All EU countries have agreed to reduce emission of greenhouse gases (GHG) by signing the Kyoto protocol. The overall commitment corresponds to a reduction of 8 percent from 1990 to 2012.
Copenhagen Economics has been asked by the European Parliament to review current and prospective climate policy related initiatives and provide recommendations for future policies.
For policy actions already affecting the commitment period up to 2012, we underline the following three priorities; create a better functioning internal market for energy, take a more selective approach to regulatory energy standards, and use more market based mechanisms to reduce road transport emissions, all with the aim of improving the cost-effectiveness of climate policies.
A more efficient internal market for energy can provide significant and cost-effective CO2 savings, in particularly by facilitating electricity trade through higher transmission capacity between member states and regions.
A more selective approach to energy standards may also help the EU meet its targets with fewer costs to consumers. Most minimum efficiency standards cover products that use energy produced by electricity and heating producers already covered by the EU’s Emission Trading System (ETS) that effectively limits total CO2 emissions from that sector to the level of allowances. In other words, minimum standards imposed on top, may undermine one of the clear advantages of the ETS, namely that cost-savings occur where they are most cost-effective.
Market based instruments such as taxes are likely the most effective instrument to contain rising emissions from road transportation. This implies that road transport emissions are difficult to control at the EU level with tax instruments being very much in the national domain. Community efforts to promote biofuels and impose legally binding fuel efficiency standards for cars – the two main EU initiatives – are likely to be less cost-effective ways to reduce car emissions.
For the period post 2012, we stress two issues, the needed reform of the ETS and the challenges involved in distributing the target reductions among member states.
An improvement of the ETS is strongly recommended. Recommendation is to change the allocation mechanism. The overall amount of allowances is to be determined at EU, not national level, to ensure a more stringent overall allocation of allowances than in the first commitment period. Moreover, allowances should be largely auctioned. Energy intensive firms exposed to strong international competition could be assisted by special schemes to avoid these firms moving production and CO2 emissions elsewhere as a response to higher energy costs. Aviation, as already proposed by the EU commission as well as some other activities, could be included in the ETS.
The distribution of target reductions will constitute a political challenge as in the previous commitment period. Based upon early studies, we suggest that the range of national targets for reductions could be narrower for the post 2012 period than for meeting the 2012 target.
 
The report can be downloaded here.

(The study note was conducted for the European Parliament, and the European Parliament owns the copyright).

For further information you are welcome to contact Mr Sigurd Næss-Schmidt or Mr Christian Jervelund.