EU Fit for 55 Package Summary – Part 3

Published on August 9, 2021

In the previous two postings, the changes proposed to existing legislation, along with planned new legislation, by the EU in their “Fit for Fifty Five” aspiration were outlined. Here we set out some bullet point thoughts and comments on the proposals.

What is controversial:

  • Carbon border adjustment mechanism (CBAM)
  • New ETS for buildings and road transport
  • Timing of phase out of vehicle combustion engines
  • Minimum tax rates on specific polluting sectors (aviation and waterborne fuels)

How to deal with higher costs:

  • One of the main concerns by European governments is the additional cost burden on consumers from these new taxes and market-based measures (as reported by Bloomberg and the Financial Times).
  • The EC must have had this in mind when they included a proposal for a new €72.2 billion Social Climate Fund.
  • Some European countries were not supportive of this distribution mechanism and may seek to oppose or alter the measures.
  • Other countries are likely to seek higher support payments or exemptions.
  • It remains to be seen if the desire to support the Paris Agreement objectives outweighs the reluctance to raise domestic consumer costs (recall the gilets-jaunes!) – the new ETS for buildings and road transport being apparently the biggest political issue.

Leadership of the EU ETS as the flagship policy tool

  • Even before the legislative amendments, the EU ETS covered around 40% of the EU’s GHG emissions. 1
  • With the expansion to new sectors, the EU ETS will resume its key role as the EU’s primary decarbonization policy tool.
  • 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 target which highlights the leadership of the EU ETS.

What is the global impact / impact outside EU (CBAM)

  • A CBAM was signalled several months ago so did not come as a complete surprise.
  • EU keen to show its global commitment and leadership in decarbonization and to spur others to do the same.
  • Compliance with WTO rules could be an issue and there are concerns of trade rifts with the EU’s major foreign trade partners as widely reported.
  • The complexity and institutional requirements also can’t be underestimated and could pose issues. This refers to the transition phase from free allocations and establishing verification systems.

How are new technologies treated (hydrogen)?

  • EU keen to support the growth of the hydrogen economy by including specific targets for green hydrogen in industry and transport.
  • Industry bodies ‘The Renewable Hydrogen Coalition’ and ‘Hydrogen Europe’ commented very positively about the planned increase in renewable hydrogen market share and potential cost reductions from increased deployment. 2
  • As ‘Hydrogen Europe’ pointed out there is a need for dedicated support mechanisms to enable the rollout of renewable electricity and hydrogen projects.
  • Against some resistance, related to the reliability and safety of CCS solutions and the appropriateness to support natural gas based technologies, low carbon hydrogen involving natural gas and CCS is also promoted on the basis that this is needed to meet the ambitious targets.

Next steps:

  • Negotiations expected into 2023.
  • Consider support mechanisms to help achieve specific goals (example hydrogen rollout and carbon contracts for difference (CCDs) – mentioned in the legislation – as a tool to offer reward above market prices for emissions reductions).
  • EC made it clear they want to gradually phase in reforms with key EU ETS reforms only fully operational by 2026.

It is abundantly clear that the “Fit for 55” package is aspirational. How realisable it will be is another matter given the need to pull all the EU countries into the necessary law making.

The conditional probabilities associated with this are very significant. Yet it demonstrates a clear seriousness of purpose, a definitive direction of travel and puts down a solid marker to other jurisdictions.

In the business of climate change and net zero carbon, there is no room for scepticism or for concerns over do-ability. Nor is there much concern over costs. Yet the most important issue will be none of these, it will be whether the policy makers can bring the people along with them on a journey that will involve them in significant costs and significant changes in the way in which they are able to lead their lives.

References:

1 https://ec.europa.eu/clima/policies/ets_en

2 https://www.euractiv.com/section/energy/news/eu-green-hydrogen-plans-hailed-as-true-game-changer-by-industry