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Analysis-Geopolitical clouds gather over Europe’s climate change plans
Global Banking & Finance Review®
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By Kate Abnett
BRUSSELS (Reuters) – Soaring energy prices and a geopolitical crisis over Russia’s invasion of Ukraine are looming over the European Union’s attempts to agree a raft of tougher climate change laws, raising concerns that some could be delayed or scaled back.
In the weeks after the European Commission unveiled the world’s biggest package of green policies last July, wildfires ripped through the Mediterranean and floods ravaged western Europe. From Greece to Germany, governments called for urgent action to address climate change.
Seven months later, as EU policymakers are negotiating how to turn those proposals into binding laws, the political context is starkly different.
Europeans’ energy bills are soaring. Gas prices ended Thursday 300% higher than in July, pushed upwards as the invasion of Ukraine by Russia, Europe’s top gas supplier, sharpened concerns of energy supply shocks. EU carbon prices are near record levels. Eurozone inflation is at an all-time high.
Brussels has billed Europe’s green transition as its escape route from reliance on Russian energy and the 300 billion euros EU countries spend on oil and gas imports each year. It will require huge investments upfront, but ultimately bring down costs and give European industry an edge in global green technologies.
Immediate concerns about cost, however, are dominating negotiations on the climate proposals among EU countries and the European Parliament. A majority from both must approve the laws.
While soaring gas prices are the main driver of recent increases in energy bills, a growing number of states – especially from the bloc’s poorer east – warn of public pushback if ambitious green goals hike costs in future.
“We used to be a fairly sizable group of countries arguing for more ambition. We’re not a huge number left,” one EU diplomat said.
CARBON MARKETS
The EU proposals are designed to deliver the bloc’s target to cut emissions 55% by 2030, from 1990 levels, putting the world’s third-biggest economy on a path that, if followed globally, could avoid global warming’s worst impacts.
They include a 2035 ban on new petrol and diesel cars, taxes on polluting jet fuel and carbon border tariffs on imports of high-carbon goods.
A proposed new emissions trading system (ETS) is particularly contentious. That would introduce carbon costs for transport and buildings – costs that fuel suppliers may pass on to consumers through higher bills.
“What is the cost and who will pay? We are warning that if we don’t discuss this we will lose popular support for the whole project,” said a senior diplomat from one EU country.
The Commission proposed using revenues from the new market to shield low-income households from the costs. Critics still warn of a political backlash.
Pascal Canfin, chair of the European Parliament’s environment committee, said the ETS proposal was so contentious it could “freeze the whole package” of climate laws.
Groups representing more than 200 of the EU assembly’s 705 lawmakers this month proposed amendments to scrap the new ETS, according to documents seen by Reuters.
Soaring energy costs are also looming over reforms of the EU’s existing carbon market, which forces power plants and industry to buy permits when they emit CO2.
CO2 permit prices soared by 150% last year and are now trading around 90 euros per tonne – a near-record level that analysts say could incentivise key green industrial technologies such as CO2 capture facilities.
But as CO2 costs have increased, so too have calls for intervention to dampen price spikes.
Parliament’s lead negotiator this month proposed rules making it easier for policymakers to release more permits into the ETS if prices rise rapidly. Countries including Poland, Spain and Romania back the idea, although others warn against undermining the price signal for low-carbon investments.
“Any intervention on pricing is undesirable,” one EU diplomat said.
BALANCING ACT
The European Parliament and EU countries plan to confirm their positions on the biggest proposals, including the carbon market, by July. The Commission has urged negotiators to strike deals before a U.N. climate summit in November, strengthening the EU’s diplomatic hand to convince other countries to improve their plans.
EU officials expect some talks to spill into 2023. Contentious proposals may be escalated to EU leaders, raising the bar for approval as they take decisions unanimously.
The challenge is to ensure that the final package will still deliver the EU’s legally-binding emissions targets.
“Everybody’s saying the targets are too high and too binding. The problem is that if you add all of those concerns, you are going to miss your 2030 target,” said Lucie Mattera, head of think tank E3G’s Brussels office.
Green lawmaker Bas Eickhout said he was optimistic some plans could be made more ambitious, such as proposals to expand renewable energy and tighten CO2 limits for cars.
“The member states on each file are becoming a bit more careful,” Eickhout said. “Well, they promised the 55% so they will have to deliver.”
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