European Union: EU Commission Publishes Its Climate And Renewables Package

The EU Commission has unveiled its long-awaited (and delayed) climate change package containing a number of proposals in different areas to boost its policy on reducing carbon emissions.

Tackling climate change is now one of the Commission's top priorities¹ and the package is intended to assist in achieving the two key climate change and sustainability targets set by Member States in March 2007:

• a minimum 20% reduction in greenhouse gas emissions by 2020 (or 30% if international agreement is reached to commit other developed countries to the same target).

• 20% of energy consumption in the EU to come from renewables by 2020.

The Commission believes that the cost of implementing the proposals would be less than 0.5% of GDP by 2020 which is at least ten times lower than the comparable cost of inaction. The measures in the package can be broadly split into four categories: general carbon reduction targets; increased use of renewables; changes to the EU Emissions Trading Scheme ("EU ETS"); and carbon capture and storage. It looks likely that proposals will be adopted by Spring 2009. In this article we give a brief run-down of the proposals in each of these areas.

General carbon reduction targets

In order to meet the 20% emission reduction target, the Commission has split the burden of emission reduction effort between EU ETS sectors and non-EU ETS sectors. The reductions would be met by:

• a 21% reduction in EU ETS sector emissions by 2020 compared to the 2005 levels (in future using a single EU-wide cap rather than National Allocation Plans to allocate emission allowances to participants).

• For sectors not covered by the EU ETS the required reduction would be 10% across the EU as a whole compared to 2005 levels. Individual Member States would then have legally-binding targets for reducing emissions which together would achieve the 10% reduction². Luxembourg and Denmark have the most significant obligation: to reduce emissions by 20%. By contrast some of the Member States with lower GDP per capita have been allowed to increase their emissions, for example Bulgaria are allowed a rise of 20%. Annual reductions will be required which will fall on a linear basis to meet the target by 2020. However, they may borrow 2% of their allowed emissions from the following year or bank the emission reductions they make in excess of their reduction targets for the following year. Up to 3% of the overall targets could be met by Clean Development Mechanism (CDM) investments in third countries. If they fail to comply, Member States will be subject to infringement proceedings.

Increased use of renewables

In order to reach the 20% target for renewables by 2020, the Commission has again proposed allocating the burden between Member States. Half of this reduction (i.e. 10%) will be shared between Members States equally and the other 10% will be "modulated" according to each Member State's GDP per capita and current share of renewables. On this basis Sweden which has current renewable capacity of 3.9% would need to achieve a target of 49%; by contrast Malta, with no current capacity, will have to reach 10%. Renewable electricity, heating, cooling and transport would all be eligible and it will be up to Member States to decide the proportion to be contributed by each sector to meet their overall target. Member States will not be limited to meeting their own targets within their own countries, but will be able to do so by contributing to the overall EU effort. This cost-saving mechanism will allow Member States to support cheaper renewables projects based in other Member States and be provided with guarantees of origin as a means of proof. There is also scope for support of projects in third countries but only where these are constructed after the relevant Directive comes into force. The EU is particularly concerned about reducing emissions in the transport sector and so has set a further target of 10% minimum of overall petrol and diesel consumption to come from sustainable biofuels. All Member States will be subject to this 10% reduction. Given ongoing controversy over the sustainability of biofuels, the Commission envisages that strict sustainability criteria will be put in place to ensure that biofuels are not produced from land with high biodiversity value or which would require a change of use. Environmental interest groups have criticised these criteria as insufficient to prevent significant social and environmental harm from biofuel production. Recent alarm over the impacts of biofuels on food availability and prices has led to growing calls from a number of directions for the Commission to scrap the biofuels target altogether.

Changes to the EU ETS

The EU ETS was launched in 2005 and has completed its first phase of trading (2005-2007). The first phase exposed a number of problems with the system including variable methods of allocation of allowances by Member States and the collapse of price of allowances on the EU ETS market. Changes have therefore been proposed to refine the system for the third phase (beginning in 2013) and to assist in meeting the more stringent targets as set out above³. Major changes include:

• Allocation of allowances to be carried out under a single EU-wide cap on the basis of harmonised rules and replacing Member States' National Allocation Plans (as mentioned above). Allowances would decrease in a linear manner each year from 2013 by 1.74% to achieve the overall targets.

