COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 01.10.1997 
COM(97)481 final 
COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL, THE EUROPEAN PARLIAMENT, 
THE ECONOMIC AND SOCIAL COMMITTEE 
AND THE COMMITTEE OF THE REGIONS 
Climate Change - The EU Approach for Kyoto 

1. Introduction 
On 3 March 1997 the EU Environment Council adopted a negotiating position on climate 
change that, inter alia, established a quantified emission reduction objective for inclusion 
in the Community's protocol proposal to the UN Framework Convention on Climate 
Change (UNFCCC). This proposal sets a 15% reduction of emissions for three 
greenhouse gases carbon dioxide (C02 ), methane, (CH4 ), and nitrous oxide (N20 ) by 
2010, individually or jpintly, compared to 1990 for all industrialised countries that are 
parties to the Convention. At the 19/20 June Environment Council, Ministers also agreed 
to include in the EU's negotiating proposal an intermediate reduction objective of at least 
7.5% for 2005. The EU position covers an average reduction for a basket of three 
greenhouse gases. At this stage no decision has been taken on specific targets for the three 
gases. 
The EU position in the negotiations has been widely debated both inside the EU and at 
the international level, particularly among other industrialized countries. Reactions have 
varied widely from positive recognition of an ambitious policy to over sceptical 
questioning of the technical, economic or political feasibility of the targets and in some 
cases outright opposition. 
This Communication seeks to place the EU negotiating position in an overall context and 
is designed to show both that it is technically feasible and that within a sound policy 
framework it is economically manageable to arrive at a reduction of greenhouse gas 
emissions of 15% by the year 2010 despite the underlying upward trend. The targets were 
agreed because of their environmental necessity and on the basis of studies showing that 
the targets are technically and economically feasible using in the main currently available 
technologies and practices. These targets are based on the assumption that other 
industrialised countries will make comparable commitments. It is also recognized that 
implementing the targets will be politically challenging. 
The EU negotiation position covers a basket of three greenhouse gases. By far the most 
important of these is C02 , responsible for approximately 80 % of the impact when the 
gases are weighted according to their so-called "global warming potential". C02 
emissions are also the most difficult to reduce since, unlike other emissions arising from 
fossil fuel use such as NOx and S02, there are as yet no end of pipe solutions for C02. 
Business-as-usual scenarios for CH4 and N20 indicate a likely reduction of emissions and 
the possibility even for a significant reduction. This implies that a cost-effective reduction 
of the overall emission of the three gases might include a higher reduction of CH4 and 
N20 emissions than 15 % and a lower reduction than 15 % for C02. However, because of 
the high relative weight of C02 it will still be necessary to achieve a reduction of C02 
above 10% in order to meet a 15 % overall target. 
For these reasons the focus of this Communication is on C02 emission reductions. The 
special circumstances concerning the other two gases are dealt with in chapter 6. 
A Commission Staff Working Paper prepared in parallel with this Communication sets 
out a fuller technical and economic justification underlying the EU negotiation position 
and explains in greater detail where the necessary reductions in greenhouse gas emission 
are expected to take place, the likely economic impact of the measures and the possible 
instruments to implement the policies. This paper also outlines a number of EU proposals 
already on the table which, when adopted, will facilitate limitations and reductions in 
greenhouse gas emissions. 
This Communication examines the 2010 EU negotiating position which has been the 
focus of international debate and is also more important in a long-term climate strategy. It 
is essential to bear in mind that the core of any strategy to protect the global climate aims 
at a significant switch from the long-term trend for greenhouse gases to increase globally 
to a significant decrease. This requires action now with the benefits spread over a longer 
time frame. 
2. Why is action necessary now? 
The First Conference of the Parties to the Framework Convention on Climate Change, 
held in Berlin in April 1995, decided to initiate negotiations on the necessary 
commitments for industrialized countries to limit and reduce greenhouse gas emissions in 
the years after 2000. The EU was always a strong supporter of the Berlin Mandate. The 
Second Assessment Report from the Inter-governmental Panel on Climate Change ( 
IPCC), published early 1996, has confirmed the view, already held by the EU, that it is 
urgent to initiate the necessary changes in production and consumption patterns that will 
allow the long-term reduction of global greenhouse gas emissions necessary to meet the 
long term objective of the Climate Convention. The EU has recognised that failure to do 
so could have potentially damaging effects in the long-term since society needs to have a 
realistic timeframe for change to take place in an open and transparent way. 
Whereas the negotiations on the Climate Convention in the early nineties were based on 
the precautionary principle (action may be needed even in the absence of the final proof 
of the damage), the Second Assessment Report goes a step further by acknowledging that 
the "balance of scientific evidence suggests that there is a discernible anthropogenic 
influence on the global climate". The global problems associated with climate change 
could have a substantial negative impact on global agricultural production and 
productivity, reduce biological diversity, lead to land loss and population displacement 
and increase a number of vector-borne diseases. The damages are likely to be 
proportionately more significant for the developing countries. 
It is important to underline that the scientific evidence of climate change (including 
research reported in, or initiated after the second IPCC Second Assessment Report) 
indicates that unacceptable social, economic and ecological impacts could occur in the 
coming decades. This calls for a precautionary approach. Moreover, much of the expected 
negative impact of climate change is likely to occur in countries that have only 
marginally contributed to causing the problem and without the financial resources to 
compensate for any possible damage. If industrialised countries do not act now to 
mitigate climate change future generations will not only be confronted with the cost of 
climate change impacts but the economic costs associated with limiting emissions could 
be much greater since there will be less time to make the adjustment. 
