EU leaders failed to agree on a financing proposal for developing countries after their two-day summit this week, leaving the EU’s negotiating position on the issue open-ended.

A Kenyan riverbed: developing countries are expected to bear the brunt of climate change because of their geography and their lack of capacity to adapt to change (Image: Matt & Kim Rudge @Flickr)

In a set of conclusions that were long on rhetorical concern about accelerating climate change but short on any new commitments for the EU, the European Council effectively endorsed the views set forth in the Commission communication on funding that I discussed a few weeks ago. This means that the 27 Member states have agreed a common view of the amount of funding required for adaptation and mitigation in developing countries – €100bn annually by 2020 – but not over how much of this should come from the EU and its members.

One of the reported reasons for the failure to reach an agreement is reported to be, as usual, down to differences between the richer and poorer members of the EU. A coalition of East European countries allegedly resisted specific commitments due to concern over their ability to afford the proposals. But the BBC also reported differences over negotiating strategy as a cause for the ambiguity of the Council’s position. Germany, it is suggested, believed that providing an explicit figure would provide less of an incentive for other developed countries to make similar commitments.

How much the EU is really willing to pay for climate change mitigation and adaptation in developing countries, then, remains to be seen. But the failure of EU leaders to establish a common position underlines the political difficulty associated with large transfers of wealth to countries whose citizens don’t vote in European elections.

In line with expectations, EU leaders did not make any substantial progress on agreeing their Copenhagen negotiating position in their Council meeting last week.

The Euroepan Council at work among the colourful graphics of the Czech Presidency, March 2009.

The formal conclusions of the summit run to twenty-three pages, of which only four paragraphs address the international climate negotiations. The discussions were dominated by economic stimulation measures and tightening regulation of the finance sector. Energy security also featured on the agenda, as this was the first Council meeting since the latest Russian-Ukranian gas crisis.

The Council took the opportunity to reiterate the EU’s official position on a global deal in Copenhagen and to mention its opinion that the CDM needs to be reformed. It also flagged the thorny issue of financing international mitigation and adaptation (particularly in least developed countries), but again without making any firm commitments or proposals for how this burden should be shared.

A debate in the European Parliament on the agenda of the Council meeting gave similarly minimal attention to the climate change negotiations, suggesting that it’s not just the EU heads of state who don’t see this issue as a priority just yet.

This apparent political inaction doesn’t necessarily indicate a cooling of enthusiasm on Europe’s part. Last year saw a similar pattern of delaying the most difficult decisions until as late as possible, culminating in a frenzy of high-level talks in November and December in an effort to reach agreement before the end of the Poznań conference. As Climatico’s Simon Billett noted at the time, it can be useful for UNFCCC participants to wait until other countries have revealed more of their own intentions before clarifying their own position.

There will be plenty of other opportunities for the EU to add some policy flesh to these very bare bones as the year proceeds. The Council will return to the issue in its next meeting in June, but whether the outcome of that meeting will be any more substantive remains to be seen.

Already a whole quarter has passed since the frenzy of negotiations that led up to the 20/20/20 Package agreement at the European Council meeting last December. The series of ministerial meetings that occurred back then are being repeated this month. Environment Ministers met last Monday; Economic Ministers will meet on Tuesday 10 March; and European heads of state (the European Council) will meet on 19-20 March.

NGOs are flagging up the importance of developing countries in a global deal

A number of NGOs, including WWF, Greenpeace and Oxfam are using the opportunity to pile on the pressure for the EU to agree on solid financing commitments for an in international climate deal. With the bloc having already committed substantial sums of money towards mitigation action domestically (see the EU section in Climatico’s new quarterly report), much of the NGOs’ focus has been on financing for mitigation and adaptation in developing countries.

Although the coming global climate negotiations in Copenhagen will feature on the agendas of the Finance Ministers and the European Council, it is very possible that both meetings will pass without substantial new commitments. The state of Europe’s economy will undoubtedly be the main priority for the Finance Ministers and the Council. Copenhagen is still relatively far away, and EU leaders may want to wait for other countries – particularly the US – to give some clearer indications of their intentions before making further climate funding decisions.

The European Parliament has this week approved the EU ETS Directive, which means that only a rubber stamp from the Council is required for it to become law. By approving the Directive, the European Parliament has created a market that will probably be worth tens of billions of Euros annually from 2013 to 2020. So how will this big pot of money be distributed?

Distribution of EUAs under Phase III of the EU-ETS (Click on the image to view it - opens in new window)

As I discussed in my last posting, some of the carbon allowances (which are officially known as EU Allowances, or EUAs) will be allocated free of charge installations in sectors that are deemed to be at risk of ‘carbon leakage’ and to some power plants. This is represented by the grey area of the graphic accompanying this post. The rest will be auctioned by member states, and these are represented by the blue and green areas of the figure.

Most of the money raised in the EUA auctions will be retained by the governments of the EU member states as they auction them. This is represented by the blue area of the picture. The number of EUAs auctioned by each member state will mainly be proportionate to its CO₂ emissions in 2005, but with some variations. Partly as a result of the recent negotiations some countries will receive more because they are relatively poor, or because a relatively high percentage of their energy comes from renewable sources.

One of the points agreed by the European Council last week was that the revenue raised by auctioning 300 million of the EUAs would be used to fund for Carbon Capture and Storage (CCS) demonstration projects.*  This would represent €6 billion, assuming a price of €20/EUA was achieved at auction. This is shown by the green area of the picture. The intention is that the demonstration projects would allow the European power sector to bridge the gap between the situation today where CCS is just a promising idea and a situation where CCS could be deployed commercially on a wide scale from 2020 onwards.

It is hoped that this will make the EU ETS produce an environmental double dividend: not only reducing emissions from existing industries directly by capping the number of EUAs available each year; but also funding the development of new low-carbon technologies at the same time.

Although €6 billion is clearly a large amount of money, it’s actually a relatively small slice of the expected total value of the EUAs that will be issued during Phase III of the EU ETS. The total emissions allowed under Phase III correspond to at least 14 billion EUAs. So if the price obtained for the EUAs auctioned for CCS reflects the average value of the EUAs during Phase III, no more than 4% of the total value of the certificates will go to the CCS demonstrators. The consortium that proposed the CCS demonstrator programme believes that 10-12 projects are required to robustly test all the possible CCS technologies, and estimated that €7-€12billion of public money would be needed to achieve this. So the amount actually agreed by the Council will probably fall short of this range, but it should be enough to fund at least some of the demonstrator projects, according to British Liberal MEP Chris Davies.

As things currently stand, member states have complete discretion over how they spend the rest of the revenue they earn from auctioning EUAs. Some of it could go to further assist CCS projects: the Directive allows individual member states to choose to use some of their EUA auction revenues towards the cost of building new ‘highly-efficient’ power plant, including up to 15% of the costs of fossil-fuel plants that are CCS-ready.

But there are signs that at least some member states are ready to use EU ETS revenue as a bargaining chip in international climate negotiations during 2009. The European Council meeting last week noted that there was a willingness to use ‘at least half’ the amount raised for mitigation efforts including reducing deforestation, R&D for renewable technologies and energy efficiency; and to fund adaptation efforts in the least developed countries. This idea will be on the agenda at the Spring 2009 meeting of the European Council, which will happen in Brussels on 19-20 March.

* The wording of the Directive suggests that some of this could go towards renewable energy technologies as well as CCS, but unlike CCS I have not seen concrete proposals for this. If anyone knows why renewables are also in the agreement, please let me know!