New European Commission emissions reduction proposals fail to prioritise energy efficiency

[This article originally appeared on 28 July on The Fifth Estate website]

Key new European Commission climate proposals, covering 60 per cent of EU greenhouse gas emissions, fail to match the aspirations of the Paris Agreement to keep global warming well below 2°C, and include astonishing “loopholes”, especially on energy efficiency, analysts say.

This autumn, the European Commission will present an Energy Efficiency Package, including a revision of the Energy Efficiency Directive and Energy Performance of Buildings Directive. The revision aims to implement a non-binding energy efficiency target of 27 per cent by 2030, which the European Commission is considering increasing to 30 per cent.

In addition, the post-2020 reform of the EU Emissions Trading System is being negotiated in the European Parliament, and on 20 July the European Commission published proposals on the Effort Sharing Decision, the idea of which is to distribute climate targets to each Member State in order to decarbonise the sectors not covered by the EU-ETS, which include transport, buildings, agriculture and waste.

The overall target is in keeping with the same 30 per cent reduction on 2005 emissions levels by 2030.

The European Parliament called in October 2014 for a comprehensive cost-benefits analysis of energy efficiency and insisted on a binding energy efficiency target of “at least” 40 per cent by 2030 in order to reach 90-95 per cent reductions by 2050. WWF criticised these targets for being far too weak at the time.

Yet, these new proposals – from the bureaucrats in the Commission – only consider a target of 27 per cent (having in mind an EU level of 30 per cent) for energy efficiency.

They are so weak that six EU member states do not need to cut greenhouse gas emissions from transport, waste, buildings and farming for 15 years. Greece, Hungary, Croatia, Bulgaria, Portugal and Romania were already emitting less than their 2030 allocation in 2014.

The weakness of this ambition has been slammed by the Coalition for Energy Savings.

“Energy efficiency improvements are the key driver of such emission cuts but the link is not made clear,” it says.

The Coalition for Energy Savings secretary general Stefan Scheuer said: “Building national climate targets on the potential for efficiency would secure benefits to all Member States, especially lower-income countries with significant investment gaps.

“The Commission should step up efforts to truly place energy efficiency first in its policymaking, which will benefit citizens directly, through renovating inefficient buildings, replacing wasteful equipment and technologies, updating production facilities and building an efficient and clean mobility system.”

The previous Effort Sharing Decision included an implicit target to reduce greenhouse gas emissions of the building sector. But this was not supported by an EU requirement to set an energy savings target for buildings. This oversight has not been corrected in the new ESR.

Another organisation condemning this oversight is Eurima, which represents insulation manufacturers. It says: “This lack of focus on sectors with high available CO2 potential, namely our existing buildings, is regrettable, especially since there are mature technologies in place to renovate and curb emissions.”

The Commission’s proposals offer Member States the possibility to bank and borrow emission allowances, and loosen the reporting/compliance measures currently in place. A formal compliance check will be organised only every five years, rather than annually.

To meet the Paris Agreement goals, around half of global emissions reduction efforts will have to come from energy efficiency, says Eurima.

“The ESR fails to encourage or provide any incentive to prioritise energy efficiency in facilitating investment in managng energy demand, through a higher energy efficiency target.”

The proposals have been analysed by Sandbag, a UK-based not-for-profit climate policy think tank. Sandbag says” “This proposal … has more loopholes than anyone expected and will not deliver Europe’s contribution to the Paris Agreement.”

Sandbag believes that 50 per cent cuts are achievable and can be delivered cost-effectively. The 30 per cent target implies just a four per cent cut in emissions beyond BAU between 2021-2030 and the sharing proposals “would allow a flood of emission credits from elsewhere to dilute the EU’s climate ambition”.

It has published its own report showing how effort could be shared in a more balanced way. “Wealthier states with higher targets but smaller cost-efficient reduction opportunities could pay countries with lower GDP/capita to cut their ESD emissions exactly where cost is lowest,” it suggests.

The Commission is proposing that the number of carbon emission allowances will decline by 2.2 per cent every year starting from 2021. (Currently there’s a 1.74 per cent annual reduction; Green MPs in the European Parliament demanded a 2.6 per cent decline).

In order to prevent “carbon leakage” – where factories move abroad to escape the restrictions – the Commission wants to see 57 per cent of allowances auctioned and allocate the remaining 43 per cent given away free.

Eastern European countries like high coal-burning Poland had demanded this in return for agreeing to the EU’s climate targets in the first place.

Germany’s target is a cut of 38 percent and France’s and Britain’s is 37 per cent. Brexit could affect the other countries’ targets, but not by that much by 2030. Poland’s target is just a seven per cent cut.

Poland objected to its target straightaway.

“Poland cannot afford such a big reduction effort,” Pawel Salek, Poland’s deputy environment minister in charge of climate policy, said in an email.

But European Commission Vice-President Maros Sefcovic told Reuters that “all member states understand very well that if you want to alleviate the burden on one country, then someone else will have to carry it”.

Imke Lübbeke, head of climate and energy at the WWF European Policy Office, said: “It seems baffling that the Commission can so quickly ignore the Paris Agreement and its temperature goals, especially since Climate Commissioner Arias Cañete has been openly endorsing 1.5°C as the temperature threshold to aim for.”

Yet this bickering about responsibility amongst nations is the reason for the low ambition of these proposals.

