EC Sets Out Details of Renewables, Climate Change Package

A Blueprint for Action

The European Commission (EC) yesterday released details of its action plan to achieve its goals for the energy sector, including a 20% decrease in the bloc's greenhouse gas emissions by 2020, and supplying 20% of all energy consumption from renewable sources by 2020. The proposals, which take the form of a draft directive that will now be subject to the European Union (EU) legislative process, establish the EC's blueprint for energy policy over the next 12 years and beyond.

Climate Change

At the forefront of the proposals is a significant revision of the EU's Emissions Trading Scheme (ETS) for the phase-three period, from 2013 to 2020. As the pivotal period for achieving the overarching 20% by 2020 emissions reduction goal—which is to be raised to a 30% contribution should other countries worldwide commit to significant action—the EC has both broadened the ETS for this period and sought to raise the financial pressure on the region's large emitters to cut back their emissions.

The ETS will be extended beyond its current focus—which includes power generation, oil refineries, coke ovens, iron and steel plants, and factories making cement, glass, lime, brick, ceramics, pulp, and paper—to cover additional sectors including chemicals, aluminium production, and aviation. Furthermore, the current focus on carbon dioxide will be extended to include other greenhouse gases. These changes will mean the ETS will cover 40% of all of the bloc's emissions during the 2013-2020 period.

In a move that will have a significant impact on the burden imposed by the ETS, the EC has proposed the introduction of widespread auctioning of emissions permits, phasing out the use of free allocations that has been the generally adopted method to date. Electricity generators will be faced with acquiring 100% of their permits via auctioning from 2013, signalling that a substantial leap in power prices can be expected. Other industrial sectors will step up to auctioning gradually, although a last-minute concession from the EC following heavy pressure from industry in recent weeks means that the phased introduction of auctioning will be more lenient than originally proposed. Revenue from permit auctions will accrue to member states, with the EC suggesting these funds should be directed towards innovation and research and development in the areas of renewable energy and carbon capture and storage. Such revenues are estimated to reach 50 million euro (US$73.4 million) by 2020.

For sectors not covered by the ETS, including buildings, transport, agriculture and waste, and accounting for 60% of overall emissions, the EC has established a goal of reducing emissions to 10% below 2005 levels by 2020. Combined with the overall cap to be imposed for phase three of the ETS, the achievement of this goal would ensure the bloc meets the overall target of a 20% cut to emissions by 2020. With regard to the non-ETS sectors, the EC has proposed a specific target for each member state (see table). These targets vary considerably – between a 20% reduction and a 20% increase in emissions – with less-developed economies being afforded greater leniency to provide room for continued economic growth.

Renewable Energy

The second key area to be detailed by the EC was the allocation of individual targets to meet the EU's headline goal of providing 20% of energy from renewable sources by 2020. Decisions on individual renewable targets had attracted considerable lobbying from member states in the lead up to the EC's announcement. In the end, the EC stuck to a wealth-based approach, as had been reported in recent weeks.

Each member state was allocated a base 5.5% increase in their 2005 share of renewables, half of the overall increase required across the bloc to boost the contribution of renewables from their current level of 8.5% to the target of 20% by 2020. The remaining gain required was then allocated based on a GDP-per-capita weighting to reflect the varying resources member states have at their disposal to undertake significant new renewable energy investment. The methodology resulted in individual targets ranging from a 10% contribution from renewables from Malta to a 49% contribution in Sweden (see table). The inclusion of a trading mechanism in the target system will ensure renewable investments are undertaken in those countries where they are most cost effective.

Biofuels

Subordinate to the overall renewable energy goal—which covers the electricity, heating and cooling, and transport sectors—was a separate minimum requirement for biofuels to provide 10% of all transport energy by 2020. The target, which applies to all member states equally, will be subject to "sustainability criteria" including that biofuels must provide at least a 35% emissions savings over oil, that they must not be produced from land of high biodiversity or high carbon stocks, and that they must be produced from farming that employs the best available agricultural practices. The EC will be hoping the announcement of these criteria will deflect some of the recent criticism that has been levelled at its biofuels policy following independent reports that, at present, such fuels provide questionable environmental benefits as compared to traditional fossil fuels.

Outlook and Implications

Ultimately, the details provided by the EC yesterday brought few surprises, remaining in line with reports in recent weeks on the substance of the proposals. Still, the measures are sure to attract considerable comment and a fair share of criticism. At least a few member states can be expected to challenge the EC's allocation of individual renewable targets, and the decision to enforce the auctioning of permits under the ETS will surely spark concerns among industry: most notably the power generation sector, which is already contending with cost pressures. However, the EC has shown a willingness to stand firm in the face of criticism before, and it will be an uphill battle for any individual country, or indeed industry, to see the proposals overturned. The proposed directives will now be forwarded both to the European Council and the European Parliament for discussion, the next stage of the EU legislative process. The EC is planning to have the package approved in the first half of 2009.

Altogether, the combined package confirms the EU's global leadership role in addressing the issue of climate change. While the bloc is also seeking to encourage other countries to take action against climate change, the policy package leaves no doubt that the bloc is also prepared to go it alone, and the reality now is that Europe will be subject to more stringent requirements earlier than anywhere else. However, there will be a price for being the global leader on climate action, and while the long-term benefits that will arise from the move are invaluable, businesses and consumers will surely be left counting the short-term cost. The EC estimates the cost of meeting its climate change and renewable energy targets will equate to 0.5% of the bloc's total economic turnover, or 60 billion euro per year. A degree of such costs will ultimately be borne by energy consumers, with initial estimates suggesting electricity bills will increase by 10-15% by 2020. The EC's policy proposals are indeed a landmark achievement, and the implications will be significant and widespread. The coming months will reveal whether individual countries, industries, and citizens share the EC's conviction in its fight against climate change when faced with what is now a very tangible cost.

Related Articles

Europe: 15 January 2008: EU Biofuels Target under Fire as New Study Reveals Sustainability Concerns

European Union: 23 November 2007: EU to Allocate Renewable Targets Based on GDP, Official Says

Europe: 12 March 2007: EU Renewable Target Gets Green Light, but Unbundling to Occur on Country-by-Country Basis

Europe: 9 March 2007: EU Ministers Agree 20% Cut in CO2 Emissions by 2020, Renewable Target and Unbundling Talks Continue

Find out more about Same-day Analysis