Aldyen Donnelly: The EU and Greenhouse Gas emissions…what you don’t know

Europe’s climate change commitments credits the EU with having adopted legally binding GHG emission limits for 2020 and beyond. This is not the case.

While EU member states have agreed to implement a series of 4 legally binding standards for Greenhouse gas (GHG) emission limits—two of which are intensity-based. But there are no legally binding national or EU-wide GHG limits in the Climate Change Action Plan that the members of the EU voted to endorse in April, 2009.

In 2006, 2007 and 2008 the European Commission appealed to member states to agree to legally binding EU-wide and national GHG limits, but the member states refused. The member states did agree to work together to develop and bind to a series of intensity-based product standards, compliance with which may or may not result in achievement of the EU goal of cutting EU-wide CO2 emissions to 20% below 1990 levels by 2020. 

In international meetings, EU negotiators consistently allow Canadian and US negotiators and reports to mis-characterize EU member states’ GHG goal for 2020 as "legally binding", largely in the hope that they will convince Canada and the US to bind to absolute GHG limits. This would deliver a massive trade advantage to EU-based energy intensive businesses. I suspect that some EU negotiators actually hope that if they can convince Canada and the US to take on binding national GHG limits that they might be able to convince EU member states to do so, as well—even though I doubt such an outcome is a possibility.

The EU cap and trade regime—which covers only CO2 and sources responsible for less than 50% of EU-wide GHG emissions—incorporates a number of provisions under which surplus free EU CO2 allowances can be freely allocated to regulated facilities. In this regard, it is similar to the Waxman-Markey proposal.

The EU Action plan goes something like this.

It will “set for each member state a mandatory national target for the overall share of energy from renewable sources in gross final consumption of energy— taking account of countries’ different starting points”. Note: these mandates are energy intensity-based limits, i.e. energy from renewable sources as a % of total energy consumption. "Each EU country will adopt a national renewable energy action plan setting out its national targets for the share of energy from renewable sources consumed in transport, electricity, heating and cooling in 2020 and will notify it to the Commission by June 2010."

Note that the EU’s cap and trade program covers CO2 discharges only, and covers less than 50% of the European Union’s GHG inventory. Many provisions in the EU cap and trade allowance allocation/auctioning proposal create the potential for free EU CO2 allowance supply to exceed the target of 80% of 1990 actual emission levels in the regulated sectors.

"Across the entire EU, greenhouse gas emissions from the relevant sectors—sectors not covered by the cap and trade rule—are to diminish by 10 % on 2005 levels by 2020, thus contributing to the EU’s goal (not mandatory limit) of a 20 % reduction in CO2 (CO2 only, not all GHGs)…across the entire economy. EU states with low GDP per head and strong prospects for economic growth may increase their carbon emissions by up to 20 % whereas those with high national income per head must cut CO2 pollution by up to a fifth."

In other words, if EU economies with lower GDPs grow faster then EU economies with high GDPs, the overall goal of a 20% reduction in CO2 over all sources covered by the EU cap and trade scheme will not be achieved. Note, as well, that unregulated CH4 emissions have been the primary driver of EU GHG growth since 1997.

The following statement applies only to the portion of the national economies that are covered by the CO2 cap and trade rule, not to the economies and/or national GHG inventories in their entirety: "The national trajectory of carbon emissions until 2020 is binding on member states and enforceable through the usual EU infringement procedure. If a country exceeds its annual objective it must implement corrective measures. In addition, the excess emissions will be multiplied by an abatement factor of 1.08 and deducted from the following year’s CO2 allowance."

Also in the limited context of the European CO2 cap and trade rule, "the Council has introduced several flexibility mechanisms, including the possibility of…carrying forward excess reductions to future years." This provision encourages European corporations to hoard their EU CO2 allowances and not to export them to other markets.

"The Council adopted a regulation setting the first legally-binding standards for CO2 emissions from new passenger cars, to apply as of 2012. The regulation will give legal effect to the EU’s existing goal of reducing average emissions from new cars to 120gr CO2 / km. This is to be achieved in two ways: A reduction to 130gr CO2 / km through engine technology plus an additional cut of 10gr CO2 / km through more efficient vehicle features, for instance air-conditioning  systems or tyres. The new regulation makes these objectives binding for the average fleet of a given car manufacturer in successive stages: In 2012, 65 % of their car fleet must meet the target, in 2013 75 % and in 2014 80 %. From 2015, the whole fleet needs to comply with the CO2 emissions objective.".Note: These mandates are intensity-based GHG limits, i.e. tailpipe GHG/km. Actual "reductions" depend on the vehicle stock turnover rate, car ownership rates and car use rates.

