All in a day (or two)’s work for EU leaders, it seems: a multi-hundred-billion euro financial rescue package, a resolution to a constitutional crisis, and now a deal on the climate and energy package that has secured the support of the entire European Council.

Much of the EU’s climate and energy package had been agreed before today, but the big remaining sticking point was over the carbon target: a 20% reduction in CO2 emissions by 2020.
As expected, the deal that was reached today represents a middle ground between the policy that would be recommended in an environmental economics textbook on one hand, and the kind of concessions required to keep all European countries on board on the other.

There seems to be little by way of direct official pronouncements on the internet at the time of writing (the negotiators and their press staff are presumably making up on some much-needed sleep), but the BBC is reporting that the compromise will allow some electricity generators to receive free emissions allowances from 2013, although they will have to buy an increased proportion of these as the years go by. There will also be ‘derogations’ for large industries who can persuade the Commission that the carbon cap will put them at risk of being relocated outside the EU, weakening Europe’s economy without creating any reduction in carbon emissions. This seems to be exactly in line with the compromise proposals made by the French presidency back in November.

In a sense, the debate that arose over Europe’s climate target is no different in principle to the discussions occurring at a global level at the UNFCCC conference. Poland’s per capita GDP is less than half of Germany’s; its electricity system is three times smaller. It, and other East-European countries, could not have foreseen the current climate policies being put in place today when most of its ageing fleet of coal-fired generators was being built. Eastern Europe is relying heavily on manufacturing and other secondary-sector activities for its rapid economic growth. And it could be argued that it’s unfair for countries like the UK to expect less economically-developed countries with lower cumulative historic emissions to pay the same to reduce emissions now.

The concern that heavy industry might relocate to ‘pollution havens’ outside the EU because of the new regulations is not original: it has been raised before when environmental legislation has been imposed in some countries but not in others, and there is some empirical evidence that such effects can occur (although often factors such as labour costs and taxation are much more important than environmental regulations in determining where firms decide to locate their operations).

Demonstrating in advance that a sector is at risk from ‘carbon leakage’ will inevitably involve some subjective economic judgement, and its inevitable that substantial industry lobbying will go hand in hand with the official economic modelling used to make those decisions.

There was an agreement on CCS financing today as well: this will be covered in another posting: watch this space!

CORRECTION TO THIS POSTING (13/12/08): In line with Dan’s comment (below), I have modified this entry. My sincere apologies for any confusion caused and my thanks to Dan for pointing this out.

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