MEMBER STATES SKEPTICAL ON CLIMATE AND ENERGY

UNCLAS SECTION 01 OF 02 BRUSSELS 001770 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAIR ECON EIND ENRG EUN EWWT KGHG SENV TPHY TRGY, TSPL SUBJECT: MEMBER STATES SKEPTICAL ON CLIMATE AND ENERGY PACKAGE PASSAGE, BUT LAST MINUTE DEAL STILL VERY POSSIBLE ¶1. (SBU) Summary: Representatives from several EU Member States have expressed skepticism that the EU will be able to come to compromise on all aspects of the Climate and Energy Package in time for an agreement by the end of the year, but each stated with differing levels of surety that an eleventh hour deal is not out of the question. In conversations with Luxembourg, Malta, Romania, Slovenia, and the UK, only the British held to the line that a deal definitely will be reached. The Parliament continues to emphasize the need for strong climate legislation in order to achieve the 25-40% emissions reductions from developed countries by 2020, as per scientific recommendations from the Intergovernmental Panel on Climate Change (IPCC). To that end, the Parliament appears to be holding firm to its commitment not to approve any Council proposal with which it does not agree. The last piece of the puzzle, the Commission, which appears to be limited in its ability to effect change, is remaining firm in its belief that there will be an agreement by the end of the year, under the argument that a failure to compromise will damage the EU's ability to negotiate internationally. End summary. ¶2. (SBU) Among the five Member States, Malta seems most convinced that the Climate and Energy Package would fall to 2009, despite the consensus among all 27 Member States to reach an agreement by December. The Maltese representatives believed there were too many differences between the various Member States to come to agreement. If that is the case, it appears likely that a deal will not be completed until close to the end of 2009. Luxembourg officials stated it most clearly, explaining that Czech representatives declared in a closed-door Council working group that they will not address the package during their Presidency in the first half of ¶2009. The Czech Republic is more focused on the internal energy market, and will therefore target the completion of the 3rd Energy Package, allowing the Climate and Energy Package to slide to the Swedish Presidency in the second half of 2009. ¶3. (SBU) From the conversations with the various Member States, a clearer picture formed as to where the possible concerns fell. The largest threat to the Package came in October, when a group of 11 Member States, composed of Italy, Poland, Slovakia, Hungary, Romania, Bulgaria, Cyprus, and the three Baltics, joined in opposition to the Package, primarily on the grounds that the legislation, specifically the Emissions Trading Scheme (ETS),would cause damage to their economies. However, it has become clear that this group does not form a tight bloc, but instead is a loose collection of countries common in their opposition, but completely divided in their goals. Poland, heavily dependent on coal, is targeting primarily a method to lower the cost or increase the number of free allowances for its energy sector. On the other hand, Hungary is most concerned with an overall redistribution of allowances, or seeking more for the Eastern Member States to promote economic growth. Romania and Bulgaria are in the middle, pushing for both additional allowances to the energy sector and a redistribution of allowances. To address this division among the 11, the French Presidency is approaching several of the Eastern Member States first, and will wait until later to negotiate with Italy. Italy is one of the largest manufacturing countries in the EU, and according to a few Member State representatives, the country with the most to lose from the legislation. President Sarkozy will thus meet with representatives from Romania, Bulgaria, Poland, and the Baltic States in Gdansk, Poland on 6 December. The meeting with Italy is scheduled to take place on the margins of the UN meetings in Poznan, the second week of December. ¶4. (SBU) Beyond the group of 11, Germany appears to be one of the largest concerns, despite public statements by Chancellor Merkel calling for continued climate legislation in the face of the financial crisis. Specifically, Germany is expressing the largest concerns over "carbon leakage" - the departure of carbon intensive industries to countries with weaker environmental laws - and the need to maintain strong support for its industry. The EU is stressing that an international climate agreement should be the first aim to solve the problem; if all countries sign up to a universally acceptable - maybe not ideal - climate agreement, there will be no need to protect against carbon leakage. Beyond that, it appears as though 100% free allocations to at-risk industries will be the fall-back, and a carbon border tax will be used as a final option if the EU feels it needs to exert further influence over foreign industries. BRUSSELS 00001770 002 OF 002 ¶5. (SBU) There are also several smaller players with smaller issues, but none of these are likely to affect negotiations. A Member State official explained that Denmark and Finland, for instance, disagree with the choice of 2005 as the base year - the EU's overall target is in reference to 1990, but it needs to use 2005 for individual targets because that is the first year where there is sufficient emissions data available for all 27 Member States. The Danes and Finns argue that 2005 is a difficult year because they received above-average rainfall, leading to a large increase in the use and availability of hydroelectric power, and therefore lower emissions. Luxembourg is concerned about its renewables target, set at 10%, as it claims to have no renewables potential at all, and will therefore need to rely exclusively on biofuels. Malta and Cyprus, both heavily reliant on tourism for their economies, have objected to the inclusion of aviation under ETS. However, both the Council and the Parliament have made clear that aviation will remain, leaving little room for negotiation. ¶6. (SBU) Spain and Portugal have been notably quiet, and according to at least one contact, this is because they stand to be the biggest winners from the legislation. They have increased their pollution, and they will be allowed to continue to increase their pollution, as they will be able to use offsets from Clean Development Mechanisms (CDMs) in South America, where they each hold very close relationships. As such, through support to developing countries there, Spain and Portugal will be able to offset their domestic emissions and still meet their targets. On renewables, both countries have a very large potential and should be able to meet their targets with little problem. ¶7. (SBU) The European Parliament has continued to work to exert its influence during the negotiations, initially moving its plenary vote to the first week of December, days before the Environment and Energy Councils and a week ahead of the European Council of Heads of State. However, despite recent comments from the Hans-Gert Pottering, the President of the Parliament, it appears as though the Parliament will await the Council decision and vote on the package at its next Plenary in Strasbourg, 18-19 December. It was believed that if Parliament waited, then the Council would be in control and probably able to strong-arm its position on the Parliament. However, Irish MEP Avril Doyle, the Rapporteur for the ETS Revision Directive, clearly stated that the Parliament will not vote in favor of a Council position with which it does not agree. It is unclear how firm Parliament will stick to this statement, especially as the Council position seems to be moving farther away from that of the Parliament as France provides further assurances to Poland and Italy. ¶8. (SBU) Comment: Despite all of the skepticism, it is very clear the French Presidency will stop at almost nothing to come to a deal, even if that means trading away the vast majority of the strength behind the Package. This type of horse-trading is typical in EU negotiations, and it seems everyone is trying to extract as much as possible. Several countries, Poland and Italy key among them, have threatened vetoes in Council if their demands are not met. From a legal perspective, these threats do not hold much weight, as under EU law, only a qualified majority is necessary to pass this legislation. The block of 11 countries together more than exceed a blocking minority, but losing a couple of the key countries would eliminate this. However, both Italy and Poland are quick to remind that it promised to pass this Package by consensus. If necessary, France can back off of this promise and revert to EU law, but the political capital lost by doing this could cause large problems in the future, and it seems unlikely France would take this step. At the moment-and details are changing o an almost daily basis-it appears as though te Council is going to yield to Parliament's position on biofuels sustainability criteria and press for the Council position on aspects related to ETS, where the Member States have the most concern. End comment. SILVERBERG .