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José Manuel Durão Barroso

President of the European Commission

"Europe's Climate Change Opportunity"

Lehamn Brothers
London, 21st of January 2008

Ladies and Gentlemen, thank you for your very warm words of welcome. I am delighted to be at Lehman Brothers today to make a contribution to your Global Insight series of lectures. It's been a very useful day, in fact – I have also had the chance to meet my high level advisory group on climate change here in Canary Wharf this afternoon, and I would like to thank them for all the work they have done together and separately to advance the agenda on climate change.

It is common place in speeches of this kind to talk about turning points. But there is no question in my mind that 2007 was a real turning point for the European Union, and for the world.

The decision by the European Council last March to set precise, legally binding targets showed the EU’s political unity, our determination, and our capacity for leadership. We then took this to the G8 Summit at Heilengendamm under the German Presidency, and on to the UN in September. And December finally saw a momentous deal in Bali to pursue a global agreement on greenhouse gas emission reduction by end 2009.

So there is a stronger global consensus than ever before. But we cannot just talk about the importance of this issue. Public opinion demands that we take decisive action. And business needs to be seen as an important part of the solution, too.

So, to ensure that 2008 can be every bit as momentous a year as 2007, I anticipate that the Commission will come forward on Wednesday with specific proposals to meet the European Council's challenge last March. I don't want to pre-empt that decision, and I'm certainly not going to give you a privileged scoop on any of the complex numbers that I expect to emerge from our very detailed preparations.

But first, to remind you of the nature of the European Council challenge. A series of specific actions, all to be realised by 2020: first to reduce our emissions of greenhouse gases by at least 20%; second, to meet the target of an overall share of 20% for renewables in the EU's overall energy consumption; and third, to increase our energy efficiency by 20%.

If I employed highly paid spin doctors in the Commission, doubtless our slogan would be: "20 20 20 by 2020".

Of course there is a strong market dimension to this, explaining the strong interest here in the City of London. The reality of course is that it not so much that we are bringing climate change to the marketplace, but that climate change is happening to the marketplace. Share prices are increasingly affected by companies’ environmental performance, and not just because of the preferences of “ethical” share-holders, but because all share-holders want to know how companies are gearing themselves up for inevitable change.

I won't repeat today the scale of the climate challenges we face. We can see on a daily basis the growing competition for energy resources, as the price of oil soars above $100 a barrel. We know energy security issues will be critical. The science is now uncontested.

So let's focus on policy solutions. Europe must set the right policies in place to continue to set the pace on climate change. It's too late for anyone in the international community, least of all the European Union to play "after you, Claude". Procrastination is no longer an option for anyone.

The case for acting now is compelling:

Taking action is not cost free, although we think we can limit the cost of our proposals to around 0.5% of GDP. But the report by Nick Stern (I am pleased to say that he is a key member of my advisory group) shows that the cost of inaction is at least ten times that, and could even approach 20% of GDP. The longer we delay, the higher the costs of adaptation and mitigation.

At the same time, the earlier Europe moves, the greater our opportunity to use our skills and technology to boost innovation and growth. Renewable energy technologies already account for a turnover of 20 bn euros and have already created 300,000 jobs.

Last but not least, energy security. Our proposals should reduce Europe's reliance on imported gas and oil by around 50 bn euros by 2020. These are figures with a real impact on our growth and prosperity.

Finally, please remember that our modelling has relied on pretty conservative assumptions about the oil price, $61 a barrel. No-one can accuse us of making over estimates.

Let me briefly set out the principles we have followed in coming up with our climate change package.

First, we must meet the targets, with credible and effective proposals.

Second, we ask for fair efforts from all Member States, reflecting their different starting points and circumstances.

Third, we must minimise the costs.

Fourth, our proposals must promote a comprehensive international agreement, and if we succeed, we should step up to a 30% reduction in greenhouse gases.

Fifth, we must drive on beyond 2020 – for example to a 50% global reduction by 2050. This means bringing in new technology.

So, from the principles to some details.

First, emissions trading. We have learned a lot from our experiences since 2005. We have learned that governments don’t have all the answers.

We need to incentivise the saving of the planet.

The logic of our proposal means that European business must pick up the baton. I call on you, the European business community, to seize this opportunity with both hands.

Our market based cap and trade system has shown companies that if they invest in emission reduction, they can generate income streams by selling their allowances. This drives innovation and cost effective microeconomic change. But we now need to take this further.

Firstly, we will develop an EU wide cap to ensure a level playing field. Never was a subject better suited to the EU’s internal market than emissions trading.

Second, we will be less generous with our allocations – which will be reduced, year on year, to allow our planned 20% reduction. Allowances will be auctioned, with revenues going to Member States – but any EU company will be able to buy allowances in any Member States. These revenues themselves can be used by Member States to adjust to the low carbon economy.

Third, we will extend the ETS to include more greenhouse gases and all major industrial emitters.

