Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - Analysis of options to move beyond 20% greenhouse gas emission reductions and assessing the risk of carbon leakage {SEC(2010) 650}
Date: 2010-05-26
Institutions: European Commission
Subjects: air quality, environmental protection, environmental tax, greenhouse gas, reduction of gas emissions, renewable energy

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EUROPEAN COMMISSION 

Brussels, 26.5.2010 
COM(2010) 265 final 

COMMUNICATION FROM THE COMMISSION 
TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN 
ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE 
REGIONS 

Analysis of options to move beyond 20% greenhouse gas emission reductions and 
assessing the risk of carbon leakage 

{SEC(2010) 650} 

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1. 

INTRODUCTION  

When the EU decided in 2008 to cut its greenhouse gas emissions, it showed its commitment 
to tackling the climate change threat and to lead the world in demonstrating how this could be 
done.  The  agreed  cut  of  20%  from  1990  levels  by  2020,  together  with  a  20%  renewables 
target, was a crucial step for the EU's sustainable development and a clear signal to the rest of 
the  world  that  the  EU  was  ready  to  take  the  action  required.  The  EU  will  meet  its  Kyoto 
Protocol target and has a strong track record in climate action. 

But it has always been clear that action by the EU alone will not be enough to combat climate 
change and also that a 20% cut by the EU is not the end of the story. EU action alone is not 
enough  to  deliver  the  goal  of  keeping  global  temperature  increase  below  2°C  compared  to 
pre-industrial levels. All countries will need to make an additional effort, including cuts of 80-
95% by 2050 by developed countries. An EU target of 20% by 2020 is just a first step to put 
emissions onto this path. 

That was why the EU matched its 20% unilateral commitment with a commitment to move to 
30%, as part of a genuine global effort.1 This remains EU policy today. 

Since the EU policy was agreed, circumstances have been changing rapidly. We have seen an 
economic  crisis  of  unprecedented  scale.  It  has  put  huge  pressure  onto  businesses  and 
communities across Europe, as well as causing huge stress on public finances. But at the same 
time,  it  has  confirmed  that  there  are  huge  opportunities  for  Europe  in  building  a  resource-
efficient society.  

We have also had the Copenhagen summit. Despite the disappointment of failing to achieve 
the goal of a full, binding international agreement to tackle climate change, the most positive 
result  was  that  countries  accounting  for  some  80%  of  emissions  today  made  pledges  to  cut 
emissions,  even  though  these  will  be  insufficient  to  meet  the  2°C  target  .  It  will  remain 
essential  to  integrate  the  Copenhagen  Accord  in  on-going  UNFCCC  negotiations.  But  the 
need for action remains as valid as ever. 

The  purpose  of  this  Communication  is  not  to  decide  now  to  move  to  a  30%  target:  the 
conditions set are clearly not met. To facilitate a more informed debate on the implications of 
the  different  levels  of  ambition,  this  Communication  sets  out  the  result  of  analysis  into  the 
implications of the 20% and 30% targets as seen from today's perspective. It also covers the 
issue  of  carbon  leakage,  in  the  context  of  the  Directive  on  the  Emissions  Trading  System 
(ETS)2  to  come  forward  with  an  analysis  in  the  light  of  the  outcome  of  the  Copenhagen 
Conference  by  June  2010.  It  is  accompanied  by  more  detailed  technical  analysis  of  these 
issues, set out in staff working papers. 

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2 

The European Council in December 2008 confirmed "the European Union's commitment to increasing 
this reduction to 30 % within the framework of an ambitious and comprehensive global agreement in 
Copenhagen on climate change for the period after 2012 on condition that the other developed countries 
undertake  to  achieve  comparable  emission  reductions  and  that  the  economically  more  advanced 
developing  countries  make  a  contribution  commensurate  with  their  respective  responsibilities  and 
capabilities". 
Directive 2009/29/EC. 

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2. 

THE 20% TARGET TODAY  

The baseline for assessing what the 30% target might mean must be to analyse what the 20% 
target  implies  today.  Not  surprisingly,  the  economic  crisis  has  had  a  major  impact  on  the 
assumptions made when the 20% was agreed. But its impact has worked in different ways.  

The economic crisis and the challenge of meeting the 20% target 

Between 2005  and 2008, the EU  cut its emissions from 7% to 10% below 1990 levels3. So 
when  the  crisis  hit,  stepped  up  climate  action  and  high  energy  prices  had  already  led  to  an 
acceleration in EU emission reductions.  

The  crisis  brought  an  immediate  further  reduction.  Verified  emissions  in  the  ETS  in  2009 
were 11.6% below 2008 emissions. Carbon prices fell correspondingly, with a drop in early 
2009 from some €25 to €8 per tonne of CO 2.4 But the fall in carbon prices has shown how the 
impact  of  the  ETS  on  companies  and  consumers  can  also  adapt  to  changing  economic 
circumstances.  

