The EU is anxious to reduce member states' reliance on fossil fuels
EU leaders are struggling to keep the 27-nation bloc's green energy targets on track amid strains caused by global economic turmoil and fears about unfair competition.
The EU's post-Kyoto targets for cutting greenhouse gases and boosting use of renewables are meant to set an example for the rest of the world. A key part of the plan is the Emissions Trading Scheme (ETS).
France - current holder of the EU presidency - is determined to get a deal on a far-reaching climate change package before next year, but the details are being fiercely debated.
What are the main arguments for these targets?
Responding to the challenge of climate change is "the ultimate political test for our generation," according to European Commission president Jose Manuel Barroso.
Many regions of Europe are vulnerable to climate change impacts, the European Environment Agency says - especially mountainous areas, coastal zones, the Mediterranean and Arctic.
Climate specialists, including the EEA, say northern Europe is getting wetter and the south drier, Arctic summer sea ice is melting faster than expected, many plant and animal species are moving further north and uphill.
Soaring oil and gas prices have made Europe's reliance on imported fossil fuels much more costly - and provided a strong incentive for developing renewables.
The rising cost of energy has also prompted the European Commission to call for a 20% increase in energy efficiency by 2020.
Yet the challenges are so great that the EU ought to have more ambitious targets, some environmentalists say.
What is the ETS?
Launched in 2005, the ETS created a market in carbon emission permits, aimed at giving industry a commercial incentive to reduce greenhouse gases.
Power stations, refineries and other heavy polluters receive permits which can be traded. If an installation's carbon dioxide (CO2) emissions are higher than the number of permits it has, it must buy extra allowances from other installations which are lower CO2 emitters.
The ETS currently covers about 10,000 industrial plants across the EU, accounting for about 40% of the EU's total CO2 emissions. Each permit is equivalent to one tonne of CO2.
The success of the ETS is crucial to the EU achieving its goal of a 20% reduction in emissions by 2020, compared to 1990 levels. That goal will be extended to 30% if a new international agreement is reached.
How will the ETS develop?
The EU is now planning for the period 2013-2020. The first phase of the ETS covered 2005-2007, the second phase 2008-2012. The second phase coincides with the Kyoto Protocol time scale.
Under the 1997 Kyoto deal, the EU is required to cut its CO2 emissions by 8% from 1990 levels by 2012. According to the latest projections, the EU is on track to meet the Kyoto targets. The figures apply to 15 EU nations - the others joined the bloc later.
In the first and second phases, the ETS only covered CO2, whereas in phase three it will also include nitrous oxide and perfluorocarbons.
In phase three, there will be one EU-wide cap on the number of carbon permits, instead of the current system of national allowances for each member state.
The national allowances are now the subject of hard bargaining. Eight new member states in Central and Eastern Europe argue that their CO2 caps do not reflect the progress they made in cutting emissions by closing down communist-era industrial plants in the 1990s.
A row has erupted over the commission's proposal to take 2005 as the baseline year for setting new targets. Poland, heavily dependent on coal-fired power stations, wants the EU's baseline year to remain 1990, as in the Kyoto accord.
The current ETS allocates firms a fixed number of free carbon permits. But from 2013, the European Commission says, the power sector will have to buy all its permits. The full auctioning of permits will be phased in gradually for other industrial sectors.
There is also opposition to that plan, with industry groups in Germany and Italy lobbying hard to delay the start of full auctioning.
Italy's Prime Minister Silvio Berlusconi says the current climate package would impose too big a burden on business, at a time of economic hardship.
EU leaders agreed on 16 October that the climate package would apply "in a rigorously established, cost-effective manner to all sectors of the European economy", but "respecting each member state's specific situation".
The European Parliament has passed a law to include aviation in the ETS from 2012. Airlines will have to cut emissions by 3% in the first year, compared to 2005, and by 5% from 2013 onwards.
The reason for including aviation is that while it accounts for only 3% of EU emissions, it is producing 87% more CO2 now than in 1990.
Is the ETS working?
The cost of the ETS to European companies is a major concern as their rivals in the US, China, India and elsewhere do not yet face the same pressure to reduce CO2 emissions.
There are fears that, with the economic downturn forcing firms to cut costs, European jobs could be lost through "carbon leakage" - industry moving operations to ETS-free countries.
But EU leaders see the ETS as an effective tool for the rest of the world to adopt in the global drive to minimise the impact of climate change.
Changes to the ETS have been driven partly by complaints about windfall profits made by the big power companies.
In April 2008 the environment group WWF said the free carbon permit scheme allowed firms to pass on to consumers the cost of cutting emissions. A WWF report said German generators dependent on coal power could make 14bn-34bn euros (£11bn-£26bn) from the free handouts.
The full auctioning of permits is expected to resolve that anomaly. In 2013-2020 the EU member states should be able to generate about 461bn euros from the ETS, according to Linda McAvan MEP, Labour Party spokeswoman on climate change. That revenue could be used to invest in carbon capture technology, renewable energy sources and help for developing countries to expand green energy.
What is carbon capture?
Carbon capture and storage (CCS) technology is still in the trial phase, but there are hopes that it can help meet the EU's emission targets.
A pilot project in Germany is the world's first coal-fired power plant to capture and store its own CO2 emissions.
MEPs agree that ETS revenue should be used to finance 12 commercially viable carbon capture plants across Europe, with plans for more in future.
What about CO2 emissions not covered by the ETS?
Under the European Commission plan - which is not yet law - sectors not covered by the ETS will have to cut emissions by 10% below 2005 levels by 2020. The commission is proposing specific targets for each member state - some of the new members in Eastern Europe may actually increase their emissions.
Buildings, transport, agriculture and waste disposal are among the sectors covered. If they fail to meet the targets the member states concerned will face stiff penalties.
MEPs have backed a target of 120g of CO2 per kilometre for cars, to take effect from 2012. The current average is 160g/km. Carmakers had urged transitional measures for their industry until 2015. Cars account for about 12% of the EU's overall CO2 emissions.
What are carbon offsets?
The Kyoto Protocol allows industrialised countries to generate emission credits through investment in emission reduction projects in developing countries. These "offsets" work through a Clean Development Mechanism (CDM).
Critics say some of these projects are dubious and allow firms to avoid seriously reducing their CO2 emissions at home.
The MEPs' environment committee has voted for tighter monitoring of CDMs and a cap on them - over the whole period 2013-2020 they should only account for up to 8% of member states' 2005 emissions.
But the economic downturn has made offsets an attractive option for European industries anxious about the cost of adopting cleaner technologies.
What role does the EU envisage for renewables?
EU leaders have backed the commission's binding target of 20% of the EU's total energy mix - not just electricity - coming from renewable sources by 2020.
The renewables target for the UK is 15% by 2020 - but the UK will have to achieve the biggest increase of any country because it is starting from a very low base.
Wind power already provides about 20% of electricity needs in Denmark and 8% in Spain, the commission says.
The EU is committed to 10% of transport fuels coming from biofuels - but only certified biofuels produced in a sustainable way. They must also produce at least 35% less CO2 than existing fuels.
There is widespread concern that the expansion of biofuel production in some countries has jeopardised food security and helped push up food prices. Critics also say that in some cases, the cost of biofuel production - including deforestation - means little or no CO2 emissions cut is achieved.
The UK government wants aviation to be exempt from the EU's 20% renewables target, because the only existing source of alternative fuel for planes is biofuel.