EU Fit for 55 Package Summary – Part 1

Published on July 26, 2021

Twenty four years ago in 1987 at Stanford University in California, John Browne (one of the most influential petroleum figures of the Anthropocene) delivered a seminal speech committing BP to a series of actions to counter global warming and climate change. Big Oil had begun to feel the heat. In the intervening period, the “Inconvenient Truth” has slowly imbued itself in the psyche of the Global North and, especially in the last few years, there has been an acceleration in affirmative action.

And how necessary this acceleration is, when one considers that the world may be on its way to a 2100 scenario of a 2.4 – 2.9 degree climate warming post the pre industrial average. To set this in context, the Paris Agreement goal has been for a 1.5 degree change.

It is in this context that the EU issued on 14th July a proposed legislative package (“Fit for 55”) to enable a 55% reduction in GHG emissions from 1990 levels by 2030 in order to meet the heroic Net Zero by 2050 target.

The proposals are part of a wider Green Deal reform package intended to make almost every sector of the EU economy contribute to the climate goals. The reforms are subject to EU Parliament and Member States approval in the EU Council and, as such, are not guaranteed to go ahead.

Energex’s Ulrich Arnheiter has reviewed the proposals and in the first piece of three, he examines the updates to existing laws. Subsequent pieces will review new legislative proposals and lastly, he will offer an assessment of the proposals.

There are 13 legislative proposals in total with updates to existing EU laws and directives:

  • Revision of the EU Emission Trading System (EU ETS)

  • Revision of the regulation on Land Use, Land Use Change and Forestry (LULUCF)

  • Revision of the Effort Sharing Regulation (ESR)

  • Amendment to the Renewable Energy Directive (RED)

  • Amendment to the Energy Efficiency Directive (EED)

  • Revision of the Alternative Fuels Infrastructure Directive (AFID)

  • Amendment of the regulation setting CO2 emission standards for cars and vans

  • Revision of the energy taxation directive (ETD)

EU Emission Trading System (EU ETS)

These are the most significant EU ETS reforms since inception in 2005. Together they represent an overall EU ETS reduction target of 61% by 2030 which is more ambitious than the overall 55% reduction (itself revised up from the existing 40% by 2030 target) which highlights the leadership of the EU ETS. In the existing ETS, only power generation, energy intensive industrial emitters and EU aviation have been included.

Increased coverage:

  • The scheme will be extended to include shipping: the maritime transport sector will be phased in between 2023-2025 with full compliance as of 2026; emissions limits will apply to voyages within the block and 50% of emissions from trips between the EU and non-member states will be captured. Also included are measures covering pollution discharged at berths in EU ports.

  • Creation of a separate ETS for fuel distribution for buildings and road transport. This ETS will be operational from 2025 with a cap on emissions set from 2026. This cap will be reduced annually to yield emissions reductions of 43% in 2030 compared to 2005.

  • Buildings and road transport are already covered by the effort sharing regulation (ESR) and are expected to remain so via national targets. This new ETS would be based on full auctioning of allowances and would have its own Market Stability Reserve and cost containment measures as per the existing ETS. The motivation is clearly to achieve carbon reductions at a level closer to that which has been observed in those sectors already covered by the ETS.

Tightened scheme:

  • It is proposed that the pollution cap of total emissions (allowances in circulation) shrinks each year by 4.2% (vs. a reduction rate of 2.2% in the current ETS phase to 2030) – the so-called linear reduction factor. This would be complemented by a one-off “rebasing” in the cap on emissions in 2023 to be in line with the new level of annual reduction having been in place from 2021.

  • Free allowances will be gradually reduced to zero by 2035. No more free allowances are to be provided to sectors covered by the CBAM. Free allowances will be made conditional on decarbonisation efforts in order to incentivise the uptake of low-carbon technologies.

Compatibility with other schemes:

  • Alignment of the EU ETS with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is planned.

Modernization Fund

  • An increase in the size of the Innovation and Modernisation Funds is contemplated. Member States must use all ETS revenues for climate-related purposes.

  • Revenues from the auctioning of allowances are to be partially channelled into the Innovation Fund and the Climate Action Social Facility, and partially used by Member States to invest in buildings and transport decarbonisation.

Land Use, Land Use Change and Forestry (LULUCF)

Expansion of carbon sinks:

  • The current requirement ensures that CO2 sinks do not shrink this decade. This will turn into an EU target to expand the EU’s sink to absorb 310 million CO2e per year by 2030. This target will be met by giving each Member State a legally binding goal. This will afford better protection for forests and wildlands.

  • Starting in 2031 agricultural emissions of gases, including methane, will be accounted for in the EU net carbon sink tally.