This  one-off  reduction  in  emissions  meant  that  in  2009,  the  EU  emitted  around  14  %  less 
greenhouse  gases  than  1990.  But,  of  course,  as  production  recovers  in  energy-intensive 
industries like steel, this rate of reduction cannot be simply extrapolated into the future.  

However, the absolute costs of meeting the 20% target have fallen. In the analysis presented 
in  2008  underpinning  the  climate-energy  package,  based  on  the  expectation  of  continued 
economic growth, the  costs of reaching the target were estimated as at  least €70  billion per 
annum in the year 20205. Today, the analysis also takes account of the recession6. The price 
tag is now estimated at €48 billion (0.32% of  GDP in 2020). This represents a reduction of 
some  €22  billion,  or  30%  less  than  expected  2  years  ago.  Nevertheless,  this  reduction  in 
absolute  costs  comes  in  the  context  of  a  crisis  which  has  left  businesses  with  much  less 
capacity  to  find  the  investment  needed  to  modernise  in  the  short  run,  and  great  uncertainty 
over how long it will take to recover. The lower cost of the climate and energy package today 
is  due  to  the  interplay  of  several  factors.  Firstly,  lower  economic  growth  has  effectively 
reduced the stringency of the 20% target. Secondly, the rise in oil prices7 proved an incentive 
to improve energy efficiency: energy demand has fallen. Thirdly, the carbon price is likely to 
remain lower as allowances not used in the recession are carried forward into the future. 

The  flexible  architecture  of  the  ETS  means  that  the  impact  of  the  crisis  will  have 
consequences  lasting  several  years.  With  many  allowances  unused  during  the  crisis, 
companies  will  be  able  to  carry  over  some  5-8%  of  their  allowances  from  the  2008–2012 
period into the third phase of the ETS (2013-2020). In addition, the achievement of renewable 

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Data based on MS inventories, without LULUCF, but with aviation included. 
Since then, the carbon price has edged up to €12-15. 
These  figures  represent  an  additional  energy  cost,  not  a  reduction  of  GDP.  It  includes  additional 
investments needed, as well as energy savings. It does not include air quality benefits. 
In the analysis presented in 2008, EU GDP over the period 2005-2020 was assumed to grow yearly at 
an average rate of 2.4%. In this updated analysis, this average yearly growth over the same period has 
decreased  to  1.7%.  For  more  information  see  table  4  of  Part  II  of  the  Staff  Working  Document 
(SEC(2010) 650) accompanying this Communication. 
The estimated oil price in the 2007 baseline was 66$ per barrel in 2020, while in the new baseline it is 
88$. 

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energy targets and efficiency measures reduce emissions further. The result will be a carbon 
price well below the projections made in 20088.  

In  the  “effort  sharing  sectors”9,  not  covered  by  the  ETS,  a  similar  picture  emerges  with 
different levels of reductions in different sectors. Through meeting the renewables target and 
energy efficiency measures already under way, appropriate incentives will be required to meet 
the overall EU target of a 10% reduction compared to 2005 for the sectors not covered by the 
ETS.  

At the same time, the crisis has put heavy pressure on the EU economy. Businesses today are 
squeezed by depressed demand and the challenge of finding sources of funding. With a lower 
carbon price, government revenue from auctioning could also  be  halved, adding to pressure 
on public finances and reducing another potential source of public funds available for climate 
purposes.  The  requirement  has  not  gone  away  to  find  the  investment  needed  in  areas  like 
electricity, heating, and transport to reach the agreed 20% renewable energy target.  

The green technology revolution 

There  is  now  a  widespread  consensus  that  the  development  of  resource-efficient  and  green 
technologies will be a major driver of growth. As countries worldwide sought to boost their 
economies  in  the  crisis  through  stimulus  packages,  there  was  a  clear  pattern  of  investment 
being  directed  towards  infrastructure  for  less  polluting  transport  modes,  such  as  public 
transport, intelligent traffic management systems (ITS), low-carbon energy production, smart 
electricity grids and clean transport- and energy-related R&D. Signs of the transition towards 
a low carbon economy are emerging across the world, with countries attracted to the greener 
option also because of its potential to create large numbers of new jobs. 

In the EU, the Europe 2020 programme has at its core the conviction that Europe's industrial 
base  needs  to  reorientate  towards  a  more  sustainable  future  and  to  seize  the  opportunities 
provided by Europe's early investment in green technology. But this potential to lead cannot 
be taken for granted. 

The reality is that global competition is fierce. Europe's automobile sector is in the vanguard 
of  efforts  to  cut  CO2  emissions  of  new  cars.  17%  of  all  new  cars  sold  in  2008  in  the  EU 
emitted  less  than  120g/km,  and  for  some  Member  States  the  market  share  of  such  cars  was 
already above 25%. In 2009 car fleet renewal schemes have further enhanced this. But similar 
progress  is  being  made  by  other  manufacturers,  leapfrogging  towards  hybrid  and  electric 
vehicles.  