"The revised directive introduces for the first time a reduction target for greenhouse gas (GHG) emissions from fuels. By 2020, fuel suppliers have to decrease by 6% climate harming emissions over the entire life-cycle of their products." Since most of the life cycle of a large share of the transportation fuels consumed in Europe physically occurs outside Europe, this target proposes that European fuel importers take credit against their European GHG inventories for reductions that might be realized outside Europe, particularly in non-treaty OPEC nations. Obviously, the 6% reduction target for transportation fuels falls short of the EU’s overall 20% GHG reduction objective. 

Note that the two most critical legally binding product standards that the member states have agreed, in principal, to implement, are intensity-based.

Remember, the EU27 "cap" that EU negotiators agreed to at Kyoto in 1997 was 14% ABOVE the EU 27 membership’s 1997 actual GHGs. So at Kyoto in 1997 the EU negotiators did not agree to cut GHGs, but agreed to cap growth. In this regard, they utterly out-negotiated the Canadian, US and Japanese negotiators.

It appears to me that a similar play is currently in the works. I hope I am correct in concluding that it is much less likely the EU will pull off such a coup in this round of negotiation. Of course, this depends on Canada’s current negotiating team being much more astute than our Kyoto negotiating team.

Successful Canadian negotiations will depend on our negotiators becoming as aware of what certain language and commitments mean for Europe as they are of what they might mean for Canada—an awareness that was not apparent in 1997 or for many years following.

If asked, I would recommend that Canada implement the same 4 product standards that the EU proposes to implement, as well as product standards for electricity, natural gas and petroleum product stales that are comparable to but more efficient than those outlined in Title 1 of the Waxman-Markey bill. That is the basis for fair and free global trade in product standard over-compliance credits and does not commit Canada to international trade in government-issued (and manipulated allocations of) quota certificates.

Please note that as allowed under the EU Energy Tax Directive of 2003, all fuels and electricity sold to "energy intensive business" in France, Sweden, Denmark, Norway, Germany and elsewhere is typically 100% free from ALL energy taxes (including but not just CO2 taxes).

By law, an energy intensive business is one in which energy accounts for 3% of more of productiion costs. So after France introduces its CO2 taxes, most energy intensive French businesses will pay lower aggregate energy taxes than are currently paid by Canadian corporations.

Over and above implementing the energy tax exemptions allowed in the EU Energy Tax Directive of 2003, some nations also exempt all participants in certain industries from CO2 taxes. Look up CO2 tax exempt industries for Sweden, Denmark, Norway, etc and scroll down to Exemptions in Environmentally-related taxes.

In most cases, you will see that 100% of fuel and electricity consumed by power producers, oil refineries, industrial chemical producers, commercial airlines, commercial marine vessels and commercial fishing vessels and consumed in the production of products that are exported, have always been exempt from CO2 taxes in most—but not all—European CO2-taxing nations. The net result is, for example, that CO2 taxes account for less than 0.95% of total government revenues in Norway and less than 2% of total government revenues in Denmark. This will be no different in France.

But because EU member states typically used CO2 tax revenues to finance corporate income tax cuts, and because government-owned agencies and enterprises, including hospitals, universities and schools,  all pay CO2 taxes, the European CO2 tax shift constitutes a tax shift from corporate to government agency taxpayers.

OECD economic indicator data reflects this reality. The OECD database shows that tax-included household expenditures on energy increased a nominal 5% to 13% between 2000 and 2007, while household expenditures on health care increased a nominal 34% to 75% in CO2 taxing European nations. Health care fees and insurance premiums have had to increase to cover government-run and taxpayer financed public institutions’ new CO2 tax liabilities, while energy intensive corporations remain, generally, CO2 tax exempt.

Between 2005 and 2012 all energy intensive industries—not including power generation—were freely allocated sufficient EU CO2 allowances to cover or even exceed their forecast GHG emissions.

For example, BP’s reported GHGs subject to the EU cap and trade regime grew 23%, absolutely, between 2005 and 2007, but BP still held surplus, bankable, EU CO2 allowances at the end of 2008. BPs GHGs increased 23% even though production at their European regulated plants declined over the period. In other words, BP’s, European GHG/Gj of energy output ratio grew much more than 23%.

It’s a similar story for every European-based integrated oil and gas producer.

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