Environment ministers from the 27-member bloc met in Luxembourg on Wednesday (21 October) to thrash out the position that the European Union will take to UN climate talks in December.
But as an international agreement slowly takes shape, the question of what to do with the billions of unused pollution credits accumulated during the 2008-2012 period has become the "elephant in the room" for negotiators.
"There is a lot of money involved," said the European Commission's environment spokesperson Barbara Helfferich. "We haven't clarified our position on this in detail," she told EurActiv after the ministers' meeting on Wednesday.
Under the Kyoto Protocol, countries were granted a certain number of permits to release greenhouse gases in the atmosphere called Assigned Amount Units (AAUs), which are equivalent to one tonne of CO2.
Kyoto targets were decided based on 1990 emission levels. But in the wake of massive deindustrialisation that followed the fall of communism, Eastern European countries are now finding themselves sitting on a huge stockpile of unused pollution credits.
"The Russians have accumulated something like five billion units" during 2008-2012, said an EU diplomat from one of the large EU member states. "This is enormous," he added, saying the amount is equivalent to the effort expected from the entire EU during the upcoming 2013-2020 period.
"We have a big problem of hot air in the system," the diplomat said.
Stefan Singer, director of global energy policy at WWF, warned that the possibility for Russia and Ukraine to carry over their surplus credits after 2012 would probably "sink" international climate talks.
"This amount is more than the entire annual emissions of the EU 27 and may - if traded and sold - sink any environmental integrity of targets for developed countries," he told EurActiv.
Britain and Germany said they wanted to kill off the excess permits, arguing that they undermine the system.
Russia is not the only country to have hot air problems. Ukraine for instance is expected to hoard nearly 2.4 billion units over the 2008-2012 period, according to figures circulated in European chancelleries. And the ten Central European countries that joined the EU in 2004 are expected to collect 2.2 billion in total.
EU diplomats are now working on possible solutions to the problem. One "extreme" option would be to cancel surplus carbon units after Kyoto expires, an option favoured by environmentalists.
However, such a radical option is likely to meet with fierce resistance from Russia and Eastern European states, which can argue that the units were granted under a legally-binding international treaty. Moreover, it would be unfair to countries which have made genuine efforts to meet their Kyoto targets.
Another "extreme" solution – allowing Russia and other countries to carry over the full amount of surplus credits after 2012 – would have dramatic consequences for the EU as such a huge injection of unused credits would send the fledgling carbon market crashing down.
To prevent such an outcome, the EU diplomat said developed countries would have to tighten their objectives in order to match the transferred surpluses. "So for example, instead of reducing greenhouse gases by 35 to 40%, we would need to do 38 to 53% cuts to absorb the surplus," he said.
East West EU-divide over 'hot air'
The "hot air" issue is also creating headaches inside the European Union. This is because Eastern member states stand to lose the most from a possible decision to outlaw credit 'banking' after Kyoto.
"For example, within the European Union, the Hungarians, which have a surplus, are saying that the EU should buy up the surplus from the Community budget," the EU diplomat said.
"In the end, we will find a solution," the diplomat assured, saying that "several options" are being examined.
A middle ground could be found by requesting that a 'discount factor' be applied to surplus credits that are carried over beyond 2012. The discount factor could amount to 80, 50 or 30%, the diplomat said. Another solution would be to have the 'compensation effort' created by surplus banking borne out only by certain countries.
Overall, Europe is within its Kyoto targets but there are wide disparities internally between member states that are meeting their objectives and those that are not. The UK, which has switched from coal to gas, is on course to meet its target but – like France – only has a small surplus. Germany is expected to fall close to its Kyoto target and so is expected to be left with virtually no surplus or deficit.
"On one side you have the Mediterranean countries – Italy, Spain, Greece – which are outside their [Kyoto] target and on the other the new member states which have had de-industrialisation since the 1990s and are well within their objective," the EU diplomat said.