STATE OF PLAY OF EU'S CLIMATE AND ENERGY PACKAGE

UNCLAS SECTION 01 OF 04 BRUSSELS 001686

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAIR ECON EIND ENRG EUN EWWT KGHG SENV TPHY
TRGY, TSPL
SUBJECT: STATE OF PLAY OF EU'S CLIMATE AND ENERGY PACKAGE

REF: A. BRUSSELS 1629

B. BRUSSELS 1439


1. (SBU) Summary: The European Union, headed by the French
Presidency, is trying to finalize a Climate and Energy
Package before the end of the year. The Package includes
directives on Europe's cap and trade system and the methods
to meet Europe's "20-20-20 in 2020 goals" (20% emissions cut
as compared to 1990, 20% use of renewable energy, and a 20%
improvement in energy efficiency by 2020). However,
divisions among the Member States, led by Italy and Poland,
and a gap between the European Parliament and Council
threaten to derail this effort. At this moment, it is
unlikely the EU will be able to overcome the divisions to
complete the Package in December, but we cannot rule out a
last minute deal, something for which the EU is well known.
The EU places a high priority on the passage of the Package,
because it will be used as the EU position in UN climate
negotiations in Poznan and Copenhagen. While the climate
negotiation aspects will have the most potential to influence
U.S. policy, EU decisions to develop a carbon border tax and
to develop strict biofuels sustainability requirements will
also affect U.S. interests and global industry. End Summary.



2. (SBU) The European Union is in the final stages of
negotiating the so-called "Climate and Energy (C&E) Package."
The European Commission on January 23, 2008, headed by the
Directorates General for Environment (DG ENV) and Energy and
Transport (DG TREN),submitted the C&E Package, consisting of
three separate legislative proposals, described below. The
C&E Package is separate but parallel to the EU's 3rd Energy
Package, released in September, 2007, which focuses on energy
security and the internal electricity and gas markets of the
EU. France, current holder of the rotating EU Presidency,
has made the C&E Package a priority and is pressing to
complete negotiations by year-end, before the Presidency
shifts to the Czech Republic in January, 2009. The
legislative status of the package is described in paragraph 5
below.


3. (SBU) The C&E Package comprises the four elements
described below. Note that the first element is a draft
"Decision", which, once adopted, will be directly applicable
and binding to the Member States. As the Decision will have
direct applicability, it will supersede member state law and
will not have to be transposed by member states into national
legislation. The other three elements, all Directives,
require Member States to enact national laws that accomplish
the goals set out in the Directives. Member States are
free--in principle--to adopt the national measures they see
fit to fulfill the requirements of the Directive.

-- The Burden Sharing Decision, penned by DG ENV, lays out
the amounts Member States will have to reduce their
greenhouse gas (GHG) emissions to meet the EU's 20% emission
reduction commitments by 2020. The proposal dictates by what
percentage each Member State must reduce, or in some cases,
is allowed to increase, its emissions by 2020 as compared to

2005.

-- The Emissions Trading System (ETS) Revision Directive,
also drafted by DG ENV, is intended to improve and extend the
EU's GHG cap and trade system for reducing GHG emissions.
The ETS Revision Directive would take effect on January 1,
2013, the end of the current iteration of the ETS, and seeks
to correct excessive allowances allotted to some Member
States and some sectors, which took place based on
projections and lack of verified emissions data.

-- The Renewables Directive, written by DG TREN, promotes the
use of energy from renewable sources and addresses the EU's

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goal to achieve a 20% share of renewable energy sources by

2020. This Directive dictates the percentage of renewable
energy each Member State must have in its energy mix and a
10% binding minimum target for alternative fuels in transport
(biofuels, electric cars, hydrogen fuel cells, etc) by 2020.

-- The Carbon Capture and Storage (CCS) Directive was also
led by DG TREN and supports the early demonstration of CCS to
help reduce emissions from coal-generated electricity. The
Commission, recognizing that coal will continue to play an
important role in European and global energy production, is
seeking to establish the regulatory framework for the
implementation of up to 12 CCS demonstration projects.


4. (SBU) The standard timeline for such a legislative package
is 18-24 months from the time of submission. The legislative
process typically follows this pattern: 1) the Commission
begins the process by proposing legislation; 2) the
Parliament then adopts amendments in a first reading; 3)
Member States vote on a 'Common Position' in the Council; 4)
Parliament subsequently amends the Council Common Position in
a second reading; and finally 5) Parliament and Council
negotiate a compromise during a conciliation round. At any
point after the Parliament or the Council make changes to the
original Commission text, the Commission then has the right
to accept or reject those amendments and then can put forward
a revised proposal to the Parliament. The decision-making
process can be shortened to as much as a single Parliamentary
reading, if Council and Parliament agree beforehand on a set
of compromise amendments. As France targeted the C&E Package
as a Presidency priority, it intended to make use of this
possibility to fast-track adoption of the legislation, with a
goal of completion (at least informally) in December 2008,
less than 12 months after the Commission proposal. By
comparison, the 3rd Energy Package, submitted in September,
2007, and considered to be less contentious, is not set for
adoption before April, 2009. The French C&E Package timeline
is exceptionally ambitious, and the disagreements among
Member States, as well as between Member States and the
Parliament, are such that agreement by December could be very
difficult.


