These are challenging times for those of us concerned with EU policy on climate change.

In mid-December, the EU agreed on a climate and energy package after intense and controversial debate. At the same time, it was sharply criticised for its performance at the U.N. climate change conference in Poznan because of its vague positions.

That contrasted with efforts by developing countries, who have been putting more and more concrete proposals on the table about how future international climate policies should be shaped.

On Jan. 28, the European Commission presented its proposals on the EU position for negotiations leading up to December's key U.N. climate talks in Copenhagen, where the world is meant to agree on a successor pact to the first commitment period of the Kyoto Protocol.

A key aspect of the European communication, "Towards a comprehensive climate change agreement in Copenhagen", was meant to be how to increase significantly the transfer of financial resources to cover the huge additional investments needed in developing countries to limit growth in their greenhouse gas emissions and adapt to the impacts of global warming. But the Commission considerably watered down its final position compared to a previous draft.

The published proposal does outline the scale of resources necessary to tackle the climate change challenge in developing countries - at least 100 billion euros per year in 2020. Yet it does not make a clear statement on how much of this the EU is prepared to offer in the negotiating process.

It says only that the scale will be negotiated in Copenhagen, and the EU's contribution should be comparable with payments from other developed countries.

It is unlikely that developing countries will be satisfied with such a vague position, given their call for additional resources of 200 to 400 billion dollars upwards. Copenhagen is approaching too fast for countries to continue to hedge their bets, and the EU should at least indicate a negotiating range.

Apart from this key issue, the EU has taken a more concrete stance on some aspects of financing. Of the several potential instruments that could generate resources to tackle climate change, it proposes two basic options.

The first is that contributions from developed countries would be assessed according to a formula based on emissions and economic capability. This sounds more like a business-as-usual "Official Development Assistance"(ODA)-style approach, which would not generate predictable funds unless accompanied by a strong system to monitor donations and make countries comply.

Although this kind of regime seems rather unlikely, the Commission makes an interesting proposal to withhold a share of national emission allowances from developed countries which would then be auctioned if countries fail to meet their commitments.

The second option is to set aside a share of developed countries' emission allowances and auction these at an international level. The revenues would be used to finance mitigation and adaptation in developing countries.

This would be a good step to implement the "polluter pays" principle and could generate tens of billions of dollars, depending on the design. However, it would generate less predictable resources because of the volatility of the carbon market.

What is remarkable is that the Commission stepped back from an earlier proposal to sell all these allowances to developed countries at a fixed price that would increase over time - an idea included in a previous draft of the communication, which would deliver more predictable resources.

The inclusion of international aviation and maritime transport in the international carbon market is proposed in the final document, which would strengthen the environmental integrity of the U.N. climate change system, since these sectors are not yet covered. Here too, the recommended approach is auctioning of emission allowances.

VOLATILE CARBON MARKET

While the carbon market has become an important tool in setting a price signal for CO2 emissions, the current economic crisis has revealed its weaknesses. As global growth slows, emissions will grow much less than expected or will even decline over the next months or even years. In itself, this is not a bad development but it will cause the carbon price to decline.

According to some analysts, the price could even trend towards zero in the next two years, and so would revenues from this market. That would also negatively affect the fledgling Adaptation Fund, which is financed from a levy on the U.N.'s Clean Development Mechanism, a scheme that allows developing countries to finance projects which reduce or remove emissions by selling credits to higher-emitting nations.

There is little doubt that more predictable flows of funding on an adequate scale to help poorer nations tackle climate change will be the deal maker or breaker in Copenhagen.

So what happens now with the EU proposal? The member states must now formulate their reaction to the Commission's view, and reach agreement on it in the coming weeks.

For the U.N. climate negotiations, it is crucial that the EU shows up with more ambitious and concrete positions at the next negotiating session at the end of March in Bonn, just one week after the EU's March summit. If the EU fails to reach internal agreement before then, its next summit will not take place until June, just after the second U.N. negotiating session this year.

The EU's position for the climate change talks should include a statement on the scale of resources it is prepared to commit, showing Europe takes its own words seriously.

And one thing should not be forgotten. According to the Bali Action Plan, the legal provisions guiding the U.N. negotiations, the ambition of efforts by developing countries - in particular on mitigating climate change - will be bound to the commitments of financial and technical support made by developed countries. This is a message the Commission has failed to reiterate.

It is now in the hands of EU member states to create the impetus expected of them. Will Europe continue to avoid leadership on climate change while U.S. President Barack Obama is blasting away Bush's climate denial policies much faster than expected and putting climate change at the heart of his response to the economic crisis?

Germanwatch will soon issue an analysis paper on the European Commission Communication. Contact Sven Harmeling at harmeling@germanwatch.org

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