The European Commission last night Australian time unveiled plans for a sweeping overhaul of the EU's emissions trading scheme, including an end to national allocation plans and new rules for linking to other trading schemes.
It also proposed new measures to speed up the development of carbon capture and storage and to put Europe on a path to meet its 20% by 2020 renewables target.
And in comments likely to set off alarm bells for Australian exporters to Europe, EC President José Manuel Barroso floated the prospect of protecting the competitiveness of EU industry by requiring importers to obtain emission allowances.
The Commission's package is designed to dramatically improve the efficiency of the EU trading scheme and to deliver on 2020 goals set by EU leaders last March: a 20% cut in emissions (rising to 30% if other developed countries make comparable efforts), sourcing 20% of the EU's energy from renewables (up from 8.5% of final energy consumption now) and a 20% increase in energy efficiency.
(Video extract of speech by European Commission President José Manuel Barroso to the European parliament on the package (requires RealPlayer))
The package will now be scrutinised by the European parliament (which must agree to the final text of legislative measures in the package) and also requires approval by EU leaders meeting as the European Council.
Trading scheme changes
The Commission wants a radical departure from the current EU trading scheme architecture, which is based on setting national emissions entitlements (in national allocation plans) that are then allocated among trading scheme participants by national governments.
Instead, the EU trading scheme directive would be amended so that after 2012 there would be one EU-wide cap on the number of emission allowances, rather than 27 national caps. This would remove the need for national allocation plans and would make allocation rules consistent across the EU.
There would also be a much greater reliance on auctioning.
"The Commission believes that auctioning of allowances should be the basic principle for allocation from [2013] onwards," its backgrounder on the trading scheme changes says.
"It is estimated that about 60% of the total number of allowances will be auctioned in 2013, and this proportion will increase in later years."
That would involve the power generation sector – widely seen as having gained windfall benefits from previous free allocations – facing full auctioning from the start of 2013.
The Commission says auction revenues could amount to 50 billion Euros by 2020 and a portion of these would be directed to helping developing countries adapt to climate change.
More industries would be brought into the scheme (including aluminium and ammonia producers), as would emissions of two more greenhouse gases (nitrous oxide and perfluorocarbons). However, a new exemption provision would be introduced for facilities emitting less than 10,000 tonnes of CO2.
The EU trading scheme currently operates in the 27 EU members states and – from the start of this year – Norway, Iceland and Liechtenstein. It currently covers about 10,000 power plants and industrial facilities.
Trade-exposed industries
Exceptions to the tougher approach on auctioning could be made for industries that would be under pressure to relocate for competitiveness reasons without free allocations, the Commission says.
"Installations in these sectors will receive up to 100% of their allowances for free," says the trading scheme changes backgrounder.
Any decisions along these lines will be made after an "in-depth assessment" in 2011 of the state of international negotiations and the impact of any international sectoral agreements. And the Commission notes free allocations need not be the only option.
The EU suggests it could also bring importers of the products concerned into the trading regime in order to "neutralise any distorting effects from imports".
European Commission President José Manuel Barroso also floated the prospect of imposing obligations on importers when outlining the reform package to the European parliament.
"There is no point in Europe being tough if it just means production shifting to countries allowing a free-for-all on emissions," Barroso said.
A rigorous international agreement would be the best way to protect international competitiveness, "but we also need to give legal certainty to companies", he said.
"So energy-intensive industries would have … allowances free of charge. And if our expectations about an international agreement are not met, we will look at other options such as requiring importers to obtain allowances alongside European competitors, as long as such a system is compatible with WTO requirements."
Linking to other schemes
Current rules allow for the EU scheme to be linked to trading schemes instituted by other industrialised countries, such as Australia, that have ratified the Kyoto Protocol.
But, in a move that would allow emerging U.S. trading schemes to be linked irrespective of any decision by the U.S. to ratify, the Commission has proposed that a trading scheme developed by any state, grouping of states or country could be linked.
Linking would be subject to the other trading scheme being a cap-and-trade system with design features that would not undermine the integrity of the EU scheme, the Commission says.
"Where such systems cap absolute emissions, there would be mutual recognition of allowances issued by them and the EU [scheme]."
New obligations on sectors outside the trading regime
In sectors not covered by the trading regime, such as buildings, transport, agriculture and waste, the EU will aim to reduce emissions to 10% below 2005 levels by 2020.
To deliver this EU-wide abatement target for sectors not covered by the trading scheme, the Commission is proposing that each member state have an abatement target for these sectors ranging from a 20% cut to a 20% increase.