5. (SBU) Most aspects of the C&E Package are contentious,
exposing differences among the Commission, Council and
European Parliament, and in all cases, within these EU
institutions. Currently, the balance of power is teetering
between the Parliament and the Council. Parliamentary
Committees finished amending the drafts in October with a
more strongly worded text, particularly as applied to the ETS
Revisions and the Renewables Directive (see reftels for
details on the amendments). Many of these changes are
opposed by the Commission and are unlikely to be acceptable
to several Member States.

-- The Parliament, having already approved its amendments in
the Environment (ENVI) and Industry (ITRE) Committees, has
set forth its negotiating position. In almost all cases, the
Parliament added more stringent requirements to the
Commission proposals, including tightening regulations on
biofuels sustainability and working to expand further the
reach of sectors covered under ETS. However, these
amendments were not unanimously supported, with the
center-right EPP-ED party voting against the ETS amendments
because of worries that the European economy will be damaged.

-- The Council is taking a more moderate stance, but internal
divisions are wide-reaching. Environmentally-focused
countries such as Sweden prefer the more stringent
requirements. Meanwhile, Italy and Poland are leading a
group of 11 countries in an effort to reduce the strength of
the legislation--claiming damage to their economies if forced
to undertake these commitments. The 11 countries-including

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the three Baltic States, Slovakia, Hungary, Romania,
Bulgaria, Cyprus and the Czech Republic--have more than
enough votes to form a blocking minority. USEU EconOffs also
have heard from various sources that Germany may be included
in this group, but that Chancellor Merkel does not want to
oppose President Sarkozy publicly. Most of their complaints
target the magnitude of the emissions cuts and the allocation
of ETS credits, though there are country-specific concerns
with pieces of each of the four proposals.

-- The Commission is standing behind its original proposals
while remaining open to compromise. Some contacts indicate
that at this point everything is out of their hands.
Commission officials continue to press in Parliament and
Council the merits of the original proposals, but do not seem
to be having an impact. The Commission has used several
arguments, including current technological realities,
financial implications of decisions, and possible breaches of
WTO rules, to try to convince MEPs and Member States.


6. (SBU) The European Council (heads of state and government
of the 27 EU Member States) will meet on December 11-12, the
date by which the French Presidency is looking for a
political agreement among the member states. France
originally hoped to use this meeting to develop a text to
submit to the full Parliament for a vote, with the belief
that Parliament would not have much recourse after the 27
Member States came to a unanimous agreement. However,
Parliament, fearing just this eventuality, made a tactical
move and advanced its Plenary vote on the proposal from the
week after the Council, ahead to December 3-4. This will
allow the full Parliament to vote on its text, which it will
then pass to the Council. In this new timing, the Council
will be required to consider the text as passed by
Parliament, which likely will look similar to the texts as
passed by the Parliamentary Committees. Member States such
as Italy and Poland oppose the text from Parliament, and
Parliament's decision to move forward its Plenary vote thus
makes the possibility of a 1st Reading agreement much less
likely.


7. (SBU) While most of the decisions taken by the EU on the
C&E Package are internally focused, the entire package is
expected to form the basis for the EU's negotiating position
in the UN climate negotiations in Poznan in December this
year and Copenhagen in December 2009. Across the board, the
EU has inserted language referring to the existence or
absence of a global climate agreement. Though no concrete
decision has been taken on how to address carbon leakage (the
departure of carbon intensive industries to countries with
less stringent environmental laws),the EU has not eliminated
the idea of a carbon border tax (an import tariff applied to
products developed in countries with weaker environmental
laws). At this point, cooler heads appear to have prevailed,
calling on the EU to wait until after UN climate negotiations
have concluded to determine if a border tax is necessary.
Specifically on ETS, the EU seeks a global network of cap and
trade systems, with ETS as the cornerstone. Additionally,
both Council and Parliament have asked that all developed
countries undertake a similar commitment, which include
25-40% GHG reductions by 2020 and anywhere from 60-95%
reductions by 2050.


8. (SBU) Comment: What takes place over the next few months
has the potential to influence directly the United States.
Beyond developing what will be the negotiating position for
Poznan and Copenhagen, efforts to limit the effects of carbon
leakage and to develop biofuels sustainability criteria are
decisions that could adversely affect companies from the
United States and the rest of the world. Here in Brussels,
the next few months are considered crucial, and many have
argued that if the EU fails to pass the C&E Package this

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year, the EU will be in a weaker position heading toward
Copenhagen. Given the political differences and gaps among
the Member States and between the Council and the Parliament,
there is a strong possibility that an agreement will fall to

2009. That said, we cannot eliminate the possibility of a
last-minute deal--the EU is well known for just that--but at
this moment, the prospects look better for a resolution
sometime in 2009. The EU has the legal authority to pass
individual pieces of the legislation without passing all of
them, but the French Presidency has made clear it considers
the four a single package and that they either all pass
together or none of them pass. Looking forward to
Copenhagen, it is likely the EU's goal of 20% emissions cuts
will remain, but many of the supporting details the EU plans
to bring to the table could change dependent on the outcome
of the upcoming discussions. End Comment.

SILVERBERG
.