Almost a year after the European Commission (EC) proposed an ambitious plan to fight climate change and promote renewable energy, the European Parliament overwhelmingly approved the detailed legislative package with changes that addressed some business complaints but raised the ire of environmentalists.

Passage of the Climate and Energy Package on Dec. 17 came just five days after intense negotiations between Parliamentary delegations and the Council of Ministers, which must still formally approve the plan, achieved a compromise.

The legislation features a 20-percent reduction in greenhouse gas emissions from 1990 levels. It also requires that 20 percent of the European Union’s (EU) energy be produced from renewable sources such as wind and solar, and that energy efficiency be increased by 20 percent–all by 2020. The legislation makes fundamental changes to the EU’s pre-existing Emission Trading Scheme (ETS), established in 2005.

But the version Parliament approved waters down the original proposal, largely in response to concerns from Germany about the legislation’s impact on its heavy industries. Poland and Hungary also protested over the plan’s potential to raise energy costs and adversely impact their economies. The changes also brought on board Italy, which at an early stage had threatened to veto the package.

For its part, business opposed the European Commission’s original proposals as too expensive and too damaging to certain sectors of the economy. But because the changes reduce the general burdens on the business community, it has for the most part accepted the plan.

“Although the measures still require the approval of the European Council, industry is now starting to absorb their impact and integrate them into their business plans,” says David Haverbeke, an associate at Lydian in Brussels.

Environmentalist Outrage

But environmentalists, including Climate Action Network Europe, Friends of the Earth Europe, Greenpeace, Oxfam and the World Wildlife Fund (WWF), are up in arms, complaining that the changes endanger the program’s emission reduction targets. Friends of the Earth Europe went so far as to call the package “good news for the dirty energy industry, bad news for people and the planet.”

Activists are particularly incensed over the increase in the number of free ETS allowances included in the compromise legislation, claiming that the revenue losses from giving away allowances rather than auctioning them will adversely impact funds available to finance green projects.

They note that while auctioning of allowances will begin in 2013, there are now several important exceptions to the general rule that companies will have to pay for allowances. The one that environmentalists find most offensive is known as the “carbon leakage” exception.

Carbon leakage would occur if companies, rather than complying with the EU greenhouse gas standards, relocated to places with more lenient climate regulation, leading to increased emissions in these countries. Sectors “exposed to carbon leakage” will be determined by the commission this year and at least every five years going forward. Sectors that qualify could receive up to 100 percent of their allowances free until the international community reaches an agreement that addresses carbon leakage.

There also is a special exception for the power sectors in “new” member states. These sectors will receive up to 70 percent of their allowances free through 2013, with reductions leading to full auctioning by 2020. Hungary was the primary protagonist behind this provision.

Offset Objections

Environmentalists also object to changes that will allow member states to “offset” emissions by financing green projects abroad under the UN’s Clean Development Mechanism. Despite the fact that the legislation limits the reductions stemming from such credits to 50 percent of EU-wide reductions, environmentalists claim that the offsets will allow companies to avoid reducing emissions at home. The WWF was particularly scathing, maintaining the final agreement was “poisoned by the large amount of carbon credits allowed from non-European countries.”

Also galling to activists is the failure of the legislation to incorporate an “excess emissions penalty” for nations that fail to meet their targets. Instead, the package includes a provision for “corrective action” that requires underachievers to compensate for their deficiency in the following year. The legislation now also allows member states to trade credits for “overachievement.”

Finally, operators of power plants with more than 300 megawatts output also got a break when negotiators rejected a provision that would have forced them to store carbon dioxide underground instead of emitting it into the air. The compromise only requires that operators assess whether storage sites are available, whether transport facilities are viable, and whether it is technically and economically feasible to retrofit the power station for CO2 capture. If the assessments are positive, member states are required only to ensure “that suitable space on the installation site for the equipment necessary to capture and compress CO2 is set aside.”

Consensus Reached

Environmentalists maintain that loose language of this kind undermines the entire climate change scheme. But chances are they’ll just have to live with it, despite the fact that the plan still requires the approval of the European Council. At press time, it appeared approval would come swiftly and without amendments.

“Even before first reading in Parliament, there was informal contact among its members, the EC and the council,” says Eric Rieger, a lawyer at Heuking K?hn L?er Wojtek in Brussels. “A huge level of consensus has been reached.”

The focus should then shift to the United Nations Framework Convention on Climate Change, which will be held in Copenhagen in December. Participants will be seeking a new global climate change agreement to replace the Kyoto Protocol, which expires in 2012.

The EU will likely insist that other countries buy into an emissions trading system as the cornerstone for fighting climate change. However, while an international agreement might be the best solution to the climate change conundrum, and especially the carbon leakage problem, it might not be the easiest, as demonstrated by the failure of the most recent climate change summit in Bali to arrive at a consensus.

Still, the EU has upped the ante, promising to upgrade its reduction commitment to 30 percent in the event international agreement is reached.

“What the EU is trying to do with its climate change package is to take a certain lead in the forthcoming negotiations,” says Dominique Grisay, a partner at Exelia in Brussels.