Legally binding renewables targets for each member state
The Commission has proposed legally binding renewable energy targets for each member state in order to meet the EU-wide goal of increasing the portion of energy derived from renewables to 20% by 2020.
States would need to set out national action plans to meet these targets, which could include measures to be carried out in other EU member states.
"This would shift investment to where renewables can be produced most efficiently, which could cut 1.8 billion Euros from the price tag for the meeting the target," said an EU backgrounder on the proposal.
The measures are described in a proposed new EU renewable energy directive.
Carbon capture and storage
The Commission has urged the rapid development of a regulatory framework on carbon capture and storage (CCS) and the inclusion of CCS projects in the EU trading scheme, in a communication to the EU parliament that forms part of the package.
At current technology prices, up-front investment costs are about 30% to 70% greater than for standard power plants, the Commission says. Operating costs are 25% to 75% greater than for non-CCS coal-fired plants.
"These costs are expected to substantially decrease as the technology is proven on a commercial scale," a CCS backgrounder says.
The Commission says the commercial uptake of CCS "is likely to begin sometime around 2020".
"The precise contribution will depend on the uptake of CCS, but projections made for the Impact Assessment of the proposed directive show that, with CCS enabled under the [EU trading scheme] and assuming a 20% GHG reduction by 2020 and further significant progress towards our mid-century objective by 2030, seven million tonnes of CO2 could be captured in 2020, rising to around 160 Mt in 2030."
"The CO2 avoided in 2030 would represent around 15% of the reduction required in Europe. Estimates for the potential global contribution are similar, in the order of about 14% by 2030."
"In view of the importance of early demonstration of CCS in power generation and given that a number of those projects may require some public funding, the Commission is ready to view favourably the use of state aid for covering the additional costs related to CCS demonstration in power generation projects."
The Commission says the EU trading scheme will provide "the main incentive" for CCS.
"CO2 captured and safely stored according to the EU legal framework will be considered as not emitted under the [trading scheme]."
Cost is manageable
Commission President Barroso told the European parliament that those who considered the changes would come at too high a cost were wrong.
"The additional effort needed to realise the proposals would [cost] less than 0.5% of GDP by 2020. This amounts to about three Euro a week for everyone. A real commitment but not a bad deal."
"Even on the most optimistic assumptions of the Stern Report, the cost of inaction is more than ten times that. And every day the price of oil and gas goes up, the real cost of the package falls."
The Commission has released an impact assessment in conjunction with the package.
CDM and JI
The Commission says that if the EU's 2020 target is a 20% cut, then its proposed rules governing the use of Clean Development Mechanism (CDM) and Joint Implementation (JI) credits from 2013 to 2020 means entities with EU trading scheme obligations will be able to meet "more than one third" of their reductions through the use of these credits.
However, if the EU ultimately adopts a 30% reduction target for 2020, then up to half this additional reduction effort could be met through CDM and JI credits.
But the Commission has vetoed changing the EU trading scheme to allow participants to use credits created through land use, land use change and forestry projects.
It says these projects do not deliver permanent reductions, monitoring procedures are not yet adequate and they would add too much complexity to the scheme.
"Moreover, the sheer quantity of potential credits entering the system could undermine the functioning of the carbon market unless their role were limited, in which case their potential benefits would become marginal."
Energy efficiency moves
A Commission communication to the parliament offers a lukewarm overall appraisal of member states' National Energy Efficiency Action plans.
"Several present comprehensive strategies and plans likely to deliver savings beyond the required 9%," it says. "However, many seem to present a business-as-usual approach."
The communication, which highlights various energy efficiency initiatives set out in the action plans, says the Commission will introduce a number of new energy efficiency initiatives in 2008.
These include a communication on sustainable production and consumption and a communication on energy efficiency in communications and information technology. It also aims to recast the directive on the energy performance of buildings.
Biofuels
EU leaders last year set a minimum EU target of 10% for the use of biofuels in transport. The Commission says this will apply evenly across each member state in order to ensure consistency in fuel specifications and availability.
Biofuels are currently regulated by a separate EU directive, but the Commission has proposed regulating their use as part of the proposed new renewables directive.
New guidelines on environmental aid to industry
The Commission has also proposed new guidelines for granting state aid to businesses for environmental objectives.
The guidelines update those issued in 2001.
(Commission promotional video clip on the climate and energy package featuring EC President Barroso and OECD Secretary-General José Angel Gurria (requires RealPlayer))