“Europeans want climate action: it is now up to their political representatives, MEPs and Member States to put the “effort” back into Effort Sharing Decision by closing the loopholes and introducing a five-yearly review that increases ambition over time, in line with Paris,”, Lübbeke said.

Europeans may want climate action, but clearly those lobbying the EC do not.

You can watch Cañete announce the proposals here:



David Thorpe is the author of:

• Best Practices and Case Studies for Industrial Energy Efficiency Improvement (with Oung, K. and Fawkes, S. UNEP, 2016)
• A London Conversation: Business Briefing on Green Bonds (The Fifth Estate, 2015)
• The One Planet Life (Introduction: Jane Davidson. Routledge, 2015)
• Earthscan Expert Guide to Energy Management in Buildings (Earthscan, 2013)
• Earthscan Expert Guide to Energy Management in Industry (Earthscan, 2013)
• Earthscan Expert Guide to Solar Technology (Earthscan, 2011)
• Earthscan Expert Guide to Sustainable Home Refurbishment (Earthscan, 2010)

Carbon capture: our get-out-of-gaol-free card just got smaller

Carbon capture and storage is not going to save us. We must wean ourselves off fossil fuels as quickly as possible.

It has emerged that it is now likely that just one carbon capture and storage project in the UK will receive funding from the European Investment Bank. This is the Don Valley Project, which has already received €180 million of European funding, and is now the only one of the nine projects put forward by the UK for European funding which will get anything at all.

This is due to the pitiful amount of cash now expected to be realised from the sale of carbon emission permits by the European Investment Bank this year under the NER300 financing package. A maximum of €1.5 billion is anticipated, due to the collapsing of carbon prices to record lows and the inability of the European Commission to do anything about it.

This cash must be shared between at least half of the 27 nations in the European Union. The Commission has stated that it wants the funding to be prioritised for member states “in economic and fiscal difficulty". You would think that this would mean Greece, Italy, Spain and Portugal.

Actually, it appears that Sweden is likely to receive funding for three proposals, the UK and Greece for two each, and Belgium, Portugal, France, Finland, Czech Rep., Germany, Austria, Italy, Poland and the Netherlands would get one each, when the final list is confirmed.

(I have put the full draft list of projects that may be funded at the bottom of this column.)

Moreover, in the second call, the remaining 15 Member States (Croatia will have acceded) will have to share a pot that might, if the carbon price remains at its current level, be half the value of the current pot. Some exciting proposals have failed to make the list, including an innovative floating wind turbine concept, a Romanian biofuels from algae project in Romania and the installation of smart grids in Hungary.

From the start, carbon capture and storage in the UK has suffered setback after setback. There have been a mixture of delays and price increases: the addition of carbon capture and storage technology to a coal-fired power station can add between 25% and 100% of the cost. Potential developers have pulled out.

The International Panel on Climate Change has always been somewhat sceptical of this technology, but nevertheless, given that most energy scenarios foresee that the world's supply of primary energy will continue to be dominated by fossil fuels until at least the middle of the century, it has been seen to be necessary to achieve stabilisation of atmospheric carbon dioxide levels.

I have shared this scepticism for most of the last decade, but more recently I have been inclined to accept that, while it does seem to let fossil fuel producers continue to satisfy society's addiction to their products into the distant future, to the detriment of the development of alternatives, it nevertheless must become an unfortunate part of our armoury of weapons with which to fight the war against rising average global temperatures, because of the dire straits in which we find ourselves.

Now, the developer of the Don Valley Power Project, 2CO, has previously indicated a need for grants totalling £1 billion to enable it to proceed. Under the terms of NER300, at least 50% of the funding must be provided by the member state. The EC can't give any single project more than €315 million (£230 million). CCS projects originally asked for far more than this (€600-700 million or £0.5 million).

To save face, DECC needs to provide much of the remaining cash, which could be up to £500 million. How likely is this? Last week, Greg Barker admitted that the cost of looking after existing radioactive waste will rise from eating up half of its annual budget to a staggering 75%. And, with the Treasury's Mr. Micawber eyes watching every remaining penny it spends, and a shopping list that includes the Green Deal, tax breaks for the North Sea oil and gas industry, new nuclear power stations, offshore wind farms and so on, something is going to have to give.

In April DECC launched another £1 billion competition to fund CCS projects which pledged ongoing finance through the forthcoming Contracts for Difference framework, assuming this becomes law. Meanwhile, the CCS Cost Reduction Task Force is supposed to be coming up with an action plan to reduce the costs of CCS. Samsung C&T and BOC have each agreed to take an equity stake in the Don Valley Project and will provide some match funding.

The 650 MW facility is supposed to be completed in 2016 and connect up to a host of additional CCS projects in the area. If built, it will be one of the most advanced projects of its kind in the world. I hope it goes ahead, but I equally hope that it is not to the detriment of the funding of other low or zero carbon initiatives.

The news also provides another reason why, later this month, the European Commission must urgently take steps to reduce the number of emissions allowances on the market in order to stimulate the price of carbon.

Above all, the delays in rolling out carbon capture and storage should send a deafening message to society that its get-out-of-gaol-free card is actually an illusion. Business as usual cannot continue. We must wean ourselves off fossil fuels as quickly as possible.