A particular reason to initiate early action on C02 emission reductions is the long lead 
time necessary before policy decisions show their full impact on the emissions. Many 
"traditional" environmental problems offer relatively fast end-of-pipeline solutions or 
modifications of existing technology: reducing S02 emissions, eliminating lead from 
gasoline or phasing out of CFC's. This is not the case for C02 
Since C02 emissions are inherently linked to use of fossil fuels (coal, oil, gas) and since 
no economical removal technology exists as yet, the only way to reduce C02 emissions is 
through modification of structures, processes, equipment and behaviour which directly or 
indirectly use fossil fuels. Because of the very long lifetime of investments in the 
transport and energy sector and because of the relatively long lifetime of many energy 
consuming goods (cars, refrigerators, etc.) a C02 emission strategy will need a much 
longer horizon for implementation than for most other environmental problems. 
As chapter 7 explains, early action by industrialised countries is also a prerequisite for 
limiting the growth in greenhouse gas emissions from developing countries. The latter is 
a development that is expected to be increasingly important in coming years. 
3. Possibilities to reduce CQ2 emissions. 
All C02 emission reduction possibilities have a cost impact and the more society is 
prepared to pay, the greater the range of reduction possibilities. In this Communication, 
among the actions to reduce greenhouse gas emissions either through investments 
incorporating existing efficient technologies or the application of new technical 
approaches and practices, only those that can be expected to be politically acceptable are 
considered. In this context such reduction possibilities must not be excessively costly and 
should not have unacceptable social and distributional effects. These emission reduction 
possibilities have been the subject of numerous studies in recent years and how to realise 
this potential has been an essential part of the preparations within the EU for the 
negotiations of a climate protocol. 
For the analysis of the reduction possibilities in the various sectors of the EU economy 
the pre-Kyoto scenario in Table I is used as a reference. It assumes an 8% increase in total 
C02 emissions by 2010 compared to 1990 provided no additional new measures are 
taken. 
Table I - Sectoral Distribution of C09 emissions in EU - Mtonnes 
Sector/year 
Transport 
Industry 
Energy Industry 
Domestic/Tertiary 
Electricity/Heat 
Production 
Total emissions 1990 2010 % inc/dec 
743 
626 
141 
654 
1036 
3200 1032 
532 
158 
680 
1057 
3459 + 39% 
- 15% 
+ 12% 
+ 4% 
+ 2% 
+ 8% 
Source: Pre-Kyoto scenario based on Eurostat data (Excludes international marine 
bunkers but includes international air transport ) 
Table I shows that it will be important to address the transport sector where the inherent 
tendency to continuous strong growth will pose a challenge for the achievement of any 
emission reduction target. Table I shows a 39 % increase in C02 emissions from transport 
between 1990 and 2010, much of which will come from road and air transport. In this 
context, it should be noted that because energy prices to end-users in the transport sector 
are generally higher than elsewhere in the economy, targeted action aimed at removing 
existing market failures and inefficiencies in transport is required to significantly cut 
emissions at low costs. 
The Council has already adopted a C02 emisson target which corresponds to an 
improvement in the average fuel economy of new cars in the market in the order of 30% 
by 2005, over today's average. Future fuel use is not fully taken into account at the 
moment of vehicle purchase. However, vehicle fuel economy can be improved at low 
cost with available technology. To this end, the Commission is currently discussing with 
the automobile industry the possibility of an effective and transparent environmental 
agreement in which the industry would commit itself to reducing the C02 emissions from 
cars. Other elements of the strategy are fiscal measures and fuel economy labelling to 
influence the vehicle market. 
The uncompleted internal market in rail and the existing barriers to intermodal transport 
are other examples of transport inefficiencies whose removal would also imply low cost 
energy savings. The Commission has already proposed several measures to address these 
issues. For example, the liberalisation and revitalisation of the Community's railways is 
expected to bring down transport costs and enhance service quality in rail, thereby 
attracting traffic that currently goes by road. Similarly, the implementation of the action 
programme proposed by the Commission in its Communications on the Citizens' 
Network about Improving Public Transport and on Freight Intermodality should lead to a 
greater use being made of alternatives to road and air transport. 
Finally, measures to improve transport pricing proposed by the Commission should 
enhance transport efficiency, both within and across modes. 
Although it is clear that these policy approaches require significant adjustments in the 
transport system, their implementation would hold out the prospect of major 
environmental, transport and economic benefits. The Commission is establishing a report 
on a strategy for the reduction in the growth of C02 emissions from transport that will be 
adopted in the near future. 
The industrial sector is characterized by very different energy intensity ratios and C02 
emissions from one sub-sector to another. In general, the most energy intensive sectors, 
particularly those exposed to international competition, already pay close attention to 
energy efficiency for sound economic reasons, notably lower final energy prices of faced 
by international competitors. For other industrial sectors a number of market barriers 
together with the low world energy prices which have applied for more than 10 years 
have pushed the issue down the list of priorities. Even though direct industrial C02 
emissions are becoming relatively less important in overall emissions there is evidence 
from several Member States that these can still be further reduced in most sectors. The 
Dutch experience of an approximately 2% annual increase in energy efficiency since 
1990, achieved in the framework of negotiated agreements is particularly convincing in 
this context. 
The role of the electricity sector in meeting the challenge of climate change is a key one. 
