Brussels' climate plan ups pressure on polluting businesses

The European Commission released its long-anticipated climate change action plan today, unveiling a raft of measures and targets that will crank up pressure on firms to embrace low carbon business models and technologies.

Speaking to the European Parliament, commission president Jose Manuel Barroso said the proposals represented a "detailed roadmap" capable of delivering a 20 per cent cut in EU emissions and ensuring 20 per cent of energy comes from renewable sources by 2020.

"Our mission, indeed our duty, is to provide the right policy framework for transformation to an environment friendly European economy and to continue to lead the international action to protect our planet," he said, reiterating Europe's commitment to cut emissions by 30 per cent by 2020 if other large polluters – most notably the US – agree to binding emission targets.

In response to business concerns that the package of measures would stifle international competitiveness, Barroso – who earlier this week said he would consider tackling any migration of carbon-intensive sectors from Europe by imposing trade tariffs on importers from countries with lax rules on carbon emissions – insisted the action plan was "not in favour of the environment and against the economy".

Combined, the package of measures is estimated to cost the UK £6bn a year as companies adapt to higher carbon and energy costs and investment in renewables increases. However, the commission insists the package represents a bargain, predicting compliance with the proposals will cost just 0.6 per cent of Europe's economic output and deliver major benefits.

"Our package… should create thousands of new businesses and millions of jobs in Europe," said Barroso, arguing that as well as mitigating climate change risks, the measures would also deliver enhanced energy security for the European firms.

At the heart of the action plan lie proposals to significantly strengthen Europe's emissions trading scheme (ETS) from 2013 by extending the number of industries included in the scheme, expanding it to incorporate other greenhouse gases besides carbon dioxide, tightening limits on the number of carbon credits that can be bought in from outside the EU to cover firms' obligations, and progressively lowering the cap on overall emissions to 21 per cent below 2005 levels in 2020.

Henrik Hasselknippe, director of emissions trading analysis at research firm Point Carbon, said that early analysis suggested the reforms would ensure that the price of carbon credits in the scheme increases over time to between €35 and €40 a tonne.

"A carbon price at that level would definitely drive major investment in cleantech," he said. "The commission really has delivered a very strong package of measures."

He added that the commission's proposal to extend the current limit on the number of UN carbon credits that can be bought by EU firms from outside the union to cover 2008 through to 2020, as opposed to 2008 to 2012, would also help ensure that emission reductions are delivered from within the EU and not developing countries.

Controversially, the free allocation of carbon credits to firms in the trading scheme will also be largely phased out under the proposals, forcing companies to buy all the credits they need to cover their emissions at auction. The power sector, which accounts for the bulk of EU emissions, will face full auctioning from the start of the new regime in 2013, while other industrial sectors, as well as aviation, will see increased auctioning phased in up to 2020.

However, Hasselknippe said the plan was likely to continue to offer free allocations to the steel, cement and aluminium industries, after the commission said it would make allowances for sectors that are "particularly vulnerable" to competition from producers in regions without "comparable carbon constraints".

Matthew Farrow, head of environment at the CBI, welcomed the commission's decision to recognise certain vulnerable sectors, but warned that those industries needed clear guidance on how they will be affected quickly.

"These companies make investment decisions that last years, so they need to know pretty sharpish how they will be affected by any changes to the ETS," he explained.

The commission estimates that increased auctioning of allowances will raise up to €50bn a year by 2020 for member states; money which it said should be used to invested in low carbon technologies and climate change mitigation measures.

Farrow said that businesses would want to see funds raised from auctions reinvested in green initiatives. "We don’t want the money disappearing into Treasury coffers and going to pay for a Northern Rock or the like," he explained.

However, according to BBC reports today, the government is set to anger the business lobby group by ignoring commission pleas to set up a dedicated fund and will instead divert money raised from auctioning straight to the Treasury

As widely anticipated, the commission also confirmed separate 2020 targets for each member state on emissions from organisations outside the ETS and the proportion of energy they generate from renewables based on their current readiness to deliver.

The UK was set a goal of cutting emissions from non-ETS sectors by 16 per cent and delivering 15 per cent of its energy from renewable sources by 2020.

But in a move that has infuriated some environmentalists, the commission signalled that it could develop a trading scheme that would allow countries falling short on their renewables targets to buy in renewable energy credits from countries exceeding their targets. In a statement the commission said such an approach would shift investment to where renewables can be produced most efficiently, potentially cutting €1.8bn from the price tag for meeting the target.

However, Philip Wolfe, executive director of the Renewable Energy Association (REA), said that countries keen to use a trading system to meet their renewables targets were likely to come unstuck.

"The commission feel obliged to offer a trading scheme so they can't be accused of not providing the most efficient option, but in practice I'm not sure it'll work," he said. "I doubt any member state will find it so easy to meet the targets that they'll have excess capacity left to sell. Without the certainty that there will be excess capacity, countries would be best served by setting out their stall to meet their share of the target."

The commission has also kept its much-criticised target of powering a tenth of Europe's road transport using biofuels, but it has confirmed that new sustainability criteria will be introduced to ensure biofuels meet strict environmental standards.

The proposals will now be debated by MEPs and member states with the final package of legislation unlikely to come into force before the end of 2009.

UK business secretary John Hutton urged the EU to finalise the package soon.

"I want to see it agreed as soon as possible to give business the certainty it needs to plan low carbon investments with confidence," he said.