EU Emissions Trading System (EU ETS)
A cornerstone of the Fit for 55 package is the substantial revision of the EU ETS to take account of the higher level of ambition for carbon reductions by 2030. Proposals include:
- lowering the emissions cap in line with the new 2030 target.
- extending the EU ETS to the maritime sector over the period 2023 to 2025.
- phasing out free allowances for the aviation sector.
- introducing a separate emissions trading system for road transport and buildings. This will be done in a separate system focused on upstream fuel suppliers which will be operational from 2026.
- introducing a carbon border adjustment mechanism (CBAM) by 2026 - see further below - and end free allowances in those sectors covered by CBAM.
Together, these measures are likely to result in an increase in European Union Allowance prices, which ultimately will be passed onto consumers in higher prices for goods and products.
Effort Sharing Regulation (ESR)
The ESR looks to "share" the effort of addressing emissions from buildings, transport, agriculture, waste and small industry across the EU Member State. Fit for 55 looks to tighten up existing ESR targets to deliver an EU-wide reduction of 40% in emissions from these sectors by 2030 against 2005 levels. National targets are based on GDP per capita to reflect each Member State's ability to act, with adjustments made to take national circumstances and cost effectiveness into account.
The EU hopes that broadening out the ESR's scope will drive changes in public and private investments, consumer behaviour and business practices towards less carbon, in lieu of much stronger regulation of the sectors within scope (eg in fuel standards, renewable energy, energy efficiency and taxation especially.
Carbon border adjustment mechanism (CBAM)
CBAM would require all non-EU countries, non-EEA countries, and Switzerland to report emissions embedded in the aluminium, cement, iron, steel, electricity and fertiliser products they import, and to buy certificates to account for them. The aim is to minimise 'carbon leakage' from producers relocating outside the EU simply to avoid its stringent carbon requirements, and would complement the EU ETS. The mechanism would start to come into effect from 1 January 2023 with full implementation by 1 January 2026.
The EU's impact assessment found that CBAM should reduce carbon leakage by almost a third by 2030, amounting to a 1% reduction in EU emissions overall. The proposed revision to the ETS would incrementally remove the free allowances given to the sectors most at risk of carbon leakage, between 2026 and 2025.
CBAM has already created international friction and will continue to do so. The Commission has stated it is designed to comply with the World Trade Organisation's non-discrimination rules. However, that does not mean challenges won't be brought forward in the face of a perceived infringement, and the EU may have to rely on diplomacy or an environmental exception under GATT. For example, Article XX(b) or (g), which allow for "protection of human, animal or plant life or health" and the "conservation of exhaustible natural resources", although there would be a high threshold for success of any defence relying on these exceptions.. Already, the US and China have expressed concerns.
There is a good chance that the UK will develop its own version of CBAM to mirror moves at EU level as it has done on a number of other climate change fronts. Russia, Turkey and China are the trading partner countries mostly likely to be hardest hit under the current proposals (but can ameliorate this by introducing their own carbon pricing policies which the CBAM would then take into account).
Social Climate Fund
Accompanying the introduction of emissions trading for road transport and building, the Social Climate Fund looks to offset the additional burden that might have on those most at risk of energy and mobility poverty, by providing dedicated funding. The EU describes this as an effort to ensure a just transition, and no doubt is in part a response to the concerns that initially drove the gilets jaunes.
The fund is to provide €72.2 billion from 2025 to 2032 to "vulnerable low and middle-income households, transport users, and micro-enterprises" affected by building and transport emissions trading. Support is expected to flow towards investments to increase energy efficiency in buildings, clean heating and cooling, and integrating renewable energy in a way that sustainably reduces CO2 emissions and energy bills for vulnerable households and micro enterprises. It will also finance access to low or zero-carbon transport.
Renewable Energy Directive
Deeper decarbonisation requires the revision of the EU's 2030 target for renewable energy in final consumption of at least 32% by 2030 set out in the Renewable Energy Directive (recast) 2018/2001 (RED II). The Fit for 55 package proposes a new target of 40%. This target is only binding at the EU level (as before), but the Commission proposes that the EU target is complemented by indicative national contributions, showing what each Member State should aim for to reach the collective target. The scale of the ambition cannot be overstated: the revised target effectively requires a doubling of the share of renewables in the EU's energy mix in the next decade.