This is recognized by both the electricity supply industry, Member States' authorities and 
the Commission. The Commission's services have completed an in-depth review with 
Eurelectric and other stakeholders on electricity's contribution in achieving both 
sustainable development and greenhouse gas reductions Developing energy services is 
recognised as fundamental to these objectives and this linked to improved supply 
technology, greater fuel switching and increased use of non-fossil fuels will lead to 
substantial reductions in emission levels. 
Taken together reduction potential from the electricity sector reflects improved end-use 
efficiency thus reducing overall demand, and greater production efficiencies. 
On the end-use side there are numerous ways to improve efficiencies, both in the 
industrial and in the domestic and tertiary sectors. Refrigerators, computers, TV's, 
washing machines, light bulbs are only a few examples where use of existing technology 
will allow the same level of service with much less energy consumption. Electric motors 
used extensively in industry can similarly be improved. The EU has already developed 
mandatory energy efficiency labeling scheme for the principal "white goods" and 
mandatory standards for refrigerators/freezers to improve efficiency. The Commission is 
now negotiating standards on a more extensive product range with the relevant industrial 
sectors. 
Likewise on the supply side the overall thermal efficiency of exisiting fossil fuel power 
plants in the EU was around 38% in 1994 compared with new power plants that typically 
offer efficiencies of around or even above 50%. There is, therefore, some scope for 
reducing C02 emission through an accelerated closing of low efficiency old plants. 
Additional reductions will result from switching from coal to natural gas as planned in 
several Member States. Combined heat and power production could further add to the 
reduction possibilities. It is estimated that increasing co-generation's share of EU 
electricity production from the present level of 9 % to 18% in 2010 could save up to 150 
Mtonnesof C02 . 
The Commission's believes that doubling the share of renewables in the EU energy 
consumption from the present 6% of overall energy consumption to 12% in 2010 while 
being a challenge to the electricity industry is a realistic target. Windpower and increased 
use of biomass in electricity generation are the most competitive uses of renewables. 
Without at least half of the increase in renewables taking place in the electricity sector the 
12% is not likely to be met. The experience from Denmark where installed wind power 
capacity is coming close to 1000MW and accounts for around 5 % of electricity 
consumption is a convincing example that the Commission's objective is not unrealistic. 
A recent Commission Green Paper has underlined that the realisation of this potential will 
require strong measures such as access of renewables to grid systems, obligations for 
renewable energies, increased payments for renewables and financial engineering in 
favour of renewables. A forthcoming White paper will set out the Commission's policy 
direction for the future development of renewables, together with a comprehensive and 
detailed action plan. Publication is planned by the end of this year. 
Most of the possibilities for reduction in emissions contained in the Commission Staff 
Working Paper have, at least in a qualitative way, been accepted for a number of years. It 
is equally true that in certain areas technological development has increased the potential 
or brought down the cost of a number of technical solutions to a more acceptable cost 
range. 
It is however disappointing that the use of most available climate friendly technology has 
been modest. Low energy prices and expectations of this continuing is an important factor 
in explaining this. The fact that up-front investment is more important than long term 
overall cost for both industry and private consumers is another part of the explanation. 
The result is that despite the cost of different measures varying considerably there already 
exists a large amount of "no-cost" or "low-cost" possibilities to reduce greenhouse gas 
emissions. 
Conclusion: 
In conclusion, what part of this greenhouse gas emission technical reduction potential 
can be tapped depends on what levels of economic, social or political cost are deemed 
acceptable. Work carried out so far shows that it is possible to identify technical reduction 
possibilities for reducing C02 emissions of 800 Mtonnes. This would be sufficient to 
achieve a 15% reduction of C02 emissions by 2010 compared to 1990 instead of the 8% 
increase in this gas foreseen in the business-as-usual scenario in Table I. When 
implemented with the right mix of cost- effective policies, this technically feasible 
reduction potential can become both economically manageable and political acceptable. 
Table II gives estimates of the potential C02 emission reductions possibilities for the 
main sectors in the EU. It is estimated that there are C02 emission reduction possibilities 
of around 300 Mtonnes in the power sector, 180 Mtonnes in transport, 200 Mtonnes from 
the end user sectors and 100 Mtonnes from renewables. The Commission underlines that 
these reductions in C02 emissions will be a challenge for the political decision makers. 
The quantities reflect the implementation of a series of policies and measures similar to 
the ones suggested in the following chapter. For each sub-sector, the reduction that is 
achievable depends on the detailed formulation of the measures. 
The Commission Staff Working Paper sets out in more detail the measures that will have 
to be taken to achieve these C02 emission reduction possibilities. 
Table II - Estimates of possible potential C02 emission reductions (Mtonnes C02) per 
sector in EU 
Sector Emission Reduction 
Possibilities 
Transport 
of which 180 
- passenger car 100 
- intermodal shift 50 
- other measures 30 
Industry 100 
Energy Industry 20 
Domestic/Tertiary 100 
Renewables/Heat 100 
Power generation 300 
of which 
- fossil fuel switching 50 
- cogeneration/ thermal 
efficiency 150 
-renewables/electricity 100 
"TOTAL 8ÔÔ 
[ 
4. Elements for a Climate Change Strategy 
A successful climate strategy needs to be comprehensive, cost-effective, technically and 
politically feasible and avoid negative social or regional side effects from the policy 
necessary to implement it. This Communication does not aim at prescribing such as 
strategy in detail but, attempts to outline the possible elements for a successful strategy. 
The development of a full strategy will only be possible when the result of Kyoto is 
known. 
