“Now the ball is rolling. The European Union has shown leadership in Brussels, giving the new US administration increased confidence to follow suit and providing real impetus to the UN climate change negotiations,” said Paal Frisvold, chairman of Bellona Europa. He welcomes in particular the funding mechanism for carbon dioxide (CO₂) capture and storage (CCS) that Bellona has worked hard to obtain.

Today the European Union (EU) leaders agreed on the last thorny issues of the legislative package on climate and energy at the summit in Brussels. They finally found compromises on tightening the EU emission trading system (ETS) and on emission reduction in sectors not covered by the ETS. Earlier this week, EU ministers and the European Parliament reached an agreement on the new directive for renewable energy and it is expected that with funding in place for CCS, the directive on geological storage of CO₂ will also be agreed on with the parliament.

Bellona has worked particularly hard to secure an EU funding mechanism for the first full-scale demonstration plants for CCS as part of the EU climate and energy package. This technology alone has the potential to reduce EU greenhouse gas emissions by more than 50 percent by 2050. While EU leaders set out the goal of having 10 to 12 such CCS projects in operation by 2015, they had until today not agreed on how to fund these relatively expensive first plants.

Funding for CCS

Today, EU leaders have agreed that 300 million EU emission allowances (EUAs), currently trading at €15 to €20 but expected to have a higher price in the future, would be set aside to reward projects selected by the EU to fully demonstrating the various options for CO2 capture, transport, and storage.

“This is, in the long term, perhaps the most important part of the climate package. This funding arrangement is the breakthrough we needed to make CCS a reality, and we are proud to have contributed to it,” Frisvold says.

The price of emission allowances

While CCS is crucial for longer-term emission reduction, the debate at the EU summit focused on the revision of the EU emission trading scheme for greenhouse gases. In line with the “polluter pays” principle, the European Commission had proposed that most allowances would be auctioned by member states to power plants and other large emitters covered by the ETS. This was supported by most member nations, while Poland and some other coal-dependent countries insisted on handing out a large number of allowances for free .

Yet, the controversy on free versus auctioned allowances may not be the most important in terms of what incentive the ETS provides to reduce emissions: What matters most is not the cost incurred by companies buying allowances, but the latter’s price on the market – in other words, the money a company saves by reducing its emissions. That is the result of supply and demand.

The agreed directive sets a total EU cap on the supply of allowances, which is to be reduced by equal cuts every year, reaching 21 percent below 2005 levels by 2020. But this supply has not in any way been linked to the demand – which depends mainly on economic activity. With the current economic slump, Deutsche Bank recently predicted emissions covered by the ETS to drop 10 percent below 2007 levels in 2009, thereby raising the prospect of low and volatile emission allowance prices in the time to come. Furthermore, companies will be able to meet many of their obligations through buying cheaper emission credits – for instance, under the Kyoto Protocol’s Clean Development Mechanism – from abroad: Up to half of emission reduction obligations will be allowed to be met through such external credits. This reduces the incentive for companies to invest in new low-carbon technologies to cut their own emissions.

Future emission ceiling for CO2

“We need extra drivers to make investments in low-carbon technologies profitable. In the 1980s we adopted strict emission ceilings for coal-fired power plants to eliminate sulphur dioxide that killed lakes and forests across Europe. Today we are facing the even more dramatic threat of global warming, so we should adopt a similar emission ceiling for CO₂. Today’s compromise reached by EU leaders is welcome, but it will need to be complemented with stricter measures if we are to prevent catastrophic climate change,” says Frisvold.

Such an emission ceiling, labelled “emission performance standard,” was introduced in California in 2007. The Californian limit of 500 grams of CO2 per one kilowatt-hour means that coal-fired power plants either have to capture and store their CO2 – or close down. The European Parliament environment committee supported a similar ceiling in a vote on October 7^th.

Background:

The Commission proposed four legislative acts on January 23^rd:

• Revised ETS directive
• Decision on effort-sharing in sectors not covered by the ETS
• Directive on geological storage of CO2
• Directive on renewable energy sources

All four need to be agreed on between the member states, as representatives meet in the Council of Ministers, and the European Parliament. One such agreement was reached on December 8^th on the renewables directive, while another, on the directive on geological storage of CO2, has been held up because of the council’s earlier failure to agree to a funding mechanism for CCS projects through an innovative amendment to the ETS directive. This, along with a number of other ETS issues having to do, in particular, with the degree of auctioning versus free allowances has been the focus of discussions among EU heads of state and government on December 11^th and 12^th. Now that they have reached a compromise among themselves, the deal will be considered by the European Parliament, which will vote on all four pieces of legislation on December 17^th. The European Parliament will be hard-pressed to change these compromises, although some – in particular, with regard to access to external credits under the effort-sharing decision – have weakened the legislation compared to what the parliament’s ambitions previously were.