In energy, renewables accounted for 61% of new electricity generating capacity in the EU in 
2009. But Europe's lead is challenged. The 2010 Renewable Energy Attractiveness Index now 
cites  US10  and  China  as  the  best  investment  opportunity  for  renewable  energy.  The  US  is 
aiming to double its renewable energy generation by 2012. In 2009, China topped the global 

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The Impact Assessment projected a carbon price of some €32 (2008 pr ices) in the ETS, in case of full 
implementation  of  the  package  (including  renewables  policies  and  maximum  use  of  international 
credits). New projections show a carbon price of €16 in 2020 (including renewables policies to meet the 
20% target, without necessitating international credits). 
The Effort Sharing Decision (Decision No 406/2009/EC) covers all emissions from sectors not covered 
by the ETS, such as road transport, heating, agriculture (excluding LULUCF) and waste. 
In particular those States with renewable portfolio standards. 

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league table for wind power installation. Chinese and Indian wind turbine manufacturers now 
appear in the top ten. China and Taiwan now produce most of the world's PV panels. This at a 
time when the lower cost of basic materials, improved efficiencies and increased productivity 
has  seen  the  price  of  PV  modules  halved  in  just  a  few  years.  These  industries  are  rapidly 
becoming global players. 

A  further  reason  for  needing  change  is  energy  security.  Despite  a  blip  in  2009,  energy 
consumption continues to rise. The International Energy Agency has warned that, by 2015, oil 
supply  could  face  difficulties  to  keep  abreast  with  increasing  demand,  leading  to  further 
increases  in  oil  prices,  potentially  stifling  renewed  economic  growth.  Domestically-sourced 
energy like renewable energy brings major benefits in terms of reduced reliance on imports. 

So  Europe  needs  to  boost  still  further  the  incentives  to  develop  these  industries  at  home. 
However, as stimulus packages are phased out and an era of tight public spending begins, the 
incentives  are  being  reduced.  Other  drivers  exist,  such  as  the  target  for  renewable  energy, 
product  standards  for  energy-efficient  products  and  vehicles  and  green  public  procurement. 
But  the  20%  target  was  always  seen  as  a  critical  force  for  modernisation.  Investment  in 
options  like  carbon  capture  and  storage  (CCS)  is  heavily  dependent  on  the  price  signal 
delivered by the carbon market. A lower carbon price acts as a much less powerful incentive 
for change and innovation. 

Increasing divergence from a 2°C trajectory after 2020 

To reach the goal of staying under a 2°C temperature increase requires reductions of 80-95% 
by  2050  for  developed  countries,  compared  to  199011.  Even  if  some  of  this  could  be 
accounted  for  by  EU  efforts  outside  its  borders,  an  initial  estimate  indicates  the  EU’s  own 
domestic emissions would have to fall to roughly 70%. The trajectory agreed in 2008 would 
bring the EU’s domestic emissions down to -20 % by 2020 and, if continued unchanged, up to 
-25 % in 2030. This is not enough to take the EU to its 2050 level of ambition at optimal cost. 
If action is delayed, the EU, as well as our global partners, would have to catch up after 2020. 
For example, the IEA has estimated that at the global level, every year of delayed investment 
on  more  low-carbon  energy  sources  adds  €300-400  billion  to  the  price  tag. 12  Therefore,  a 
long-term  roadmap  to  2050  is  needed  in  order  to  plan  investment  ahead  in  the  most  cost-
effective way. 

Therefore, there is a risk that, with the 20% target by 2020 now driving change less strongly 
than  expected  in  2008,  the  task  for  the  EU  after  2020  will  become  more  difficult  and  more 
expensive. 

3. 

AN ANALYSIS OF THE 30% TARGET  

The changing circumstances that have had such an impact on the 20% target also underline 
the  need  for  a  careful  analysis  of  the  30%  target.  The  economic  consequences  of  the  30% 
target for the EU must be clear. Going beyond 20% would in all probability entail increasing 

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Reaching the goal of staying under a 2°C temperature increase will also require developing countries as 
a  group,  in  particular  the  more  advanced  among  them,  to  achieve  a  substantial  and  quantifiable 
deviation  below  the  currently  predicted  emissions  growth  rate,  in  the  order  of  15  to  30%  below 
business-as-usual by 2020. 
World Energy Outlook 2009, estimate: US $ 500 billion. 

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the stringency of existing policies or introducing new policies. The question arises, therefore, 
what these new policies might be, which existing policies might be made more stringent, and 
how this stringency might be increased.  

The  options  below  are  among  those  which  could  be  considered  by  the  EU  if  and  when  the 
decision is taken to step up to the 30% target. 

3.1. 