The list of approved projects

CCS

• Don Valley Power Project, Yorkshire (2CO is the developer)


• Belchatow CCS project, Poland


• Green Hydrogen, Holland


• Teeside CCS (Progressive Energy is the developer)


• UK Oxy CCS demo, Yorkshire (Drax and Alstom are the lead developers)


• C.Gen CCS demo, North Killingholme Power Station, Lincolnshire


• Zero Emission Porte Tolle, Italy


• Steelworks project, France

Reserve list

• Getica CCS, Romania


• Peterhead CCS, Scotland (Scottish and Southern Energy, Shell and National Grid are the developers)

Renewables

• Pyrogrot bioenergy scheme, Sweden


• GoBiGas bioenergy scheme, Sweden


• BEST bioenergy scheme, Italy


• Vindpark Blaiken wind project, Sweden


• Ajos BTL bioenergy scheme, Finland


• Windpark Handalm, Austria


• Minos concentrated solar project, Greece


• Swell wave power scheme, Portugal


• Smart Grid Gotland scheme, Sweden


• UPM bioenergy scheme, France


• Innogy wind scheme, Germany


• Litomerice geoethermal scheme, Czech Republic


• Solar scheme, Portugal


• Maximum concentrated solar scheme, Greece


• Scottish Power tidal project, Isle of Islay


• Slim distributed energy scheme, Belgium


• Verbio straw bioenergy scheme, Germany


• Hungarian geothermal project


• Windfloat scheme, Portugal


• PV megalopolis scheme, Greece


• Archetype 30+ concentrated solar project, Italy


• ETM Martinique wave power scheme, France

European emissions rose in 2010, with UK second largest emitter

European greenhouse gas emissions increased by 2.4% in 2010, or 111 million tonnes of CO2-equivalent, due to a cold winter and the economic recovery following the 2009 recession in many countries.

About 56% of the EU increase in GHG emissions was accounted for by Germany, the United Kingdom and Poland, with a growth in hydrofluorocarbon emissions becoming a worrying factor.

The figures were supplied by the European Environment Agency today and cover all greenhouse gas emissions of the 27 member states of the European Union. They corroborate the figures released last week from the latest figures from the International Energy Agency, revealing that global greenhouse gas emissions reached a record high of 31.6 gigatonnes last year, an increase of 1Gt, or 3.2%, on 2010.

EEA Executive Director Jacqueline McGlade said that “the increase could have been even higher without the fast expansion of renewable energy generation in the EU.” The report itself also attributes the reduced increase to “the improved carbon intensity of fossil fuels, underpinned by strong gas consumption".

Nevertheless, final energy demand increased by 3.7% in 2010, outpacing the increase in economic output (2.0%).

In the previous year there was a sharp 7.3% decrease due to the recession. Combined with this, the EU is still fully on track to meet its Kyoto target. The long-term trend of reduction is continuing, with emissions to 15.4% below levels in 1990. However, the emissions from the 15 member states with a common commitment under the Kyodo Protocol in 2010 were just 11% below 1990 emissions.

“This rebound effect was expected as most of Europe came out of recession,” said McGlade. Economic growth was positive in the EU as a whole in that year, with GDP increasing by about 2% compared to 2009.

The worst performers

The overall EU GHG emission trend is dominated by the EU-15 (mainly by Germany, the United Kingdom, Italy, France and Spain) accounting for 80.4% of total EU-27 GHG emissions.

Germany has the highest emissions of all European countries, at 1246.1 million tonnes, followed by the United Kingdom with 763.9 million tonnes, France (559), Italy (519.2) and Poland (457.4). Of the new Member States, Poland contributes most to the total EU-27 GHG emissions, namely 8.5%, followed by the Czech Republic and Romania (2.9% and 2.6%, respectively).

Between 2009 and 2010 the UK increased its emissions by 3.1% and Germany by 2.7%. The worst performers were Estonia (a 25.2% increase), Finland (up 12.8%), Sweden (up 11%) and Latvia (up 10.2%). In line with their poor economic performance, continued emission reductions were experienced in Greece and Portugal (both -5.1%), Spain (-2.8%), Cyprus (-2.4%) and Romania (-1.6%).

The industrial sectors covered by the EU Emissions Trading System (EU ETS) increased their emissions more in 2010 than those outside the EU ETS. They increased by 2.5%, with emissions from industrial sectors rising by 5.2%. However, this increase was lower than the growth in industrial gross value added that year, showing a slight reduction in carbon intensity.

In terms of overall performance since the base year of 1990, the United Kingdom and Germany are in the median position of European countries with a reduction of 24%. Spain is the worst performer over this period with an increase of 22.8% on the base year, followed by Portugal (up 17.4%), Greece (up 10.6%), Ireland (up 10.3%) and Austria (up 7%).

The top overall performers are in Eastern Europe: Lithuania (a reduction of 57.9%), Romania (down 56.4%), Bulgaria (down 53.7%), Latvia (down 53.4%) and Estonia (down 51.9%). Even coal-reliant Poland has managed a reduction of 28.9% on its base year.

The main reason for emission reductions in Germany is increasing efficiency in power and heating plants, but in the UK it is mostly due to the liberalisation of energy markets and the subsequent fuels switches from oil and coal to gas, plus nitrogen dioxide emission reduction measures in the production of adipic acid, widely used in the manufacture of nylon and polyurethane.

