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Fit for 55 Policy Update

No. 13 | 21 October 2021

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Dear reader,

Welcome to this week’s edition of Dr2 Consultants’ Fit for 55 policy update. Dr2 Consultants is pleased to provide you with the latest insights on this package of climate and energy legislations, which was presented by the European Commission on 14 July, including updates on the decision-making process and the latest political developments in the EU institutions.

Highlights of the week

EUROPEAN COMMISSION ANNOUNCES WORK PROGRAM FOR 2022: On 19 October the European Commission published its work program for 2022. The program, titled Making Europe Stronger Together, sets out the Commission’s priorities for the next year, divided into six headline ambitions. In the area of environment, energy and climate, the Commission announced a revised list of surface and groundwater pollutants (Q3), a revision of the EU ambient air quality legislation (Q3), a new initiative on a Carbon Removal Certification (Q4), an EU framework for harmonized measurement of transport and logistics emissions (Q4), a revision of the CO2 emission standards for heavy-duty vehicles (Q4), a revision of the restriction of the use of hazardous substances in electronics (Q4) and a revision and merger of the End-of-Life Vehicles Directive and the Directive on the Type Approval of Motor Vehicles (Q4).

The Commission also highlights the measures presented as part of the Fit for 55 package as a priority pending proposals, meaning that it will encourage the Council of the EU and the European Parliament to prioritize work on these files.

POLAND CALLS FOR POSTPONEMENT OF FIT FOR 55 MEASURES AMID ENERGY PRICE CRISIS: In light on the ongoing energy price crisis across the EU, Poland is calling for an analysis of all elements of the Fit for 55 package to assess their impact on energy prices. Should the impact be negative, Warsaw calls for their revision or postponement. Poland specifically cites the revision of the EU Emissions Trading System and of the Energy Taxation Directive as having potential adverse effects. Poland goes as far as proposing its own plan for the EU ETS revision, which would include transaction limits or transaction taxes to limit speculation, as well as measures to restrict the access to the EU ETS to companies whose emissions are regulated at EU level. Poland also demands the creation of new EU financial mechanisms to finance the energy transition.

GERMANY CLOSER TO NEW RULING COALITION: Germany’s Social Democrats (SDP), Greens and Liberals (FDP) have reached a preliminary agreement on a joint program for a ruling coalition. On climate change, the program includes plans to end the sale of internal combustion engine vehicles – in line with the Fit for 55 CO2 emission performance standards reduction measure. If the coalition was formed, it would also work to make Germany the lead market for electromobility, and massively accelerate the development of charging station infrastructure for electric vehicles. The three parties will now enter into negotiations to form a coalition government.

ANALYSTS RAISE EU CARBON PRICE FORECASTS: The surge in gas prices worldwide has led some electricity generators to revert to more polluting coal for power, increasing the demand for carbon allowances under the EU Emissions Trading System. This surge in demand has in turn led analysts to revise their carbon pricing forecasts upwards for the years to come. Compared to forecasts dating from July, the cost of EU ETS allowances is expected to increase by 7.4% in 2021, reaching €55.88/tonne, and by 12.1% in 2022, reaching almost €70/tonne. Although carbon prices could decrease in case gas prices drop, leading to less coal use, analysts warn the current discussions regarding the revision of the EU ETS, proposed as part of the Fit for 55 package, will prevent carbon prices from falling down significantly.

Looking ahead – what’s next?

During the European Council Summit starting on Thursday and continuing on Friday, the Member States will discuss the surge in energy prices and the toolbox presented last week by the Commission to address the crisis. Despite the will of the Commission to deliver a common and united response, negotiations will be tense, and finding common ground appears difficult.

Indeed, Member States already disagree with potential solutions, and even on whether the EU should act at all. Some Member States, such as Greece, Spain, Italy or France have been calling for higher market regulation and for the creation of a joint gas purchasing scheme, but Germany, The Netherlands and Belgium, as well as Austria and Denmark, have already announced they were not in favor. For them, the energy price issue is temporary, and profoundly restructuring the energy market could have lasting adverse consequences.

The discussions will also no doubt be clouded by the ongoing conflict with Poland regarding the rule of law, meaning that the Member State’s proposal to postpone Fit for 55 measures will likely not receive much support.

Final decisions on the Commission’s toolbox should, however, only be made during the Energy Council on 26 October.