Possible options to reach the 30% target  

Options inside the Emissions Trading System 

As  the  primary  tool  to  drive  emission  reductions,  the  ETS  should  be  the  starting  point  for 
options for going beyond 20%. 

–  Recalibrating the ETS by "setting aside" a share of the allowances planned for auction – 
Should  a  political  decision  be  taken  to  increase  the  emission  reduction  target,  the  ETS 
could make its main contribution to a stepped up target through a gradual reduction of the 
allowances  auctioned.  A  tighter  ETS  cap  would  raise  the  level  of  environmental 
achievement and would have the effect of strengthening the incentive effect of the carbon 
market.  Reducing  auctioning  rights  by  some  15%  over  the  whole  period  2013-2020, 
representing  some  1.4  billion  allowances,  could  be  sufficient.  Projections  suggest  that 
auctioning revenue might increase by around a third, because carbon prices are expected to 
increase by more than the reduction of allowances auctioned. How Member States use the 
new  revenue  from  auctioning  will  be  important  in  terms  of  investing  in  low  carbon 
solutions for the future. 

–  Rewarding  fast  movers  that  invest  in  top  performing  technology  -  The  benchmarking 
system  provides  an  opportunity  to  identify  those  who  make  rapid  progress  in  improving 
performance and to reward them with extra unallocated free allowances. This would be a 
way to release extra finance to companies ready to innovate. 

Technological options 

Regulation  can  contribute  to  reaching  more  ambitious  climate  targets,  particularly  by 
encouraging energy and resource efficiency. This can come through product standards, such 
as  the  measures  taken  under  the  Eco-design  Directive13  and  limits  of  CO2  emissions  from 
vehicles14,  and  implementation  of  the  Digital  Agenda15.  Smart  grids  can  help  change 
consumer behaviour, increase energy efficiency and enable a higher penetration of renewable 
energy. Smart meters for example, have been estimated to pay for themselves in less than 4 
years through increased productivity, as a result of increased customer awareness and energy 
price signals.  

Carbon taxes 

The  introduction  of  taxes  that  target  CO2  emissions  in  sectors  not  covered  by  the  ETS 
represents  a  straightforward  market-based  instrument  to  incentivise  lower  emissions  at 

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Directive 2005/32/EC. 
Regulation (EC) No 443/2009. 
COM(2010) 245. 

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national or European level. Calibrating the tax system for fuels or products to reflect the CO2 
component  is  one  of  the  options  some  Member  States  already  apply,  for  instance  to  exploit 
the  large  reduction  potential  in  heating,  reduce  the  carbon  intensity  of  the  car  fleet,  and 
increase  transport  efficiency.  The  analysis  indicates  that  this  could  make  an  important 
contribution to meet stepped up targets, and, depending on the level and the application range, 
generate  considerable  revenues  for  Member  States,  which  could  be  used  for  low  carbon 
investments in order to create local green jobs, and allow for "greener" public procurement, 
such as provided for by the Directive on the Promotion of Clean and Energy Efficient Road 
Transport Vehicles16. 

Using EU policies to drive emission reductions  

The EU could continue to encourage Member States, regions and cities to step up low-carbon 
investment  by  directing  a  greater  volume  of  cohesion  policy  funding  towards  green 
investments. This would accelerate the existing trend to use cohesion funds more effectively 
to boost renewable energy, energy efficiency, and the promotion of public transport. It would 
also provide an alternative to the use of surplus Assigned Amount Units (AAUs) as a source 
of funding, which undermines the environmental integrity of the carbon market. 

Significant  energy  saving  possibilities  remain  unused  due  to  many  market  and  regulatory 
barriers.  An  enhanced  energy  efficiency  policy  framework  would  make  an  important 
contribution to move beyond the 20%.  

Land use, land use change and forestry (LULUCF) activities were not included in the 2008 
climate  and  energy  package,  but  have  potential  for  additional  emission  reductions.  Also 
maintaining  and  restoring  natural  carbon  sinks  is  necessary  to  avoid  further  emission 
increases. Today, uncertainties in calculation17 and volatility18make short term predictability 
of LULUCF activities – and their contribution to EU targets – difficult to assess. However, as 
the work continues to establish effective rules to govern these activities, they could over time 
provide a growing contribution to the mitigation effort through improved cultivation methods 
and  forestry  management.  The  Common  Agricultural  Policy  could  incentivise  farmers  and 
foresters  to  move  towards  more  sustainable  practices  and  make  a  greater  contribution  to 
emission reductions over time.  

Using the leverage of international credits 

The  EU  was  first  in  recognising  that  efforts  made  outside  its  borders  can  stimulate  private 
sector  action.  The  Clean  Development  Mechanism  (CDM)  has  led  to  several  thousand 
projects  worldwide,  often  making  very  cost  effective  reductions.  But  such  initiatives  now 
seem  more  appropriate  for  action  by  emerging  economies  themselves,  and  a  generous  and 
prolonged stream of such low-cost reductions into the EU ETS slows down innovation in the 
EU.  

