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No one tries harder than Europe to fight climate change. The recession is testing that.

This week, the European Union outlined a proposal for the 28-member bloc to cut carbon-dioxide emissions 40 percent below 1990 levels by 2030. Seeing as how the E.U. tends to be the most aggressive region in the world on climate-change policy, it's worth taking a closer look.

Virginia Mayo/Associated Press - Protestors from an anti-fracking group wait for the start of a demonstration outside EU headquarters in Brussels on Wednesday, Jan. 22, 2014. The European Commission on Wednesday proposed a framework for climate and energy policies beyond 2020 and up to 2030. Protesters from an anti-fracking group wait for the start of a demonstration outside E.U. headquarters in Brussels on Jan. 22. The European Commission proposed a framework Wednesday for climate and energy policies beyond 2020 and up to 2030.

The European Commission's new proposal is already coming under criticism from environmentalists for being too weak (many were hoping for a 50 percent cut or more by 2030). On the flip side, policymakers have to worry about moves that hike energy prices at a time when Europe's economy is still badly struggling. And there's the nagging question of whether Europe's often-unstable cap-and-trade system is up to the job of cutting emissions.

What's more, the commission proposed to loose Europe's clean-energy laws. No longer would each nation have binding targets for renewable power. Instead, the entire continent would commit to getting 27 percent of its energy from renewable sources like wind and solar by 2030 — though its not yet clear how that goal will be divvied up among different countries.

So here's a big rundown of the E.U.'s big climate proposal (which, note, still needs to be approved and likely modified by all 28 member states):

1) The European Union already has a goal of cutting emissions 20 percent below 1990 levels by 2020. Technically, this target has three components: By 2020, the E.U. is planning to cut emissions 20 percent, boost energy efficiency by 20 percent, and raise the fraction of energy it gets from renewable sources to 20 percent.

2) The E.U. is on track to meet those 2020 emissions goals. Some of that is due to sheer luck — the collapse of communist East Germany, for instance, meant that Germany's emissions dropped dramatically after the 1990 baseline year. Some of that is due to the ongoing economic downturn. Some of it is due to the fact that Europe is "outsourcing" some of its carbon pollution to factories in China. But the continent has also made real progress in boosting renewable energy and efficiency.

3) The E.U.'s newest proposal — a 40 percent cut below 1990 levels by 2030 — is part of efforts to modify that existing goal. The idea is to update existing climate policies while taking into account both the economic calamity in Europe and pressure from environmental groups to ratchet up emissions cuts.

4) One big thing that needs tweaking was Europe's cap-and-trade program. The Emissions Trading Scheme works by setting an overall cap on carbon emissions for about half of Europe's industries — some 12,000 firms. Companies get a certain number of pollution permits that they can trade among themselves. As the cap ratchets down each year, the number of permits is supposed to dwindle and the "price" on pollution keeps rising.

So far, Europe's emissions have stayed below cap (see chart to the right). But the policy hasn't exactly unfolded as planned. Thanks to the recession and an oversupply of credits, carbon prices have plummeted from $40 per ton in 2008 to around $7 per ton of carbon today. That doesn't give companies much incentive to cut their emissions.

(Yes, you could argue that that's how cap-and-trade is supposed to work — when there's a grinding economic downturn and emissions are falling anyway, the price should fall and give companies breathing room. The delegation from Poland kept making this argument. But other countries, like Germany, have argued that the continent needed a stable carbon price to provide incentives for more advanced clean-energy technology.)

5) So, in this latest proposal, the E.U. wants to alter its cap-and-trade program by tightening the pace at which the cap ratchets down — right now, the cap gets lowered by 1.74 percent per year. The new proposal would call for a 2.21 percent reduction each year after 2021.

The proposal would also create a "market stability reserve" that automatically either releases new permits into the market or withdraws them depending on market demand. This would, in effect, be a way for regulators to interfere with the carbon market to keep the price stable — it's a convoluted way of making the cap-and-trade program a bit more like a carbon tax.

