EU deal on climate change still possible by end 2008

European Union (EU) leaders agreed to reach a compromise on the bloc’s future CO2 emissions reduction regulations in December. However, current proposals will likely be watered down to secure the support of member states concerned about short-term costs on their economies.

In the two day summit (15-16 October) of EU leaders, Poland and six other Eastern European nations threatened to block a December target for agreeing details of the EU plan to reduce emissions by 20 percent by 2020. Joined by Italy, the countries raised concerns over the costs that going green, combined with the looming economic downturn would inflict to their industries.
In this context and at the conclusion of the summit, EU leaders agreed to stick to the December deadline for reaching agreement and to ensure that measures are introduced in a cost-effective manner, taking into account each Member State's specific situation.

On the one hand, achieving a timely agreement in December on details of how to achieve EU emission cuts by 20 percent by 2020 would enable Europe to take the lead in discussions with the new U.S. administration and place Europe at the forefront of international talks on climate change in the United Nations climate change summit in Copenhagen in December 2009. On the other hand, achieving Member States consensus over the next six weeks is likely to involve significant compromises in order to secure the support of member states concerned about imposing further costs on their industries and economies.

Potential mechanisms to achieve compromises

Although no mention was made to specific ways in which the climate/energy package could be applied cost-effectively, discussions now are likely to focus on mechanisms that provide member states with flexibility in achieving their national targets. For example:

• Time flexibility: Member states may be able to defer a proportion of expected annual emission reductions from one year to the next and to trade emission rights amongst themselves.
   
• Location flexibility: Most member states support a significant extension of a current system which allows developed states to purchase emissions reductions credits achieved in third countries as part of the climate package. However, concerns still remain over the fact that the Joint Implementation and Clean Development Mechanisms (JI/CDM) could undermine EU domestic efforts while producing few verifiable emissions reductions abroad.
   
• Sectoral flexibility: According to the proposed law, certain energy-intensive industry sectors exposed to international competition will initially receive a percentage of emissions allowances for free under the EU Emissions Trading Scheme (EU-ETS), easing their compliance costs. The specific sectors still need to be indentified and the timeline for this remains the subject of dispute. Member states support an early identification of sectors in 2009, while the European Commission and the European Parliament argue that international climate talks need to progress before any sectors are singled out.

State aid measures likely to help industry

The European Council invited the European Commission - the EU's executive body - to make appropriate proposals to preserve the international competitiveness of European industry by the end of the year.

French president Sarkozy, whose country currently holds the six-month rotating EU presidency, explicitly referred to the European auto industry, which recently called for a € 40 billion bailout fund, and drew a parallel to a U.S. government $25 billion low-interest rate loan for the US auto industry big three manufacturers announced last month.

Background & next steps

On 23 January 2008, the European Commission presented a series of proposals to reduce the EU's greenhouse gas (GHGs) emissions by 20% by 2020, while increasing the bloc's share of renewable energy use to 20% over the same period.
The French EU Presidency will seek to finalise the deal on climate and energy package by the end of 2008, by achieving consensus between the European Council and the European Parliament.