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Directive 2009/33/EC. 
e.g. because of lack of data or of agreed measuring techniques for carbon in forest and agricultural soils. 
Due  to  a  large  impact  of  variable  weather  conditions  (e.g.  storms  affecting  the  standing  stock  of 
forests). 

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One way to improve the leverage of EU action would be to substitute part of the demand for 
CDM credits with new sectoral credits19. This would redirect carbon market finance towards 
actions  with  a  greater  potential  for  carbon  reduction  (e.g.  in  the  power  sector  in  advanced 
developing  economies),  and  could  be  linked  to  schemes  like  a  multiplier20  for  conventional 
CDM credits (e.g. industrial gas projects). This could deliver significant additional emission 
reductions in developing countries to contribute to the overall EU effort, while leaving at the 
same time greater room for continued CDM in Least Developed Countries (LDCs). 

On maritime emissions, the EU will continue to pursue an international agreement through the 
IMO and the UNFCCC. As agreed under the climate and energy  package, the EU will take 
steps to move forward if no such agreement has been agreed by 31 December 2011. 

Significant  progress  has  been  made  in  Copenhagen  on  developing  a  robust  international 
rulebook  in  order  to  accelerate  the  fight  against  the  loss  of  tropical  forests.  Cooperation 
between developing countries with tropical forests, EU Member States and the Commission 
should be fostered. The EU could partially fulfil reinforced targets with international emission 
reduction credits that meet adequate standards of environmental integrity. 

3.2. 

The challenge of reaching the 30% target 

The fact that the 20% is now more in reach than was assumed in 2008 has an obvious knock-
on effect on the challenge of meeting a 30% target. In absolute terms, the €70 billion price tag 
in 2020 as estimated in early 2008, would be sufficient today to take the EU more than half 
way towards stepping up from 20% to 30%, although in a situation where the EU economy is 
more constrained. 

The additional total costs for the EU to step up from the current 20% to 30% are estimated to 
be  around  €33  billion  in  the  year  2020,  or  0.2%  of  GDP.  In  order  to  achieve  this  30% 
reduction, it is estimated that the carbon price in the EU ETS would amount to some €30 per 
tonne  of  CO2,  which  is  similar  to  the  level  estimated  to  be  necessary  to  meet  the  20% 
reduction target in 2008. Domestic emissions would reduce to -25% compared to 1990 with 
the remaining being covered by banked allowances and international credits21. 

The total cost of a 30% reduction, including the costs to go to 20%, is now estimated at €81 
billion, or 0.54% of GDP22.  

Recalling that in early 2008, the cost of the climate and energy package was estimated to be 
€70 billion, or 0.45% of GDP in 2020. Therefore,  going to the 30% reduction target represents 
an increase of €11 billion compared to the absolu te costs of the climate and energy package in 
2020 as projected in 2008. 

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Art.11.a(5) of the ETS Directive (2009/29/EC) contains the legal basis for the Community to conclude 
agreements with third countries for the provision of sectoral credits in the event that the negotiations on 
an international agreement on climate change are not concluded by 31 December 2009. 
A multiplier of e.g. 2 for 1 would mean that for every tonne emitted in an ETS installation, two tonnes 
of CDM credits would have to be surrendered. In this way every CDM credits used to cover a tonne 
emitted in Europe would as a by-product result in another tonne reduced in a developing country. 
As available under existing legislation. 
Cost estimate includes the achievement of the 20% renewables target. 

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But  while  costs  clearly  have  decreased,  the  reduced  profitability  of  companies,  spending 
power of consumers, and access to bank loans has reduced the ability of the EU economy to 
invest in low carbon technologies: a legacy of the crisis which can only be offset by the return 
of growth and proactive policies to prioritise growth in these sectors.  

Where would the extra burden fall? 

In terms of sectors, the analysis suggests that the greatest potential for emissions reductions 
comes from the electricity sector through a combination of improved demand-side efficiency 
and a reduction of carbon-intensive supply-side investments. A significant amount of ageing 
electricity generating capacity needs to be replaced in the coming decade, and doing this by 
low-carbon  solutions  represents  an  important  opportunity  to  reduce  emissions.  As  for 
industrial sectors in the ETS, some have a significant cost-effective potential (e.g. refineries). 
In  the  "effort  sharing  sectors",  households  and  services  are  important  to  reduce  CO2 
emissions, mainly from heating. In the agricultural sector, experience in some Member States 
suggests that there may be further potential for reducing methane and nitrous oxide emissions 
in intensive farming, although the costs must be carefully evaluated. 

As  regards  the  geographical  distribution,  the  emission  reduction  potential  for  moving  from 
20% to a 30% target is proportionally higher in the poorer Member States. It will be necessary 
to mobilise the public and private financial resources to enhance emission reduction without 
jeopardising  economic  growth.  The  EU's  cohesion  policy  is  an  important  instrument  in  this 
regard. 

