By James Kanter and Stephen Castle
International Herald Tribune
December 12, 2008

BRUSSELS: European leaders agreed on Friday to binding measures to curb global warming but pushed back deadlines and granted significant concessions to smokestack industries that said they were struggling in a hard economic climate.

At the close of a two-day summit meeting, the leaders also endorsed a €200 billion, or $267 billion economic stimulus package of mostly national measures, which are devised to avert the worst effects of recession.

But most of the focus was on the climate deal amid fears that the dire economic straits would result in a watering down of the package. In the end, the leaders stuck to their ambitious targets of reducing emissions of greenhouse gases by 20 percent by 2020, and insisted the goal would not be jeopardized by the breaks, granted mainly for East European countries and heavy manufacturers.

They also challenged the United States, after Barack Obama becomes president, to match their ambition.

"This is historic," said the French president, Nicolas Sarkozy, who added that no other continent had agreed to be bound by such strict rules. He called on Obama to "join Europe and with us to lead in this global effort."

José Manuel Barroso, the president of the European Commission, echoed Obama's campaign slogan with his message, telling the EU's global partners: "Yes you can."

But analysts and representatives from the renewable energy industry criticized the concessions made to East European countries fearing sky-high energy bills and to industries facing stiff foreign competition that will continue to receive some of their pollution permits for free, rather than having to pay for them. Critics say that will only allow industries to put off making fundamental improvements in their operations to reduce emissions.

"EU governments to some extent have removed the incentive to invest in less carbon-intensive processes," said Mark Lewis, the global head of carbon research at Deutsche Bank in Paris. "We could have gone further and done so a good deal faster without this political compromise."

Under the original plan, electric utilities, which now get most of their pollution permits for free, would have had to start paying for them starting in 2013. Instead, utilities in East European countries like Poland and Hungary would not need to buy all of their required permits until 2020.

In another concession, heavy industry sectors like steel and chemicals would receive free emissions permits if they can show their costs are increasing and that they are significantly exposed to international competition.

Manufacturers not exposed to international competition will have to pay for their permits beginning in 2013, starting with 20 percent and gradually increasing. But rather than paying for all of their permits by 2020, as under the commission's original plan, they would pay for only 70 percent by then.

Christian Kjaer, the chief executive of the European Wind Energy Association, warned that Europe was "losing credibility and leadership in the fight against climate change."

Even so, EU governments kept in place an earlier goal of capping emissions in Europe at a level significantly lower than the current level. That was "a genuine achievement in the current very difficult economic circumstances," said Lewis of Deutsche Bank.

During tense negotiations in Brussels, Sarkozy first won over Germany with concessions to its industry and then, gradually, managed to reach a deal with Eastern European nations.

"At the end of the negotiation," said Mikolaj Dowgielewicz, Poland's Europe minister, "Hungary and Poland were the last actors on the stage," underlining their tough negotiating stance, he said.

Warsaw would gain €15 billion in the form of free emissions permits to help poorer nations, he added.

Dowgielewicz said that the package "would not have been workable" without that concession.

"It would have blown up after introduction in countries like Poland because of the economic and social effect."

Sarkozy also argued that without assistance, Polish energy prices would rise two or threefold, because of the country's heavy reliance on dirty coal.

Poland's prime minister, Donald Tusk, greeted cameras with a V for victory sign as he left the summit meeting.

But analysts said large windfall profits would continue for some electricity generators in Eastern Europe.

Under the accord, power companies in countries that are comparatively poor and that use significant amounts of coal still will be able to receive 70 percent of their permits for free from 2013, although that amount would gradually decline to zero by 2020. The formula devised by the EU would include Latvia, Lithuania, Estonia, Malta, Cyprus, Bulgaria, Romania, Czech Republic, Poland and Hungary.

Stig Schjolset, a senior analyst at Point Carbon, said power companies in these countries stood to make billions of euros in windfall profits in the same way that West European companies, like RWE of Germany, have been able to in recent years.

West European power companies would have to buy all of their permits beginning in 2013, and that meant "their fat margins should disappear," Schjoset said. But Germany - worried about Polish electricity companies gaining a competitive edge from continued access to free permits - also won important benefits for its powerful, coal-fired electricity sector.

In a measure aimed at placating Germany in particular, governments will be entitled to use money earned from selling permits to help companies like RWE build highly efficient power stations that could connect to equipment to capture and store carbon dioxide underground or under the sea.

Even so, RWE reacted furiously to the decision to make power companies buy their permits, saying that risked a power shortfall in coming years.

Johannes Lambertz, the chief executive of RWE Power, said "the EU has failed to create a level-playing field and has greatly weakened Germany as a center of energy production." He said "the EU has seriously curtailed its prospects" of secure energy supplies and said that would mean more reliance on imported gas.

Despite the breakthrough on the so-called climate package, the precarious economic situation still overshadowed the summit meeting on Friday.

Chancellor Angela Merkel of Germany, endorsed proposals for a €200 billion stimulus package for the European economy, and kept open the possibility of announcing extra measures above the €32 billion worth of proposals already announced.

Germany had gone into the summit with a more strident position than that traditionally taken by a country renowned for its commitment to European integration. But Merkel, who has been nicknamed "Madam Non" by the French media over her reluctance to sanction greater spending, said that on Friday she had turned out to be "Madam Yes."

Sarkozy said that backing for a commission proposal to spend €5 billion of EU money on infrastructure projects, including installation of broadband networks, was conditional on specific plans being proposed and approved. Sarkozy said that finance ministers would reach a decision next March on reductions of sales taxes and that he had received an assurance from Merkel that her finance minister's approach would be "constructive."

Merkel declined to give any such commitment at her press conference.

Gordon Brown, the British Prime Minister, said that the debate over the need for a fiscal stimulus had been ended by the summit's endorsement of the European package.

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