The household and services sectors accounted for the highest increases in emissions, increasing by 43 million tonnes of carbon dioxide-equivalent compared to 2009, mostly attributable to the colder winter in 2010.

HFC emissions up

A worrying trend is that hydrofluorocarbon (HFC) emissions are increasing at a faster rate than carbon emissions now, and becoming more significant as a result. Each HFC molecule does 11,700 times more damage as a greenhouse gas than a carbon dioxide one over a 100 year period.

There was an increase in their emission in 2010 of 4.4 million tonnes or 6.6%, stemming from these gases' use in refrigeration and air conditioning. Finland, Italy, Spain and the United Kingdom are responsible for the largest increases in absolute terms. The UK's emission of HFCs is 125% up on 1990 levels.

All the figures are based on data submitted by member states and then checked by the European Commission and the EEA. They cover information up to 28 March 2011. All parties to the Kyoto Protocol also have to provide information on how they are implementing their greenhouse gas commitments to minimise impact on developing countries. This information is presented in the full report.

European climate policy in disarray as carbon crashes

An ineffective record low price for carbon, the dilution of energy efficiency targets, and failure to agree on which nations should have seats at a UN meeting are contributing to an impression that Europe can no longer lead the world on climate change policy.

1. Carbon price collapse

On Monday, the price of carbon fell to an all-time low following the release of new figures showing lower than expected greenhouse gas emissions last year from the 12,000-plus facilities registered under the EU Emissions Trading Scheme.

1.7 billion tonnes were emitted in 2011, down 2.45% on the previous year, compared with a total allocation of 1.63 billion tons. Combined with a surplus the previous year due to over-allocation, there is now an accrued total surplus above the current ETS carbon budget of 355 million allowances, including auctions.

The highest emitting manufacturing sectors, steel and cement, have amassed the largest of these surpluses, amounting to 279 million and 195 million credits each.

In the UK, the largest single emitter is still the Drax coal-fired power station, at over 21.47 million tonnes, well over its allocation of 9.5 million tonnes.

As a result of the market glut, allowances are currently trading at €6.39, which represents a 61% fall in the price over the last year. Most analysts now agree that the European carbon market will be oversupplied up to at least 2020, without intervention.

Observers renewed their calls for urgent action by European lawmakers to set aside a number of permits to bolster the market, but this was still seen as unlikely.

“Unless EU governments come up with a surprise decision to strongly support the set-aside or ambitious mid-term emission- reduction targets, I don’t see prices moving up much over the coming months,” Tuomas Rautanen, head of regulatory affairs and consulting at carbon asset management company First Climate.

Damien Morris, Senior Policy Adviser from the climate campaign group Sandbag said: "The window is rapidly closing to fix the ETS before the next trading period commences in 2013". He said it was therefore "imperative that the European Council move swiftly ... to withdraw ETS allowances.”

But Per Lekander, UBS’ global head of utilities research, said that prices would probably have to fall about €3 before European legislators would act.

2. Compromised energy efficiency targets

The latest proposed draft from Denmark on the Energy Efficiency Directive contains further weaknesses following previous drafts which failed to attract universal approval.

As a result, the Coalition for Energy Savings estimates that it would close as little as one third of the gap to Europe's 20% energy saving target for 2020.

The new draft rejects MEP's requests for binding national targets and weakens nearly all the binding measures in previous drafts, including:

• requirements to renovate public buildings
• long-term targets for cutting energy use of the European building stock
• national end-use saving targets, which would result in no genuine improvement or even standards lower than those in the Energy Services Directive which the EED will replace
• targets for the public procurement of more efficient combined heat and power generation.

Ambassadors are meeting today to try and agree on a negotiating position in preparation for discussions in the European Parliament on 11th of April.

Stefan Scheuer, Secretary General of the Coalition, accused the Council of "a lack of responsibility in light of the energy challenges Europe is facing".

"Exploding energy costs, high unemployment and a slow economic recovery call for urgent investment in energy efficiency within Europe rather than spending money on energy imports", he said.

"Member States need to focus less on finding ways to wriggle out of taking action and more on how to agree on effective legislation."

3. Squabbling over Climate Fund

Finally, at the end of last week, European ambassadors failed to agree on who should have a seat on a committee which will negotiate directly with developed countries about the allocation of funds to help them fight climate change, which meant that now none of them will take part.

They had until 31 March to reach agreement on the allocation of seats between member states on the UN Framework Convention on Climate Change’s Green Climate Fund (GCF), but couldn't do so.

Thirteen of the 27 member states wanted a seat to ensure they had a say in the funding decisions of the $100 billion Green Climate Fund, that was agreed at Cancun in 2010.

Britain, France, and Germany were lobbying for a permanent seat in addition to an alternating seat that each would share with another country. But this idea was apparently stonewalled by Germany and Poland, who both demanded exclusively non-rotational seats, according to an anonymous source.

“(The Commission) has tried to rob us so many times before,” a Polish government source told Reuters. “This time around we want to wear a second jacket - just in case - and let nothing we are eligible for miss us.”

Members of the European bloc will now have to negotiate directly with other developed countries to determine the makeup of the governing board.

“Despite willingness to compromise and adequately share board seats, it has, unfortunately, not been possible to come to an agreement within the EU,” said Danish presidency spokesman Jakob Alvi.

