The EU is justified in claiming leadership on environmental policy. In March 2007, European leaders agreed to cut EU emissions of carbon dioxide by 20 per cent by 2020, rising to 30 per cent if other countries step up to the challenge. The Commission has set ambitious targets for energy efficiency and renewable energy. This is great news as far as it goes. But setting emissions targets is all very well – the hard part is putting policies in place to meet them. In the EU's case, there is also the tricky issue of distributing the EU's overall emissions target among its member-states.

There is no single way to reduce emissions. Regulation, such as the setting of ambitious energy efficiency standards for buildings and emissions standards for cars, will play a big part. There will also need to be considerable state support to facilitate the commercialisation of energy efficient methods of generating energy, such as carbon capture and storage (CCS), and low emissions transport. Emissions trading will also have to form part of any comprehensive strategy to curb emissions of greenhouse gases. This works by setting a limit on emissions of carbon dioxide and by distributing permits to emit the gas to polluters. If a firm emits more than its allowance it has to buy additional permits; unused allowances can be sold. Companies, therefore, have a financial incentive to use energy more efficiently.

The EU’s emissions trading scheme (ETS) is a very ambitious project, and the EU deserves much credit for establishing it in 2005. So far, the ETS has been a qualified success, but it requires substantive reform if it is to make a big contribution to meeting the Union’s emissions targets. A carbon market is only as effective as the institutions that oversee it. The lack of a strong central authority to administer the scheme and short time-frames are fundamental flaws. The Commission is currently finalising its review of the regime and will publish its recommendations in late 2007. These should include a call for fully independent institutions to run and oversee the scheme.

Fears that tight emissions controls could impair Europe's competitiveness are exaggerated. First, there is a strong correlation between high energy prices and energy efficiency. Anything that encourages European businesses to adopt energy efficient technologies will stand them in good stead in a world of increasing energy scarcity, and strengthen the EU’s energy security. Second, tight emissions controls would enable Europe to consolidate its existing lead in many energy efficient technologies, and help European companies to set global technical standards.