The European Parliament has backed a package of measures to tackle climate change, which EU Commission President Jose Manuel Barroso has described as "the most ambitious proposals anywhere in the world".

The EU's credibility is at stake as it strives to be a role model in the run-up to negotiations over a new global climate deal to succeed the Kyoto Protocol, which will end in 2012.

The EU's plan sets out how member states will cut carbon emissions by 20% by 2020, compared with 1990 levels. This target will rise to 30% if an international agreement is reached committing other developed countries and the more advanced developing nations to comparable emission reductions.

The EU Emissions Trading Scheme (EU ETS) will play a key role in meeting this target. The EU ETS is a system for trading carbon dioxide (CO2) allowances which has been operating since 2005. It covers heavy industry and big power plants, with more sectors to be added in the future.

In order to help meet the new targets for emissions cuts changes to the EU ETS have been proposed:

  • Under the EU ETS, permits for emitting CO2 are handed out under a system of national allocations. The permits can then be traded so that heavy emitters of CO2 can buy extra allowances from "greener" organisations. Under the EU's plan, the total number of permits is to be reduced by 21% from 2005 levels by 2020 and there is to be a single EU-wide cap on the number of allowances.
  • The EU ETS currently covers about 10,000 heavy industrial plants such as power plants, oil refineries and steel mills. The EU's plan will bring all major industrial emitters of CO2 under the EU ETS.
  • The EU's plan will significantly impact upon power plant operators who will have to buy all their permits at auction from 2013. Big electricity generators in Eastern Europe have been given an easier ride to help maintain economic growth in those member states. Rather than having to buy all their CO2 permits at auction from 2013 they will only need to buy 30% of their allowances from 2013, with full auctioning not kicking in until 2020.
  • Full auctioning will be phased in by 2020 for other industry sectors but might be delayed for sectors where "carbon leakage" might occur, for example if full auctioning could lead to a transfer of jobs or plant to non-EU countries where the rules on curbing emissions are less strict. The Commission will have a challenging time identifying these "carbon leakage" risks and can expect pressure from industry lobbies arguing for derogations.
  • Revenues from the auctioning of permits will continue to go to member states' treasuries, but the EU's plan means that member states will need to commit to spending some of that income on low-carbon technology and innovation. Revenues from EU ETS auctions will also specifically be used to fund carbon capture and storage projects, with plans to build up to 12 pilot plants in the EU by 2015. This means that revenues generated from charging CO2 emitters will finally have to be channelled into combatting climate change.
  • The Kyoto Protocol set up the Clean Development Mechanism under which industrialised countries can "offset" some of their emissions by investing in "green" projects in developing countries in exchange for CO2 credits that can be used for EU ETS compliance. The EU's plan sets the "offset" limit for each EU country at 3% of verified 2005 emissions.  

The effect of all of these changes on the cost of compliance, UK and EU competitiveness and on the viability of carbon projects and related research and development remains to be seen.