LINES DRAWN WITHIN EU OVER CCS

UNCLAS SECTION 01 OF 02 BRUSSELS 001771

SIPDIS

E.O. 12958: N/A
TAGS: EAIR ECON EIND ENRG EUN EWWT KGHG SENV TPHY
TRGY, TSPL
SUBJECT: LINES DRAWN WITHIN EU OVER CCS

REF: A. BRUSSELS 1689

B. BRUSSELS 1770


1. One component of the EU's Climate and Energy Package of
legislative proposals is to promote the development and
deployment of clean coal technologies through the principle
of carbon capture and storage (CCS). The proposal calls for
the construction of 10-12 pilot projects by 2015, to
facilitate deployment of CCS-enabled industries by 2020.
Given the reliance on coal for EU power generation (30.3% in
2005),and the plans by many member states to shut down
nuclear power plants and open over 50 new coal plants across
the EU by 2015, there is widespread support for the use of
CCS to reduce greenhouse gas (GHG) emissions. However, the
EU is currently at an impasse as to how these pilot projects
will be funded.


2. On November 18, the European Parliament declared that
"direct financial commitment is necessary in order to ensure
that 12 demonstration facilities are constructed." It has
proposed that 500 million credits (about 11 billion Euros) be
allotted under the EU's emissions trading scheme (ETS) to
finance the CCS pilot projects. These credits would be taken
from a pool of emissions allowances established by the EU for
new power plants and factories that would enter the ETS
scheme between 2013-2020. (Note: The EU is also grappling
with how to distribute these allowances among member states.
End note.)


3. Parliament's proposal has generated opposition from
several member states, notably Poland. Poland, which
currently uses coal for over 90% of its power generation, has
been one of the most vocal. Poland claims that as its
industries grow, they will stand to benefit from the pool of
ETS allowances for new entrants. Thus, it does not want the
pool to be reduced for CCS projects. Instead, Polish
official has said that funding should instead come from the
EU's research and development fund. Other opponents contend
that too much is being allocated for unproven technologies or
that member states should control allocation of ETS revenues.
The two member states most supportive of using the
allowances for new entrants are the UK and the Netherlands,
both service-based rather than manufacturing economies, which
would be unlikely to benefit from the new entrants allowance
pool.


4. In an attempt to reach a compromise, the French Presidency
has proposed the allocation of 100-200 million allowances
(approximately 2.2 - 4.35 billion Euros) be available for CCS
pilot projects until the end of 2015. Under the French
proposal, support would be provided to projects that have
"verified avoidance of CO2 emissions," and no project would
be eligible to receive more than 10% of the total allowances
available.


5. In response, EP CCS Rapporteur Chris Davies (UK-ALDE)
wrote the French Deputy Permanent Representative that the
proposal seems "designed more with a view to securing support
in the Council than of delivering a mechanism that will (lead
to construction of projects)." Davies cited an IEA report
that estimated construction of 20 CCS projects would require
20 billion Euros in subsidies and an internal EU estimate
that 7-12 billion Euros would be need to bridge the funding
gap for the EU's 10-12 projects: "It must be clear that the
use of 100-200 million allowances proposed will be hopelessly
inadequate." Davies also criticized the 2015 deadline. He
said most projects would not be operational until 2015 and
thus would only have a few months benefit from the scheme.
In order to be effective, he wrote the allowances must be
available until 2015. On the 10% limit, Davies said some CCS
technologies are more capital intensive than others. He
wrote if "the objective is to test a wide range of
technologies . . . the upper limit should () be raised to
20%.


6. Comment: Both the French and the Commission have committed
to finalizing the Climate and Energy Package this year (see
reftels for details on the Package),and recent press reports
indicate that an extraordinary Council may be called on
December 27, if it is not passed by then. Davies has been
one of the EU's biggest proponents for CCS, and as
Parliament's rapporteur, holds significant power. The French
will likely be working hard to strike a balance between
Davies and the member states over the next month. Even if a
deal is struck, industries have stated that they need
incentives up front, not just after the technology is
perfected.


BRUSSELS 00001771 002 OF 002


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