Questions and Answers on the European Commission`s proposal for effort sharing
1. What is the Commission proposing?
On 10 January 2007 the Commission adopted an energy and climate change package, calling on the Council and European Parliament to approve:
- an independent EU commitment to achieve a reduction of at least 20% in the emission of greenhouse gases by 2020 compared to 1990 levels and the objective of a 30% reduction by 2020, subject to the conclusion of a comprehensive international climate change agreement;
- a mandatory EU target of 20% renewable energy by 2020 including a 10% biofuels target.
With this independent commitment, the EU shows leadership in the fight against change, while at the same time showing its willingness to go even further in the context of an ambitious international agreement.
This strategy was endorsed both by the European Parliament and by EU leaders at the March 2007 European Council. The European Council invited the Commission to come forward with concrete proposals, including how efforts could be shared among Member States to achieve these targets.
This package is the reply to that invitation. It comprises a set of key policy proposals that are closely interlinked. They include:
- a proposal amending the EU Emissions Trading Directive (EU ETS);
- a proposal relating to the sharing of efforts to meet the Community's independent greenhouse gas reduction commitment in sectors not covered by the EU emissions trading system (such as transport, buildings, services, smaller industrial installations, agriculture and waste);
- a proposal for a Directive promoting renewable energy, to help achieve both of the above emissions targets.
Other proposals that are also part of the package include a proposal for a legal framework on carbon capture and storage, a Communication on the demonstration of carbon capture and storage and new guidelines for environmental state aid.
2. How is the 20% greenhouse gas target shared between sectors and Member States?
The EU ETS is a central pillar of the Commission's climate change strategy, and is an EU-wide policy instrument to reduce greenhouse gas emissions in electricity plants and major industrial installations. It currently covers some 40% of all EU-27 greenhouse gas emissions. This will increase as a consequence of the proposed extension of the EU ETS. Increased use of auctioning and Community-wide rules for free allocation will become the norm.
In the past, National Allocation Plans were used to define the total amount of allowances to be distributed to these companies. Now, a single EU wide cap for the emissions covered by the EU ETS is proposed, ensuring a level playing field in the single European market for industrial installations. Consequently, there are no specific national emissions targets under the EU ETS.
The total effort for greenhouse gas reduction needs to be divided between the EU ETS and non-ETS sectors. The Commission is proposing the following approach:
- a 21% reduction in EU ETS sector emissions compared to 2005 by 2020;
- a reduction of around 10% compared to 2005 for the sectors that are not covered by the EU ETS.
Taken together, this results in an overall reduction of -14% compared to 2005, which is equivalent to a reduction of -20% compared to 1990. A larger reduction is required of the EU ETS sector because it is cheaper to reduce emissions in the electricity sector than in most other sectors.
A second consequence of the EU-wide cap under the EU ETS is that the sharing of greenhouse gas reduction efforts between Member States is determined solely for sectors not covered by the EU ETS. These sectors, which are made up of small-scale emitters in a wide range of sectors such as transport (cars, trucks), buildings (in particular heating), services, small industrial installations, agriculture and waste, currently represent some 60% of total GHG emissions in the EU. As a rule, it will be left to Member States to define and implement policies and measures in such sectors, although a number of EU-wide measures in areas such as energy efficiency standards, CO2 and cars, and waste legislation will also contribute to emission reductions in these sectors.
3. How is the -10% target for sectors not covered by the EU ETS to be shared out among Member States?
Member States all have individual targets expressed as a percentage, which average out at 10%. The Commission is proposing to use GDP/capita as the main criteria when setting the targets for Member States. This approach has two advantages. It will ensure that the actual efforts and the associated costs are distributed in a fair and equitable manner, and it will allow for further, accelerated growth in less wealthy countries where economic development still needs to catch up with other Member States. The package therefore ensures that there will be no negative effect on economic and social cohesion.
The figures chosen are limited to a maximum of -20% or +20% compared to 2005. These limits ensure that specific national targets remain technically and economically feasible and reasonable in each country, and that there is no unreasonable increase in overall costs.