We are however conscious of the need to allow the industrial sector to adapt. Energy intensive industries face a particular challenge during the transition, and especially those exposed to international competition from countries without low carbon measures. There would be no point in pushing EU companies to cut emissions if the only result is that production and indeed pollution shifts to countries with no carbon disciplines at all. Of course, an international agreement would reduce, or even remove, this risk. Sectoral agreements would also help.

But in case of need, I think we should also be ready to continue to give the energy intensive industries their ETS allowances free of charge, or to require importers to obtain allowances alongside European competitors, as long as such a system is compatible with WTO requirements.

In short, the ETS can be climate friendly, market friendly, industry friendly and finally, friendly also to jobs and growth.

Briefly, we also need an EU framework for national commitments in other sectors (such as smaller industrial plants, buildings, transport) for greenhouse gas reduction beyond the ETS. Some of this reduction will come from EU wide measures, such as to curb CO2 emissions from cars, but Member States should determine where to focus their efforts.

Let me now turn to our plans on renewable energy. Getting to an average of 20% will be a hard climb (currently renewables are just 8.5% of the EU's final energy consumption), requiring a major investment effort across the EU.

Of course, Member States enjoy different prospects in terms of deploying renewable energy, and as I have said, "effort sharing" needs to take account of different national starting points and potentials. Some Member States have potential in wind power, others in solar power or biomass. Lead times for bringing renewable energy on stream are long, and investors want certainty. Member States should be free to set their own national action plan to meet their target.

We can also approach this with flexibility. Member States should be able to meet their individual targets by helping develop renewable energy elsewhere in the EU, thereby reducing their compliance costs. This should also ensure that we meet our targets in the most efficient way.

Two words about biofuels, which are the subject of a separate minimum target set by the European Council (10% share of sustainable biofuels in overall transport fuels by 2020). Whilst biofuels are the only viable alternative transport fuel for the foreseeable future (at least until hydrogen becomes competitive), their growth requires criteria to be set for the environmental sustainability of biofuels. Indeed, I think our focus should be firmly on only sustainable biofuels, that is to say only those which produce a substantial CO2 saving compared to the oil that would be consumed instead.

Indeed that is the thrust of our work inside the Commission, and at the heart of what I intend to announce on Wednesday. I feel confident that the outcome will provide the most comprehensive and sustainable system anywhere in the world for the certification of biofuels – and for domestic and imported biofuels alike. We will continue to promote the rapid development of second generation biofuels. This is critical to attaining public confidence that the environmental benefits of using biofuels outweigh any possible disadvantages.

On energy efficiency, meeting our 20% reduction target here should save the EU some 100 billion euro, and cut emissions by 800 million tonnes. In virtually all areas of our lives, we can find savings – in transport, electrical goods, buildings, power generation and transmission. A mixture of legislation and public information will be required, but once again, a major effort is needed from both public authorities and EU citizens.

Last but not least, technology must be factored in. Wind and solar energy are becoming more commercially viable every day, and not just because of the oil price. Energy efficiency is becoming a key design factor in products ranging from the lightbulb to complex production machinery. But again, major investments are needed. Of particular relevance here is carbon capture and storage (CCS). We have to continue to be able to exploit fossil fuels as a key source of energy for decades to come. But this risks ballooning global emissions by mid century. So we need to make CCS the norm for new power plants, and to set up 12 demonstration plants by 2015. Again, significant investment will be needed, and from public and private sources.

Before I come to conclude, I have been asked several times today: how will Member States react to the package ? I hope positively, as we have worked closely with them in its formulation, and – I stress again – we are following the lines set unanimously by the EU's political leaders in the European Council.

But of course we are also ready for criticism from some national politicians. And that goes with the territory. Sometimes politicians remind me of what JS Mill said of his father: "he loved mankind in general but hated each person in particular" – in other words, the idea of acting against climate change may be fine, but not the necessary policy detail that must follow.

In conclusion, when you look at the scale of the challenges and opportunities before us, it seems to me that human society is now on the verge of a paradigm shift. In the past, economic growth has relied heavily on increasing carbon content and usage, to the cost of the planet.

Our efforts to tackle climate change reverse all that.

Moreover, previous major developments were driven at least in part by international competition. Climate change will require unprecedented international cooperation. Starting here in Europe. Indeed, action on climate change is exactly the kind of test for the European Union in this century. A test of our capacity to act, our capacity to deliver.

And it is also a test of our capacity to lead. For while the UK cannot solve climate change alone. Nor of course, can the European Union. We need a global agreement, for we are only one planet.

But one thing is very clear – we will not get anywhere without sustained EU leadership – from the Commission, from the Member States, from the European Parliament.

I sometimes wonder how history will judge us. All I can say is that I am increasingly convinced that in the context of the relatively short history of human life on this planet, the fight against climate change in the twenty first century is likely to become a central chapter.

Thank you.

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