“It shows that the EU unity we had in Durban has been eroded and that could damage Europe’s image in global climate change talks.”

Coal-addicted Poland is particularly to blame for Europe's collective failure to agree both on the energy efficiency standards and this issue. It also recently succeeded in vetoing Brussels’ carbon reduction roadmap.

All these developments give an impression elsewhere of a waning of Europe's confidence in leading the world on fighting climate change.

This corresponds to an increased assertiveness in climate change discussions amongst the richer developing countries, especially Brazil, India and China, and to a lesser extent other South American and African nations. But that is far from a guarantee of effective action.

Germany and UK have greatest deficit of EU carbon allowances

UK carbon Emissions and allowances by sector

Figures show that the UK and Germany have the largest deficit of allowances to pollute under the EU Emissions Trading Scheme (EU-ETS), meaning they have to purchase more to meet their obligations.

The deficit arises exclusively from their power sectors' burning of more fossil fuels than originally estimated.

Individual Member States implement the trading scheme in different ways and have mixed fortunes.

Each are given allowances, distributed amongst their industrial sectors by arrangement, in anticipation of how they will be "spent".

The summary below, using up-to-date figures collected by Sandbag shows that Germany and Britain have the greatest deficit, and Romania and France the greatest surplus of allowances.

The figures represent the balance among many EU nations between the total of free allowances (EUAs) given in the current Phase II of the EU-ETS, minus the actual carbon emissions up to date, by country, ranked from the winners to the losers.

Romania: +60.3m
France: +43.7m
Spain: +33.3m
Czech Republic: +27.9m
Italy: +26.4m
Belgium: +19.4m
Poland: +13.3m
Portugal: +12.0m
Bulgaria: +10.3m
Sweden: +5.24m
Austria: +4.4m
Luxembourg: +927,553
Finland: -222,813
Slovenia: -414,803
Greece: -1.9m
Denmark: -5.47m
United Kingdom: -81.9m*
Germany: -174.6m*

* exclusively due to the power sector, which has a considerable shortage of allowances.

This means that, assuming, say, a price of €9 per EUA, Romania's surplus is worth €542.7m, and Germany's deficit will cost it €1,571.4m while the UK's costs it €737.1m.

The UK’s industrial sectors, that is, the heavy energy users which have been complaining that the EU-ETS adds to the cost of their energy use, actually currently have a combined surplus of permits of 46 million EUAs, worth €414m, at the €9 rate, which they were given for free.

Across Europe, some energy intensive sectors still oppose reform despite the fact that they, so far, are not affected by it.

Germany's severe deficit contributes substantially to an overall shortfall among the above nations of 7.34 million credits.

The UK and Germany's position has arisen from the need to burn more coal, and to a lesser extent gas, to compensate for closing nuclear power stations (in Germany's case) and a closed nuclear power station and cold winter, in the UK's case.

EU may act to boost carbon price

More top businesses have been joined by European Parliamentarians in calling for reform of the EU ETS in order to prevent a new generation of investments being made in fossil fuel intensive technologies.

The danger of this happening was made clear in a leaked Commission document last month, as a low price for carbon makes polluting technology more economically attractive than most renewables and provides less incentive to invest in saving energy.

The business names include: Shell, Alstom, Doosen and Philips, as well as a growing number of power companies, such as E.ON, SSE, ENECO and DONG Energy.

A vote yesterday by EU parliamentarians to withdraw an unspecified number carbon allowances in order to prop up EUA prices, which have reached record lows, means that a move to cut the glut of EUAs on the ETS market looks more certain to happen.

Carbon prices perked up at the news, with the benchmark contract price rising nearly 4% to €8.68 per tonne within hours.

After the meeting, Dutch Green MEP Bas Eickhout reported that negotiators from all parties supported the compromise and there was "a good chance" it would get voted through at a crucial meeting of the European Commission on 28 February.

UK Allowance sales

A sale by DECC of 3.5 million EU Allowances on 9 February showed a healthy demand, with 5.89 times the demand of the supply, such that bidders were only able to obtain 62% of what they bid for.

The EUAs went for €8.11 each, down from €9.72 fetched at the last auction three months earlier.

The price has halved from a peak last summer, as the figures below show:

Nov '11: €10.38
Sept '11: €12.31
July '11: €13.17
June '11: €16.34
March '11: €15.59
Feb '11: €14.36

The price drop underscores the call by the big companies and Parliamentarians for action.

Last month, think-tank Civitas criticised the EU-ETS for being expensive and ineffective.

Sandbag's research points to the opposite conclusion: that emissions trading delivers carbon reductions at lowest cost, minimises the burden on consumers and businesses, and that the electricity sector has consistently shouldered the greatest effort under the scheme.

The design of the next trading period (2013-2020) is being deliberated now.

It is already determined that the electricity sector will buy all of its pollution permits at auction, and that heavy energy using industrial companies will continue to receive up to 100% of their permits for free, depending on their exposure to international competition and their carbon efficiency compared with their European competitors.

The latter are affected by indirect carbon costs, but the Directive allows member states to compensate them if required, and this is exactly what George Osborne announced in his autumn statement.

Is the UK about to support weaker energy efficiency measures?

