Country Snapshot: EU

On 6 March 2015, the European Union (the EU) adopted its Intended Nationally Determined Contribution (the INDC) proposal and promptly submitted it to the Secretariat of the United Nations Framework Convention on Climate Change (the UNFCCC).

The EU committed to a binding target of an at least 40% domestic reduction in greenhouse gas emissions by 2030 compared to 1990 levels (the 40% Target).

The 40% Target does not include any contributions from international emissions credits (although such market mechanism will still be available for use in the EU Emissions Trading System, at least until 2020).

The 40% Target constitutes a significantly increased commitment when compared to the 20% target which the EU adopted for 2020. However it should be noted that under the IPCC (Integrated pollution prevention and control) Directive the EU has already committed to reducing emissions by 80-95 % by 2050.

The following areas will be covered by the 40% Target: energy, industrial processes and product use, agriculture, waste, Land Use, Land-Use change and Forestry (the LULUCF). In relation to LULUCF, the EU does not provide any details on how it will be treated (if taken into consideration, it could represent an estimated 5% reduction of greenhouse gas emissions). A public consultation is planned to gather proposals, experiences and opinions from citizens, experts and other parties. The EU will provide further detail on this matter “as soon as technical conditions allow“ and by 2020 at the latest.

The EU published its INDC 6 months before the due date. This move was widely interpreted as showing a strong willingness by the EU to take leadership on environmental issues before COP21 and therefore to demonstrate that climate change is a priority at a global level.

The full text of the EU’s INDC submission can be accessed here.

The commitments set out in the INDC are underscored by the recently agreed 2030 Framework for climate and energy, including EU-wide targets and policy objectives for the period between 2020 and 2030. These include:

• a 40% cut in greenhouse gas emissions compared to 1990 levels
• at least a 27% share of energy consumption from renewables
• at least 27% energy savings compared with the business-as-usual scenario

Legislation in respect of such targets remains subject to negotiation, but the European Commission has proposed reforming the EU ETS (see below), and a new governance system based on national plans for competitive, secure, and sustainable energy.

The EU’s current “Climate Change Package” covers the period until 2020 and encompasses the "20-20-20" targets, being:

• a 20 per cent. reduction in EU greenhouse gas emissions from 1990 levels by 2020;
• raising the share of EU energy consumption produced from renewable resources to 20 per cent. by 2020 (see further below); and
• a 20 per cent. improvement in the EU’s energy efficiency by 2020 (see further below).

The EU Emissions Trading System (the EU ETS) was established in 2005 and was the first emissions trading scheme to be established under the Kyoto Protocol. It remains one of the central limbs of the Climate Change Package and is, to date, the world’s largest carbon market. Currently in its third phase (from 2013 to 2020), the EU ETS market represents 45% of total greenhouse gases emitted in the EU.

The EU ETS is based on a “cap and trade” system. An emissions cap is set on the total amount of certain greenhouse gases that can be emitted by installations falling within the scope of the EU ETS, including power plants, facilities in a wide range of energy-intensive industry sectors, and aircraft operators. Operators are required to surrender allowances in respect of their emissions during a compliance year. Scarcity of allowances is intended to incentivise operators to reduce their emissions in the most efficient way possible (buying allowances on the market where necessary).

Since the beginning of the third phase of the EU ETS, the default method for obtaining emissions allowances (permits) has been auctioning. There is a residual amount of free allocation of allowances other than in the power sector. Harmonised EU-wide allocation rules have been set up for allocation of free allowances.

The average carbon price so far in 2015 is EUR 7.41 per tonne, which is much lower than was envisaged at the outset of the scheme¹. Changes are being put in place to try to redress this to some extent.

Furthermore, carbon taxes and limited taxes on the use of fossil fuels have been instituted within certain EU Member States to (indirectly) bolster the price of carbon on a domestic level.

It is intended that new EU ETS measures will be adopted under a legislative proposal which was presented by the European Commission in July 2015 in respect of the period from 2020. These measures include the following: increasing the pace of emission cuts, better targeted carbon leakage rules (taking account of the risk of emissions simply being displaced to outside of the EY), and the implementation of support mechanisms such as funding low-carbon innovation and energy sector modernisation.