The analysis further highlights that in relative terms the cost-effective split between efforts in 
the ETS and non-ETS sectors in the case of a 30% reduction target remains largely the same 
as for the 20% target. In the case of moving to a 30% target, in 2020, the ETS cap would be 
34%  rather  than  the  current  21%  below  2005  emissions,  while  the  overall  target  for  sectors 
not covered by the ETS would be 16%, rather than the current 10% below 2005 emissions.  

The analysis in the accompanying staff working paper has been done at EU level. A potential 
move  to  30%  would  require  a  decision  on  a  specific  mix  of  options  on  how  to  share  the 
additional  reductions.  A  detailed  analysis  of  impacts  at  Member  State  level  and  economic 
sectors can only be on the basis of specific options.  

3.3. 

Other implications of the 30% target 

The realisation of a 30% target cannot be seen in isolation. Alongside achievement of the 30% 
target itself, there will be a variety of other consequences. 

One  would  be  to  restore  the  incentives  for  innovation  lost  by  the  easing  of  the  20%  target. 
This  is  particularly  important  because  low  carbon  technologies  tend  to  be  more  labour 
intensive  than  conventional  sectors,  and  also  increase  energy  security.  Achieving  a  30% 
reduction target reduces imports of oil and gas by some €40 billion in  2020, at an assumed oil 
price of US$ 88 per barrel in 2020. Instead, investment would be geared to promoting green 
jobs  in  low  carbon  technologies  in  the  EU,  such  as  a  more  energy  efficient  housing  stock. 
Macro-economic  analysis  generally  shows  small  overall  effects  on  employment  -  although 
sectoral differences exist - but smart use of auctioning revenues or carbon taxes changes the 
picture.  There  will  also  be  a  need  for  both  re-skilling  and  up-skilling,  and  education  and 
trainings  systems  have  to  adapt  to  this  challenges,  as  reflected  in  Europe  2020  strategy 
flagship initiative  

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Global low-carbon technology markets and air quality co-benefits 

The advantage of acting earlier rather than later contributes to significant long-term benefits 
for  Europe’s  competitiveness,  by  maintaining  a  strong  position  in  a  rapidly  growing  global 
market for low carbon technologies. 

Finally, there would also be benefits in terms of air quality. Achieving the 30% targets would 
mean less pollution control equipment would be needed for the reduction of other pollutants 
like particulates, sulphur dioxide and heavy metals so that the costs of reaching the objectives 
of  the  Thematic  Strategy  on  Air  Pollution  would  be  reduced  by  around  €3  billion  in  2020. 
Improved  air  quality  would  bring  additional  health  benefits,  estimated  between  €3.5  to  8 
billion in 202023. These co-benefits are not included in the cost estimates of going to 30%. 

4. 

ASSESSING THE RISK FOR CARBON LEAKAGE  

One of the important considerations in EU climate policy is avoiding "carbon leakage". This 
concerns the risk that in the absence of sufficient global effort, domestic action leads to a shift 
in  market  share  towards  less  efficient  installations  elsewhere,  thereby  resulting  in  increased 
emissions  globally.  There  are,  of  course,  many  reasons  for  competitive  advantages  and 
disadvantages  other  than  the  costs  of  carbon,  but  the  more  competitor  countries  sign  up  to 
comparable levels of effort to cut emissions, the less the risk of carbon leakage. The climate 
and energy package recognised that the risk of carbon leakage had to be monitored, and put in 
place measures to counter it.  

The fact that the carbon price has been lower than originally foreseen has consequences for 
the carbon leakage debate. In addition, due to the fall in emissions, energy-intensive sectors 
already  in  the  ETS  before  2013  are  likely  to  end  up  with  a  very  considerable  number  of 
unused freely allocated allowances at the end of the second period of the ETS in 2012, which 
can  be  carried  over  into  phase  three  (2013-2020).  This  will  put  them  into  a  comparatively 
better position when facing international competition compared with 2008 estimations.  

The ETS legislation set out the need for a report by June 2010, to examine carbon leakage in 
the  light  of  the  outcome  of  the  international  negotiations.  The  fact  that  the  UNFCCC 
negotiations  continue,  means  that  a  definitive  assessment  is  difficult.  But  an  implemented 
Copenhagen Accord  would clearly be a move in the right direction All developed countries 
and  the  major  developing  countries  –  so  the  key  competitors  for  the  EU's  energy-intensive 
industries  –  have  for  the  first  time  officially  promised  to  undertake  actions  to  reduce 
emissions.  