Tory Energy Minister Charles Hendry has appeared to indicate support for a weaker European law on energy efficiency than former Lib-Dem Energy Secretary Chris Huhne had suggested Britain would hope to achieve.

A draft text of the Energy Efficiency Directive, produced by Denmark and released yesterday, has no binding targets, nor any “meaningful review” in 2014 which could have triggered legal action.

It does contain a voluntary imperative on member states to force their energy companies to make a total of 1.5% energy savings each year.

The Danish presidency is steering through the legislation and has made it the top priority of its six month tenure.

The issue will be on the agenda of the European Energy Council in Brussels on 14 February, which is to consider the contribution of energy efficiency and renewable energy to growth and jobs.

At this meeting, the Presidency will report on progress of negotiations over the draft Directive, and during lunch Ministers will discuss potential areas of concern in terms of scope, requirements and implementation, and how they can be best addressed, before negotiations begin with the European Parliament.

In advance of the meeting, Energy Minister Charles Hendry has issued a statement saying, "We support the general level of ambition in the draft Directive although we have concerns over the level of prescription. We are pleased with the direction of discussions in Council, which reflects these concerns."

If "prescriptive" is an interpretation of "legally binding", then this stance is in contrast to former Energy Secretary Chris Huhne's previous line, which indicated support for the Directive's target to be enshrined in law.

As Ed Davey's energy efficiency team gets down to work, getting the correct wording of the Directive is likely to be high on his agenda, as UK industry will have concerns over any unilateral investments in energy saving it would have to make that could give it competitive disadvantage in Europe as a whole.

The timing is tight, since, following next week's meeting, the Parliament committee on Industry, Research and Energy (ITRE) votes on the Energy Efficiency Directive on 28 February, with the whole European Parliament plenary vote taking place a month later.

Cumulative savings

The draft text says that the 1.5% savings would have to accumulate each year, in contrast to existing legislation, such as the Energy Service Directive (2006), which allows member states to count savings from the previous decade towards their annual targets.

However, the text includes an option for member states to count savings from the energy transformation sector towards the target.

This point was criticised by the campaign group Climate Action Network-Europe. “This particular target was meant to trigger savings at the end use, not in the transformation sector,” said spokeswoman Erica Hope.

"Europe's GDP will be higher if the 20% savings target is met, according to the Commission's Impact Assessment accompanying the EED," she continued. "This is besides the other benefits listed in the energy efficiency plan such as, for example, two million new jobs and €1,000 annual savings on energy bills."

The European Commission had asked for a 2014 review to be built into the Energy Efficiency Directive, at which point, if certain criteria had not be met, mandatory national targets would be introduced.

The Danish text fails to include this, instead introducing weaker assessment points in 2013 and 2015 deadline, which would simply determine whether the European Union is on track to achieve its 20% by 2020 energy efficiency target.

The Danish draft takes account of the previous, Polish presidency’s concerns, that a directive would be costly to their coal-dependent energy regime, by curbing industry interference over how member states' individual targets are distributed.

The draft represents a victory for the lobbying power of conservatives such as Business Europe and German Liberal members of the European Parliament, who oppose binding targets and argue that market forces, rather than regulators, should dictate policies.

A grouping of Conservative politicians had called for the 20% target to be achieved either through a cut in primary energy use of 368 million tonnes of oil equivalent (Mtoe) or by a cut in EU energy intensity.

But this would be unacceptable to Europe's more coal-dependent, less rich nations, while richer ones like Germany are already closer to the target.

"An energy intensity target is a lose-lose situation," said Brook Riley, climate justice and energy campaigner for Friends of the Earth. "It might not provide an adequate incentive to improve further."

The UK is well placed to meet the concerns of the EED already. Buildings consume 40% of total final energy in the EU, and improvements in their performance will form a core part of the Directive.

The Green Deal and consequent expansion of the use of Energy Performance Certificates will be crucial to achieving reductions.

Financing the measures

On the issue of financing the Directive's measures, an amendment to the draft Energy Efficiency Directive being considered would mandate the set aside of 1.4 billion emission allowances (EUAs).

This would, according to a submission by oil company Shell, push up the EU-ETS carbon price to around €23/tCO2.

Since this could also generate extra revenues for governments, which could be invested in low-carbon technology, the extra value created by the increase in price is expected to be more than the value of the allowances that would be set aside.

The amendment is intended "to restore the price mechanism to levels envisaged in the impact assessment on which basis [the energy efficiency directive] was agreed".

Fifteen companies and lobby groups, including Dong Energy, Alstom, Vestas and Shell, wrote to the president of the EU Commission in support of the amendment.

The Commission has so far shied away from interfering in the carbon credits market, although policymakers said yesterday that carbon prices should rise to no higher than 30 euros through a one-off market intervention, while another coalition of industrial high carbon emitters urged European Parliamentarians to reject any proposal to give the European Commission the power to slash the supply of carbon permits.

Exposed: airlines to make windfall profits from the EU-ETS

Four US airlines didn't hesitate to say they would immediately add $3 to a European flight - each way.

Contrary to complaints that the European carbon tax on flights will harm them, analysis shows that many air carriers could well end up with large profits.

Two studies bear out this claim. The first, from the Journal of Air Transport Management, part-funded by the US government itself, has calculated that if airlines were to pass all costs of the emission certificates on to passengers, then they will make up to $2.6 billion profit over the next eight years because most of the permits will be given away for free.