  • A system of carbon removal certificates will be established that farmers and foresters can sell to polluters needing to balance their emissions, creating a financial incentive to store carbon.

Effort Sharing Regulation (ESR)

Tightened country targets in non ETS sectors:

  • It is intended that country targets in non ETS sectors will be tightened via the revision of the binding annual emissions reduction targets in non-ETS sectors for each EU country for the period 2021–2030, always according to GDP per capita and always adjusting to reflect cost-effectiveness.

Renewable Energy Directive (RED)

Increase of renewables market share

  • In an important tightening of objectives, the market share of renewable energy will, by 2030, increase to 40% (replacing the prior “at least 32%” target). Specific targets are proposed for renewable energy use in transport, heating and cooling, buildings and industry.

  • The achievement of higher shares of renewable energy sources in final EU energy consumption depends on national contributions from each Member State.

Sustainability criteria:

  • Sustainability criteria for the use of bioenergy are strengthened, for example by applying the existing land criteria (e.g. no-go areas) for agricultural biomass also to forest biomass and by applying the existing greenhouse gas saving thresholds for electricity, heating and cooling production from biomass fuels to existing installations (not only new installations). Strengthened sustainability criteria for forest biomass should have positive impacts on biodiversity, contribute to the carbon sink and reduce air pollution. Provisions are added to minimise the negative impact of harvesting on soil quality and biodiversity.

  • Minimum thresholds of the sustainability and greenhouse emissions saving criteria will apply to different fuel types.

Energy Efficiency Directive (EED)

Tightening of energy efficiency savings

  • The existing energy efficiency directive aims to achieve savings of “at least 32.5% compared to projections of the expected energy use in 2030”.

  • The target is currently non-binding, but the European Commission now plans to make it a legal obligation and increase the target to 36%. This is an EU wide as opposed to national target.

Alternative Fuels Infrastructure Directive (AFID)

Improve Charging infrastructure:

  • Requires Member States to expand charging capacity in line with zero-emission car sales, and to install charging and fuelling points at regular intervals on major highways: every 60 kilometres for electric charging and every 150 kilometres for hydrogen refuelling by 2025.

  • Requires that aircraft and ships have access to clean electricity supply in major ports and airports.

CO2 emission standards for cars and vans

Tighten vehicle carbon budgets

  • The regulation allocates vehicle manufacturers a carbon budget based on the weight of vehicles registered in a given year. Should emissions exceed the CO2 target assigned, the manufacturer must pay a penalty on the excess emissions. This carbon budget has been tightened as the EU pushes to end tailpipe emissions, with hefty penalties for carmakers who fail to meet the target. The move is widely seen as laying the groundwork for an EU-wide switch to electric mobility.

  • Emissions will be required to reduce by 55% for cars and by 50% for light commercial vehicles from 2030 and by 100% for both from 2035 (in leaked documents a required reduction of 65% for cars by 2030 had been expected). This marks a significant tightening from the current required 37.5% reduction for cars by 2030. Some observers had suggested that a 60% reduction level would be difficult to achieve for car makers even with plug-in hybrids. However, some carmakers have already announced even more aggressive targets by 2030. This policy clearly will favour the adoption of electric battery vehicles.

  • All new cars sold from 2035 would have to be zero emissions. There is a provision that the 2035 deadline can be postponed to 2040 if manufacturers struggle.

  • Since the average lifespan of a car is around 15 years, the full conversion of the European carpool will take place between 2035 and 2050 when it is believed that electric cars will be affordable. The push by industry to accelerate the rollout of electric vehicles is expected to help the passage of this legislation without too much resistance.

Energy Taxation Directive (ETD)

Remove fossil fuel incentives

  • The current 2003 EU Energy Taxation Directive incentivises fossil fuel usage rather than cleaner alternatives. The principles of the reform starting in 2023 are that taxation of energy products and electricity should be based on both their energy content and environmental performance, and that different minimum levels of taxation should be allowed for motor fuels, heating fuels and electricity in order to promote greener choices and remove incentives for fossil fuels.

  • An EU-wide minimum tax rate would be applied to polluting aviation fuels – except cargo-only flights, ‘pleasure flights’ and ‘business aviation’ – as well as to polluting waterborne navigation fuel, including fishing vessels. These minimum tax rates would be introduced over 10 years, starting from zero in 2023.

  • The package also contemplates the possibility of tax-exempt renewable electricity, renewable hydrogen and advanced biofuels and biogases, again with a view to promoting greener energy sources.

  • This package is one of the most politically sensitive and difficult to implement given the requirement that EU countries agree unanimously on tax measures.

The above cover the main points where changes to existing EU laws and directives are planned. The next piece to be considered will cover new legislative proposals.