Any EU strategy while being effective in meeting the interim targets also needs to initiate 
a process of technological and behavioral changes that curbs the growing greenhouse gas 
emissions and sets them on a sustainable paths which will meet the requirement for 
continued reductions at and beyond 2010. That implies the need to address both the 
emission intensity of economic activities as well as the growth in demand for goods and 
services which trigger the increase in greenhouse gas emissions. 
The choice of the right strategy with the right mixture of instruments is not only 
important from the technical or economic point of view, it is the core of the political 
challenge of making progress to protect the global climate. In the development of this 
strategy it will be necessary to ensure that the action is taken in the right way, - both to 
ensure a cost-effective strategy and to avoid negative social, equity or regional side 
effects from policy implementation. 
The Commission is therefore convinced that a comprehensive strategy that brings all 
these elements together is a top priority. The Commission has already tabled a number of 
proposals including: 
- the Communication - Energy Dimension of Climate Change1 and the Council 
Conclusions on it in which the Council invites the Commission to come forward with 
an action programme in the energy sector to address climate change in the energy 
sector in the context of common and co-ordinated policy measures 
- the extension of SAVE II to the year 2000 with a budget of 45 Mecu and a proposal 
for an ALTENERII programme 
- a proposal for Rational Planning Techniques in the supply and demand cycle 
- a Communication setting out a strategy for reducing C02 emissions from cars 
- proposals, in the context of the Common transport policy, for the revitalisation and 
liberalisation of the railway sector and for European Rail Freight Freeways, in order to 
encourage the shift of freight from road to rail 
- a proposal for a Council Directive to restructure the Community framework for the 
taxation of energy products (COM(97)30) 
- a proposal for Fifth Framework Programme for RTD covering the period 1998 to 2002 
for which an overall amount of 16.3 bn Ecu is proposed. 
The Commission, however, is convinced that proposals on the table and in the pipeline 
are not sufficient to meet the targets proposed by the EU and depending on the outcome 
in Kyoto will make additional proposals that will reduce significantly C02 , some of 
which are already listed in the working programme, to complete the strategy that will 
allow the EU to meet its post-Kyoto commitments. Additional proposals could be: 
- a proposal aimed at significantly increasing the share of renewable energies in the 
EU's energy consumption by 2010 along the lines spelled out in the Commission's 
recent Green Paper 
- a proposal to increase significantly by 2010 the share of cogeneration - the production 
of electricity and heat - in the EU's electricity production 
- a series of actions regarding standardization, harmonisation and liability to promote 
intermodal freight transport 
- revision of the Trans-Europe Network guidelines to integrate strategic environmental 
considerations 
Com (97) 196 final of 14.5.97 
proposals to significantly improve the overall thermal efficiency of power plants; 
increased penetration of co-generation would be a particular effective way to 
improve thermal efficiency. 
In addition potential exists for developing a comprehensive approach to promote 
sustainable consumption patterns with a positive impact on climate policy goals. To 
facilitate such reorientation of consumer behaviour and choice, it is necessary to promote 
consumer awareness and to provide them with appropriate education, reliable information 
and advice. » 
A comprehensive strategy calls for the use of a broad range of policy instruments. 
Traditional regulatory measures will play a role in some cases (examples of regulation 
are, banning the use of HFC's for self chilling cans, higher efficiency standards for 
certain electrical equipment). However, in many areas more flexibility for economic 
sectors offers obvious advantages. 
Economic incentives - positive as well as negative - are one way to secure a high level of 
flexibility and can often achieve an objective more rapidly and at a fraction of the cost of 
regulation. 
In this context it is important to be aware that the use of fiscal incentives does not imply 
higher taxes overall. In areas already subject to taxation, incentives can be created 
through differentiation (as was done to promote lead-free gasoline). Switching the tax 
burden from labour to energy and carbon intensive production is a revenue-neutral 
possibility likely to reduce barriers and to increase the acceptance by the consumer of 
cost-effective technologies. 
Some of the key challenges will be to identify and to implement policy measures that 
allow the exploitation of energy efficiency improvements in the existing stock of 
buildings and equipment.The social discount rate employed is the one used in public 
policy decisions. Private discount rates can of course be higher. For this reason measures 
are needed to bridge the gap between the social rate of return and the private rate of 
return used by business and commerce when they take their investment decisions. 
There are also other market based options such as changes in the current structure of 
subsidies. The present trend for phasing out subsidies on energy products such as coal 
should be continued and accelerated where this brings benefits for emission reduction. At 
the same time using short-term and temporary subsidies to encourage renewables or clean 
technologies is an additional option available. 
Negotiated agreements between public authorities and specific industrialized sectors. 
These offer, in principle, maximum flexibility for industry to act in a cost-effective way. 
The Commission has recently issued a Communication outlining the conditions under 
which Negotiated Agreements would be useful instruments. 
Technical options used to achieve the EU emission reduction objectives up to 2010 are 
mainly based on existing technologies. The role of new technological research and 
development is limited for this time horizon. Additional efforts are needed to diminish the 
10 
cost of existing advanced technologies given that at present they are not always 
competitive. 
Furthermore, socio-economic research is necessary, in order to understand better the 
barriers to the application of available technologies to realise emission reduction 
possibilities and organisational aspects of the integration of new technologies. The 
impacts of economic instruments both at the micro and sectoral levels and the condition 
for behavioural change (including consumption patterns) also need to be researched. 
In relation to RTD, it is very important to underline the need for continued focused 
research that will assess the socio-economic and ecological impacts of climate change 
(especially at the regional level) and will develop the necessary technical solutions to 
reduce greenhouse gases beyond 2010 and to cope with possible adverse impacts. Such 
research efforts could also be an advantage for EU competitiveness and lead to improved 
opportunities for EU exporters of such technologies. 
