Bridges Trade BioRes Review • Volume 3 • Number 3 • December 2009

The microcosm of climate change negotiations - What can the world learn from the European Union?

by Håkan Nordström

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The relatively heterogeneous European Union has become a leader on climate change despite many odds. The mobilisation of the member states to move together provides insight into elements needed to ensure momentum also at the global level. These include leadership, burden-sharing, and financial support for weaker economies. While tools to address competitiveness concerns may be needed, the most confrontational ones - border tax adjustments - can hopefully be left untouched in the bottom drawer of the tool box.

The EU has played a leading role in the international efforts to combat climate change since the issue emerged on the agenda in the 1980s. The EU was the first party to commit to a stabilisation target in 1990; it assumed the toughest target under the 1997 Kyoto Protocol; and it has made the most ambitious offer for Copenhagen with an autonomous target of 20 percent emission reductions by 2020 relative to the 1990 level, or 30 percent if its key counterparts join in. The EU has also indicated a willingness to contribute significant funding to support adaptation and mitigation actions in developing countries.

The EU has emerged as a leader on climate change against all odds. Collectively, the EU is responsible for 13.8 percent of current emissions of greenhouse gases, with individual country shares ranging from 0.01 to 2.8 percent. None of the member states is large enough to influence the global emission trajectory in any significant way, nor is the EU as a collective able to do so, since global emissions are growing faster than what the EU can offset alone. The leadership is intriguing also in that the member states have veto power over key aspects of climate policy, including fiscal measures and energy policy. The EU cannot order member states to phase out fossil fuels in favour of renewable energies. Nor can the EU impose a carbon tax or cap-and-trade system without the agreement of all members.

This raises a number of questions that are of potential interest for climate negotiators and NGOs. What formula did the EU use to get all member states in line? How did the EU deal with competitiveness concerns, carbon leakage and the distribution of burdens among the member states? Can the internal formula be transposed to the global level? With these questions in mind, this article reports the findings of a study that followed the paper trail of the internal EU climate change negotiations from the first stabilisation target in 1990 to the adoption of the 2008 energy and climate package, which is the basis for the EU negotiations in Copenhagen. The analysis generates two interlinked lessons:

Lesson one: The EU cannot move further

First, it will not be easy for other parties in Copenhagen to squeeze out more concessions from the EU than what the member states have agreed beforehand. The EU will speak with one voice in Copenhagen, but behind that voice there are 27 voices with different national interests to protect; all with an effective veto power. It would be a mistake to assume that the EU can be pushed to the 30 percent conditional target without significant commitments from other industrialised countries as well as economically more advanced developing countries. Even the 20 percent target was the result of difficult bargaining. The energy-intensive industry had to be “bought off” with free emission allowances; less developed member states with generous allocation of emission rights and redistribution of the auction revenue; and developed member states with flexible rules on clean development mechanism (CDM) credits. No formula has been agreed for the sharing of the burdens if the target were to be raised from 20 to 30 percent. If the negotiation breaks down in Copenhagen, it may be difficult enough to maintain the political support for the 20 percent target. Even the current Kyoto target has been difficult for the EU to meet. Less than half of the distance has been covered thus far, and four member states are 20-35 percent above their national assignments. The appetite for taking on additional burdens for the 2013-2020 period is likely to be low if other parties shirk their responsibility in Copenhagen. A breakdown will also increase the pressure from industry and some member states to introduce a “carbon equalisation system” (border tax adjustment), an option that was included in the revised ETS Directive. The climate stakes are thus very high in Copenhagen, as are the stakes for the global trading system. The EU may be leader on climate change, but it cannot move much faster than “competing” nations.

Lesson two: Elements for an international agreement

Secondly, to the extent that the “microcosm” analogue is valid, the analysis may give some insights on what elements are needed to conclude a comprehensive international agreement. The internal negotiations suggest that four ingredients are necessary to make any progress:

Leadership

The first ingredient is strong leadership. In the EU, this is provided by the Commission and some climate-conscious member states in northern Europe, with support from green members of the European Parliament. It is more difficult to see where this leadership will come from at the international level. The secretariat of the UN Framework Convention on Climate Change (UNFCCC) does not have the executive powers of the European Commission, although it provides invaluable intellectual leadership together with the Intergovernmental Panel on Climate Change (IPCC). The leadership must instead come from the parties themselves. It would be particularly valuable if some developing countries would step forward in order to break the unfortunate “north-south” divide. The EU example clearly shows that progress can only be made by a multi-polar effort that speaks both for and to different constituents. The Annex I countries cannot halt climate change alone.