The reduction required in Member States where GDP/capita is below the EU average will therefore be less than the EU average (i.e. less than -10% below 2005 levels), and in fact some Member States will even be allowed to increase their emissions above 2005 levels in sectors not covered by the EU ETS, to a maximum of 20% above 2005 levels. In the more wealthy Member States, where GDP/capita exceeds the EU average, a bigger effort is required, and a reduction above the EU average will be demanded, up to a maximum figure of -20% below 2005 where GDP/capita is highest.
Countries with a low GDP per capita will be allowed to emit more than they did in 2005 in sectors not covered by the EU ETS because their relatively higher economic growth will probably be accompanied by increased emissions in sectors such as transport. These targets do however still represent a cap on their emissions, and will require some sort of reduction effort for all Member States.
Countries will not be able to appeal against the targets once they are set, but the codecision procedure ensures that there is some room for negotiation in the legislative process. The intention is for the targets to be finalised within the current term of parliament.
4. What can a Member State do to meet its national target in the non ETS sector?
In sectors that do not come under the EU ETS, such as buildings and road transport, many of the important decisions will be made at Member State level. Individual EU governments will introduce policies and measures to lower emissions such as traffic management, shifts away from carbon-based transport, taxation regimes, the promotion of public transport, biofuels, urban and transport planning, improved standards for the construction industry, the promotion of adequate insulation, more efficient heating systems, and renewable energy for heating. Measures to reduce and recycle waste streams can also have a significant impact on GHG emissions. The new guidelines for State aid in the area of environment that are also being adopted as part of the package will increase the ability of Member States to implement such measures, while avoiding distortions of competition in the internal market.
A number of important EU-wide measures will also help Member States to reduce emissions. The recently proposed regulation on CO2 and cars for example, requiring manufacturers to improve the CO2 efficiency of new cars by 19% by 2012, will help Member States meet their national targets. New efficiency standards for boilers and water heaters, together with adequate labelling systems to inform consumers, could also help deliver major emissions reductions in buildings. The full implementation of the Landfill Directive (in 2016) will deliver further important emission reductions, as reducing landfills for biodegradable waste will bring a major reduction in emissions of methane, a powerful greenhouse gas.
In addition to this, Member States can also use credits from Clean Development Mechanism (CDM) projects (see below)
5. What are the benefits of the energy and climate package?
The package will bring important economic benefits in the short and long term. If the greenhouse gas and renewables targets are met, oil and gas imports will fall by some 0.3% of GDP, which translates into import savings of €50 billion. This would also mean that the EU economy would be less exposed to disruptions in supply and price shocks that might result from having supply concentrated in a limited number of countries.
These savings are based on a conservative estimate of an oil price of around $60 per barrel. If the current high oil prices of almost $100 per barrel continue, these benefits will be considerably higher. Overall, reducing greenhouse gas emissions and increasing renewable energy in line with the targets agreed by the Heads of State will make the EU considerably less dependent on imports of oil and gas. As well as bringing positive trade balances, this will reduce the EU's exposure to rising and volatile energy prices, inflation, geopolitical risks and the risks inherent to supply chains that fail to match the global demand for growth.
Implementing the package will also create a first mover advantage for the EU in low carbon technologies. Already today, EU companies are global leaders in renewable technology such as wind and solar energy. The package will further boost the competitiveness of these hi-tech sectors.
The package will also generate important benefits related to air quality. The major air pollutants (sulphur dioxide, nitrogen oxides and particulate matter) will be reduced by some 15%, bringing significant health benefits. In addition, investment in air pollution control equipment will have been reduced by some €11 billion by 2020, thanks to the use of intrinsically cleaner technologies.
6. What are the costs of the energy and climate package?
The Stern Review estimated the economic cost of any failure to act on climate change as being between 5 and 20% of global GDP. To avoid paying that cost, the EU has agreed that future climate change must be limited to an increase of no more than 2°C above pre-industrial levels. This will require global greenhouse gas emissions to fall to no more than 50% of 1990 levels by 2050. In the shorter term, the EU has set a target of a 30% reduction in 2020 for developed countries. To achieve this, a broad international agreement is essential.
Through its adoption of an independent commitment to a 20% fall, the EU is taking the lead in the fight against climate change and demonstrating to our global partners that strong action will go hand in hand with continued economic growth and prosperity.