Above, many possibilities for reducing emissions in the EU have been identified. 
However, the implementation of measures to capture this potential and to reduce 
emissions, particularly above the normal rate of equipment replacement, is unlikely to 
take place in the absence of strong action. No one instrument will be sufficient for 
achieving the Community's emission target. It will require a combination of actions. 
Any policy or strategy must, therefore ensure the broadest possible co-operation and 
acceptance of all stakeholders: governments, industry, trade unions and the public at 
large. Several sectors of society and several regions of Europe will have to cope with 
significant changes if an overall 15% reduction of greenhouse gas emissions in the EU is 
to be achieved over the next 13 years. Options that have a favourable benefit on 
employment and economic growth should be pursued. 
While liberalization is generally conducive to higher efficiency it is less supportive of 
investments that pay off in the long-term rather than in the short-term. The globalization 
of capital markets have been followed by expectations from investors of rapid profits 
from invested capital. The profitability of the more cost-effective measures to reduce 
C02 emissions, however, often need longer periods to pay back the investment. This is a 
problem that will have to be addressed politically as part of the implementation of any 
future strategy. Investors need the certainty of a firm commitment to reductions to 
persuade them to invest in cost-effective efficient measures. 
Policies to break the growth trend in emissions will have to attack the problem from two 
sides. They will have to reduce the emission intensity of relevant economic activities, and 
they will have to curb growth in demand for goods and services triggering the emission of 
greenhouse gases. In consequence, the environmental success of any strategy will depend 
on these policies' ability to stimulate the necessary technological and behavioral changes. 
Their political, economic and social success will depend on their economic and 
distributional implications. To this end, a least-cost strategy, based on a multi-gas, cross-
sectoral and multi-country approach, not yet developed in detail, should be pursued. 
11 
5. Economie Implications 
Even a comprehensive strategy based on a least-cost approach is not costless but comes at 
a price. Production processes and products will have to be adjusted to become less 
polluting or fuel and energy consuming, new technologies will have to be developed, and 
the dissemination of existing cleaner technologies will have to be accelerated, the 
replacement of old and pollution intensive production facilities by more modern and 
environmentally friendly capital stock will have to be accelerated and consumption 
patterns and habits will have to be changed. All this entails costs: resource costs for 
developing and implementing new technologies, adjustment and distributional costs for 
adjusting to an altered framework for supply and demand and for different demand and 
supply dynamics and other welfare costs resulting from an interference in production and 
consumption decisions to limit greenhouse gas emissions. This will make the 
implementation of such a policy a challenging process. 
However, most of the above cost components will at least partially be compensated for by 
cost savings: investing in a more fuel and energy intensive production process or product 
will lead to fuel and energy savings , reducing excessive use of fertilizers in agriculture 
will reduce input costs. Moreover, a reduction in the demand for polluting products and 
services frees financial resources for alternative uses. The wider emission-reducing 
technology is spread the more likely will it be that economies of scale come into play and 
substantially reduce mitigation and resource costs, potentially putting in place a virtuous 
circle. Most efforts will also have secondary benefits: reducing the use of fertilizers in 
agriculture will also be beneficial for the quality of groundwater; reducing demand for 
traffic services will also improve ambient air quality; reducing noise, congestion and 
accidents, or reducing fuel consumption will contribute to less acidification. It should be 
noted that the total environmental benefits that can result from avoided ecological 
damage of adverse climate impacts (with associated social and economic benefits) are 
difficult to calculate accurately. It is essential, however, that they are taken into 
consideration in the overall assessment. 
The costs: 
Estimating the net costs of a strategy to combat greenhouse gas emissions would require 
detailed and reliable information on mitigation costs, preferably at the individual 
enterprise level, for the whole economy, and across all relevant greenhouse gases. 
Moreover, the degree and effects of adjusting production and consumption patterns in line 
with the planned policy objectives would have to be quantified as would welfare costs 
resulting from interferences into production and consumption patterns. The same holds 
Indeed, replacing an old coal-fired power plant by a plant based on combined cycle gas 
turbine production is normally a win-win situation for both the environment and the power 
generator, investing in a car with improved fuel efficiency comes at zero lifetime costs for the 
car-owner in Europe as long as the investment costs of the efficiency-improving technology 
are not too high. 
12 
for offsetting cost savings and side effects. Finally, the different cost components, 
including offsetting cost reductions and resource savings do not necessarily match over 
sectors, regions or in time. Typically, policy measures require substantial investment in 
mitigation technologies or changed demand patterns before resource cost savings, side 
benefits and the core benefits can be enjoyed. Also sectors and firms providing mitigation 
technologies or benefiting from changed consumption behaviour are not identical with 
those who have to invest in cleaner production. 
This information is not yet available on a sufficiently detailed and broad scale. 
Nevertheless, there exist numerous efforts to quantify the overall costs connected to a 
policy aiming at a reduction in greenhouse gas emissions. These estimates are using 
bottom-up and top-down approaches, often based on partial information, simplified 
assumptions, and often reflecting only parts of the economy and economic effects. 
Notwithstanding these shortcomings, they give a first rough impression of the issues at 
stake, quantified in money terms. 
