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December 13, 2019

EU climate disagreement overshadows budget

The European Council expected to devote the summit dinner last night to the budget discussion, and to be able to agree on climate policy as part of the afternoon session. But disagreement on the climate-neutrality target dragged on, pushing the budget off of the meeting's agenda. In the end, it was not possible to agree on the climate targets either. The marathon session concluded recognising that Poland cannot commit to an objective of climate neutrality by 2050, and putting the issue back on the agenda for the June 2020 Council summit. 

Poland, which is largely dependent on coal for energy production, managed to extract a commitment to including a just transition mechanism in the next multi-annual financial framework. The European Commission will work on a proposal for a €100bn pot. Both Ursula von der Leyen and Angela Merkel seemed convinced that Poland would eventually come around, and that it just needs more time. We are reminded of the establishment of cohesion funds as a central pillar of the EU budget alongside the common agricultural policy thirty years ago. Spain played a key role in this by making structural funds a condition for supporting the Single European Act. In any case, the Just Transition Mechanism ties the climate targets to the budget, including whether this new fund should be part of the structural funds or in addition to them, as well as its size.   

Other partial holdouts include the Czech Republic, which depends on nuclear energy as well as coal. The Czechs agreed to the climate-neutrality target, but on condition that the summit conclusions include language recognising that some member states use nuclear power as part of their energy mix, which member states have the right to choose. This may sets the Council on a collision course with the Parliament again. Last week's inter-institutional political agreement on the sustainable investment taxonomy got around the disagreement on nuclear energy by subjecting it to a yet-to-be-defined do-no-harm principle. Green MEPs are convinced that this principle will set so stringent environmental impact conditions as to exclude investments in nuclear power from the sustainable taxonomy. We would not be surprised if other countries where nuclear power is a big part of the energy mix, such as France or Sweden, will be tempted to water down the do-no-harm principle. However, these countries are also fully on board with the climate targets, unlike the Czech Republic whose government can safely be rated as sceptical.

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December 13, 2019

House of Representatives approves law to sanction NordStream 2

The House of Representatives passed legislation to impose sanctions on European companies actively involved in the NordStream2 gas pipeline. The vote came in at 377 to 48 - and formed part of the defence budget law. Ted Cruz and the Democrat Jeanne Shaheen brought in the bipartisan Senate version of the law, which is expected to be approved next week. President Donald Trump said he will immediately sign the legislation into law. He accused Germany of making itself dependent on Russian gas, yet seeking military protection from Nato. 

The main significance of this legislation is the precedent it sets. It establishes the principle of secondary sanctions. And it sends a message to the Europeans that this is not an erratic decision by President Trump, but the result of an overwhelming cross-party consensus. Heiko Maas, the German foreign minister, said the EU would decide its own energy policy. We note with interest that German politicians tend to invoke the EU’s geopolitical interests mostly at the times when Germany’s own material wealth is at stake. 

FAZ has an interesting article explaining that the sanctions are unlikely to have a significant commercial effect. The law only applies to the companies directly involved in the construction, not the investors. Gazprom and the five European investors, Uniper and Wintershall Dea from Germany, Shell and OMV from Austria, and Engie from France, are not directly affected. 

The Swiss company Allseas will be affected because its ships are deploying the pipeline in the Baltic Sea. The new law contains a 30-day moratorium. If Allseas manages to get the pipeline finished in that time, the company will face no sanctions. But the project is behind schedule because Denmark took a long time to grant a licence to allow the pipeline to cross Danish territory. It is not clear that Allseas can finish in time. If it doesn't, the company faces a sequestration of assets and visa bans for its executives and owners. 

FAZ reports that the official reaction of the company was subdued, but there was a lot of disquiet behind the scenes. The paper quotes the chairman of OMV, the Austrian investor, as saying that the US sanctions law was a diplomatic offensive directed at Germany in particular. It was time for Brussels and Berlin to prepare counter-sanctions. But the paper writes that Shell, Uniper and Wintershall Dea did not agree with that position. Phil Hogan, the new EU trade commissioner, is also taking a wait-and-see position for now, until there is more clarity on the sanctions themselves.

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