The European Commission Proposes to Raise Climate Targets Across Sectors Under the Fit for 55 Package to Further Decarbonize the Economy

Yesterday, the European Commission published the long-awaited “Fit for 55” Package designed to drive forward the EU’s objective to radically reduce dependence on fossil fuels. As European Commission President von der Leyen stated in the press conference, the “fossil fuel economy has reached its limits”. Consisting of over a dozen initiatives, including both new and revised proposals, it aims to ensure that the European Green Deal’s objective of reducing carbon emissions by at least 55% below 1990 levels is met by 2030, ahead of the 2050 climate neutrality objective.   Main takeaways from the climate proposals:

• Carbon pricing under the Emissions Trading Scheme (ETS) remains central to the green transition. Emissions will become costlier as, under the revised proposal of the ETS Directive, the linear reduction factor increases from 2,2% to 4,2%, with the aim of reducing emissions falling under the scope of the ETS by 61 % by 2030. The proposal extends the ETS scope to cover maritime transport for the first time, in respect of intra-EU voyages emissions, and in respect of half of the emissions from extra-EU voyages and emissions occurring at berth­ in EU ports. The proposal also makes free allocations conditional on decarbonization efforts in order to incentivize the uptake of low-carbon technologies. It also proposes new emissions trading for buildings and road transport to be established separately as from 2025 which risk passing on the carbon price to consumers. Further, a separate Directive aims to phase-out free emission allowances in the aviation sector, which has benefited from free allowances since 2012.
• In a similar fashion, under the revised Effort Sharing Regulation (ESR), the Commission’s proposal upgrades national binding targets to achieve an EU-wide reduction of 40% in the ESR sectors compared to 2005 by 2030.
• Lastly, the revised Regulation on Land Use, Forestry and Agriculture sets out three transition phases with different objectives. Until 2025, greenhouse gas emissions should not exceed removals; from 2026 to 2030 the EU as a whole should remove 310 million tons of CO2 emissions from use of natural sinks. To that end, the target will be broken down among Member States to determine national binding targets for minimum net CO2 removals. The end goal is to achieve climate neutrality in land use, forestry and agriculture sectors by 2035.

  Main takeaways from the energy proposals:

• The Carbon Border Adjustment Mechanism(CBAM) complements the ETS in seeking to avoid carbon leakage, whereby carbon-intensive production processes are outsourced to jurisdictions with more lenient environmental standards, by imposing a levy on imports depending on their carbon footprint. The mechanism is expected to become fully operational in 2026. Sectors impacted will include cement, electricity, fertilizers, aluminum, and iron and steel. Annex II lists the jurisdictions that fall outside the scope of the regulation while Annex III sets out the methods for calculating the carbon footprint of listed products. Further, to ensure the transition from the system of free allowances to the CBAM, the CBAM will be gradually phased-in, giving traders and importers time to adjust under a transitional period, while the free allowances in sectors covered by the CBAM will be gradually phased-out by 2035. Until this date, the CBAM will only apply to emissions not benefitting from free allowances under the ETS. Steptoe will delve further into CBAM in a separate upcoming note.
• The revision of the Energy Taxation Directive changes the method of taxation whereby taxation shall be based on the energy content of the listed products, and on their environmental performance. Therefore, the aim is to reduce use of fossil fuels by setting higher tax rates than for renewable products, which rates will be lowered, and withdraw tax exemptions for fossil fuels.
• The revised Renewable Energy Directive increases the share of renewable energy in the EU’s energy consumption to at least 40​%, up from 32%. It specifies targets for renewable energy use in transport, heating and cooling, buildings and industry; phases out support for electricity production from biomass from 2026, while allowing for some exceptions; and provides that renewables should account for 49% of the energy used in buildings by 2030. It also calls on Member States to ensure that energy from biomass is produced in a way that minimizes harmful impacts on biodiversity.
• The amended Energy Efficient Directive increases EU-wide binding energy targets for final energy consumption to 36% and primary consumption to 39% -- both targets are up from 32.5% -- which Member States are to reach through national energy efficiency contributions. To be able to assess these non-binding national contributions, the Commission provides a formula on how to calculate them. The annual energy savings obligation is increased to 1.5% of annual final energy consumption as of 2024. Lastly, the public sector is further involved in this effort as the scope of the renovation obligation now applies to all public bodies and in all sectors of their activities.

  Main takeaways from the transport proposals

• Transport represents 29% of carbon emissions. The revised Regulation on strengthening the CO2 emission performance standards requires stricter CO2 emissions standards for cars and vans. In particular, the proposal seeks to accelerate the transition to zero-emission mobility by requiring average emissions of new cars to decrease by 55% from 2030, and by 100% from 2035. This target amounts to a de facto ban on sales of diesel and petrol cars by 2035.
• To support this transformation, the amended Alternative Fuels Infrastructure Regulation requires Member States to install user-friendly charging infrastructures every 60 kilometers for electric charging and every 150 kilometers for hydrogen refueling.
• The aviation and maritime sectors are subject to further obligations under the ReFuelEU Aviation Initiative and the FuelEU Maritime Initiative. The first regulation aims to increase the uptake of sustainable fuels by imposing obligations on both aircraft operators and aviation fuel suppliers. The second regulation aims to stimulate the uptake of sustainable fuels and zero-emission technologies by setting a yearly maximum limit on the greenhouse gas content of energy used by ships calling at European ports.

  Ensuring a socially fair transition The European Green Deal underlines the need for the green transition to be socially just and fair. Therefore, the Commission suggests to launch the Social Climate Fund to provide funding to Member States which in turn should be used to help the most vulnerable citizens finance investments in energy efficiency, sustainable heating and cooling systems, and cleaner mobility. The fund would be financed by allocating 25% of the expected revenues of emissions trading for building and road transport fuels expected to amount to €72.2 billion in funding.   Conclusion The package constitutes a major turning point in the EU’s path to climate neutrality. It is both far-reaching and comprehensive. However, many difficult questions and political choices remain to be addressed in negotiations between the European Parliament and the Council. The proposed initiatives will bring sweeping changes to Member States’ national policies, to companies operating in the EU and beyond, but also to EU citizens. Therefore, the proposals will be subject to close scrutiny from a wide range of stakeholders, inevitably leading to tough debates. In particular, whether the Social Climate Fund will be sufficient to support vulnerable citizens in view of potential additional costs due to the extension of the ETS to heating and road transport, and more generally whether it is the right course of action in contrast to the relatively slow removal of free allowances for industry, will be up for debate. French MEPs in particular have already raised concerns due to the Gilets Jaunes demonstrations. Further, the Carbon Border Adjustment Mechanism is likely to run into pressure exerted by many of the EU’s trading partners as some of their key industries face financial penalties on exports due to their high-carbon footprint. Enshrining the Fit for 55 Package into law will take time due to the importance of the proposals, and due to the Member States’ different interests and starting points, despite an overall agreement on the objectives to decarbonize the economy. In addition, over the course of the two to three years of expected back and forth on the legal texts, the upcoming elections in Germany, Czech Republic and later in France are to be monitored as these could shift the direction of the negotiations.