For a 15% reduction in C02 emissions compared to 1990 estimates of the direct 
compliance costs related to energy supply/demand mitigation actions range from around 
15bn Ecu to about 35 bn Ecu annually by 2010. This corresponds to roughly 0.2 and 0.4 
% of GDP in the year 2010. This estimate is based on C02 alone since adding methane 
and nitrous oxide is not expected to alter this drastically . A cost-effective multi-gas 
strategy could even be somewhat less costly. The lower cost figure assumes that a part of 
the reduction can be achieved through zero or low net cost measures, i.e. resource costs 
related to the introduction of more efficient mitigation technologies are expected to be 
(almost) totally paid off through fuel and energy savings over the life cycle. The lower 
cost estimates are also based on the assumption that the political decision-making 
process manages to pursue the cost-effective solutions for reducing C02 emissions, i.e. to 
pursue those policies which allow the reduction target to be met at least costs. This 
requires that C02 is reduced by those quantities and in those countries and sectors where 
it can be done more cheaply. 
Figure 1 depicts the annual direct compliance costs (in 2010) as a function of the 
emission reduction compared to 1990. A reduction of 15% compared to 1990, when 
effected in a least cost way, might cost between 15 bn and 30 bn Ecu, depending on the 
model. POLES estimates suggest costs of 30 bn Ecu (35 bn Ecu if the emissions are not 
based on the least-costs). Costs are high also because POLES assumes a 15% increase in 
C02 emissions compared to the 8% increase in emissions in the pre-Kyoto scenario. The 
results of PRIMES are only available for reductions of up to 12% in emissions. If these 
results are extrapolated to a 15% reduction in emissions a similar range of costs is 
obtained compared to other models . 
3 The Commission Staff Working Paper provides more details on this and the following. 
4 The Commission Staff Working Paper provides more detail on this. 
13 
bn ECU/yr Figure 1. Annual Direct Compliance Costs in 2010 
15 11 1 2-4-6-8 
% reduction (from 1990) -10 -12 -14 -15 -17 -18 
POLES PRIMES CRASH91 
The estimates are assuming discount rates of 8% and are based on existing technologies. 
New technologies and the exploitation of substantial economies of scale once there are 
prospects for fast growing markets for these technologies may reduce mitigation costs. 
Moreover, work under IPPC has recently confirmed that the possibility to apply Joint 
Implementation could significantly (up to 50%) reduce the overall cost figure. The 
Community has actively supported Joint Implementation in the protocol negotiations and 
there is evidence that a number of industrialized countries such as the Associated 
Countries, can offer relatively cheap C02 reduction potential. 
Similarly, emission trading in principle offers scope for overall cost reduction. It is, 
however, important to make sure that an eventual emission trading system will be set up 
in such a way that it ensures that the overall reduction objectives are met. 
The assessment of the macro-economic impact shows wider ranges. While the direct 
static effects, as a result of higher resource cost, are negative, the overall impact, when 
considering the traditional multiplier effects are much more difficult to predict and 
depend to a large extent on the policy package chosen. The Commission Staff Working 
Paper reports on different studies that have tried to assess overall costs. Not all studies 
have taken the 15 % reduction by 2010 as their basis. Estimates in available studies range 
from a positive impact on GDP of close to 1 % to a negative impact of up to 1.5 %. That 
implies that the absolute GDP level might be 1.5% lower with than without climate 
policy. These observations are in line with a recent report from World Resources Institute 
(WRI) and with the IPPC second assessment report. Positive impacts can occur if the 
Poles and Primes results are based on a 8% discount rate and CRASH91 uses 5% to 8% ( 
depending on the country). These are discount rates that are usually applied for public 
policy decision making . Similar discount rate levels are used in AUTO-oil and the 
acidification strategy and recommended by international organisations such as the QECD. 
Private discount rates might of course be higher. 
14 
revenues or carbon/energy taxation (or the revenues from selling tradable permits) are 
used in a effective ways, such as reducing labour costs for employers or giving 
investment tax credits. 
It is important to note that in spite of the uncertainty none of the cost figures are 
disturbingly high compared to the overall GDP, or compared to the expected 50 % growth 
in GDP between 1990 and 2010. 
The underlying assumption for the EU policy on climate change is that other 
industrialized countries undertake comparable commitments to cut greenhouse gas 
emissions. With unilateral action in the EU alone, the changes in industrial structure and 
costs would be much larger. Energy-intensive industries would relocate to outside the 
EU. Moreover, energy consumption in the EU might fall but rise elsewhere (since global 
energy prices would fall). As a result carbon dioxide emissions in the rest of the world 
would increase (carbon leakage) which would partially undo the efforts of the EU to 
reduce global emissions. 
The benefits: 
The benefits of any climate strategy are difficult to quantify in monetary terms. This is 
especially so because of the global and inter-generational nature of the climate change 
issue. Further complications arise because of the difficulties of attaching money values to 
categories such as ecological preservation and human health impacts. 
The benefits, both primary and secondary, of emission reduction are often less obvious 
and the cost estimates mentioned above neglect the positive economic primary and 
secondary benefits from reduced damage due to less air pollution, Estimates of the 
primary (climate) benefits depend on the assumptions made on discount rates, climate 
sensitivity, the reference point for the emissions and the weight attached to damage in 
developing countries. Accounting for all these factors suggests that the global benefits of 
a 15% reduction in C02 emissions in the EU would be between 0.3bn and 101 bn Ecu /yr. 
These estimated benefits are for the world as a whole and only part of them will benefit 
the EU. The large range of estimates for the benefits mainly depends on the value 
attached to damage occuring in the distant future. If this value is very high (the discount 
rate is zero) damage in the future is worth as much as damage now. If the value is low 
(e.g. a discount rate of 10 %) the value of 100 Mecu of damages in 50 years ahead would 
be worth less than 1 MEçu now. The choice is basically political. 