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Previous updates

No. 12 | 14 October 2021

Highlights of the previous week

COMMISSION PRESENTS TOOLBOX TO TACKLE ENERGY PRICE CRISIS: On 13 October, the European Commission presented a Communication on Energy prices to address the exceptional rise in energy prices and ensure a rapid and coordinated response. The Commission expects that the energy price crisis will last throughout the winter of 2022. The Communication includes a toolbox that Member States can use to address the immediate impact of ongoing price increases and strengthen resilience against future crises. These measures include emergency income support to vulnerable households, authorization of temporary bill payment deferrals, state aid for companies, and targeted tax reductions. The Commission will also support investments in renewable energy and energy efficiency, examine possible measures on energy storage and purchasing of gas reserves, and assess the current electricity market design. In this Communication, the Commission reminds that the clean energy transition is the best insurance against price shocks in the future.

EU MINISTERS CALL FOR NUCLEAR POWER TO BE PART OF THE GREEN TRANSITION: A group of ten EU Member States, led by France and the Czech Republic, signed a letter to the European Commission calling it to recognize nuclear power as a low-carbon energy source. Energy and economy ministers from the ten involved Member States ask the Commission to include nuclear power in the EU Taxonomy, the EU’s list of sustainable activities. The letter states that nuclear energy is safe, affordable, stable and an independent energy source, which will be needed to produce enough electricity to meet the need of a decarbonized society.

Deep dive – Proposal for establishing a Social Climate Fund

Why create a Social Climate Fund?

As part of the Fit for 55 package, the European Commission proposed a new Emissions Trading System (ETS) for greenhouse gas emissions for buildings and transport (see our policy update No. 3). Moreover, the Commission is also proposing to revise the Energy Taxation Directive (ETD), to impose a higher tax rate for fossil fuels.

However, both measures are expected to lead to price increases for heating and transport fuels in the short-term, impacting end-users such as consumers. It will especially weight on poorer households, who have the least investment capacities for renovating their houses, purchasing energy efficient heating devices, or installing solar panels, or renewing their cars for a low or zero-emission one.

In the impact assessment for the revision of the Energy Taxation Directive, the Commission recognized the short-term risk for consumers, realizing that they might not have the purchasing power for an immediate change in consumption patterns. In presenting the Fit for 55 package, Commission Vice-President, Frans Timmermans, acknowledged that certain households already struggle to pay their energy or transport bills. The risk is even higher considering the recent surge in energy prices.

To mitigate the social impact that the climate measures such as the EU ETS could have, the Commission is proposing to establish a Social Climate Fund. This fund would finance temporary direct income for the most vulnerable households, and also support Member States in adopting measures to reduce emissions in road transport and buildings sectors, limit reliance on fossil fuels and reduce costs for vulnerable households, businesses and transport users. These measures can include renovation programs to increase the energy efficiency of buildings or infrastructure development for increased integration of renewable energy in the country’s energy mix and improved supply of and access to zero- and low-emission transport.

How will it work?

The new ETS for buildings and road transport will also work on a cap-and-trade principle. The cap is planned to decline yearly. Within this cap, all allowances will be auctioned. The new ETS burdens fuel suppliers, who will have to monitor and report the quantity of fuel put on the market, as well as the carbon intensity of the fuels. Based on this reporting, fuel suppliers will have to surrender corresponding emissions allowances. All allowances within the cap will be auctioned, meaning fuel suppliers will have to purchase the number of necessary allowances.

25% of the expected revenues from these auctioned allowances will finance the Social Climate Fund, to an amount of €72.2 billion for the period 2025-2032. The Multiannual Financial Framework, which sets the EU’s budget for the next seven years, will be amended in that sense. The European Commission also plans for Member States to match the ETS funding, so that the Social Climate Fund would in total mobilize €144.4 billion.

A maximum financial allocation will be calculated per Member State, based on total population, the population at risk of poverty living in rural areas, CO2 emissions from fuel combustion by households, the percentage of households at risk of poverty with arrears on their utility bills and the Member State’s gross national income per capita.

To receive the funds, Member States will have to submit Social Climate Plans, to be approved by the Commission, outlining the measures they will take and investments to be made to mitigate the social impact of the transition.

What will be the impact of the fund?

With this Social Climate Fund, the European Commission hopes to prove that the sustainable transition will be fair, alleviating the burden on most vulnerable households. This is necessary to avoid large social resistance against the measures taken by the Commission against climate change.

The Commission also expects that investments driven by the Fund into renewable energies and low and zero-emissions transport solutions will increase market supply and therefore bring prices down.

EU Member States are particularly cautious about the social impact of the Fit for 55 measures, especially in the context of rising energy prices. Although the Commission repeatedly stresses that the energy price spike is due to a shortage of fossil gas, driving prices up, and that reducing the energy dependance of the EU on (imported) fossil fuels will help keep prices down, most Member States expressed worry during the first Environment Council on the file (see our policy update No. 11) that the Social Climate Fund will not be sufficient to shelter vulnerable households from the short-term additional costs brought on by carbon pricing and fossil fuels taxes.

What’s next?