Burden-sharing

The second ingredient is an “equitable” burden/effort sharing formula. The first stabilisation target of the EU12 in 1990 was made possible because of the pledges of a handful of member states, in particular Denmark and Germany that had adopted national plans to reduce emissions by 20/25 percent by 2000/2005. This allowed the less developed member states to take on a lighter burden in accordance with their social and economic needs, subject only to an undertaking to enhance their energy efficiency per unit of output. The burden sharing dispute became more difficult under the Kyoto protocol, requiring a reduction of the overall emissions by 8 percent. Member states that were not in a position to reduce emissions in absolute terms had to accept a cap on their emission growth. The national assignments under the 1998 burden sharing agreement ranged from minus 28 percent for Luxembourg to plus 27 percent for Portugal. The latter, while being far more generous than for any other Annex I country, represented a significant cut from the business-as-usual scenario. The sticking point of the internal negotiations was to find a formula that ensured some degree of “comparability of efforts”. A similar solution was used in the 2008 energy and climate package. The global burden sharing formula in Copenhagen would presumably have to be based on a similar equation, factoring in both per capita incomes and “comparability of efforts”.

Financial support

The third ingredient in the internal recipe is financial support to the less developed member states to ease the transition to a low-carbon development path. The financing issue was solved in an ingenious way in the EU, through redistribution of auction rights under the EU Emission Trading System. Specifically, 12 percent of the auction rights will be redistributed to the member states in the lower income brackets. Some member states will receive more than 50 percent more auction rights than their basic allocation (”needs”). The additional revenue may be worth 0.5 percent of GDP by 2020, depending on the market price of the allowances. The income transfer is earmarked for climate investments. The financing issue would have to be solved also at the global level, somehow. One could for instance imagine that a share of the revenue from a future global carbon market could be set aside for mitigation and adaptation actions in developing countries, as within the EU. But a global carbon market is a long way off. In the meantime, the EU has proposed a formula for sharing the financing burden based on (a) ability to pay and (b) responsibility for emissions. It remains to be seen if such a formula, or version thereof, will be accepted in Copenhagen.

Dealing with competitiveness and carbon leakage

The fourth ingredient in the internal recipe is provisions that reduce the competitiveness and climate leakage concerns. This is bound to be a controversial issue in Copenhagen (and in the WTO) but there is no way around it. Competitiveness and carbon leakage concerns have been a restraining factor for the climate policy of the EU from the early days in the 1990s. (It was also the reason for why the US backed down from the Kyoto protocol). In the absence of such concerns, the EU (and other Annex I parties) would have moved both faster and more forcefully. As explained by the President of the Commission, José Manuel Barroso, when introducing the energy and climate package to the European Parliament, “there is no point in Europe being tough [on itself] if it just means production shifting to countries allowing a free-for-all on emissions.” For its part, the EU left the option of a “carbon equalisation system” in the bottom drawer in wait for the outcome of Copenhagen. But it came at the cost of having to concede free allowances to sectors and sub-sectors exposed to a significant risk of carbon leakage. The forgone auction revenue would have gone a long way towards financing EU´s contribution to the international climate finance.

In the best of all worlds, Copenhagen will be a success, with all parties making meaningful commitments in accordance with the principle of common but differentiated responsibilities. Auctions could then be phased in at a faster rate in the EU and other countries considering domestic cap-and-trade systems. A share of the revenue could be used to finance mitigation and adaption actions in developing countries, which would reduce the cost for developing countries to undertake ambitious commitments in the first place. And there would be no need to reach for the bottom drawer (border tax adjustments), with all the tensions it would create for the global trade system.

The full study this article is based on is available online at http://www.icsd.org

Håkan Nordström is Chief Economist at the National Board of Trade, Sweden