European commission publishes draft climate law: Europe’s “man on the moon” moment?
18 March 2020
These revisions1 are key planks of the Commission’s wider European Green Deal2, which was announced in December 2019. The EU climate law sets a long-term direction of travel for EU climate policies and future legislation, and are intended to give investors and businesses greater clarity on, and help reorient the flow of capital to, more sustainable, carbon neutral investments.
The Commission’s President, Ursula von der Leyen, has described the draft EU climate law as the EU’s “compass for the next 30 years”. However, based on the initial reception the draft law received from some Member States, the proposal could have a rather bumpy ride in its passage through the European Parliament and Council.
Draft EU climate law
The draft EU climate law, which will take the form of a Regulation3, enshrines the EU’s 2050 carbon neutrality objective in law and commits the EU collectively to reaching net zero greenhouse gas (GHG) emissions by 2050. The Commission estimates that existing EU policies and legislation are only expected to deliver a 60% reduction in GHG emissions by 2050, so more drastic action is needed to meet the objectives of the Paris Agreement.
The following are some of the key features of the draft EU climate law.
- It imposes a duty on the EU institutions and Member States to “take the necessary measures” at EU level and national level to meet the 2050 target.
- The Commission will be under a duty to assess whether any draft measure or legislation it proposes in future is consistent with the 2050 target.
- Member States will be will under a duty to develop and implement climate change adaptation strategies and plans. This is bound to grow in importance as the effects of extreme weather, such as storms, flooding droughts and heat waves, continue to be felt across the globe.
- By September 2020, the Commission must review the EU’s 2030 target (which is currently set at a 40% reduction in GHG emissions compared to 1990 levels) and explore options for changing this to a 50-55% target.
- By 30 June 2021, the Commission must review how the EU laws that implement the 2030 target (e.g. EU Emissions Trading System Directive, Renewable Energy Directive, Energy Efficiency Directive and Effort Sharing Regulation) need to be amended to meet the new 2030 and 2050 targets. It must consider taking the necessary measures, including the adoption of legislative proposals to amend that legislation.
- The Commission is given the power to set a trajectory starting from the 2030 target to achieve the 2050 targets via “delegated acts”. That trajectory needs to be reviewed every five years. Article 9 sets out the procedure for the making of these delegated acts. Once the Commission has adopted the delegated act, the act shall enter into force unless the European Parliament or the Council object within a limited timeframe.
- The Commission is required to review progress towards meeting the 2050 target at regular intervals. If a Member State is not making sufficient progress or if their actions are inconsistent with the 2050 target, the Commission has the power to issue “recommendations”. The Member State must take “due account” of the recommendation or explain why it has not done so.
Stakeholders can submit their feedback on the draft EU climate law until 1 May 20204.
Importantly, the draft EU climate law does not change the current 2030 target. The Commission is working on a detailed impact assessment of what it would mean if the current target were changed from 40% to 50-55%. The Commission has said it will publish the assessment in September this year. This has been criticised by both environmental campaigners and a group of 12 Member States, which are pressing the Commission to publish the assessment in June, in order to give the EU sufficient time to come up with a more ambitious action plan for the COP26 climate summit in Glasgow in November. Not all Member States are keen on increasing the interim 2030 target to 50-55% and want to see the Commission’s detailed assessment first, before are any decisions are taken on this.
The other element of the draft EU climate law that has received considerable criticism is the Commission’s power to amend the 2030-2050 trajectory every five years through “delegated acts”. Although the Regulation requires the Commission to consult Member States before adopting the delegated act, once the Commission has adopted the act, the Council and the Parliament would have no power to amend it; just object to it within two months (or four months if there is an extension) of having been notified of the act.
Clearly, we shouldn’t expect the draft EU climate law to have a smooth passage through the Council and European Parliament. In the words of the European Environmental Bureau, the EU climate law is more “man stuck in traffic” at present than “man on the moon”5. Much will depend on the approach Germany decides to take when it takes over the rotating Council presidency in July.
Initial consultation on EU carbon border adjustment mechanism
The Commission had indicated in the European Green Deal that, if differences in levels of climate ambition worldwide persist, the Commission would propose a carbon border adjustment mechanism (CBAM) for certain sectors in order to reduce the risk of carbon leakage.
“Carbon leakage” is when production is transferred from the EU to other countries that have lower climate change standards or when EU products are replaced by more carbon-intensive imports. A CBAM is intended to ensure that the price of imports more accurately reflects their carbon content.
The inception impact assessment on the CBAM, which was published alongside the draft EU climate law, seeks initial feedback on possible policy options6. The initial consultation will run until 1 April 2020 and will be followed by a more detailed consultation in the third quarter of 2020, with a draft Directive planned for the second quarter of 2021. In addition to the general public consultation, the Commission has said there will be a more technical consultation for specialised audiences and that dialogue with third countries will take place through WTO channels.
The Commission has made it clear that the measure would need to comply with WTO rules and would be an alternative to the current carbon leakage measures in the EU Emissions Trading System (EU ETS). At present, certain industries benefit from free EU ETS allowances to encourage them to stay in the EU.
The inception impact assessment suggests a number of policy options:
- a carbon tax on selected products (both on imported and domestic products);
- a new carbon customs duty or tax on imports; or
- an extension of the EU ETS to imports.
The sectors to which a CBAM might apply will need to be scoped to ensure that the measure applies where the risk of carbon leakage is the highest. The Commission will take as its starting point the study currently underway to identify risk of carbon leakage under Phases III and IV of the EU ETS. There has been some speculation that cement is likely to be one of the first sectors to be targeted.
The Commission is hoping, perhaps naively, that an EU CBAM would encourage its trading partners and others worldwide to adopt more ambitious climate policies. Others fear that an EU CBAM could be seen as protectionism by some of the EU’s main trading partners (e.g. US and China) and spark retaliatory trade measures.
Initial consultation on review of Energy Taxation Directive
The Commission also published an inception impact assessment for revision of the Energy Taxation Directive 2003/967, which seeks initial feedback on how to better align the taxation of energy products and electricity with EU energy and climate policies. Revision of this Directive is part of a group of other policy reforms to deliver the new 2030 and 2050 climate targets.
In particular, it is felt that the Energy Taxation Directive does not at present adequately promote GHG emission reductions, energy efficiency or alternative fuels (e.g. hydrogen, synthetic fuels and advanced biofuels) or provide sufficient incentives for investments in clean technologies.
The initial consultation will run until 1 April and will be followed by a more detailed consultation in the second quarter of 2020, with a draft Directive planned for the second quarter of 2021.
4https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12108-Climate-Law. As part of its so-called "better regulation agenda", the Commission invites stakeholders and citizens to provide feedback on new EU policies and laws. They can submit their feedback in relation to legislative proposals during a period of 8 weeks, after which the contributions will be passed on to the Parliament and Council. The Parliament and Council must agree on the text in order for it to become EU law.
6https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism New ideas for EU policies and legislation are outlined in roadmaps and inception impact assessments, which are open for feedback during a period of 4 weeks.
Great Fund Insights: Environmental, Social and Governance (ESG) Regulatory Developments - What fund and asset managers need to knowRead More
Review of the Non-Financial Reporting Directive: towards an EU-wide ESG reporting standardRead More
Culture, compliance, and corporate governance in the new decadeRead More
Global M&A Insights: our deal-making predictions for 2023Read more