Implementing the package will, however, require a considerable economic effort and increased investment in renewable energy. Power plants, appliances and transport must be made more energy-efficient. The Commission has estimated the direct cost of mitigating emissions in the energy system and non-CO2 emissions in all sectors at approximately 0.6% of GDP – or €90 billion – in 2020, if the EU achieves the required emission reductions internally. CO2 credits acquired through the Kyoto Protocol's flexible mechanisms will reduce this further to 0.45% of GDP.
At the macro-economic level, GDP in 2020 would be reduced by some 0.35-0.5%. In other words, each year GDP growth would be reduced by 0.04 to 0.06% between 2013 and 2020.
7. What are the implications for citizens?
It is very important for citizens to be closely involved. Their daily decisions about using energy and purchasing energy-consuming goods will be crucial in reducing greenhouse gas emissions.
Citizens are also targeted in that the package aims to induce accelerated investment in renewable energy and increased energy efficiency. Such investments will reduce exposure to ever-increasing fossil fuel prices and will, over time, mean reduced energy bills in comparison to a business-as-usual scenario.
The Commission estimates that by 2020, a household's overall energy bill would rise by an average of €150 per year. This is a rise of around 5% compared to current energy costs. The rise is very limited because extra investment in energy saving and switches to cleaner fuels will bring lower bills for heating and electricity. This estimate is based on an oil price of $61 per barrel. The higher the oil price, the lower this projected increase will be.
8. Why are all objectives based on the year 2005, and not on 1990, as the Kyoto Protocol
The year 2005 has been used as the base year or yard stick against which greenhouse gas reductions are presented. Calculating reductions and renewable energy shares in comparison with 2005 gives a transparent and easily understandable picture of the changes needed, as it compares such changes with what is effectively the present situation.
The data for 2005 is also more reliable and more easily available. It includes verified emissions at installation level within the EU ETS, as well as the overall GHG emissions of Member States as officially reported to the United Nations Framework Convention on Climate Change.
9. Can Member States use the Clean Development Mechanism to meet their national targets?
Under the proposals, if there is no progress beyond the 20% independent commitment, Member States can use CO2 credits from GHG reduction investments in third countries, up to a level of 3% of 2005 emissions: so almost one third of the 10% reduction being made. This amount is transferable between Member States.
The limits are in place to ensure that the package triggers investment in cleaner technologies and renewables. Higher limits might mean that targets could be missed, with Europe straying from the path towards a low-carbon economy. They should also ensure that Europe has greater leverage in international negotiations.
10. What happens when an international agreement is reached?
The EU will increase its target to 30% if developed countries agree to take equivalent measures under a satisfactory international agreement. To send a clear signal to the rest of the world on this commitment, the current proposals contain detailed provisions that will take effect when an international agreement is reached and ratified. In particular:
The targets can be adapted to be consistent with a higher international target. Targets for both the EU ETS and for sectors not covered by the ETS will be adapted in a manner that is proportional to their share of total emissions in 2020.
Targets can be met with an increased amount of CO2 credits acquired through GHG reduction investments in developing countries, thereby giving a strong incentive to third countries. The amount of CDM credits Member States may use to meet their target will increase. Half of the additional reduction effort required from each Member State may come from such credits.
11. How do emissions need to evolve between 2013 and 2020?
Both proposals, on the EU ETS and the targets for non ETS sector, foresee a linear reduction path. The figures must be reported each year. This will ensure a gradual move towards agreed 2020 targets. Both proposals however also foresee flexibility in meeting these targets. Part of this flexibility comes through the use of the CDM. For the non ETS sector Member States 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.
12. When will the package become operational?
After the conclusion of the first commitment period of the Kyoto Protocol, in 2013.
13. Will there be tougher targets in the future?
If we are to limit climate change to 2°C above the temperature in pre-industrial times, reductions will have to continue worldwide after 2020 as well. Global emissions need to be halved by the middle of this century. However, in reaching the 20% reduction target by 2020, we will be taking a decisive step on the path to steeper reductions in the future. At the same time, more advanced technologies will be needed to meet more stringent reductions in the future.
