Fit for 55 package published

As we discussed in our blog post on the European Climate Law, the previous 40% 2030 target was implemented through three regulations. The legislation for the 55% target covers a broader ambit aimed at delivering the “transformational change needed across [the EU] economy, society and industry”. It comprises 15 new proposals, which together propose 4 new regulations and amend 10 directives/regulations/decisions. It also includes a Commission Communication on the package, as well as a Strategy on Rapid Deployment of Alternative Fuels Infrastructure. The EU Forestry Strategy was originally supposed to be included, but is now expected to be published tomorrow.

The Commission describes the proposals as covering three main pillars of pricing, targets and rules, underpinned by additional support measures to “promote innovation, build solidarity and mitigate impacts for the vulnerable”. 

We will be discussing these new measures in more detail in a series of seminars called “Fit for 55: A deeper dive” and in further blog posts, but in the meantime here is an overview of the some of the key proposals:

Revised emissions trading and anti-carbon leakage measures

Revision of the Emissions Trading System (ETS)

The Commission has found that, as the ETS stands, the sectors covered by it would achieve emissions reductions of less than 51%. As such, it has proposed a number of changes aimed, amongst other things, to strengthen the system to ensure it will contribute to the new 2030 target. These proposals include:

• Reducing the cap on total allowances by increasing the Linear Reduction Factor (LRF, the mechanism which reduces the amount of allowances available each year) to 4.2% (from 2.2% for phase 4). This would be combined with a one-off reduction of the cap.
• Preserving free allocation of allowances initially, but introducing a complete phase-out over a 10 year period starting in 2026. 
• Phasing-out free allocations for aviation, with full auctioning by 2027.
• Implementing Member State notification to EU-based airlines to surrender credits for their 2021 emissions to comply with requirements of Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), a market-based scheme from the UN’s International Civil Aviation Organization (ICAO).
• Expanding the ETS to including maritime activity. This will apply to all emissions from voyages within the EU and 50% of the emissions from voyages arriving at or departing from an EU port.
• Creating a separate but adjacent emissions trading system for the road transport and buildings sectors, which will not benefit from free allocation of allowances. The systems could be reviewed after “a few years” of functioning to consider whether they should be merged.
• Adjusting the Market Stability Reserve (MSR, the mechanism which was introduced to support resilience of the ETS) and introducing a MSR for the new road transport and buildings system.
• Providing that surrender obligations will not apply to emissions that are permanently chemically bound in a product so that they “do not enter the atmosphere under normal use”, which is aimed at encouraging carbon capture-type solutions.

Introduction of a Carbon Border Adjustment Mechanism (CBAM)

The CBAM is a new mechanism aimed discouraging businesses from shifting their operations outside of the EU to jurisdictions with less strict emissions requirements (which is also known as carbon leakage). Carbon leakage can dilute the efficacy of emissions reduction policy. 

The proposed CBAM Regulation would set a carbon levy on goods from third countries (excluding European Free Trade Association countries) from the cement, fertiliser, iron, steel, electricity and aluminium sectors, with further sectors able to be added in the future. The price would be based on the price of a certificate on the average closing price of for a EU ETS allowance in the preceding week.

Countries or territories could be excluded from the CBAM where:

• The EU ETS applies to such a country/territory, or
• The third country/territory and the EU have an agreement to fully link their emission trading systems; and
• The price paid in the originating country of goods is effectively free from any rebates, other than those also applied under the EU ETS.

A transitional period would apply, with a phase-in of requirements as the free allocation in the ETS is reduced. The Commission is aiming for the CBAM Regulation to be effective from 1 January 2023, with the bulk of the provisions applying from 1 January 2026.

The CBAM proposals will garner particular attention beyond the EU, with a number of countries already expressing concerns as to whether it could amount to unfair discrimination on their EU exports. The Commission has stated that the measure has been designed to comply with the World Trade Organization (WTO) rules, but the reaction of WTO members remains to be seen.

LULUCF Regulation amendments

Protecting terrestrial carbon sinks from anthropogenic impact can contribute to climate change mitigation. The Land Use, Land Use Change and Forestry (LULUCF) Regulation aims to ensure that the sector where these carbon sinks are sited produces no net GHG emissions. The Commission is proposing to amend the Regulation, including:

• Adding a target of 310 million tonnes of net CO₂ equivalent removals from 2026-2030.
• Expanding the scope to include non-CO₂ agricultural emissions from 2031.
• Requiring increased carbon removals from 2036 onwards to balance other sectors that are exhausting their emissions reductions potential.

Effort Sharing Regulation amendments

The Effort Sharing Regulation (ESR) sets out the binding GHG targets for each of the Member States. It covers sectors not otherwise covered by the EU ETS or the LULUCF Regulation. Currently, these sectors must reduce emissions by 30% relative to 2005 levels. The Commission has found that, on the current trajectory, the ESR sectors will outperform this target, but that it will nonetheless be an insufficient contribution towards the new 55% target.

