Part 2

Following on from Part 1 of the Energex summary of the details of the EU’S proposed updates to existing legislation announced on 14th July as part of the “Fit for Fifty Five” package of measures, Energex’s Ulrich Arnheiter now sets out the new legislative proposals.

New EU legislative proposals:

• EU Forest Strategy

• Carbon Border Adjustment Mechanism (CBAM)

• Climate Action Social Facility

• ReFuelEU Aviation – Sustainable Aviation Fuels

• FuelEU Maritime – Sustainable Alternative Fuels

EU Forest Strategy

Improving forest protection

• This strategy sets a vision and concrete actions for increasing the quantity and quality of forests in the EU and strengthening their protection, restoration and resilience. It aims to adapt Europe’s forests to new conditions, weather extremes and high uncertainty brought about by climate change.

• The strategy also foresees the development of payment schemes to forest owners and managers for providing ecosystems services, e.g. through keeping parts of their forests intact. It calls on Member States to set up, inter alia, under the Common Agricultural Policy (CAP), payment schemes for ecosystem services for forest owners and managers in order to cover for costs and income foregone.

• The strategy is accompanied by a roadmap for planting at least 3 billion additional trees in the EU by 2030.

• In order to have a comprehensive and comparable picture of the state, the evolution and the envisaged future developments of forests in the EU, the Forest Strategy announces a legal proposal on Forest Observation, Reporting and Data Collection in the EU. A harmonised EU data collection system, combined with strategic planning at Members States’ level is paramount to making sure that forests can deliver on their multiple functions for climate, biodiversity and economy as agreed at the EU level.

Carbon Border Adjustment Mechanism (CBAM)

Phasing out free allowances and introducing tariffs on selected imports:

• The aim is to create a level playing field for EU industries, which could be put at a competitive disadvantage as Europe deepens its decarbonisation while others do not. As with free allowances, the aim is also to prevent carbon leakage of carbon intensive industries from the EU.

• Free EU ETS allowances will be phased out for covered industries (initially cement, iron and steel, aluminium, fertilizers and electricity). In return importers of certain raw materials would be required to buy virtual certificates at the prevailing EU Allowance price. This proposal is controversial because there is a risk of double compensation if free allowances continue to be issued while tariffs are levied on foreign businesses importing goods into the EU which do not have adequate carbon pricing mechanisms in place. This creates a risk of non-compliance with WTO rules. No exemptions for the tariffs are expected for developing countries.

• Any carbon price paid in a third country can be fully deducted for the EU importer.

• Emissions embedded in goods are to be calculated based on information to be provided by the importer and verified by an accredited third party.

• The CBAM would be phased in from 2023 with a 3-year transitional period to minimize the impact on trade flows. There is no global precedent for this kind of carbon pricing mechanism as yet.

• Certified importers will have to provide a CBAM declaration annually and surrender a corresponding number of CBAM certificates. Failure to do so will result in a penalty amounting to three times the average price of CBAM certificates. CBAM revenues will be assigned to the EU budget.

Climate Action Social Facility

Redistribution of ETS revenue

• A new €72.2 billion Social Climate Fund for the period 2025-2032 will provide funding to Member States to support vulnerable European citizens most exposed to fossil fuel price increases. The aim is to support building renovations and the uptake of clean cars uptake by vulnerable families and small businesses and to provide temporary lump-sum payments to vulnerable households to compensate for the increase in road transport and heating fuel prices.

• It will be funded by the EU budget using 25 percent of the expected revenues from the new ETS for buildings and transport.

• Member States should use their auction revenues from the ETS for building and road transport fuels to finance parts of their national contributions to the Fund. Member States will design their own Climate Action Social Plans and then ask financial support from the facility, which shall be conditional upon achieving the promised milestones and targets.

ReFuelEU Aviation – Sustainable Aviation Fuels

Increase sustainable aviation fuel supply (SAFs)

• To increase the supply of sustainable aviation fuels (SAFs), the EU is set to impose a blending mandate. All aircraft departing from EU airports will be required to refuel using green jet fuel. The blending requirements are a 2% share of SAF in 2025, moving to 5% in 2030, 20% in 2035, 32% in 2040, 38% in 2045 and 63% in 2050.

• Crop-based biofuels are not eligible, but the Regulation sets out an increasing sub-mandate of synthetic aviation fuels over time. This is necessary in view of the significant decarbonisation potential of such fuels and in view of their current estimated production costs. When produced from renewable electricity and carbon captured directly from the air, synthetic aviation fuels can achieve as high as 100% emissions savings compared to conventional aviation fuel. The blending requirements for synthetic aviation fuels are 0.7% in 2030, 5% in 2035, 8% in 2040, 11% in 2045 and 28% in 2050.

FuelEU Maritime – Sustainable Alternative Fuels

Increase sustainable marine fuel supply

• The FuelEU Maritime initiative aims at increasing the demand for renewable and low-carbon fuels (RLF). This recognizes that there is currently no EU regulatory framework specifically addressing the use of renewable low carbon fuels in maritime transport. There is also currently no mechanism, either at the IMO level or at EU level, to correct for the presence of negative externalities (the indirect costs of emissions that are otherwise not considered) in the sector. Owing to the cross-border and global dimension of maritime transport, a common maritime Regulation is preferred over a legal framework requiring EU Member States to turn EU legislation into national law. EU wide rules are necessary to avoid carbon leakage, which maritime transport is prone to due to its international nature and the possibility to bunker fuel outside the EU, and to avoid arbitrage between competing ports.

• Unlike in aviation, the Commission has decided not to mandate a certain share of green fuels used in shipping but instead opted for a goal-based approach, requiring a maximum yearly average GHG intensity limit to be met for the energy used on-board. This leaves the choice of technology to market operators. This flexibility in fuelling options was strongly pushed for by industry during the legislative consultation period.

• The greenhouse gas intensity targets are based on complex calculations and will tighten over time. The RFL penetration rate will be closely monitored on a yearly basis. The policy will be evaluated five years after its implementation date.

• Given the specific fuel needs of the shipping industry liquefied natural gas (LNG) is among the technologies backed on the grounds that LNG represents the cleanest fossil fuel available at scale. The legislation also encourages the development of more advanced, zero-emissions technologies reducing both air pollutants and greenhouse gases.

• Aside from the FuelEU Maritime initiative the EC proposes to extend the EU ETS to the maritime sector and to increase shipping’s contribution in the Energy Taxation Directive (ETD).

Part 3 of this short series will, in the coming days, pull together an interpretation of the proposed legislative diet and consider the next steps in this process.