Impacts  of  EU's  20%  target,  when  others  implement  their  low  pledges,  are  estimated  to  be 
less than 1%, with the organic chemicals, inorganic chemicals and fertiliser sectors hardest hit 
with  production  losses  of  respectively  0.5%,  0.6%  and  0.7%.  Only  the  sector  "other 
chemicals"  has  an  even  higher  impact  of  2.4%.  Compared  to  the  EU's  unilateral 
implementation of the 20% target, some EU energy-intensive sectors would actually be in a 
slightly better position, while for other sectors it would make no difference at all. Given the 
uncertainties related to the actual implementation of the Copenhagen Accord, the Commission 
considers  that  the  measures  already  agreed  to  help  energy-intensive  industries  –  free 
allocation and access to international credits – remain justified at present. 

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Stepping up to 30%  

The macro-economic analysis shows that the incremental impact of stepping up the EU effort 
to 30% while the others remain at their low pledges in comparison to the current climate and 
energy package on the output of the EU’s energy intensive industry would be limited, as long 
as the special measures for energy-intensive industry stay in place. Stepping up to 30% would 
entail extra estimated production losses of around 1% for the ferrous and non-ferrous metals, 
chemical products and other energy intensive industries compared to the 20% target. Impacts 
for  the  sectors  of  organic  chemicals,  inorganic  chemicals,  fertiliser  and  "other  chemicals" 
increase  to  0.9%,  1.1%,  1.2  and  3.5%  respectively.  The  more  that  major  trading  partners 
implement their high-end pledges, the lower the risk of carbon leakage. 

Evidence  gained  so  far  from  the  emissions  patterns  of  energy-intensive  industries  is 
inconclusive, in particular as to the extent EU climate policy has triggered the relocation of 
economic activity outside Europe. On the one hand, the emissions of energy intensive sectors 
have significantly declined over the last years. Unused free allowances have been monetised. 
On  the  other  hand,  investment  in  low-carbon  technology  in  energy-intensive  sectors  has 
strengthened their overall productivity.  

There are cases where carbon leakage can have effects other than loss of competitiveness. For 
some Member States at the periphery of the EU with easy interconnection to countries outside 
the  EU,  there  could  be  an  impact  on  energy  security.  For  example,  this  is  the  case  for  the 
Baltic  States,  given  the  unique  situation  of  the  Baltic  electricity  markets.  This  is  one  of  the 
reasons  why  the  ETS  already  provides  for  an  optional  and  partial  exemption  from  full 
auctioning for these countries. Investments in the transmission grid can help reduce the risk to 
electricity security. In addition, the Commission will closely monitor developments and will, 
if appropriate, take further measures with a view to enhancing energy security and providing a 
level playing field for competition on the electricity markets. 

Options for addressing carbon leakage 

The  main  issue  for  carbon  leakage  is  the  competitive  difference  between  the  EU  and  third 
countries. There are, therefore, broadly three ways in which carbon leakage could, if it can be 
demonstrated,  be  tackled:  by  giving  further  support  to  energy-intensive  industries  through 
continued free allowances; by adding to the costs of imports to compensate for the advantage 
of avoiding low-carbon policies; or by taking measures to bring the rest of the world closer to 
EU levels of effort. 

Given the uncertainties surrounding  the Copenhagen pledges,  stepping up to the 30% target 
could  be  accompanied  by  additional  steps  in  this  direction.  These  measures  would  also 
provide  additional  incentives  for  countries  to  engage  more  strongly  in  an  international 
agreement. 

The most obvious way to provide further help to level the playing field by action inside the 
EU is to maintain the free allocation of allowances.  

As set out in the current legislation, there would also be an option of including imports into 
the  ETS.  Specific  proposals  have  been  formulated  along  the  lines  according  to  which 
international  aviation  activities  has  been  included  into  the  ETS.  That  would  imply  that 
allowances  would  have  to  be  bought  on  the  market  to  cover  for  the  emissions  of  certain 

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imported  goods.  Similar  proposals  are  also  being  discussed  in  the  United  States,  and 
obviously it would be desirable for such initiatives to be taken together with such partners.  

This raises broader issues about the EU's trade policy and its overall interest in an open trade 
system: a number of emerging economies have already signalled their concerns related to this 
issue  and  any  system  would  have  to  recognise  that  developed  and  developing  country 
mitigation  efforts  will  not  run  at  the  same  pace.  Also  the  impact  of  increased  costs  of 
imported  inputs  for  EU  manufacturers  needs  to  be  considered.  Such  a  measure  could  also 
potentially  be  circumvented  by  EU  imports  being  delivered  by  the  "cleanest"  third  country 
producers, while keeping "dirtier" production for their own domestic use. 