The proposed revisions update the overall target to a 40% reduction as well as setting new targets for individual Member States. It also sets a review for 2025 to take into account how the current data may have been skewed by the Covid pandemic.

Renewables Energy Directive (RED II) amendments

RED II is aimed at promoting energy from renewable sources. Currently, it has a target of 32% renewable energy by 2030, with sub-targets for particular energy sources. The proposed amendments:

• Increases the target to 40% renewable energy by 2030, including increasing the sub-target for advanced biofuels from at least 0.2% in 2022 to 0.5% in 2025 and 2.2% in 2030.
• Introduces new GHG emissions savings criteria for renewable fuels of non-biological origin (RFNBOs, i.e. non-biomass derived alternative fuels). These will be counted towards revised targets if the GHG emissions savings are at least 70%.  RNFBOs also must be counted in the sector they are consumed. The renewable energy used to produce them does not count.
• Member State support for production of electricity from biomass is excluded from 31 December 2026 unless it meets certain additional criteria. The Commission will report by 2026 on the impact of Member State support for biomass electricity, including the implications for biodiversity and market distortion, with possible further limitations on forest biomass schemes.

Energy Efficiency Directive (recast)

Energy efficiency is an important climate change mitigation strategy and complement to greening energy production. The European Green Deal underlines this by noting that “[e]nergy efficiency must be prioritised”. The current Energy Efficiency Directive sets an aim of increasing energy efficiency by 32.5% by 2030, however the Commission’s analysis indicates this target may not be achieved, and in any event needs to be stepped up.

The Commission proposes a recast Directive which:

• Makes the targets binding and increases them to 39% for primary energy consumption and 36% of final energy consumption by 2030.
• Enshrines in the directive an “energy efficiency first” principle.
• Requires Member States to consider the whole lifecycle of carbon emissions of buildings, included embodied carbon of the materials used in construction and the emissions from use stage. The Commission emphasises the importance of considering reuse and recycling of materials at the end of operational life of a building in design – an issue that was in the news in the UK recently following comments from the Royal Institute of Chartered Surveyors.

CO₂ emissions standards for cars and vans

The Commission notes that transport is the only sector where GHG emissions are on the rise, with emissions from road transport accounting for almost 20% of the total EU GHG emissions. It proposes to amend the current Regulation on CO₂ emissions standards for cars and vans to:

• Increase the 2030 targets for such vehicles from 37.5% to 55% for new passenger cars, and from 31% to 50% for new light commercial vehicles (in each case measured as a reduction from 2021 targets).
• Add a new 100% reduction target for both from 2035 – effectively ending the sale of new petrol and diesel cars and vans form this date.
• Require a Commission review in 2028 of the effectiveness and impact of the amended Regulation.

Sustainable aviation fuels and maritime fuels

The Commission proposes to introduce new regulations relating to sustainable aviation fuels and sustainable maritime fuels.

The proposed Sustainable Aviation Fuel Regulation would require most EU airports (excluding smaller regional airports) a make a minimum amount of sustainable aviation fuel available, including a minimum share of synthetic fuels. A transition period of 5 years would apply starting from 1 January 2025. The Commission is aiming for the new regulation to broadly apply from 1 January 2023.

A new Regulation for Renewable and Low-Carbon Fuels in Maritime Transport would set rules limiting the GHG intensity of energy used on-board by ships arriving at, staying within or departing from Member State ports. It would also require ships to use on-shore power supplies (which reduce both GHG emissions and air pollution) or zero-emission technology whilst at such ports.

Alternative Fuels Infrastructure Directive amendments

The Alternative Fuels Infrastructure Directive aims to set out a framework for deployment of alternative fuels infrastructure, including requirements to make publicly accessible recharging and refuelling points available and to set up markets for alternative fuels. In a review of the Directive under the REFIT programme, the Commission found that the current framework suffers from a number of shortcomings, failing to be a comprehensive and complete infrastructure across the EU.

The Commission proposes to change the framework legislation from a directive to a regulation to avoid inconsistent application across Member States and increase interoperability. The new Alternative Fuels Infrastructure Regulation would set out minimum levels of infrastructure required to support uptake of alternative fuels across all transport modes to support the European Climate Law 2030 target, as well as improving user information and providing adequate payment options.

Next steps

Timing for finalisation of these proposals is unclear. The Commission has been at pains to emphasise that the measures have been designed as an integrated package. However, each proposal will have its own path through the legislative process (for the most part, using the Ordinary Legislative Procedure) and are likely to be scrutinised by different committees within the co-legislators. Views between Member States are likely to diverge given the different mixes of sectors within their domestic economies, and international responses to CBAM could influence the process.

From initial reactions, it seems likely that the package will not have a straight-forward path to the statute books.

Author: Kelly Sporn