EU boosts global climate policy lead with 2030 deal

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European Union leaders worked long into the night last week to fulfil their promise to deliver a climate and energy policy framework to cover the decade from 2020 to 2030 at this month’s meeting of the European Council.

The deal – the centrepiece of which is a 40% reduction in greenhouse gas (GHG) emissions below 1990 levels by 2030 – keeps the EU in the vanguard of climate policy in the run-up to crucial international treaty talks in Paris at the end of 2015. It also provides a degree of certainty to energy investors, though nowhere near as much as most would have liked. As far as the natural gas industry in Europe is concerned, much will depend on the success of efforts to reform the Emissions Trading System (ETS) so that it provides meaningful investment signals.

Concerns that the deal might be vetoed by one or more of the member states pleading for special treatment persisted until the very end – with eastern member states, led by Poland, insisting on financial help with modernising their electricity generation systems; and the Iberian peninsula countries, Spain and Portugal, wanting help with exporting surplus renewable energy into the rest of the EU via France. For the most part they got what they were asking for.

“Not easy at all” That all those obstacles were overcome says a lot for how important concluding a deal was seen by all involved. In the early hours of Friday morning, the president of the European Council, Herman Van Rompuy, said: “ It was not easy, not easy at all, but we managed to reach a fair decision. It sets Europe on an ambitious yet cost-effective climate and energy path . . .

“Economic actors need the predictability of a long-term framework – to plan investments, to spur innovation, to bolster research. Back in March, we set ourselves today as a deadline, and we’ve kept our promise. We offer certainty . . .

“Today’s decision will allow the European Union to bring a positive message to the international climate negotiations . . .  well in time for the UN conference in Paris next December, which should shape the post-2020 world order, at least in terms of climate policy.”

The sense of achievement felt by both Van Rompuy and the president of the European Commission, José Manuel Barroso, was highlighted by a letter they sent to UN secretary-general Ban Ki-Moon after the deal, in which they wrote: “We are pleased – and even proud – to inform you that the Union will hold to its commitment . . . to submit its contribution to the conclusion of a global climate agreement . . . by the first quarter of 2015.”

Four targets, but how binding are they? Along with the 40% target reduction in GHG gases, EU leaders agreed on three other main 2030 targets: 27% of total energy consumed to come from renewable sources; a 27% improvement in energy efficiency beyond business-as-usual levels, which may be increased to 30% following a review in 2020; and for member states to have electricity interconnections of at least 15% of their generation capacity with neighbouring states.

The Council also agreed – as part of a series of proposals to increase energy security – to “implement critical projects of common interest in the gas sector”. Such projects include the North-South corridor, the Southern Gas Corridor, the promotion of a new gas hub in southern Europe, and infrastructure projects to enhance energy security in Finland and the Baltic States. The primary objectives are “to ensure diversification of energy suppliers and routes and to ensure market functioning”.

The Council also wants to see the EU “improve arrangements for a better use of regasification and  storage capacity in the gas system to better tackle emergency situations” – such as the current concern over supplies of Russian gas to Europe via Ukraine.

Inevitably, most aspects of the deal are proving to be controversial, with some seeing the targets as too ambitious and others regarding them as not ambitious enough. For investors wanting as much certainty as possible about the future business environment in Europe energy sectors, the question of how binding the targets are is central to their concerns.

The GHG reduction and renewable energy targets are binding, but only at the EU level, which raises questions about how they will be enforced. The energy efficiency target is described as “indicative” and is seen by some as little or no better than business-as-usual. It is also hard to see how the EU will enforce the electricity interconnection target.

Emissions trading reforms The main instrument for achieving the 40% GHG reduction target will be the ETS, the reform of which will include a stabilisation mechanism as proposed by the European Commission earlier this year. The annual factor to reduce the emissions cap will change from 1.74% now to 2.2% from 2021 onwards.

The current ETS covers power plants and industrial companies, but the cap-and-trade approach to emissions reduction is to be extended into non-ETS sectors such as transport, agriculture and buildings. The European Council expects reductions in the ETS and non-ETS sectors amounting to 43% and 30% respectively by 2030, compared with 2005.

As for the 27% renewables and energy efficiency targets, the Council expects these “will be achieved while fully respecting the member states’ freedom to determine their energy mix”.

By Alex Forbes