6) The E.U. is also proposing changes to its renewable-energy mandates. No longer would each nation have to meet binding renewable-energy targets. Instead, the entire continent would have to get 27 percent of its energy from renewable sources by 2030. If some nations do less than that, others will have to do more. (This idea is a compromise to appease countries like Britain, which wanted to be free to decide its own energy mix and rely more heavily on things like nuclear power.)

7) There's no new energy-efficiency target in the latest proposal (there are just "aspirational" goals). The E.U. is already struggling to boost efficiency 20 percent by 2020. In its release, the commission also noted that ethanol and other early biofuels haven't been very effective at reducing emissions from cars and trucks, so they're still studying this issue.

8) Does this combination of policies make sense? That's up for debate. Some economists, like Harvard's Robert Stavins, have argued that it's counterproductive for Europe to have both a cap-and-trade system and a renewable-energy mandate. After all, the whole point of cap-and-trade is that it sets a ceiling on emissions and lets companies figure out for themselves the best way to get there.

Maybe that involves wind and solar. But maybe it involves a mix of shale gas and nuclear and efficiency. Who's to say? Adding a renewable-energy requirement on top of a carbon price puts a thumb on those scales and, as MIT modelers concluded, ultimately makes it more expensive for companies to meet those emissions targets (because they don't have full freedom to decide how to cut emissions).

9) There are a few counterarguments to Stavins. First, if the cap-and-trade system is wobbly and unreliable, then maybe a renewable-energy mandate can act as a backstop — ensuring that power companies can't game the system and have to make at least some genuine reductions. Alternatively, as Michael Levi details here, the mandate can reduce Europe's reliance on often-dubious international "offsets." (Levi's post is worth reading in full for those who want to delve into the details here.

10) Environmentalists have argued that Europe's proposed 2030 targets are too weak. As Jeff Spross notes, the continent's emissions are already close to 20 percent below 1990 levels by 2020 — so making a 40 percent cut by 2030 seems reasonably attainable:

What's more, Germany's aggressive push away from nuclear power and toward renewable energy means that the 27 percent renewable target was within reach regardless.

11) Still, these targets could well change as international climate talks proceed. German environment minister Barbara Hendricks told the Guardian that Europe could move past the 40 percent target at the U.N. climate talks in Paris next year. Europe is essentially trying to set the pace in global climate talks.

If other countries like the United States follow, then Europe could set even more aggressive targets. (Right now, the United States has a target of cutting emissions 17 percent below 2005 levels by 2020, but nothing after that.)

Ultimately, Europe is aiming for an 80 percent cut by mid-century. Some climate scientists have criticized that target as too weak if the world wants to keep global warming below 2°C. But either way, it will take more than small tweaks in efficiency and a smattering of extra wind farms to get cuts that drastic. It will also take cooperation from the rest of the world — Europe can't influence the global climate on its own if emissions from countries like China and India continue rising.

12) These proposed climate policies could well put a further drag on Europe's already-hurting economy, although there's some debate as to how much. The near-term impact could be small, but the cuts will get harder and harder as Europe proceeds.

For instance: A recent study from the Potsdam Institute for Climate Impact Research used a number of different models and found that Europe could meet that 40 percent goal using existing technologies. The cost? Europe's GDP would be just 0.7 percent lower in 2030. But there's a catch: "However, in some models, costs increase considerably after 2040, while others show costs increasing in a linear manner. This allows us to conclude that the 80% GHG reduction target is indeed challenging, especially after 2040 when a substantial amount of effort is required."

13) Important note: This is still a proposal. The 2030 targets aren't a done deal yet. They have to be agreed on by all 28 E.U. governments and the European Parliament. So there will still be a lot of discussion and debate about this in the months ahead.



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Brian Fung · January 23, 2014

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