The European Council agreed on a set of climate and energy targets for 2030 (the 40/27/27 package) at its meeting last month. The agricultural sector has a particular interest in these conclusions given that it is affected by climate change targets in three different ways:
In this post, I look briefly at what the European Council conclusions imply for agriculture under each of these three headings.
Higher input costs?
The European Council endorsed a binding EU target of an at least 40% domestic reduction in GHG emissions by 2030 compared to 1990, with a target reduction in the ETS sector of 43% by 2030 compared to 2005. The main instrument to achieve this target will be an increased rate of annual reduction in the cap on the maximum permitted emissions under the ETS which will be changed from 1.74% in the period 2013-2020 to 2.2% annually from 2021 onwards. Other things equal, the intention is that this will lead to a gradual increase in the price of emission allowances which firms must purchase at auction if they wish to emit CO2 or other GHGs.
There are various let-outs. Unused ETS allowances from the period 2013-2020 can be carried forward into the post-2020 period which will reduce the ‘stringency’ of the 43% reduction target. Free allocation to industries at risk of losing international competitiveness will not expire; existing measures will continue after 2020 to prevent the risk of carbon leakage due to climate policy, as long as no comparable efforts are undertaken in other major economies.
Agriculture, given its dependence on fossil fuel energy in the form of inorganic N fertiliser, will be adversely affected by any rise in the price of emission allowances. However, the following back-of-the-envelope calculation suggests that the potential order of magnitude will be relatively small.
• According to Eurostat, the average use of N fertiliser per hectare Utilised Agricultural Area (UAA) in the EU27 is around 50 kg/ha. Mineral or inorganic N use per ha accounts approximately for 40% of total N use, so around 20 kg/ha inorganic N is used in the EU27 (this averages across cropland and grassland, and also across member states).
• We then need to assume a calculated carbon footprint for each kg of mineral N. Figures from the Dutch consulting company Blonk suggest that the cradle-to-gate carbon footprint (in kg CO2eq/kg N) in the literature varies between 2 and 10, but let us assume a value of 4. So allocated emissions from use of inorganic mineral N in EU agriculture is 80 (20 x 4) kg CO2eq/ha.
• Finally, we need an estimate of the increase in the cost of emission allowances as a result of the tightening of the ETS ceiling. The current price is around €6/tonne CO2 or €0.006/kg CO2, and an estimate from Thomson Reuters Point Carbon suggests this could rise to €23/tonne (€0.023/kg) by 2030 (cited in this Carbon Market Watch publication). If all of this increase in the cost of emission allowances was passed on to farmers in the price of fertiliser, this would suggest that the cost of fertiliser would increase by, on average, €1.36 (80 x €0.017) per hectare.
This figure may not appear to be large, and may even be on the high side (for example, it makes no allowance for the fact that 20% of mineral N is imported and may not bear a climate levy, that some of the emissions in the cradle-to-grave calculation may also occur outside the EU and thus not be affected, and that some of the additional cost may be absorbed by the fertiliser industry and the marketing chain). Also, the overall cost of N fertiliser depends much more on the cost of energy which, even if it is expected to steadily increase, is also notoriously volatile (for example, energy prices have fallen by 30% in the past few months, despite the political instability in many oil producers). However, the calculation does underline the exposure of agricultural production to changes in the ETS. There will be implications for the competitiveness of EU agriculture, particularly if competitors have access to fertiliser from cheap natural gas.
What implications for burden-sharing?
The latest EEA report tracking progress towards meeting Europe’s climate and energy targets for 2020, which was published just a few days after the European Council meeting, confirms that continuing to reduce agricultural emissions will be difficult. While agricultural emissions fell by 24% between 1990 and 2013, they are expected to fall by only a further 1% in the period 2013-2020 in the ‘with existing measures’ scenario, according to this report. This is in line with the EU’s Trends to 2050 Reference Scenario 2013 which projected that agricultural emissions would fall by only 4% by 2030 compared to 2005 on the basis of current trends.
In an earlier post, I developed a ‘pain index’ for individual countries to measure the degree of difficulty each country could face in meeting its projected 2030 ESD ceiling due to its agricultural emissions. The index was based on a burden-sharing formula attached to an early leaked draft of the European Council conclusions, but it has no official status. In this regard, the European Council gave the following guidance for setting national reduction targets by 2030 for the ESD (non-ETS) sector.
