS directive is to ensure consistent regulation of carbon capture and storage. An emission limit for new power plants of 350 grams/kWh was proposed in the report by Parliament (Chris Davies, British liberal democrat). This would have meant a ban on new coal power plants without CCS, but permitted efficient fossil gas power plants. New coal power without CCS thus remains a big possibility – a possibility that many power companies are of course banking on.
In other respects the potential for CCS is governed mainly by the emissions trading directive.

Revenues from the sale of up to 300 million emission rights will be taken from reserve for newcomers to the trading system and distributed to as many as 12 CCS demo plants or projects that demonstrate innovative renewable energy technologies. At an emission price of 10 euro this totals three billion euro.

This is not such good news for CCS as it may seem. The figure was cut from 500 to 300 million rights and at the same time the value has fallen sharply as a result of the price drop in emission rights.

Parliament also wanted half the revenues from auctioning to be earmarked for a variety of purposes, including CCS. But this figure was whittled down to 12 per cent, to be used for climate policy measures in poorer EU countries.

At the end of January the Commission proposed that 1,250 million euro from unused agricultural subsidies in the 2008 budget should be used for CCS projects, but no decision has been reached.

Of the other possibilities for reducing emissions, no decision was reached on nuclear power, as expected. Nuclear power is in any case influenced by both emissions trading, which slightly favours nuclear power, and by the renewables directive, under which nuclear power makes it more difficult to achieve targets. The energy efficiency target probably also works against nuclear power most of the time. In Sweden, for example, increased nuclear power generation that results from increasing capacity by 1 TWh would require a corresponding 1 TWh increase in wind power output. But if electricity consumption were to increase at the same rate it would be very difficult to meet the energy efficiency target. Exporting nuclear power does not provide any solution to the problem either, since the origin of all electricity must be identified. If Germany, for example, imports Swedish nuclear power it is added to other non-renewable sources of energy.

The legislation on emissions standards for new passenger cars sets a target of 130 grams/km for the average new car by the year 2015. This will be reduced to 95 grams in 2020.

It is assumed that a further 10-gram reduction can by achieved by using biofuels, for example. Significant penalties are imposed per car if emission targets are exceeded.

Manufacturers of cars with very low emissions (less than 50 grams/km) will receive “super credits”, meaning that one of these cars will counts as 3.5 normal cars. This is a further move to favour electric and hybrid cars that mostly run in electric mode.

Fredrik Lundberg

1 ETS: MEMO/08/796
2 Effort-sharing: MEMO/08/797
3 CCS: MEMO/08/798
4 CO2 from passenger cars: MEMO/08/799

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