EU Regulatory Watch

The European Commission’s Energy Package Published
January 23, 2008

 

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Today, the European Commission published its “Energy and Climate Change Package” which contains proposals on how to reach the targets agreed upon last year. The Commission President Jose Manuel Barroso introduced the new energy package as “the most far-reaching package prepared by the Commission in years.” This energy package is designed to respond to the energy challenges faced by Europe and it contains a set of proposals setting ambitious targets on greenhouse gas emissions and the use of renewable energy. The Commission believes that this package can create “a true internal market for energy” through strengthened energy regulation. While the proposals pave the way for greener future for the Europeans, justified voices of concern both from Member States as well as stakeholders have been raised.

Background

This is not the first time for the EU to reform its energy policy. The first energy package was adopted in the late 1990s. This first wave focused on liberalization of energy markets and led to the adoption of Directive 96/92/EC concerning common rules of the internal market in electricity which entered into force on February 19, 1997, and Directive 98/30/EC on common rules for the internal market in natural gas which entered into force on August 10, 1998. Eventually, these Directives were repealed following the adoption of a second regulatory package in 2003.

Along the liberalization of energy markets, the EU has also attempted to increase the use of renewable energy sources. A decade ago, the EU set a target of a 12% share of renewable energy in its mix by 2010, which meant doubling the 1997 levels. Although the production of renewable energy did increase by 55% since, the EU is not expected to meet the 12% target. The EU has suffered from the lack of a coherent and effective policy framework and consequently only a limited number of Member States have made serious progress to increase the use of renewable energy. With this latest energy package, the European Commission is determined to overcome the previous shortcomings but also to correct the existing built-in structural problems affecting energy markets as well as regulatory problems which have not been addressed by the previous energy reform packages.

Another major existing pillar is the Emissions Trading Scheme (ETS) Directive (2003/87) introducing emission allocations and emission trading for a limited number of energy-intensive industry sectors. There have been numerous disputes between individual Member States and the Commission over the acceptance or non-acceptance by the Commission of the national allocation plans under the ETS Directive as well as other interpretation issues. This more recently led to a defeat of the Commission in court [T-397/07] against Germany concerning the possibility of so-called ex-post adjustments.

In a run-up to the new regulatory package, in March 2007, EU Member States already generally committed themselves to cut greenhouse gas emissions by 20% by 2020 compared to 1990 levels. Furthermore, they declared their binding intention to increase the share of renewable energy from 8.5% to 20% and the share of biofuels in total transport fuel to 10% by 2020.

The Commission Proposals

The Commission’s new proposed energy policy is three-fold. It is aimed at combating climate change, securing Europe’s energy supply by limiting the EU’s external vulnerability to imported hydrocarbons, as well as promoting jobs and growth and thereby eventually delivering secure and affordable energy to European consumers.

The legislative package proposed by the Commission revises the existing ETS and contains measures to promote the use of renewable energies including biofuels as well as a proposal on how Member States should share their CO2 reduction burden. In addition, the Commission presented new rules on carbon capture and storage as well as a revision of the existing EU State aid rules to allow for more environmental subsidies.

The new ETS which will replace the current scheme (Directive 2003/87) by 2013 will include new sectors such as aviation, petrochemicals, aluminum, and the emissions from the production of certain acids. However, road transport, shipping, agriculture and forestry will remain excluded from its scope. Under the new proposal, there will be one EU-wide cap on the number of emission allowances instead of 27 national caps. The general objective is to gradually reduce emissions from the sectors covered by 21% from 2005 levels in 2020.

The Commission’s intention to dramatically reduce the amount of allowances allocated for free constitutes a departure from the current rules. Whilst at the moment 90% of allowances are allocated for free, at least two thirds of the allowances are intended to be auctioned under the new scheme. Most sectors will have to buy one fifth of their required allowances from 2013 onwards, a figure that will gradually rise to 100% until 2020. Among the affected sectors are energy and power generation, including refineries, which will face full auctioning as from 2013. Only three energy-intensive sectors, namely steel, aluminum and the cement industry will initially receive their allowances for free but will increasingly have to purchase them by auction, too, until all allowances are auctioned by 2020.

A number of business sectors have criticized the Commission’s plans to auction allowances. According to representatives of major business associations, Europe faces the risk of relocation of installations to non-EU countries because of the competitive disadvantages created. This danger appears to be particularly high for sectors such as chemicals, fertilizers and the pulp and paper industry which, though energy-intensive too, do not benefit from the exemptions mentioned above. The Commission seems to be aware of those risks and intents to review the situation in 2011. Whether or not it will then decide to allocate more allowances for free depends inter alia on the existence of an international agreement able to meet the concerns of distorted competition. Alternatively, the EU may require importers to buy allowances for goods from third countries with less rigorous legislation, such as the US and China. Such a ‘carbon-tax’ has long been promoted by France and certain Trade Unions. However, it could raise question under WTO Law and is strongly opposed by the US and UK government which consider it as ‘protectionist’. Finally, European consumers are concerned that the new rules would increase their energy prices again, which are already among the highest in the world. Many of the EU’s power plants are aged, requiring significant investments or replacement.

Equally controversial remains the proposal to promote renewable energies by implementing a 10% target for biofuels in transport fuel. The environmental benefit of biofuels is increasingly questioned by scientists as has been indicated by two recent studies, one by the Commission’s own scientists. Only a few days before the publishing of the Commission’s proposals, the Joint Research Center (JRC) issued a working paper according to which the costs of EU biofuels outweigh the benefits. The scientists argue that the envisaged target will cost between 33 billion and 65 billion Euro, although the use of biofuels will hardly reduce greenhouse gases at all. Whilst energy security may be strengthened, the impact on employment will only be marginal. The UK House of Commons Environmental Audit Committee has signaled a worry that the overall environmental effect of biofuels is negative. This adds to concerns expressed by environmental and development NGOs which have asked the EU to abandon its support of biofuel as it allegedly contributes to the global increase in food prices and the shortage of foodstuffs for the world’s poor as well as to a further reduction of ecosystems.

Under the proposal Member States will be able to buy guarantees of origin (GO) from other Member States where the development of renewable energy is cheaper to produce. However, the Commission has dropped certain provisions on the trading of GOs for renewable energy after strong resistance from Germany and Spain which both protect their national support schemes.

Other Member States could not convince the Commission to change its proposals on how to share the burden of CO2 reduction in the sectors not included in the ETS, namely agriculture, transport buildings and waste in order to meet the target to reduce emissions to 10% below 2005 levels by 2020. The Commission proposes to base the national targets on the countries’ GDP, thus forcing wealthier Member States to pay more.

Conclusions and Comments

The Commission’s proposals come at a time when the liberalization of the energy market remains nothing but a distant ideal. Proposals to “unbundle” energy generation and transmission by obliging companies to sell parts of their assets are likely to remain under fire from Member States such as France and Germany which are reluctant to attack their national champions.

In particular, the 10% target for biofuels appears questionable in the light of recent developments in agriculture and the rising demand for foodstuffs. The concerns expressed by scientists in this regard should be taken seriously in order to avoid costly mistakes. Furthermore, Europe’s commitment to the Kyoto targets should not excuse other parts of the world from contributing to our common objective to combat global warming.

It seems therefore important to insist on a comprehensive thorough review of the ETS system as well as the remainder of the energy package before the new rules are adopted. If the EU looses its competitiveness, it will not be able to contribute to any solution towards greener and safer energy sources in the future. Now the decision whether or not to principally endorse the proposals lies with the European Parliament and the European Council as the proposals fall under the co-decision procedure.