• The methodology to set the national reduction targets for the non-ETS sectors, with all the elements as applied in the Effort Sharing Decision for 2020, will be continued until 2030, with efforts distributed on the basis of relative GDP per capita. All Member States will contribute to the overall EU reduction in 2030 with the targets spanning from 0% to -40% compared to 2005. Note, as in the current Effort Sharing Decision, there is no provision for a mid-term review of targets in the light of changes in economic circumstances in member states, an issue which has proved problematic with the current ESD.
• Targets for the member states with a GDP per capita above the EU average will be relatively adjusted to reflect cost-effectiveness in a fair and balanced manner. This provision runs counter to the previous one in that it implies higher reduction targets for poorer member states with presumed larger scope for reducing emissions.
• Targets will be based on ‘domestic’ reductions i.e. from 2021 member states will not be able to use international carbon offsets to avoid taking action themselves.
• The availability and use of existing flexibility instruments within the non-ETS sectors will be significantly enhanced in order to ensure cost-effectiveness of the collective EU effort and convergence of emissions per capita by 2030. This implies greater scope for countries to be able to buy allowances for compliance purposes from member states that have a surplus in their ESD sectors
• A new flexibility in achieving targets will be established for member states with national reduction targets significantly above both the EU average and their cost effective reduction potential as well as for member states that did not have free allocation for industrial installations in 2013 through a limited, one-off, reduction of the ETS allowances, to be decided before 2020. This ability to offset emission reductions in the ESD sectors with ETS allowances is a notable if limited shift in policy.
• Member states continue to have the option of including the transport sector – which accounts for around one-quarter of total EU emissions – within the ETS framework.
The treatment of agriculture and forestry
The European Council conclusions include some important text on the role of agriculture and forestry that, according to Irish Minister for Agriculture Simon Coveney, were largely drafted by Ireland.
the multiple objectives of the agriculture and land use sector, with their lower mitigation potential, should be acknowledged, as well as the need to ensure coherence between the EU’s food security and climate change objectives. The European Council invites the Commission to examine the best means of encouraging the sustainable intensification of food production, while optimising the sector’s contribution to greenhouse gas mitigation and sequestration, including through afforestation. Policy on how to include Land Use, Land Use Change and Forestry into the 2030 greenhouse gas mitigation framework will be established as soon as technical conditions allow and in any case before 2020.
There are a number of hooks in this paragraph on which the Commission can hang its legislative proposals on the overall climate and energy targets and a new ESD burden-sharing formula. Most obviously, it gives scope to modify a burden-sharing formula based on relative GDP per capita to take into account the importance of agricultural emissions in each country’s total ESD emissions. This could be done by keeping agriculture inside the ESD and modifying the national reduction percentages, or by taking agriculture outside the ESD and making it a third pillar, together with LULUCF, with its own individual targets. The key then would be the relative efforts required by the agriculture/forestry sector (the ‘third pillar’), on the one hand, and the transport and buildings sectors (the remaining ESD components), on the other (h/t to JC).
The latter approach is implicitly favoured by the Irish government which is pushing its vision for an approach based on the idea of carbon neutrality in the agriculture and land use sector, including forestry, which does not compromise capacity for sustainable food production.
The way in which such an approach would work in practice depends a great deal on how net emissions from the LULUCF sector are measured. Currently, the sector acts as a net sink, thus offsetting the non-CO2 emissions from the agricultural sector. The size of this net sink is projected to diminish up to 2020 and beyond. However, as explained in this earlier post, this is not likely to be the relevant benchmark.
Credits and debits from LULUCF emissions are measured in the current Kyoto commitment period (2013-2020) not from a base year but rather from a reference level under a business-as-usual (BAU) scenario. A reference level based on BAU projected emissions and removals would already incorporate the projected reduction in the carbon sink effect. Thus, any efforts made by member states to increase the size of the sink effect above and beyond the BAU level (for example, through afforestation) would count against agricultural emissions in this ‘third pillar’ proposal.
