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EU eyes increased CO2 reductions

The EU is upping the ante before climate talks in Cancun with plans to hike emissions-reduction targets

AS GOVERNMENTS prepare for December's climate-change talks in Cancun, the EU is seeking to strengthen its leadership in the battle to reduce carbon emissions. Momentum is building for the adoption of larger emissions-reduction targets; the ground rules are being established for a tougher new phase of the bloc's emissions-trading scheme; and even the international aviation sector may be about to come on board.

The EU's longstanding target is to cut carbon emissions by 20% from 1990 levels by 2020, largely by using a Europe-wide emissions-trading system. Until recently, any suggestion of an increase in this target was linked to progress on emissions cuts elsewhere in the world, but that view is now softening. Several high-profile politicians argue that a 30% target should now be adopted unilaterally by the bloc – a move that could provide much-needed impetus for global climate talks.

The environment ministers of Germany, the UK and other EU states have supported the move. They argue that falling emissions levels as a result of reduced industrial activity during the economic downturn would make bigger cuts achievable without much extra economic hardship. In October, the European Parliament's Environment Committee approved a resolution stating that raising the target to 30% would be "in the interest of the future economic growth of the EU".

In September, the UK government published the findings of a report that claimed an increase in the target would have little impact on industry. "For most sectors, the results suggest the reduction in EU output would be negligible," said Chris Huhne, the UK's energy minister. The report said the only sectors likely to be seriously affected would be lime, iron, steel and ceramic-tile manufacturing. A European Commission analysis released earlier in the year suggested increasing the emissions cut target by 10% would cost only an extra 0.6% of GDP.

The 20% emissions-cut target is part of the EU's 20-20-20 initiative, which also includes a 20% target for the use of renewable energy and a 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency, all by 2020.

Vital to the success of these goals is the EU Emissions Trading Scheme (ETS), the world's largest cap-and-trade system, which is heading towards its third – and toughest – phase, running from 2013-20.

The EU ETS allows polluting companies to buy permits – EU allowances (EUAs) – to offset emissions produced above an imposed limit. During the two introductory phases of the scheme, which started in 2005, there has been an oversupply of free EUAs allocated to polluters, partly to ease their entry into the system. That, combined with falling emissions during the recession, has dragged down the price of carbon and provided little incentive to invest in CO2-reduction measures.

EUAs – each of which is equivalent to 1 tonne of CO2 – were trading at around €15-16 (around $22) in October, but investments such as carbon capture and storage, or nuclear plants, need a price closer to €50/t to make them viable in the absence of other policy measures.

Under Phase 3, the intention is to reduce the cap and auction a larger share of permits, rather than giving them away. That should push up the carbon price – though not to the dizzy heights of €50/t – and have more of an influence on polluters' behaviour.

"More so than anywhere else in the world, the sectors involved in the EU ETS have to comply with a tight CO2 cap up to 2020 – and that means companies must take CO2 into account when making important longer-term investment decisions," says Andreas Arvanitakis, senior analyst at Point Carbon, an energy consultancy.

The scheme will also move to a centralised – and lower – EU-wide cap in Phase 3, rather than working with varying national and sector settings, which have been kinder to some industries than others. For most of the power sector, there will be no free permits, with all allowances to be auctioned, while for non-power sectors, auctioning will start at 20% of EUAs and then rise to 100% by 2027.

Point Carbon forecasts that Phase 3 allocations to the sectors covered by the EU ETS will amount to almost 18bn EUAs, while emissions over the phase will be almost 20bn tonnes of CO2. That indicates a shortfall of 2bn tonnes, some 1.4bn tonnes of which could be offset by imported credits from UN-backed mechanism.

If the EU decides to move to a 30% emissions-reductions target, Point Carbon estimates the cap in the EU ETS would fall to less than 15bn EUAs, creating a shortfall of over 5bn tonnes of CO2, of which 1.8bn tonnes could come from project mechanisms.

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