GROWING OPTIMISM ON CLIMATE AND ENERGY PACKAGE

UNCLAS SECTION 01 OF 02 BRUSSELS 001854

SIPDIS

E.O. 12958: N/A
TAGS: EAIR ECON EIND ENRG EUN EWWT KGHG SENV TPHY
SUBJECT: GROWING OPTIMISM ON CLIMATE AND ENERGY PACKAGE


1. The horse-trading is moving at a furious pace in Brussels
as efforts to finalize the EU,s Climate and Energy package
appear to be yielding fruit. The French, in their capacity
as Council President, have been holding meetings of
representatives from member states (COREPER) and between
Commission, Council and Parliament officials (trilogue) on a
daily basis. (Notably, the Environment Council cancelled
today,s session and did not issue any conclusions on the
package.) The meetings have been stretching to one and two
o,clock in the morning in an effort to iron out the details
on issues including auto emissions, carbon capture and
storage (CCS) and biofuels. One Commission official said
that most of the contentious issues have been addressed, but
lamented that package has become watered-down. The major
remaining obstacle appears to be Italy,s opposition to the
renewables legislation, but there is a growing consensus that
a political agreement will be reached during the 11-12
December European Council meeting, if not sooner. French
President Sarkozy will also travel to Gdansk, Poland on 6
December to address concerns of eastern bloc countries.
Auto Emissions

2. One of the key agreements reached this week was on auto
emissions. Under the terms, auto makers will have until 2015
) three years more than originally proposed ) to limit
average emissions to 130 grams of carbon dioxide per
kilometer, down from the current average of 158 grams.
There will be a phase-in period, beginning in 2012 when 65%of
new vehicles must meet the emissions cap, 75% by 2013 and 80%
by 2014. Auto makers that fail to reach these goals will be
fined five Euros for each extra gram of CO2 per car and 95
Euros per gram if they miss the limit by four grams.
Beginning in 2019, the penalty for each extra gram will cost
95 Euros per car.
Emissions Trading Credits

3. The Emissions Trading Scheme (ETS) directive of the
package extends the EU,s CO2 cap and trade system into its
third phase, beginning in January 2013 and running to 2020.
The scheme, which sets forth the emissions limits for certain
sectors, has come under much criticism from eastern member
states, particularly Poland, which is dependent upon coal for
over 90% of its power supply. Under a proposal put forth by
the French, emissions permits would be issued to member
states with half of the EU,s average per capita income or
less and which rely on coal for more than 30% of their
electricity. The allocations would commence in 2013 and
would be phased out over a three to or-year period, after
which all permits would ave to be purchased at auction. The
goal of this proposal is to afford the Polish and other
coal-based and/or less-affluent economies more time to
convert their power sectors. President Sarkozy will meet
with leaders from Polan, the Czech Republic, Bulgaria,
Estonia, Hungary, Latvia, Lithuania, Slovakia and Romania in
Gdansk on 6 December to discuss the proposal an secure their
support for the package. If the proposal s adopted, Cyprus
and Malta could also benefit.
Aviation Emissions

4. Under a directive issued this summer, aviation was
included in the overall ETS from 2012 and subject to the
changes in the general review for the next phase 2013-2020.
For the initial one year period 2012-2013, the level of
auctioned permits --as opposed to those distributed for free
-- was set at 15 percent. According to contacts at DG
Transport and DG Environment, it remains an open question as
how the amendments to the general emissions will impact the
aviation sector, but latest indications are that specific
provisions will be left unchanged. It is possible, however,
the final decision could increase the auction level to 20
percent as Parliament has suggested or could even bring the
aviation sector more closely in line with general ETS
requirements.
Carbon Capture and Storage

5. Funding for CCS pilot projects has been a contentious
issue between the Parliament and the Council. Parliament has
sought to finance the projects by providing them with 500
million carbon credits from the ETS, new entrants reserve
(which investors could then sell on the market). The Council
and Commission had offered 100-200 million. An agreement
will likely come in the range of 300-350 million credits,
which would allow for the financing of five to six pilot
projects. In consideration, Parliament may agree to postpone
emissions performance standards on CCS plant, which were
opposed by some member states and the industry.
Biofuels

6. The French have also reached a compromise with the
Parliament on biofuels targets. Biofuels are a component of
the renewables directive, which establishes a 10% target for
renewable energy sources for transport, including also

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electricity and hydrogen fuel cells, by 2020. Under the
agreement, biofuels must yield a 35% lifecycle greenhouse gas
(GHG) emissions savings commencing in 2010. By 2017,
biofuels from existing plants must yield a 50% savings, while
new plants must produce fuel with a 60% savings. There are
no mandatory social criteria applicable to producers, but
firms will be required to report to the Commission on social
conditions (i.e. labor) at production locations.

7. The legislation does not require calculations for indirect
land use change (ILUC) at this time due to the lack of
reliable scientific data. However, the Commission will
commence a study on ILUC in 2010 in an effort to incorporate
by 2012 ILUC calculations into the biofuels legislative
targets. In order to spur investment in biofuels, producers
who achieve a minimum of 45% GHG savings before 2013 will be
excluded from ILUC calculations until 2017.
Renewables ) Italy Still Holding Out

8. An agreement on the renewables target ) 20% of energy
production from renewable sources by 2020 ) has yet to be
reached, with Italy as the lone holdout. About 8.5% of
Europe,s energy production currently comes from renewable
sources; 7%comes from hydroelectric sources and the remaining
1.5% is mainly from wind and solar. To bridge the 11.5% gap,
targets will be apportioned among the member states based on
their capacities to implement new technologies.

9. Italy, which one Commission official described as the
member state best poised to benefit from wind and solar,
claims that the costs to transform its energy industry would
be prohibitive. It is seeking a renewables trading
mechanism, along the lines of the ETS. Under this scheme,
member states could invest in renewable technologies in other
member states or import renewable energy from outside the EU,
in Italy,s case from North Africa and/or Albania. While
there is much support for this proposal, Italy does not want
to hedge its bet. Thus, it insists on a review of the scheme
in 2014, a proposal opposed by other member states and
Parliament. Nonetheless, there is optimism that this will be
resolved and the EU,s leaders will announce a political
agreement by 11 or 12 December to coincide with the final day
of talks at Poznan. Thereafter the package will be sent to
the Parliament, which could approve it as early as December
15, giving the French Presidency its major deliverable in
time for the holidays.
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