The authors conclude: "Windfall gains from free allowances may be substantial because, under current allocation rules, airlines would only have to purchase about a third of the required allowances."

American companies have not hesitated to impose costs on passengers due to the EU-ETS, which came into force on January 1st, ahead of all other carriers in the world, while at the same time calling for trade sanctions against Europe.

The US Congress is considering measures that would prohibit US airlines from taking part in the EU-ETS. Secretary of State Hillary Clinton has written to the Commission warning the US will "be compelled to take appropriate action" if the charges are not postponed.

Delta Air Lines, American Airlines, United Continental and US Airways Group and US Airways say they  have already added a $3 surcharge each way on tickets for flights between the United States and Europe.

But actually, in practice, it is impossible to tell what proportion of a ticket price is a result of the EU-ETS, says Rick Searney of the website farecompare.com, which monitors pricing of air travel, since many factors affect ticket pricing and operators won't reveal commercially-sensitive information.

The academic paper's conclusions are backed up by number-crunching from an aviation analyst at UK-based RDC Aviation, Peter Hind.

He has calculated that if Delta were forced to buy every permit in the open market it would cost them around 3 euros ($3.80) per passenger, based on current EU carbon permit prices equivalent to a tonne of CO2 of around $8.55.

“That would, of course, cover all of their CO2 emissions and therefore you could work on the basis that their free permit allocations were a windfall – assuming that it doesn’t damage demand, of course,” comments Hind.

This contrasts wildly with airline industry claims that the scheme will cost it about €1 billion this year, rising to €2.8 billion by 2020.

Many airlines. such as Thai Airways. have already been buying carbon permits in the EU ETS, taking advantage of the current record low prices of around €7.9 per ton of carbon.

The notion that airlines could make windfall profits was predicted by WWF in 2006.

Free credits

The actual figures airlines pay will depend on the fuel efficiency of each aircraft and how many passengers are on board each flight.

Airlines will receive 85% of the permits they need in the first year for free. The EU intends them to use such profits to invest in more efficient aircraft.

The percentage of free credits will then fall to 82% from 2013 to 2020.

The free allocation is based on figures submitted to the EU detailing airlines' share of passengers and cargo transported in 2010 that is expressed using a revenue-tonne-kilometre metric.

"If you look at the impact on the ETS, that only starts kicking in at the end of the year. It's very clear that they're (airlines) looking for excuses in more or less the same way as the power companies did when the ETS started," said Dutch Green member of the European Parliament Bas Eickhout.

The situation looks like becoming reminiscent of that for the European energy intensive industries.

Analysis by Sandbag and others has shown that the top ten "Carbon Fat Cats" in these industries share between them 240 million surplus allowances with a value of around €4.1bn.

Their report concludes that "the fact that the ETS has provided substantial windfalls to some participants and a money making opportunity for many others has not prevented industry from attacking it whenever it can and from successfully lobbying to keep it in its current state".

Many airline operators are now following the example given by these existing participants.

The International Air Transport Association (IATA), has asserted that the ETS will cost airlines $1.15 billion in 2012, forecasting a 49% fall in 2012 industry-wide profit to $3.5 billion.

However, the weak global economy and high fuel prices are more likely to be behind this drop.

EU position

The EU position says that it is only right that airlines, like other industries, should pay for the carbon they emit.

They have had since 1997 to come up with their own solution, when the Kyoto Protocol on tackling climate change asked developed countries and the UN's International Civil Aviation Organisation (ICAO) to find a way to reduce aviation greenhouse gas emissions, and have not done so on their own.

The EU will impose financial penalties of up to €100 per tonne of CO2 on non-compliant carriers, or even ground them.

"From our point of view it is quite simple," a spokeswoman for EU climate commissioner Connie Hedegaard has said, "there is a law and we expect people to follow it."

The measure is hoped to save around 183 million tonnes of CO2 each year by 2020. But this may be counteracted by growth in air travel: the Commission expects traffic to rise more than double from 2005 levels.

The Commission's own figures state that complying would add between €2 and €12 per passenger, depending on how much airlines decide to pass on to their customers.

Thomson Reuters Point Carbon data calculates that the impact will only begin to happen from 2013 to 2020, when airlines are expected to buy about 700 million permits.

This could help to drive up the carbon price, which is necessary to finance low carbon infrastructure.

Jean Leston, head of transport policy at WWF-UK, said more credits needed to be auctioned, with the receipts funnelled towards efforts to combat climate change, such as the UN's $100bn Green Climate Fund.

Other airlines' responses

Lufthansa is amongst European airlines that has said it will raise ticket prices as a result of the EU-ETS, but it will not do so yet. It says it will need to buy 35% of the permits it needs for 2012 on the open carbon market.

The world's second largest long-haul carrier after Dubai's Emirates claims that the cost of the credits will be €130 million this year, but will not disclose how this is calculated.

Singapore Airlines Ltd. (SIA), the world's second-most valuable airline, is adopting a more progressive stance, saying it would try to offset the impact of the ETS by improving fuel efficiency and reducing its carbon emissions, which would lower the carbon charges.

This is exactly the response hoped for by the European Commission. In practice it is likely that most airlines will follow suit, though they will not shout about it.

Cathay Pacific has said the ETS would add about $6.44 to a ticket between Hong Kong and Europe.

