Block’s Indicator of Sustainable Growth

by Ray Block

The final agreement on climate change by the 27 countries making up the European Union, which is to be ratified by the European Parliament this coming week was hailed as historic. But like a type of swiss cheese, the agreement is full of holes and wriggle room.

As earlier proposed by the EU officials in Brussels, the basis of the agreement is for a three part process – a 20 per cent reduction in CO2 emissions from the 1990 level to be achieved by 2020; renewable energy as a proportion of total energy used reaching 20 per cent by 2020; and a 20 per cent increase in energy efficiency by 2020.

There is a fourth goal, that the EU would commit itself to a 30 per cent reduction in emissions, rather than just 20 per cent, if by the time of the Copenhagen conference in 2009, there was broad agreement between the developed and developing countries for a global agreement on CO2 emissions.

So far, so good. But these targets have been rightly condemned by the environment movement. For one thing, power companies and heavy industry retain the right to free allocation of emissions allowances on which CO2 quotas are based to 2012, limiting the amount of costly new plant and equipment to be installed for scaling up the reduction of carbon emissions.

This compares with the previous system, whereby the EU commission had proposed by 2013 full government auctions of carbon permits. Under the new time table in 2013, the power companies in the western European countries will have to buy all their carbon permits at government auction.  For the eastern European countries, the power producers only need to start at 30 per cent auctioning in 2013, with a gradual phase in to 100 per cent by 2020.

Heavy industries such as steel, paper, cement, chemicals etc are singled out even more favourably for considerable concessions. Germany in particular had feared that some of the industries would flee to non-EU countries. Now heavy industries will only need to phase in carbon credits initially at 20 per cent in 2013, and rising only to 70 per cent by 2020. It will take until 2027 before all the concessions are ended.

The nine eastern European countries, which earlier were rocking the boat, are treated even more generously. Half of the revenues generated from the auctioning of allowances in the EU greenhouse gas emissions will be used in the east to reduce emissions, mitigate and adapt to climate change, and for measures to avoid deforestation, to develop renewable energies, energy efficiency and other technologies to move towards a safe and sustainable low carbon economy.

The coal industry, the biggest carbon emitter of all also received last minute concessions. The EU will spend nine billion euros on carbon capture and storage to commercialise the process to make coal “clean”, and the UK hopes to win two of the 12 demonstration projects to be set up.

The new rules centre on the EU emissions trading scheme, which requires companies exceeding their CO2 quotas to buy permits from businesses that emit less. The new EU law will reduce the annual quotas for electricity, steel, paper and other industries now in the trading system by 11 per cent on average in 2013-2020 compared with 2008-2012.

The political issue now resolved was over the extent to which the EU should add to the costs for industry of reducing C02 emissions to allocate the allowances that make up the shrinking quotas.