EU to Require More Energy Savings, May Exceed 2020 Carbon Goal

The European Union plans to oblige governments and businesses to make energy efficiency a higher priority, a strategy to help the bloc exceed its goal of cutting carbon by 20 percent and boost the security of supplies.

The EU may cut greenhouse gases 25 percent by 2020 compared with 1990, as long as it steps up energy-saving measures, the European Commission, the bloc’s executive arm, said in a policy paper published today in Strasbourg, France. The document maps a path for an 80 percent reduction in greenhouse gases by 2050.

To avoid a drop in the price of carbon allowances as new efficiencies lower emissions, the commission offered the option of withholding an unspecified number of permits starting in 2013. The EU, which aims to lead the global fight against climate change, said the most cost-efficient scenario is to cut emissions by 40 percent in 2030 and 60 percent in 2040.

“What we presented today shows very clearly it’s sound economics, good business and responsible politics to start now the transition to a low-carbon society,” EU Climate Commissioner Connie Hedegaard told a news conference today. “To delay and to postpone action it would become more expensive.”

EU carbon permits for December rose 0.3 percent to 15.91 euros ($22.13) a metric ton as of 5:30 p.m. in London on the ICE Futures Europe exchange in London. Before the EU published its plan, prices were as low as 15.71 euros.

Market prices may move higher on the EU plan, especially the set aside of potentially hundreds of millions of allowances to increase scarcity, said Carine Hemery, an analyst in Paris at Orbeo, the emissions trading venture of Societe Generale SA and Rhodia SA. “They don’t want to see the carbon price going down,” she said today by phone.

Lagging Behind

While the 27 EU nations are poised to meet the binding goal to cut emissions by 20 percent, they are lagging behind on their pledge to boost energy efficiency by 20 percent, the commission said in the document. Recent EU estimates show Europe will achieve only half of the improvement it aims for.

Measures that could help accelerate energy savings include requiring public authorities to refurbish at least 3 percent of their buildings each year, roughly double the actual renovation rate, the commission said in a separate statement. Higher standards should also be applied in public purchases of goods, services and works, it said. Another idea is to focus on the roll-out of smart grids and smart meters to limit energy consumption, according to the document.

‘Binding Measures’

The commission plans to present “legislative proposals with very concrete binding measures” in a few months, it said.

To reach the energy-savings goal, it may be necessary to set aside some of the emission allowances in the next phase of the bloc’s emissions-trading system that starts in 2013, the commission said. The program, known as the ETS, is the EU’s cornerstone of its plan to reduce greenhouse gases blamed for climate change. It imposes pollution limits on more than 11,000 utilities and manufacturing companies.

“Without a set-aside, energy savings achieved by one company would result, via relatively lower demand for allowances, in weakening of the price of allowances,” the commission said. “This could prompt another company to produce more, consume more energy and emit more carbon dioxide. As a result, net energy savings would be low or non-existent.”

The commission revised the proposal from the original draft obtained by Bloomberg News last month, when it suggested that between 500 million and 800 million allowances could be withheld in the eight-year trading phase through 2020. That would correspond to as much as 5 percent of supply.

‘Hamper Competitiveness’

The commission’s plans to withhold some permits sparked criticism from energy-intensive industries, including the association of the European steel producers Eurofer. The group said last month the set-aside would effectively mean tighter emission caps and higher costs for companies in the EU emissions program.

“Setting aside allowances in the EU ETS could create uncertainty for business and hamper competitiveness of European industry,” Brussels-based BusinessEurope, an employers’ federation representing more than 20 million companies, said in an e-mailed statement. “To improve predictability, it is essential not to disrupt the EU climate and energy policy framework already in place for 2020.”

The potential set-aside, which would have to be approved by member states, would be built gradually from the pool of allowances to be auctioned by member states, according to the commission. The bloc, which has given away the majority of allowances since it started the program in 2005, will require most emitters to purchase their pollution rights from 2013.

“The set-aside is one of the better options to fix the emissions-trading system,” said Sanjeev Kumar, an associate at climate-protection group E3G in Brussels. “Now we have to win the politics.”

Political Divide

In its policy paper today, the commission stopped short of proposing a more-ambitious binding emissions-reduction target for Europe in 2020, as member states and businesses remain divided on whether the bar should be raised. Western European countries including France, Germany and the U.K. have called for a tougher goal of 30 percent, and eastern nations tend to favor a more-cautious approach.

“The roadmap shows that Europe’s current 20 percent target for 2020 isn’t enough or cost effective and shows that Europe’s already got the policies and the tools to cut emissions by 25 percent at home,” U.K. Energy and Climate Change Secretary Chris Huhne said in a statement. “This makes the case for going to 30 percent stronger and more urgent.”

‘First Step’

Building a low-carbon economy will require an additional annual investment of around 270 billion euros over the next 40 years, an equivalent to 1.5 percent of the EU’s gross domestic product, the commission said. Much of this will be recovered through lower import bills for oil and gas, it projected.

The spending will help reduce Europe’s reliance on imports of energy, stimulate new sources of growth and help create jobs, according to the commission.

“The roadmap is a first step towards defining the elements of that longer term clarity and predictability which will enable our companies to begin to plan and execute the significant investments which will be needed to deliver a low carbon economy,” Brussels-based European electricity industry association Eurelectric said in a statement.

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