Unlike other Fit for 55 files, the proposal for a Social Climate Fund is not being submitted to consultation.

The proposal has been forwarded to the Council of the EU, where it will be dealt with by the Environment Council. Environment Ministers already held a preliminary discussion on the file on 6 October (see our policy update No. 11). In the European Parliament, the Environment, Public Health and Food Safety (ENVI) Committee will lead the work on the file with MEP Esther de Lange (EPP, The Netherlands) acting as the rapporteur. The Industry, Research and Energy (ITRE), Economic and Monetary Affairs (ECON) and Regional Development (REGI) Committees will provide an opinion.

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No. 11 | 07 October 2021

Highlights of the previous week

EU MEMBER STATES AND COMMISSION CLASH OVER RESPONSE TO GAS CRISIS: The EU is facing a surge in energy prices, plagued by a 17% inflation rate in September, due to a global shortage in gas and coal supply. To face the crisis, and avoid social unrest, many EU Member States have had to adopt short-term measures that indirectly support fossil fuels, in the form of support schemes for vulnerable households. France, Greece and Italy have all announced one-off payments to low-income households, indirectly subsidizing heating fuels. In this context, some Member States, led by France and Spain, as well as Poland, are calling the European Commission to review the EU’s energy market regulation to face the crisis, including the potential creation of a common procurement scheme for natural gas. The European Commission, however, defends accelerating the transition to renewable energies (e.g. wind and solar generated electricity) and improving energy efficiency through building renovation as a way to counter the spike in energy prices. The Commission is joined in this sentiment by Member States relying on energy mixes that include a higher share of renewable energies, such as Finland.

Focus – Examination of Fit for 55 policy files in the Environment Council

Environment ministers of EU Member States gathered on 6 October in Luxembourg to hold their discussion on the Fit for 55 files falling under their remit: the revisions of EU Emissions Trading System, revision of the Effort Sharing Regulation, of the Land Use, Land Use Change and Forestry Regulation and of the CO2 emissions performance standards for cars and vans, and the Social Climate Fund.

The preliminary discussion suggests tense discussions and tough negotiations to come between Member States.

Timmermans’ introduction

European Commission Vice-President, Frans Timmermans, introduced the debate, presenting the package. He reminded that the Commission has never presented a set of legislation so comprehensive and transformational for society. Timmermans framed the discussion, asking to address mainly new elements in the package, namely the extension of the EU Emissions Trading System (EU ETS) to road transport and buildings, which he strongly defended. However, he remained opened to Member States’ proposals for different measures that could achieve the same level of emissions reduction. The issue of effort sharing between sectors and between Member States was also raised, reminding that the package would need to be assesses in an integrated and comprehensive way to ensure a just transition, fair between and within societies. Finally, Timmermans addressed the current energy price crisis, denouncing those who blame the European Green Deal and the EU ETS for price surges, and highlighting that the current situation provides an additional incentive for accelerating the transition to renewable energy.

A few agreements

Member States generally welcomed the package and the 2030 55% emissions reduction objectives. They also shared the opinion that the Fit for 55 package should be apprehended as a whole, implicitly accepting that ambitions could be lowered in certain files if balanced by increased measures in other files. Moreover, they agreed that the transition should be fair for citizens, and that the burden of reducing emissions should be spread across all sectors of the economy.

Member States such as Austria, Denmark or the Netherlands were particularly supportive of the package, even sometimes calling for higher ambitions, especially with regards to the end of internal combustion engines (planned for 2035 by the CO2 standards for cars and vans revision).

Nonetheless, many concerns were raised, and disagreements between Member States already appeared.

Attacks on the EU ETS

The most controversial proposal of the Fit for 55 package, that stirred up the most outcry from Member States, is the revision of the EU Emissions Trading System (EU ETS), and especially the Commission’s intention to create a separate carbon market for transport and building emissions. Most Member States worried about the cost of this measure for vulnerable households and businesses and the risk of increasing energy poverty, fearing it would impact social acceptability of climate measures.

They also raised doubt about the Social Climate Fund, worrying that it would not be sufficient to mitigate these negative impacts. The Commission was asked to provide a better impact assessment of the Social Climate Fund.

Central and Eastern European Member States, such as Hungary, Romania or Poland were the most vehement against the EU ETS revision proposal, stating that it would disproportionally hurt their citizens, and that other measures could just as well limit emissions from road transport and housing.

Coastal and island Member States (Greece, Malta and Cyprus), of which a large share of the economy is dependent on the shipping industry, also denounced the inclusion of maritime transport in the scope of the EU ETS, saying it would hurt their economy and lead to higher living costs.

Still, a few Member States expressed positive views on the proposed revision, especially Finland, due to the crucial role of carbon pricing for reducing emissions.