“The airlines will never admit to the reason for a surcharge because they will say they don’t discuss pricing decisions,” he said.

"Fares are dynamic. They are going up and down all the time according to market conditions. Carbon is just another cost," adds Bill Hemmings, manager of environmental lobby group Transport & Environment.

China's position

The China Air Transport Association (CATA) is also mulling whether to take legal action against the EU on the tax and has declared a policy of non-compliance.

The EC says that a 17,000-kilometre flight from Frankfurt to Shanghai would generate about 678 kilograms of carbon, using the UN's ICAO carbon calculator.

Assuming a price of €17 per tonne (around double the current level) and the full value of emissions being passed to fares, that would increase a ticket price by €11.50.

China, the world’s biggest emitter, has a target to reduce greenhouse gas emissions per unit of output by 40-45 percent from 2005 levels by 2020.

Its policies to achieve this include implementing energy efficiency and energy intensity measures, but poor inter-ministerial coordination is hindering development of a carbon trading scheme.

The National Development and Reform Commission (NDRC), which has overall responsibility for carbon emissions, hopes to launch pilot schemes in seven cities and provinces next year.

Pale green budget tomorrow will cancel CCS levy and forbid Green Investment Bank from borrowing

George Osborne's first budget tomorrow will say that the Green Investment Bank will not be allowed to raise its own finance for some time.

And the levy on electricity bills which had been proposed to raise finance for carbon capture and storage (CCS) plants is to be dropped.

The levy was touted in last autumn's Spending Review as a means of raising billions of pounds for flagship CCS projects. In the review, Osborne said £1 billion was set aside for at least one CCS pilot, with a further three projects to be financed either by the levy or by public money.

But the levy is no longer on the cards following lobbying from industry. This argued that effectively there will already be four carbon taxes, which is complicated enough, and the levy would be a fifth - just too much. The four taxes are:

• the Climate Change Levy (CCL) - since 2001, taxing fossil fuel energy supply to those businesses without a climate change agreement (CCA) with DECC (which gives 80% - reducing to 65% from next month - reduction on this tax)


• the CRC Energy Efficiency Scheme - beginning in 2012, which will raise £1 billion a year by 2014-15 from businesses who consumed over 6,000 MWh in 2008


• the EU Emissions Trading Scheme (affecting generators and the metals, mineral, and pulp and paper industries) - now, most permits are given away free, but the proportion will reduce significantly in 2013


• the new carbon price support mechanism (CPSM), designed to tax fossil fuels used in electricity generation (by removing CCL exemptions from 2013) to make generators' investment in CCS, renewable and nuclear generation more favourable.

The carbon price support mechanism, currently the subject of a consultation, is also to be further described in tomorrow's budget.

City accountancy firm PricewaterhouseCoopers was amongst those arguing against the CCS levy. Its partner Mark Schofield has written: “The introduction of a floor price would be a significant change for many companies with high emissions, particularly if the Government decides to set this higher than the EU ETS traded permit price. It is likely that the Government will set a lower price initially, rising over time, but they can’t be too generous.

“One of the main criticisms from the industry is that the carbon floor price will add another layer of policy complexity to an already overcrowded energy supply chain policy mix. It may be difficult for potential investors in low carbon generation to distil from these overlapping policy measures a reliable carbon price signal to guide investment decisions, and for users of energy to understand the overall policy objective.”

This raises questions over how or whether the three further CCS projects will be built. Scottish and Southern Energy, Powerfuel Power Limited, Alstom UK and Ayrshire Power are amongst the companies competing to build them.

The prospect of being able to capture carbon from fossil fuel burning power stations has become key to many policies about tackling climate change while keeping business as usual. This is despite the fact that there is no large-scale commercial demonstration that the technology works anywhere in the world.

The EU will be part subsidising the projects. CCS supporters are hoping that the floor price for carbon will be set high enough to raise sufficient funding for CCS. But then so will renewable energy generators and nuclear newbuild supporters.

The Treasury itself says (in the CPSM consultation document) that around £110 billion in new generation and grid connections alone is required by 2020. The same amount again will be required for further upgrades.

The Green Investment Bank

Where will this investment come from? Great hopes have been pinned on the Green Investment Bank.

Osborne is expected to pledge tomorrow that £3 billion will be given to kickstart the Bank. He will say that he believes this will be enough to raise £18 billion of investment into green projects by 2014-15, with the rest coming from the private sector.

This is still a fraction of what is required, which has raised criticism of the Treasury for blocking Energy Secretary Chris Huhne's demand that the new Bank be able to borrow money itself.

Osborne will say tomorrow that the Bank will be able to issue bonds once the nation's debt is falling as a poor portion of grass domestic product–anticipated after April 2015. But for many this will not be soon enough.

Huhne has been locking horns with the Treasury, demanding that it be created as a fully fledged bank. The Treasury's line has been that allowing small investors to take part in the bank's investments would be too complicated, and any borrowing liabilities would be on the government balance sheet, thereby making the deficit appear worse.

“This throws into doubt Britain’s chances of building a low carbon economy and means we will now lose jobs and industries to places like China, Germany and Silicon Valley in California,” said John Sauven, Greenpeace executive director.

The bank is expected to be funded by sales of assets, such as the government one third share in Urenco, the company which enriches uranium for nuclear power stations.