European leaders finally reach the endgame this week after their laborious efforts to seal a pact that would slash greenhouse gas emissions in the European Union by 20% over the next 12 years.
French President Nicolas Sarkozy, who holds the rotating, six-month E.U. presidency until the end of the year, will have to find a way to appease those industrialized countries that want to limit costs for their manufacturers, as well as coal-dependent Eastern European members, worried about what effect the new rules would have on their electricity prices.
The European Commission presented almost a year ago a set of measures to cut greenhouse gases, increase the use of renewable energy and improve energy efficiency within the E.U. by 2020. After months of negotiations, leaders will try to resolve the last, crucial sticking points when they meet for a two-day summit in Brussels at the end of the week.
An agreement would then have to be approved by the European Parliament, which is planning a vote next week.
"This is a credibility test for Europe," European Commission President Jose Manuel Barroso said Tuesday in a press conference. He and Sarkozy have made the plans to fight climate change a top priority, with the aim of leading international negotiations on the subject at a global summit next year in Copenhagen.
The Commission has proposed a cut of 20% in CO2 emissions within the 27-country bloc by 2020, compared with 1990. According to the commission plans, power companies would have to buy all of their allowances to emit CO2, which they now mostly get for free, starting in 2013, as the plan seeks to broaden the use of the existing Emissions Trading Scheme, which allows companies that increase their emissions to buy more credits, or sell them if they cut emissions.
Barroso's and Sarkozy's determination has run into fierce opposition from a group of nine Eastern European countries, led by Poland, who fear their electricity prices would soar because much of their energy is produced from high CO2-emitting coal. More than 95% of Polish electricity comes from coal.
A French proposal to gradually implement the new rules hasn't yet broken the impasse, a Polish diplomat said. "It is going in the right direction, but it doesn't yet satisfy us," the diplomat said.
Meanwhile, Italy and Germany are seeking free allowances for some of their industries such as cement, aluminum, tile and paper producers, which use a high amount of energy in their production processes and are highly exposed to international competition. Buying CO2 allowances would increase their costs and make their products less competitive internationally.
Some of these industries would be tempted to move production sites in countries with less costly environmental regulations and end up emitting as much, if not more, CO2, a risk called carbon leakage. Italy still considers as unsatisfactory a parameter proposed to assess which industries to consider at risk of carbon leakage, Foreign Affairs Minister Franco Frattini said during a press conference Monday.
And since the Commission has also proposed that 10% of revenues from the sale of CO2 allowances should be given to poorer E.U. countries to help investments and modernize their power sectors, the more free allowances there are, the less revenue there is to be redistributed.
The energy intensive E.U. steel industry, which generates EUR140 billion ($181.2 billion) in sales annually and employs about 370,000 people directly, has loudly raised its concerns.
Austria-based specialty steelmaker Voestalpine (VOE.VI) said it would consider closing production capacity at Europe's most efficient steel plant in Linz, Austria and shifting the capacity abroad to either Turkey or Ukraine if the plan is passed through in its current form.
E.U. leaders at the summit will also have to discuss two other crucial issues: a EUR200 billion stimulus package aimed at sustaining the European economy in the current downturn and the way forward to modernize E.U. institutions after Ireland rejected a proposed new treaty, which would have reformed the institutions.
"This is probably the most crucial council in recent years," Barroso said when explaining the issues at stake.