• Extension of the EU ETS to include further greenhouse gases, namely nitrous oxide and perfluorcarbons (and also CO2 in certain chemical sectors and aluminium production from 2013). Aviation and Carbon Capture and Storage (CCS - see below) would also be brought into the system.

• Introducing an 8 year compliance period for Phase 3 as opposed to 5 year periods adopted for Phases 1 and 2.

• Increased use of auctioning such that, by 2020, all allowances would be auctioned.

• The holding of allowances in a single community-wide registry rather than in individual Member States' registries.

• A number of proposals dealing with emission credits from projects in third countries (i.e. CDM and JI projects), their acceptability, and the use of credits from Phase 2 of the Scheme in Phase 3.

More detail on the proposed changes to the EU ETS is contained in the Clifford Chance Briefing "The shape of things to come - the EU ETS from 2012 - perspectives on the EC's proposals - February 2008".

Carbon capture and storage (CCS)

There is a growing acceptance that storage of CO2 under the land or seabed will be needed to accompany more stringent carbon emission reduction targets to boost climate change action. CCS is regarded as having major potential in this regard but barriers to deployment still exist in understanding whether the technology will work on a commercial scale and whether it will be economic.

The Commission's package gives some additional assistance to support the ongoing development of CCS which is still largely in the experimentation stage:

• Proposals to relax EU State Aid guidelines which will hopefully encourage Member States to provide further funding.

• EU support for the 12 demonstration projects that the Commission wants to see created by 2015 - this support is, at this stage, more logistical support through co-ordination and facilitation rather than financial aid.

• CCS will be incorporated into the EU ETS during Phase 3 so that emissions from the associated plant would be treated as not having been emitted (during Phase 2 this will also be permitted but through a recognition procedure under the current EU ETS Directive).

In addition a regulatory framework for CCS has been proposed⁴. As a matter of principle, CO2 storage will only be allowed in geological formations within Member States' territories, exclusive economic zones or continental shelves. The framework sets out a consenting regime for the exploration of sites to store CO2, for the subsequent storage and post-closure monitoring.

CCS will be subject to environmental assessment and the Integrated Pollution Prevention and Control (IPPC Directive). Finally, the Large Combustion Plants Directive will be amended to ensure that all new combustion plants over 300 MW retain sufficient space for CCS equipment to be fitted or retrofitted.

More detail on the proposed regulatory framework is contained in Clifford Chance Briefing: "A New Framework for Carbon Capture and Storage - January 2008".

Final Thoughts

The Commission was in a difficult position in framing its climate change and renewables package and this was amply highlighted by the significant delay in its publication.

Criticised by some commentators for stifling EU competitiveness in the global market, and by others for not going far enough to avoid climate change, the package is in for a rocky ride as Member States negotiate furiously over coming months to secure the best position for their particular interests.

Already, at the summit of EU leaders in March 2008 at which the package was discussed, Germany managed to secure a significant commitment which could seriously dilute the effect of the proposals. Germany among other nations, was concerned that, faced with increasingly stringent emissions targets, heavy industry such as steel and car manufacture would simply relocate to countries where onerous emission reduction obligations do not apply (referred to as "carbon leakage"). The Commission must now consider how such industries could be spared emissions obligations in the event an international agreement is not reached on emissions reductions in international climate change negotiations in Copenhagen in 2009.

The Commission has its work cut out to ensure that a sensible and strong agreement is in place to gain maximum leverage in Copenhagen.

1 In February 2008, the Commission announced it was a top 5 priority for 2008/2009 along with employment, economic growth, immigration and Europe as a world partner.

2 Examples of qualifying measures which could be used to meet a Member State's target include action to comply with new CO2 efficiency requirements for new cars and new efficiency standardsfor boilers and water heaters.

3 a draft Directive has been published COM(2008) 16 final, which would amend the current Directive (2003/87/EC).

4 With a draft Directive on the geological storage of carbon dioxide: COM(2008) 18 final.

Copyright Clifford Chance 2008

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