Cheat Sheet: Europe's Climate Change Action Plan

Sounds important.
It's "the great project of our generation," not to mention "the most far-reaching legislative proposals made by the European commission for many years" if you believe EU president José Manuel Barroso.

Ah, good old political hyperbole.
Not this time. If these measures make it onto the statute book they really do have the potential to change the way we all live and do business. If the various targets and mechanisms are enforced properly with crippling fines for non compliance then governments and businesses will have no alternative but to deliver a low carbon economy.

So what can we expect?
The proposals aim to set in stone the 20:20:20 targets Brussels has been touting for the past few years. That means a 20 per cent cut in carbon emissions and 20 per cent of the energy mix delivered from renewables by 2020. For good measure there's also a target for 10 per cent of all road fuels to come from biofuels by 2020.

So we all have to knock a fifth of our carbon footprint?
Well that would be nice. But I'm afraid it's a bit more complicated than that. To account for the different levels of development of each of the member states the action plan is governed by the principle of effort sharing which means different countries and sectors have different targets. So all the heavy industries in the emissions trading scheme (ETS) will have to deliver a 21 per cent cut in emissions by 2020 regardless of where they are. Meanwhile, targets for sectors outside the ETS vary from country to country with developed economies such as the UK and Denmark having to deliver cuts of 16 and 20 per cent respectively, while developing economies such as Bulgaria will actually be allowed to increase emissions by 20 per cent.

Pretty daunting then.
Yup, and it could get more daunting still if the unbelievable happens and an international agreement to follow on from Kyoto was agreed. If that happens and the US and China agree to mandatory cuts the Commission has said it will activate "automatic triggers" (whatever they may be) and commit to 30 per cent cuts.

How do we meet these targets?
The Commissions proposals are pretty wide ranging covering everything from plans for more carbon capture plants to increased investment in energy efficiency, but essentially it boils down to a three pronged approach: reforms to the emissions trading scheme (ETS), legally binding targets for the proportion of renewable energy in the overall energy mix, and similar targets for biofuels.

Go on.
Well, the big one is the ETS. Industries such as aviation will be dragged into the scheme to join heavy polluters such as the energy companies and the caps on emissions from 2013 will get progressively tighter. Ultimately the scheme should deliver a 21 per cent cut on 2005 emissions by 2020 and as demand for credits increases the price of carbon should climb to around €35 a tonne. But the really big change will be that instead of being given their credits for free and then being able to trade them the Commission is proposing firms in the scheme will have to buy the credits they need at auction each year. They will have to pay for every tonne of carbon they emit, in effect creating a carbon tax.

The business lobby aren't going to like that. What's to stop them just moving operations to China?
That's the Commission's big fear. Heavy polluters such as the cement, steel and aluminium industries have been making noises that they would up and leave if costs got too high so the Commission has extended them an olive branch by saying that certain vulnerable to international competition would continue to get free allocations. However, most industries won’t be so lucky. Energy companies will have to buy all their credits at auction from 2013 and other sectors will see auctioning phased in up to 2020.

And the other two parts of the strategy?
The renewables targets are pretty self explanatory - the UK, for example, must generate 15 per cent of its energy from renewable energy or face massive fines. Cue, huge increase in renewable energy investment, popping of champagne corks at wind turbine firms, and frustration at the CBI who claim targets interfere with the market and that the ETS should ensure that the most cost effective means of cutting emissions is pursued.

And they've stuck with the biofuels targets?
Looks like it. There had been whispers that the Commission might cave into calls from environmentalists to abandon the targets, but instead it has simply introduced plans to ensure that only sustainable biofuels are used. Quite how it plans to enforce this when a not insignificant proportion of biofuels already comes from illegal plantations is unclear.

Right, that's all clear then, but what does it all mean?
In a nutshell the combination of increased renewables investment and carbon credit auctions means higher energy costs. Estimates range from a five per cent increase in energy prices by 2020 to a price hike of 15 per cent plus, irrespective of inflation. But the wide-reaching nature of the ETS means costs in many other sectors will also increase, flights will get more expensive, as will carbon intensive products such as steel and cement. The paper industry, for example, has already warned its products will get more expensive. Meanwhile, governments will have to deliver carbon savings from those sectors outside the ETS which will mean more stringent regulations and in the case of the UK an extension of carbon trading to include sectors such as retail and leisure.

That's going to be painful.
Indeed, but there is an upside the cost pressure will make investment in low carbon technologies and business models more attractive and technology transtions tend to drive economic growth, not dampen it. Cleantech companies will become titans of the European economy over the next few years creating thousands, if not millions of jobs and countering the necessary decline in carbon intensive industries. Overall, Barroso reckons the cost to the EU economy will be 0.6 per cent of GDP, or €2 per person per week, which sounds reasonable if you consider it will result in thousands of new cleantech jobs and deliver the world's first low carbon sustainable economy.