The attraction of the ‘third pillar’ approach to Ireland, or at least the Irish agricultural sector, which has both ambitious plans to expand its agricultural output once milk quotas are eliminated next year, and also has the potential and ambition to greatly increase its forest area, are obvious. Whether the ‘third pillar’ approach will prove equally attractive to other member states will not be known until further work on its implications is undertaken. In part, as the potential for new afforestation may be much more limited in other member states, this may depend on whether net sinks not only from forestry but also from other LULUCF sectors can be included within this pillar. The European Council has asked the Commission to come forward with proposals on this before 2020.
Even in Ireland, the potential of this approach needs to be evaluated. Irish farmers have shown a marked reluctance to plant trees in the past, despite the availability of very attractive grants, subsidies and tax incentives. There are now calls for even greater subsidies to the forestry sector, making it urgent to undertake an economic analysis to evaluate the marginal cost to the country as a whole of mitigating CO2 emissions in this way.
These issues will now be pursued by EU environment ministers who must begin the process of deciding how to ‘share the burden’ among member states of implementing the ESD reductions. While some observers have suggested that this could be done as early as next year, before the Paris climate summit, it is much more likely to happen towards the end of the decade in view of the uncertainties around measurement and verification in the LULUCF sector.
What are the implications for biofuels?
The EU’s climate change targets to 2020 helped to support the development of biofuel and biomass markets based on agricultural feedstocks, at considerable cost and with sometimes dubious climate change benefits. The European Council conclusions set a binding EU target of at least 27% of its energy from renewable sources by 2030 but with no national targets (member states can set more ambitious targets and support them in line with state aid guidelines). The existing renewable energy target of 10% share in transport fuels (almost entirely met by biofuels, and which itself will be revised downwards when the Council and Parliament eventually agree on the Commission’s proposal for revised biofuel targets) will be discontinued. Future support for bioenergy production in agriculture will thus depend entirely on member state policies.
In the EU, biodiesel production is the most important biofuel. More than half of all EU rapeseed production is crushed for biodiesel. Bioethanol production uses about 3.5% of total EU cereal production and about 10% of total sugar beet production. In Germany, biogas production especially from maize has been important. In all cases, this use of biofuels has been stimulated by either tax rebates or, more recently, blending mandates driven by the 2020 targets. Whether this production will continue in the absence of binding targets at EU and national levels will depend partly on market conditions but also, as I have noted, on individual member state policies.
Can EU climate policy provoke a constitutional crisis?
The outcome of the European Council summit was greeted with headlines like “EU leaders hammer out targets for climate policy”. However, in legal terms, this is not the case. The European Council does not have any legislative power. These targets will only come into force following a Commission proposal and agreement under the ordinary legislative procedure (co-decision) between the Council and the Parliament. Thus, at this stage, the targets should be treated as tentative and subject to revision.
For a number of the targets, the Parliament in its previous positions has called for a more ambitious policy than what was agreed by the European Council. The European Parliament supports three binding targets for 2030: a 40% reduction in GHG emissions, at least 30% renewable energy sources and a 40% target for energy efficiency. We can thus expect further difficult negotiations between the Council and Parliament before the new targets become law.
However, a number of reports following the summit meeting suggested that the European Council wanted to retain a veto on certain aspects of its decisions. For example, Euractiv reported that member states agreed that any legislation following the agreement will be subject to national vetoes. The report in Nature also noted that “the deal hammered out last night requires that decisions on all elements be agreed upon by all parties, risking a stalemate should some countries refuse to comply.”
The language in the European Council conclusions is certainly ambiguous and open to interpretation. It notes:
The European Council will keep all the elements of the framework under review and will continue to give strategic orientations as appropriate, notably with respect to consensus on ETS, non-ETS, interconnections and energy efficiency.
The key phrase is the emphasis on the ‘consensus’ on these policies. It could be that the member states, in the European Council, have agreed that decisions in the Council of Ministers on this legislation will be taken unanimously rather than by qualified majority voting (under the new voting rules which came into force on 1 November last).
If, however, it is the case that the European Council (and hence the Council when it comes to co-legislate with the Parliament) holds that its decisions are non-negotiable, then it is surely setting itself on a collision course with the Parliament on purely constitutional grounds. Given the uncertainty created by the wording in the Conclusions and by the interpretation in these reports, it would be helpful to clarify this issue as quickly as possible.
This post was written by Alan Matthews.
Photo credit: © Copyright Steve Daniels and licensed for reuse under a Creative Commons Licence.