The above estimate does not yet reflect the avoided damage costs (secondary benefits) 
due to the reduction in other pollutants. The strategy would not only reduce greenhouse 
gases but would also reduce sulphur dioxide, nitrogen oxides sulphur and particulate 
emissions compared to current legislation by 15% to 25% if not more. The associated 
benefits (on mainly human health, agriculture and infrastructure damages) can be 
estimated to be at least 1 lbn to 32 bn Ecu. In addition, the reduction in C02 emissions 
15 
would also cut the annual compliance costs from the Commission's proposed 
acidification strategy by at least 4 bn Ecu each year. 
The total (primary and secondary) benefits related to the reduction in greenhouse gases 
are difficult to express and quantify in monetary terms. Available estimates suggest that 
these might range from 15 to 137 bn Ecu per year. This estimate taken together with the 
direct compliance costs, would imply that the proposed emission reduction-could on 
balance bring net benefits if one attaches a high value to damage in the far future. 
Improving overall the allocation of resources, e.g. through a better restructuring of tax 
systems will tend to have, positive overall effects on employment. C02 emission 
reductions are often linked to the more labour intensive solutions, i.e. imported fuels 
could be replaced by domestically-produced mitigation technologies. Although this is 
difficult to quantify in general terms, it has'to be an important element in the detailed 
elaboration of a climate change strategy after Kyoto. 
Finally, it is necessary to emphasise the strong case for collective action, first and 
foremost by the industrialised countries. Unilateral action would imply that the EU 
would carry the full costs of the policy alone. At the same time other countries would 
benefit without having contributed to the solution. Coordinated action ensures that 
environmental costs and benefits for the EU would be -better balanced. Joint action with 
other industrialized countries is therefore essential to overcome the imbalance that would 
be created by unilateral action and is the only way that the parties can arrive at an 
effective climate policy. 
Conclusion 
Although the overall costs might look to be relatively manageable at the aggregate level, 
costs could be substantially higher at the disaggregated level, e.g. for specific sectors and 
could have a significant impact on their international competitiveness if other 
industrialised countries do not take on comparable commitments. The extent to which the 
costs are politically and socially acceptable depends on the willingness of society to 
invest in a European policy that addresses global warming. This will crucially depend on 
the commitments of other industrialized countries described in chapter 7. Joint action is a 
condition for a proper balance of costs and benefits for all countries concerned. 
Mitigation costs differ between economies, regions, sectors and firms, and also between 
greenhouse gases. These differences and the numerous leverage points and policy 
measures for reducing greenhouse gas emissions make the choice of the policy mix and 
the geographical coverage of a comprehensive climate policy a crucial issue. Policy 
makers should struggle for implementing a policy mix which achieves the aimed-at 
emission reduction at least cost. This holds both domestically and internationally. The 
more instruments and measures are available and the broader the geographical coverage 
the cheaper and the more politically acceptable a cost-effective strategy will turn out to 
be. Moreover, common and co-ordinated policies and measures could open a new and 
less costly vector of cost-effective policies, inter alia because it would make policies 
globally more environmental efficient, e.g. through limiting the risk of carbon leakage. 
16 
6. Other Greenhouse Gases 
Methane is the second most important greenhouse gas in the EU basket. In 1990 
agriculture accounted for 45 %, waste 32 % and energy 23 % of EU methane emissions. 
Calculations, referred to in the Commission's Communication on methane ( COM (96) 
557), indicate that in 2010 compared to 1990 a reduction of methane emissions of up to 
13% to 15% is feasible with current policies. A reduction of 40% over the same period is 
estimated to be the maximum technically feasible assuming that significant policy 
changes are made. 
The costs of this extra 25% reduction of CH4 ( from around' 15% to around 40% ), 
equivalent to around 100 Mtonnes of C02, can be estimated at around 20 to 30 Ecu/tonne 
of C02 equivalent reduced which gives an annual cost of around 2bn Ecu to 3bn Ecu. 
However, this additional 25% methane reduction may allow C02 to be reduced by 12% 
instead of 15%. It should be noted that this additional 25% reduction assumes a 60% 
reduction of methane emissions in the waste sector and reductions of 34% in agriculture 
and energy . As far as agriculture is concerned, further analysis is required to ensure that 
only such measures are pursued that are technically feasible, politically acceptable and 
consistent with other policy objectives. It is therefore uncertain, how much of the 
reduction potential of methane above 15 % will actually take place. 
Policy measures aiming at improved treatment of waste, methane recovery in new and 
existing landfills, best available recovery techniques in coal mines, minimising emissions 
in the production on-shore and off-shore of oil and natural gas and minimum leakage 
standards and more frequent control of gas pipelines need to be pursued. For agriculture, 
a better storage and treatment of animal manure is a promising option and there is a need 
for analysing how the Common Agriculture Policy (CAP) and Rural Development 
policies can assist such a development, for example, in the form of incentives or 
investment aid for covered manure storage combined with biogas utilisation, notably at 
larger intensive animal production units. Research into the possibilities for improved 
feeding of animals should also be encouraged in the Community's agricultural research 
programme. 
Emissions of Nitrous oxide, N20, in 1990 amounted to 0.9 Mtonnes, equivalent to 
around 300 Mtonnes of C02 Reductions in N20 emissions from industry, in particular 
the nylon producing sector, which accounts for a third of total N20 emissions can lead to 
a reduction of 30% in N20 emissions in the year 2010. N20 emissions from energy use 
(power stations) are expected to remain stable up to 2010 since most new power plants 
are likely to be gas fired and the lower N20 emissions will more than offset growth in 
electricity production. N20 emissions from agriculture are estimated to fall due to 
reduced fertilizer use and this trend should be further assisted by enhancing the 
agricultural component of the CAP in the- context of Agenda 2000 . The reductions in 
these sectors will more than offset increases from transport due to catalytic converters. 
