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In a move that analysts hope will liven up international climate-policy efforts, European Union (EU) leaders have agreed on a set of medium-term climate and energy targets for the region, the world’s third-largest largest emitter of greenhouse gases.

The EU’s new climate and energy policy framework, finalized in the course of an all-night session of the European Council, obliges the bloc’s member states to reduce their domestic greenhouse-gas emissions by at least 40% by 2030, relative to 1990 levels. The agreed target will form the EU's contribution to a planned global climate agreement next year, unless countries such as China and the United States unexpectedly pledge substantially more ambitious targets — in which case Europe would follow suit.

European heads of state also agreed on a politically binding EU-wide target to increase the proportion of energy generated from renewable sources to 27% by 2030, up from just over 14% currently. Another 27% target, for improving EU-level energy efficiency, is merely ‘indicative’, to be reviewed in 2020 with the intention of increasing it to 30%.

Policy analysts cautiously welcomed the agreement. “Politically, nothing much more was possible,” says Severin Fischer, a climate-policy analyst with the German Institute for International and Security Affairs in Berlin. “What the deal is really worth depends on what China and the United States will offer next year.”

"Europe is setting an example," said French President François Hollande when the agreement was announced, but he added that the deal is a compromise between governments with different views on the urgency and affordability of climate action. For example, Poland, which relies heavily on coal for electricity generation, had threatened to veto a decision unless far-reaching concessions were made to its energy and heavy industries.

“It is important that the doors remain open to more ambitious targets,” says Eva Filzmoser, director of the Brussels-based initiative Carbon Market Watch. “But the deal also includes a number of unwelcome concessions to large polluters, which threaten to severely limit its effectiveness.”

Greenhouse-gas emissions in the EU have already dropped by almost 20% since 1990. The greater share of the additional reductions will have to be achieved by more than 11,000 energy-intensive industrial plants and power stations covered by the EU’s mandatory Emissions Trading System (ETS). From 2021 onwards, the cap on maximum permitted emissions will be reduced by 2.2% each year, up from the current 1.74% per year. But to avoid ‘carbon leakage’, Brussels will continue to give ample free pollution rights to energy-intensive manufacturing industries that might otherwise transfer production to countries with less stringent climate regulations.

Carbon market analysts also point to more than 2 billion unused allowances — left over from previous trading periods as a result of over-allocation and the economic crisis of recent years — which businesses can use to offset future emissions. The ETS is to be reformed with a view to stabilizing the price of emissions, which temporarily dropped to zero during the 2008–12 trading period.

But critics say that neither the cap reductions nor the planned market-stability measures will suffice to raise the price of carbon emissions from the current roughly €5 (US$6.40) per tonne to the levels required to stimulate serious investment in clean-energy technologies. “It is about time now to fix the most important instrument of the European climate policy,” says Ottmar Edenhofer, chief economist at the Potsdam Institute for Climate Impact Research in Germany. “Without a working ETS, it’s difficult to see how the climate targets will be put in practice.”

EU member states must still negotiate on national targets for sectors not covered by the ETS. This could be a tough job, says Fischer, because the new deal requires that decisions on all elements be agreed by all parties, risking a stalemate if some countries refuse to comply.

Countries will, however, be granted more flexibility in how they achieve their national targets. For instance, they may be able to offset domestic carbon emissions against emissions reductions in non-traded sectors such as building and heating. But after 2020, it will no longer be possible to offset domestic emissions by supporting clean-energy projects in developing countries — projects that are often of questionable quality.