* EU toughens energy saving strategy
* Climate chief to say strategy implies 25 pct CO2 cut
* Hedegaard will stop short of setting new CO2 target
(Adds detail, background)
By Pete Harrison
BRUSSELS, Feb 11 (Reuters) - The European Union is overhauling its energy strategy in a way that should put it on track for a 25 percent cut in greenhouse gases by the end of this decade, smashing its own 20 percent target, EU sources say.
But it will stop short of setting a new headline target for now -- avoiding a clash between government and industry -- and instead opt for rigorous energy-saving measures and low-cost tweaks to the carbon market, one of the sources said.
The move sets the scene for a debate on binding targets at a later date.
The EU's 27 leaders last week agreed to improve their enforcement of the EU's 20 percent energy efficiency strategy after hearing they were on track to fall halfway short. [ID:nLDE7130OG]
Next month the EU's energy commissioner, Guenther Oettinger, is expected to warn member states that he will push for mandatory energy saving targets in 2012 if they do not improve their performance. [ID:nLDE7181WV]
That will be backed by new research from EU climate commissioner Connie Hedegaard showing that the energy-efficiency strategy could boost carbon cuts, currently at 17 percent below the EU's baseline, to 25 percent below by 2020 -- way ahead of the official 20 percent goal.
The recommended efficiency measures include improved insulation of homes and better design of industrial motors.
Europe's heavy industries such as steel manufacturing have previously clashed with the Commission over its climate ambitions, fearing that tougher targets might drive up the cost for buying emissions permits from the EU's carbon market, known as the Emissions Trading Scheme (ETS).
The new strategy avoids confrontation with major energy consumers by seeking to limit the impact on their costs and could save the average EU household 1,000 euros ($1,356) per year in avoided energy bills.
"This could be a good thing internationally as it would be more politically acceptable in the short term," said Emmanuel Fages, an analyst at Societe Generale/Orbeo. "It doesn't preclude a 30 percent cut but may allow the EU to do it gradually."
Oettinger echoed industry fears that extending the EU's carbon-cutting goal to 30 percent would force business to relocate outside the EU's borders.
"If we go alone to 30 percent, we will have only a faster process of de-industrialisation in Europe," he told reporters in London late on Thursday.
"We are ready to go to 30 percent if a big global partner such as the U.S. and China follows us, but not without," he added.
With countries including Australia, Japan and the United States recently rowing back on climate action, the option of moving to 30 percent cuts appears to be off the table for now.
Oettinger's stance was challenged, however, by the Climate Group, which represents 30 companies that want a unilateral 30 percent goal including big players such as Vattenfall [VATN.UL], Centrica (CNA.L) and Alstom (ALSO.PA).
"Europe's economy needs a clean industrial revolution to stay competitive," said Climate Group chief executive Mark Kenber.
Climate consultancy E3G said the biggest threat to European competitiveness was more ambitious climate action in China.
"China will pump nearly 1,000 billion euros into lucrative low-carbon markets through sector targets and substantive financing in its upcoming five-year plan," said E3G's Sanjeev Kumar. "By 2020 it will be light-years ahead if Europe doesn't act now."
Although the EU strategy avoids setting a new 25 percent target, it implies further ratcheting down of caps to emissions under the ETS.
Failure to do that would lead to an oversupply of carbon permits as energy-efficiency measures curb the activity of power producers, and that would lead to further erosion of carbon prices.
The answer is to tweak the ETS in unison with action on energy efficiency to keep prices level, and that has to be done before its next trading phase starts in 2013, EU sources said, without providing further details. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a FACTBOX on global plans on climate change [ID:nLDE6AD0HW] For a FACTBOX on energy issues facing the EU [ID:nLDE7130OG] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Additional reporting by Karolin Schaps and Nina Chestney, Writing by Pete Harrison, editing by Rex Merrifield and Jane Baird