European heads of state struck a deal on 12 December on how to go about reducing Europe's greenhouse-gas emissions to 20% below 1990 levels by 2020.

But the plans got a lukewarm response from environmentalists and climate scientists because of the far-reaching concessions given to industry in the deal brokered by France's Nicolas Sarkozy, the outgoing European Union (EU) president.

Industry successfully lobbied to have some emissions permits remain free. Credit: Getty

The compromise overturns contentious plans to force the power sector to buy all of its emissions permits in the EU's mandatory emissions-trading system from 2013. Instead, power plants and other emissions-intensive industries will only need to buy up to 30% of their allowances from 2013; currently they get all of them for free.

The deal means that "Europe has passed its credibility test", says José Manuel Barroso, president of the European Commission. "It means business."

Greens disagree

By 2020, the power sector will need to pay for all of its allowances. But sectors that can prove they are facing serious competitive disadvantages — as is claimed by the steel, cement and aluminium industries — can apply for exemptions to grant them up to 100% free emission permits, even after 2020.

Credit: Source: European Environment Agency

To qualify, firms must show that the burden from emissions trading would add at least 5% to their overall production costs, and that more than 10% of their imports and exports are exposed to international competition, which might shift such businesses to countries with less intensive regulations. Heavy industries that cannot prove these risks will have to buy 20% of allowances by 2013, and 70% by 2020.

"EU climate leadership is in meltdown," says Satu Hassi, a Finnish Green League politician and vice-chair of the European parliament's environment committee. "The only good news is that the agreement on renewables will not be reopened." That agreement includes a target of producing 20% of the EU's energy needs from renewable sources by 2020.

The European parliament was expected to vote on the deal on 17 December. By spring 2010, the commission must provide parliament with a detailed analysis of the outcome of the United Nations climate-change conference, to be held in Copenhagen in December next year. The council will then decide whether to increase the 2020 reduction goal to 30% relative to 1990.

Sarkozy's deal was hammered out to satisfy lobbying from industry and several eastern European countries. Some industries had threatened to flee the EU, and some governments, including those of Poland and Italy, threatened to veto the legislation.

Economic growth vs. emissions regulations?

Italian prime minister Silvio Berlusconi was eventually content with the softened quotas. Poland's agreement was sweetened by promises of a multibillion-euro 'solidarity fund' for member states with lagging economies. The fund, to be financed with revenues from 12% of the emission permits sold at auctions, is to help Poland and eight other countries in eastern Europe to switch to cleaner energy production.

Furthermore, at least half of the overall auction revenues — estimated at €50 billion (US$68 billion) annually by 2020 — are to be invested in technologies such as carbon capture and storage throughout the EU.

Even so, the softened quotas will still allow the power sector to make windfall profits from factoring in the 'costs' of free allowances in the consumer price of energy. This practice, although economically legitimate, has been a main reason for widespread criticism of the emissions-trading scheme in its current form.

"Emissions trading can work only if emission allowances are auctioned, ideally without exception," says Claudia Kemfert, a climate and energy expert at the German Institute for Economic Research in Berlin, and a climate policy adviser to Barroso.