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Fit for 55 package: carbon pricing in the transport sector

The European Green Deal aspires to reduce the transport sector’s dependence on fossil fuels. In June 2021, the Commission will present the ‘Fit for 55 Package’. This legislative package will have to align the EU’s legislation with the 55% emission reduction target to be achieved by 2030. In order for the transport industry to play its part, the EU is increasing its efforts to put a price on CO2-emissions. Dr2 Consultants will demystify the Commission’s greening efforts within the ‘Fit for 55 Package’ through three illustrative examples of increased carbon pricing across different transport modalities.

1. Eurovignette and CO2-emission standards to decarbonize road transport

The use of road infrastructure by heavy-duty vehicles is regulated through the Eurovignette Directive. The revision of this file has entered the final stages of the decision-making procedure. The co-legislators are currently negotiating whether to replace time-based road charges with distance-based road charges in order to apply the polluter-pays principle, in which the polluter bears the expense of its pollution, as envisaged by the Commission in its original proposal.

The decarbonization of heavy-duty road transport will also be further incentivized by the introduction of a new system of varying road charges based on CO2 emissions. Moreover, the draft revised Eurovignette text allows for discounts for zero-emission vehicles, thereby incentivizing the shift towards clean alternatives.

With regards to passenger cars and light-duty vehicles, which are responsible for 75% of EU road transport CO2 emissions, the EU will table the revision of the Regulation setting CO2 emission performance standards for cars and vans in June this year to make them ‘fit for 55’. The CO2 reduction target for cars, currently set at 15% for 2025 and 37,5% for 2030 compared to 2021 levels, are expected to be sharpened in order to have at least 30 million zero-emission cars on the European roads in 2030. Dr2 Consultants expects that the various carbon pricing measures in the road transport sector will stimulate the market demand for zero- and low emission vehicles, both for passenger as well as freight transport.

2. Extending the EU ETS to the maritime sector

The EU Emissions Trading System (EU ETS), the EU’s instrument to measure and price CO2 emissions per unit, is up for a revision as part of the fit for 55 package. The revised proposal will not only increase its ambition to reduce the number of EU-wide annual allowances (which will significantly drive up the price for CO2 per ton by cutting supply of emissions permits), it is also expected to extend its scope towards other sectors. Where fears for adversely impacting consumers and fuel prices might prevent the road transport sector from being included in the EU ETS on top of already existing CO2 emission standards, emissions from intra-EU maritime transport are likely to become regulated under the EU ETS.

Ultimately, Executive Vice-President Timmermans will decide on the future scope and shape of the revised EU ETS as part of the fit for 55 package. Whereas a closed-system EU ETS would imply a special emission cap for the maritime sector without links to other sectors, an open EU ETS would result in allowances trading with other sectors under the stationary EU ETS. There is also the option for a semi-open ETS in which there are dedicated ‘maritime allowances’ while access to emission allowances under the stationary ETS remains intact. On top of this, there is the question how the revenues flowing from the EU ETS will be earmarked.

Dr2 Consultants expects that a future EU ETS will reflect the inherently international character of the maritime sector. As global measures remain critical to decarbonize the maritime sector, we expect the Commission will try to preserve the competitive position of the EU at a global level. In view of the decarbonization challenges for the sector in the next decades, we expect that the revenues deriving from the EU ETS will be earmarked for research and innovation to stimulate the greening of the sector.

3. Revising energy taxation: end fossil fuel subsidies and incentivize green alternatives

The Energy Taxation Directive (ETD) sets the rules for the taxation of energy products such as motor fuels or electricity. The Directive has not been successfully revised since its introduction in 2003 as it requires unanimity in the Council. However, the file is up for revision as part of the fit for 55 package in order to contribute to the EU’s climate objectives and to end existing tax exemptions.

Ending tax exemptions for aviation kerosene, for example, would result in higher tax burdens, thereby incentivizing the transition to using sustainable aviation fuels. Moreover, the revision of the ETD is welcomed by the railway sector, as ending tax exemptions for polluting fuels would accelerate the modal shift, level the playing field between the different modes of transport, and encourage consumers to choose clean alternatives such as rail transport.

Is your business fit for 55?

The Fit for 55 Package will shape the legislative landscape for the upcoming decade, trigger the public debate and impact businesses across the different transport modalities. The revised and updated CO2-emission standards might radically impact your day-to-day business operations. More than ever, having your voice heard is crucial.

Over the last years, Dr2 Consultants has built up a track record in advising a broad range of transport clients in navigating the EU ecosystem. Would you like to know more about what the upcoming ‘Fit for 55 Package’ means for your organization? Feel free to reach out or visit our Transport Sector webpage.

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