14. Will jobs be lost or move out of the EU?
This package of measures will have a major economic impact, and will involve structural changes as the EU transforms itself into a low carbon economy. The in-depth analysis that led up to the package showed that the overall impact on employment will be marginal. The employment impact in specific sectors will vary to a far greater extent. Carbon-intensive sectors will incur increased costs, and this will affect their competitiveness compared to low carbon alternatives. But this will be offset by new low carbon sectors, where employment will expand significantly, as has already been demonstrated in the renewable energy sector. The impact will therefore be to affect the sort of jobs that are created, and the sectors in which they will be found. A structural change towards an economy with higher energy efficiency and lower carbon intensity is inevitable, as oil prices have demonstrated over the last year.
As the EU succeeds in creating a competitive edge in low carbon technologies, new export opportunities will appear. Other countries will begin to follow EU leadership in the fight against climate change.
This is why the package includes detailed provisions on the action the EU will take if the level playing field is distorted and production – and emissions – switch overseas. The best way to ensure a level playing field is, of course, a comprehensive international agreement.
15. Will the rest of the world follow suit?
The latest Conference of the Parties adopted the Bali Roadmap. This was a breakthrough, with all countries agreeing to start formal negotiations for a future international climate change agreement as a follow-up to the Kyoto Protocol, to be concluded by 2009.
The EU cannot decide for the rest of the world. But we are facing a global threat, and the best we can do is to show global leadership by example, and demonstrate that the economy and the community can prosper while fighting to limit climate change.
16. What sort of penalties will be involved if national targets are not met?
Each Member State is granted a yearly amount of total allowed emissions in sectors not covered by the EU ETS. The amounts are in accordance with a linear reduction path towards the final 2020 target. Member States are however allowed to borrow 2% of their allowed emissions from the next year and can bank the emission reductions they make in excess of their reduction targets for the following year.
Member States already monitor their greenhouse gas emissions and report on them every year. If a monitoring report shows that a State is not in accordance with the allowed amounts specified in the effort sharing decision, the Community can launch infringement procedures against the Member States concerned under Article 226 of the EC Treaty.
Article 226 of the Treaty gives the Commission powers to take legal action against a Member State that is not respecting its obligations. If the Commission considers that there may be an infringement of EU law that warrants the opening of an infringement procedure, it addresses a 'Letter of Formal Notice' (first written warning) to the Member State concerned, requesting it to submit its observations by a specified date, usually two months. In the light of the reply or absence of a reply from the Member State concerned, the Commission may decide to address a 'Reasoned Opinion' (final written warning) to the Member State. This clearly and definitively sets out the reasons why it considers there to have been an infringement of EU law, and calls upon the Member State to comply within a specified period, usually two months. If the Member State fails to comply with the Reasoned Opinion, the Commission may decide to bring the case before the Court of Justice. Where the Court of Justice finds that the Treaty has been infringed, the offending Member State is required to take the measures necessary to conform.
Article 228 of the Treaty gives the Commission power to act against a Member State that does not comply with a previous judgement of the European Court of Justice. The Article also allows the Commission to ask the Court to impose a financial penalty on the Member State concerned.
There may also be external factors that encourage the EU make emissions cuts. Under the Kyoto Protocol, any non-compliance needs to be made up, plus an additional restoration factor of 1.3. It is hoped that something similar will be contained in the post 2012 agreement.
17. Can a Member State set its own overall target for a reduction in greenhouse gas emissions?
The fact that there is no overall legally binding target for greenhouse gas emissions is the logical consequence of the introduction of a single EU-wide cap for the EU emissions trading system. Eventually, the market operators will decide where emission reductions will take place, most probably in places where they are most cost-efficient. It is therefore not possible to define a specific target for a country at EU level. Naturally this will not prevent Member States from adopting their own targets, giving visibility to their own efforts to fight climate change, benchmarking progress and engaging the public.
18. What are the next steps?
The proposal will be discussed in parallel in the Council and the European Parliament. It falls under the so-called co-decision procedure, meaning that the European Parliament is co-legislator and must agree on the final legislative text. The intention is to push through the package during the current term of Parliament.