Consequently, estimated reductions in N20 could be between 70 to 95 Mtonnes of C02 ( 
equivalent ). 
17 
The reduction of N20 ( 0.285 Mtonnes) could cost around 120 Ecu/ton of N20 or 0.36 
Ecu/ton of C02 equivalent, in total 0.03 bn Ecu. As regards policy instruments, steps can 
be taken to ensure that as regards emissions from industry agreements cover all 
producers. In agriculture, increased support should be given to environmentally friendly 
farming practices, such as best practice in fertilizer use. In the energy sector intensified 
research to reduce N20 emissions from fluidised bed combustion of fossil fuels needs to 
be pursued and improved catalytic technology is required in the transport sector. 
7. All industrialized countries must be committed to comparable action 
Implementing reductions in greenhouse gas emissions that will imply significant changes 
in production and consumption pattern, is not possible for individual countries or groups 
of countries such as the European Community. Many industries operate in an 
environment with increasing global competition where relatively small cost margins are 
important. More and more economic sectors compete for capital in a global market where 
short term profit is important. And several important industrial sectors in Europe have 
faced or are facing overcapacity that make changes difficult to achieve. 
Experience with the implementation of the Climate Convention since Rio makes it 
evident that only in a global regime of shared responsibility and comparable commitment 
will it be possible to change the trend in emissions which is necessary. This is why the 
EU proposal is a negotiation position and nrït a unilateral commitment. It is based on the 
assumption that other industrialized countries must and can act in the same way and it is 
linked to the proposal to identify common and co-ordinated policies and measures to 
achieve the targets. It has been argued that agreed common and co-ordinated policies and 
measures will reduce the flexibility for parties to the protocol in implementing their 
commitments. The EU position is based on the belief that in some cases : global co­
ordination of policies and measures makes it easier to pursue cost-effective solutions and 
it reduces the political resistance to take action that will easily be seen as applying to only 
some parties to the protocol. 
It is important to underline that the potential for C02 emission reductions identified in the 
EU for achieving the proposed EU target by 2010 are available to other industrialized 
countries as well. Significant improvement in fuel efficiency in cars and electricity 
consumption in appliances can be achieved throughout the world. Higher performance of 
fossil fueled power plants or accelerating the use of renewables can also be achieved as 
well as improved energy efficiency in industry. 
It is also clear that many of these measures can also apply in developing countries. There 
is reason to believe that even without legal commitment by developing countries, a 
significant carry-over effect is likely to be observed. Fuel efficiency of cars is basically 
decided by international producers based in Europe, US and Japan and cars exported to 
or produced in countries outside these countries will not continue with higher specific 
fuel consumption. The same will hold true in several other areas. 
8. Developing Countries 
18 
The Climate Convention, as well as the Berlin Mandate, recognise that industrialised 
countries must take the lead in reducing greenhouse gas emissions. Industrialised 
countries emission accounted for 75 % of global emissions in the base year 1990 and on a 
per capita basis C02 emissions in industrialised countries are on average 10 times as high 
as in developing countries. 
It is also generally true that the ongoing and expected development in developing 
countries is likely to lead in future to much higher emissions from these countries, 
although on a per capita basis most developing countries will remain well below emission 
levels in industrialised countries. 
The answer to the challenge is three fold. The first answer is a reinforcement of the 
obligation on industrialised countries to act now. Only through political and 
technological leadership will it be possible to create a situation that will bring developing 
countries closer into the global process. 
The second answer. Both greenhouse gas emissions and the economic capability to limit 
or reduce greenhouse gas emissions vary enormously among developing countries. It is 
important, therefore,that the more developed among the developing countries gradually 
assume bigger responsibilities when their level of development justifies it. There is no 
room for free riders on this issue. This reflects the fact that both greenhouse gas 
emissions and the economic capability to limit or reduce greenhouse gas emissions vary 
enormously among developing countries. 
Finally, if the industrialised countries apply and develop technologies that have low 
greenhouse gas emissions in order to meet their emission reduction commitments many 
of these are also likely to be applied in the developing countries in reducing their 
emissions. The Commission recognises that to facilitate this technology transfer the 
Community will need to focus and to expand its technical and financial cooperation with 
the developing countries. 
9. Conclusions 
In conclusion the Commission underlines: 
- that the potential future damage and cost resulting from anthropogenic climate change 
makes it imperative to urgently reduce greenhouse gas emissions 
- that industrialised countries must continue to take the lead 
- that the emission reduction targets are technically feasible and economically 
manageable in the EU only if all industrialised countries make comparable reduction 
efforts 
- that many of the measures identified within this Communication for a cost-effective 
strategy, are equally applicable to other industrialised countries 
19 
that the choice of the right mixture of instruments is essential for a cost-effective 
climate strategy. 
that given the political challenge and the need for action, the involvement of all parts 
of society will be needed. 
that the Commission will develop a more detailed Climate Change strategy after the 
emission reduction commitments have been agreed in Kyoto 
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ISSN 0254-1475 
COM(97) 481 final 
DOCUMENTS 
EN 14 15 
Catalogue number : CB-CO-97-511-EN-C 
ISBN 92-78-25616-1 
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