The  inclusion  of  imports  per  se  into  the  ETS  would  need  to  be  very  carefully  designed  to 
ensure  that  it  is  fully  compatible  with  WTO  requirements.  It  could  be  hard  to  implement  a 
system  which  sought  to  define  in  detail  the  carbon  content  of  each  individual  category  of 
goods, but such precision might be required: this suggests that the system could at best only 
be  envisaged  for  a  limited  number  of  standardised  commodities,  such  as  steel  or  cement. 
Secondly, for each category of goods an average EU carbon content would have to be defined. 
This  could  become  an  administrative  burden,  and  require  agreement  on  such  an  average, 
likely to be a difficult and protracted process. Thirdly, it would seem challenging to verify the 
performance  of  individual  installations  in  third  countries  without  a  highly  sophisticated 
monitoring and reporting system in place at installation level. 

There are different ways in which action by the EU could help to bring low-carbon measures 
in  other  countries  closer  to  EU  levels,  closing  the  competitive  gap  for  energy-intensive 
industries.  These  would  help  to  remove  any  "free  rider"  effect  or  unfair  competition  from 
third countries. 

For  example,  the  EU  should  consider  applying  a  more  targeted  approach  to  the  nature  and 
recognition  of  international  credits  in  the  ETS.  Options  are  to  reinforce  efforts  to  move 
towards  sectoral  crediting  based  on  ambitious  crediting  thresholds  (except  for  the  Least 
Developed  Countries),  and  to  restrict  the  use  of  CDM  credits  generated  in  energy-intensive 
sectors (e.g. steel, cement and aluminium) in third countries other than the Least Developed 
Countries. Consideration should also be given to enhance the environmental integrity of CDM 
credits from countries which are not participating adequately in international climate efforts. 
One promising option for such an enhancement would be to apply a multiplier, for instance 
requiring two CDM credits to be surrendered per tonne emitted in the ETS. These ideas could 
be  embodied  in  bilateral  agreements  on  sectoral  crediting  between  the  EU  and  a  number  of 
third  countries  –  for  example,  the  EU  should  engage  in  supporting  a  pilot  for  an  EU/China 
sectoral crediting agreement on steel. 

Other  approaches  would  see  more  positive  efforts  by  the  EU  to  help  partners  to  meet  EU 
levels of climate action and close any potential competitive gap. For developing and emerging 
economies,  this  could  include  technology  transfer.  For  more  developed  partners,  the  rapid 
development of an international carbon market covering, in the first place, the most energy-
intensive sectors across the world, would remove the need for special measures to be taken.  

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5. 

CONCLUSION 

Since the EU took its historic decisions on combating climate change in 2008, the economic 
crisis has brought some fundamental changes to the political and economic landscape of the 
EU's climate policy. The pressure on the EU economy is intense. The EU, however, remains 
deeply  committed  to  action  on  climate  change.  Arresting  the  rise  in  global  temperature 
remains  one  of  the  biggest  challenges  facing  this  generation.  The  EU  has  led  the  way  in 
showing  how  concrete,  effective  measures  can  be  taken  to  reverse  the  trend  of  increasing 
greenhouse  gas  emissions  without  adversely  affecting  economic  growth.  It  will  stay  in  the 
vanguard of global efforts with the implementation of the climate and energy package. 

The implementation of policies to cut greenhouse emissions is acting as one of the key drivers 
for the modernisation of the EU economy, directing investment and innovation to sectors with 
huge  potential  for  growth  and  employment  in  the  future.  As  set  out  in  the  Europe  2020 
strategy, it is one of the core themes in any credible strategy to build sustainable prosperity for 
the future.  

This  Communication  has  set  out  how  changed  global  circumstances  have  impacted  on  the 
targets  set  in  2008.  While  the  absolute  costs  of  meeting  a  20%  target  have  been  reduced, 
representing  a  welcome  relief  for  businesses  facing  the  uphill  battle  of  recovery,  it  also 
represents  a  risk  that  the  effectiveness  of  the  20%  target  as  a  motor  for  change  diminishes. 
This all comes at a time of severe economic constraint, both for Governments and businesses.  

Therefore,  it  is  important  to  analyse  the  direct  consequences  of  a  possible  move  to  a  30% 
target. A political decision to move to this target cannot be taken without consideration of the 
international context. At present the conditions set for stepping to 30% have not been met. In 
addition,  such  a  decision  also  needs  to  be  taken  in  full  consciousness  of  the  economic 
consequences at home. Both the international context and the economic analysis suggest that 
the  EU  should  maintain  the  option  for  moving  to  a  30%  target:  we  should  be  ready  to  act 
whenever the conditions are right to take this decision.  

In the meantime, we need to strengthen efforts to work with our international partners, to push 
and encourage them so that we can achieve the level of ambition needed to put global efforts 
on track to secure the real limitation of climate change to which we are all committed.  

The Commission will continue to monitor the situation, including the competitiveness of EU 
industry  vis-à-vis  its  main  international  competitors,  particularly  those  which  have  not  yet 
taken convincing action to combat climate change. Furthermore, in the light of the evolving 
economic situation and the international negotiations, the Commission will further update its 
analysis to inform the continued discussions in the Council and the European Parliament on 
the content of this Communication. 

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