The Fit for 55 package also revises the renewable energy sector sub-targets including:
- a new indicative EU-wide target of 49% of renewables in energy consumption in buildings by 2030.
- new targets for renewable energy in industry: an indicative target of an annual average increase of renewable energy of 1.1 percentage points (ppts) and a binding target of 50% for renewable fuels of non-biological origin (RFNBOs) (such as electrolytic or green hydrogen) used as feedstock or as an energy carrier.
- increasing the target for heating and cooling from 1 ppt to 2.1 ppt of energy from renewable sources and from waste heat and cold in district heating and cooling.
- increasing the target for renewables in transport by setting a 13% greenhouse gas intensity reduction target, increasing the sub-target for advanced biofuels incrementally up to 2.2 % in 2030, and introducing a 2.6% sub-target for RFNBOs.
In addition to the revision of the renewable energy target and sector sub-targets, a number of other measures are proposed to facilitate the integration of renewables into the economy. These include changes to the guarantees of origin scheme, tighter restrictions on biomass generation, better labelling of renewable energy used in industrial products, greenhouse gas emissions saving criteria for RFNBOs (such as green hydrogen) and recycled carbon fuels, measures to promote the entry into of corporate renewable power purchase agreements, and obligations to improve cross-border cooperation.
Whilst many of the proposals may appear highly technical, as has been seen with the 2009 renewable energy directive, the revision of RED II is expected drive investment in renewable energy, alternative fuels and in related infrastructure. As a result, if adopted, it is pivotal for the EU's economy.
Energy Efficiency Directive (EED)
The changes to the EED would see annual energy savings obligation for Member States almost double, along with a target for the public sectors to renovate 3% of its building each year to bring down energy usage.
Energy Taxation Directive (ETD)
The proposed revision to the ETD is to align minimum tax rates for heating and transport fuels with EU climate objectives whilst mitigating negative social impacts. Exemptions for aviation and maritime transport, for example, will be removed, as will incentives for the use of fossil fuels, in favour of promoting the uptake of clean fuels. There will be a move away from volume-based taxation to focus on energy content and environmental performance so that the greatest pollutants bear the highest rates of tax.
Relatedly, in reviewing the State aid guidelines for environment and energy, the Commission has said it will pay particular attention to making sure they mirror the ambition and scope of the EU's Green Deal.
Alternative Fuels Infrastructure Directive (AFID) and vehicle emissions standards
Tighter emissions standards for cars and light commercial vehicles have been proposed that would require emissions from new cars to drop by 55% in 2030 and 100% by 2035 against 2021 levels, reflecting the average life of cars in service today. In effect, this means no new internal combustion engines and the need for a dramatic shift towards producing electric vehicles and the infrastructure that will support them. Other types of vehicle would not be affected (yet).
The AFID accordingly also imposes an obligation on Member States to install interoperable and user-friendly charging points for electric cars and hydrogen pumps and aims to help drive update on non-fossil fuel burning vehicles, in conjunction with higher carbon prices.
'ReFuelEU Aviation' and 'FuelEU Maritime'
As a complement to the ETS, the Commission has also proposed measures to promote the uptake of sustainable aviation and maritime fuels, which the International Maritime Organization and Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) are also promoting.
Jet fuel would be greened by imposing a 'blending mandate' requiring all aircraft leaving the EU to refuel using green jet fuel, building incrementally to 63% in 2050. The upcoming Zero Emission Aviation Alliance will also work to ensure market readiness for aircraft configurations based on hydrogen and electricity.
Ships would be made more sustainable by imposing a limit on the greenhouse gas content of the energy they use, regardless of their flag and whether they are coming to or going from the EU.
Both measures are complemented by the revised Energy Taxation Directive, which will close loopholes for polluting fuels and make cleaner fuels more attractive, including imposing a minimum rate of tax on aviation fuels used for intra-EU business and pleasure flights (cargo flights and those to international destinations would be exempt).
Land Use Land Use Change and Forestry Regulation (LULUCF)
As the EU states "the twin climate and biodiversity crises cannot be treated in separately… we either solve the climate and nature crises together, or we solve neither". The bloc is therefore aiming for climate neutrality in land use, forestry, and agriculture by 2035 through a natural carbon sink target and a plan to plant three billion trees across Europe by 2030.