EU Fit for 55 Package

Wednesday, July 14, 2021 - 12:00pm

On July 14, the European Commission released its “Fit for 55” legislative package, an ambitious set of proposals intended to align EU climate, energy, land use, transport, and taxation policies to achieve the bloc’s 2030 goal of reducing greenhouse gas emissions by 55% compared to 1990 levels. This will be a multi-year undertaking with various elements of the package advancing at different rates.

Fit for 55 is built around three main pillars:

  1. Revisions to the Emissions Trading System (EU ETS), and its extension to maritime transport, buildings and road transport; and the proposed carbon border adjustment mechanism (CBAM);
  2. Measures to address emissions in the transport sector, including: mandatory clean fuels roll out for aviation and shipping; more stringent CO2 emissions standards for road transport; revisions to the Energy Taxation Directive; and mandatory targets for charging infrastructure to support electric and hydrogen-powered vehicles;
  3. Higher targets for renewable energy and energy efficiency, including measures to encourage renewable energy installations and to achieve more energy efficiency in buildings. 


Emissions Trading Scheme (ETS)
The ETS is a cap and trade system, which limits the total amount of greenhouse gases (GHG) that can be emitted annually by covered entities and reduces the cap over time. Companies covered by the ETS buy emissions allowances, which they can trade with one another, and a certain number of free allowances are also distributed. At the end of each year, companies must surrender enough allowances to cover their emissions. “Saved” allowances can used to cover future emissions or sold to another entity.
 
Sectors currently covered by the ETS are power and heat generation, energy-intensive industrial sectors, and aviation within Europe. Together they account for 40% of total EU emissions.
 
The current proposal will inter alia – 

  • Lower the overall emissions cap and increase the annual rate of reductions;
  • Reduce the number of free allowances for all sectors, thereby increasing prices for CBAM sectors, free allowances will begin to be phased out in 2026;
  • Free allowances for manufacturing and aviation to be phased out over 10 years, beginning in 2026;
  • Extend the ETS to maritime sector;
  • Establish a separate upstream ETS for upstream suppliers of fuels used in road transport and buildings, beginning in 2026. Fuel suppliers would be required to report the quantity of fuels they put onto the market and surrender the requisite number of allowances needed. As with other sectors covered by the ETS, this new mechanism will cap and gradually reduce emissions from the road transport and building sectors.

Carbon Border Adjustment Mechanism (CBAM)
Unlike the ETS cap and trade system, the CBAM will require importers to purchase permits to cover the embedded emissions in products that they import into the EU. The certificates will mirror the ETS price. If a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer. 
 
The system, set to launch formally in 2026, will cover a limited number of sectors at first – iron and steel, aluminum, cement, fertilizers, and electricity generation – but will expand over time. These sectors will have initial reporting requirements laid on in 2023 to facilitate the move to the formal launch. 
 
For the CBAM to be WTO-complaint, the EU will need to eliminate the free allowances currently provided under the ETS. 
 
Land Use Change, Forestry, Agriculture
The Regulation on Land Use, Forestry and Agriculture sets an overall EU target for carbon removals by natural sinks (forests, wetlands) equivalent to 310 million tons of CO2 emissions by 2030. The EU also aims to be climate neutral in the land use, forestry and agriculture sectors, including also agricultural non-CO2 emissions, such as those from fertilizer use and livestock. The EU Forest Strategy calls for planting three billion trees across Europe by 2030. Additional complementary measures – including the New Soil Strategy, EU Nature Restoration Law, and Carbon Farming Initiative – will be introduced later in 2021. 

CO2 Emissions for Cars & Vans
A popular headline of the roll out, the proposal would put the EU on a path to end use of the internal combustion engine by 2035. The regulation would require fleet-wide CO2 emissions cuts of 55% compared to 2021 levels by 2030 and 100% by 2035. All new cars registered as of 2035 will be zero-emission.

Revised Alternative Fuels Infrastructure Regulation
Member States will be required to expand charging capacity and hydrogen refueling stations to meet the increase in demand, and the proposal would call for new member state reporting requirements.

ReFuelEU Aviation 
This proposal would oblige fuel suppliers to blend increasing levels of sustainable aviation fuels in jet fuel used at EU airports, beginning with a 2% requirement in 2026 that will increase to 5% by 2030.

FuelEU Maritime Initiative 
This proposal would impose a maximum limit on the GHG content of fuel used by ships calling at European ports, regardless of flag, and would tighten the limit over time. 

Energy Taxation Directive
Would align the minimum tax rates for heating and transport fuels with EU energy and climate policies, aimed at securing revenue for member states from green taxes. The proposal also aims to tax intra-EU travel, not including cargo flights as well as intra-EU maritime travel, with a 10-year transition period. Easily the most politically fraught set of proposals, these measures will require unanimous support from member states to be adopted. 

Renewable Energy Directive
Increase the current bloc-wide 2030 target of energy from renewables from 32% to 40%, with specific targets in transport, heating and cooling, buildings, and industry. The Directive also includes more restrictive criteria for the use of biomass (wood).

Energy Efficiency Directive
Buildings use a substantial portion of the EU’s energy - the new package mandates governments to reduce their energy consumption across the board and renovate 3% of their buildings annually. 
 
Social Climate Fund
Recognizing the social impacts of the proposal, the Commission will establish a Social Climate Fund. Financing would come from the EU budget using an amount equivalent to 25% of the revenues anticipated from the new ETS for road transport and buildings, and will help citizens finance investments in energy efficiency, new heating and cooling systems, and electric mobility. Member states will submit plans for how they’ll spend the money and will also need to come up with matching funds. The Commission proposes to invest €72 billion ($85 billion) for the period 2025-2032.