Under the EU ETS operators have had the opportunity to surrender credits from emissions reducing projects registered under the market mechanisms of the Kyoto Protocol. For a time this created a buoyant market in the sale and purchase of Certified Emission Reductions (CERs) from Clean Development Mechanism projects (see elsewhere on the Norton Rose Fulbright website for further details). However, revised EU ETS rules and the low price of carbon have dramatically reduced the incentive to use CERs to satisfy EU ETS obligations.

The 2009 Renewable Energy Directive requires Member States to promote energy produced from renewable sources.

Member States must demonstrate how they will meet targets in national renewable energy action plans that contain the following elements:

• “individual renewable energy targets for the electricity, heating and cooling, and transport sector
• the planned mix of different renewables technologies
• policy measures to achieve national targets including cooperation between local, regional, and national authorities
• any planned statistical transfers and/or joint projects with other countries
• national policies to develop biomass resources
• measures to ensure that biofuels used to meet renewable energy targets are in compliance with the EU’s sustainability criteria”.²

According to the Member States’ forecasts, the 20% target to be reached by 2020 should be exceeded by 0.3 points³. Three Member States (i.e, Sweden, Bulgaria, and Estonia) have already reached and even exceeded their 2020 objective⁴.

The Energy Efficiency Directive 2012/27EU of 25 October 2012 provides for an ambitious target:

“The Directive establishes a common framework of measures for the promotion of energy efficiency within the Union in order to ensure the achievement of the Union’s 2020 20 % headline target on energy efficiency and to pave the way for further energy efficiency improvements beyond that date.

It lays down rules designed to remove barriers in the energy market and overcome market failures that impede efficiency in the supply and use of energy, and provides for the establishment of indicative national energy efficiency targets for 2020” (the “Energy Efficiency Directive”).

The Energy Efficiency Directive covers “the full energy chain, including energy generation, transmission and distribution; the leading role of the public sector in energy efficiency; buildings and appliances; industry; and the need to empower final customers to manage their energy consumption. Energy efficiency in the transport sector was considered in parallel in the White Paper on Transport, adopted on 28 March 2011.”

Allowances, certificates for energy efficient buildings, labels, energy audits or advantageous tax provisions are some of the means to achieve energy efficiency.

The EU supervises national efforts and national targets as well as long-term strategies. At this stage, the European Commission has indicated that the 20% target will not be reached; instead, savings around 18% to 19% are expected⁵.

The EU has agreed that 20% of the EU budget (2014-2020) should be dedicated to climate action. This amount will be mostly invested in mitigation and adaptation actions that will be integrated in all major EU spending programmes⁶. This budget represents a key milestone in transforming Europe into a clean and competitive low-carbon economy.

Member States of the European Union have implemented a wide range of support schemes under the auspices of the Renewable Energy Directive. These include feed-in tariff regimes and green certificates systems that incentive the generation of electricity from renewable sources. Further details of such schemes are available elsewhere on the Norton Rose Fulbright website.

Outside of Member State support schemes a wide range of support has been made available for renewable energy. This includes:

European Energy Programme for Recovery: This €3.98 billion programme finances key energy projects. So far, the EEPR has helped fund 44 gas and electricity infrastructure projects, 9 offshore wind projects, and 6 carbon capture and storage projects.

European Energy Efficiency Fund (EEE-F): This fund offers financial products such as senior and junior loans, guarantees, or equity participation to energy efficiency investments made by local, regional, and national authorities.

The EU's Research and Innovation Programme Horizon 2020 provides €5.931 billion in funding towards energy projects between 2014 and 2020, including for smart energy networks, tidal power, and energy storage.

The NER 300 programme uses money from the sale of carbon allowances under the EU ETS (see above) to fund demonstration projects for carbon capture and storage (CCS) and renewable energy in Europe. These projects are designed to demonstrate the commercial viability of technologies such as concentrated solar power, smart grids, bioenergy, and post-combustion CCS. So far, €2.2 billion has been awarded to 38 renewable energy projects and 1 CCS project.

The EU established updated rules in guidelines for State aid for environmental protection and have been energy that were adopted in April 2014 and applicable since 1 July 2014 (the Guidelines)⁷. The Guidelines’ extend the scope of the previous environmental aid guidelines of 2008 to the energy field, including but not limited to state aid to energy infrastructure projects, generation adequacy measures, and energy intensive users.

An important facet of the Guidelines is that they are intended to make the allocation of renewable energy support more market-focussed and competitive. This has meant, for example, that in the UK, projects bid in competitive auctions for the allocation of renewable energy support.