Battle in sight on Effort Sharing

The preliminary statements of environment ministers with regards to the revision of the Effort Sharing Regulation foreshadow tough discussions on the revised annual national emissions reduction targets it sets. Northern and Western Member States almost all called for “more convergence and alignment” between Member States. The Netherlands notably, called for the revision to already plan for the climate neutrality objective of 2050, already increasing targets with this ambition in sight in order to ensure that Member States do not have to face a steep increase in 2030.

On the other hand, Central and Eastern Europe Member States, such as Czech Republic, warned that the envisioned targets, which are almost doubled for most of them, are too high and not sufficiently counterbalanced by the Social Climate Fund. They asked for the particularities and specific challenges of each Member States to be better considered when defining the targets.

Concerns over LULUCF in the North

Nordic Member States, led by Sweden, which have very important forestry industries, expressed concerns about the revision of the Land Use, Land Use Change and Forestry Regulation (LULUCF), which would set national targets for carbon sinks, limiting their forest harvest capacities. They denounced a lack of understanding of the benefits of forest products for the environment and carbon sequestration.

What’s next?

The Environment Council will meet again on 20 December to further discuss the Fit for 55 package. Bulgaria also called for a joint Agriculture and Environment Council to together assess the revision of the LULUCF Regulation, given the relevance for both Council configurations. In the meantime, Germany might have a new Chancellor and coalition government, which will likely impact Germany’s position and the negotiations.

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No. 10 | 04 October 2021

Highlights of the previous week

MEPs QUESTION HOW TO ACHIEVE CLIMATE NEUTRALITY IN THE TRANSPORT SECTOR: The Transport & Tourism (TRAN) Committee in the European Parliament received Commissioner for Transport, Adinea Valean, on 27 September for a discussion on the Fit for 55 package. The exchange of views specifically addressed three proposals particularly relevant for the transport sector: the revision of the Alternative Fuels Infrastructure Directive and the proposals for new ReFuelEU Aviation and FuelEU Maritime rules. MEPs urged the European Commission to seek and conclude agreements with third countries to align the new stringent rules that the sector will face in order to safeguard its competitivity. MEPs also worried about the costs these measures would have on companies and consumers and asked the Commission to ensure that measures are in place to support vulnerable groups, ensuring a fair transition.

ENVI COMMITTEE EXCHANGES VIEWS ON CO2 STANDARDS AND THE EFFORT SHARING REGULATION: During its meeting on 27 September, the Environment, Public Health and Food Safety (ENVI) Committee of the European Parliament exchanged views with the Commission on two major Fit for 55 files: the revision of the CO2 emission performance standards for cars and vans and the revision of the Effort Sharing Regulation (ESR).

On CO2 standards, MEPs recognized the effectiveness of the proposal to decarbonize the road transport sector. However, many worried about the timing, by which car manufacturers will have to comply with the new standards and the increased costs for industry and consumers. Some MEPs also called for the inclusion of alternative fuels such as hydrogen, or hybrid technologies.

On the revision of the ESR, MEPs agreed that effort sharing was the cornerstone of emissions reduction and recognized the need for increased targets. However, some questioned the lack of recognition for Member States that have already made significant efforts and called for incentives to focus on Member States that are lagging behind. MEPs also questioned the interoperability of the ESR with the EU ETS, and especially with regards to buildings and road transport, which are set to be covered in both systems.

GERMAN ELECTIONS RISK IMPACTING FIT FOR 55 COUNCIL NEGOTIATIONS: The uncertain outcome of the German federal elections, which took place on 26 September risks impacting the Fit for 55 negotiations within the Council of the EU. With social-democrats from the SDP winning 25.7% of the votes, closely followed by the CDU-CSU (24.1%), a coalition will need to be formed by either party to govern. However, both parties have ruled out forming a coalition together, meaning that either will have to reach an agreement with the liberals from the FDP and the Greens. These two parties are not aligned regarding climate policies, with the Greens calling for the end of sales of new petrol and diesel cars, as well as the end of coal-generated electricity by 2030, whereas the FDP follows a much more conservative approach. In any case, negotiations for forming a coalition are expected to drag on, impacting the timing of the negotiation of the Fit for 55 within the Council of the EU. The final coalition and the distribution of ministerial portfolios between the political parties involved will also strongly impact the positioning of Germany in these negotiations.

Deep dive – Revision of the Land Use, Land Use Change and Forestry Regulation

As part of the Fit for 55 package, the European Commission presented a proposal for a revision of the 2018 Land Use, Land Use Change and Forestry Regulation (LULUCF).

What is the LULUCF Regulation?

The LULUCF Regulation, adopted in 2018, sets a binding obligation for each Member State to account for greenhouse gas emissions from land use, land use change and forestry by an equivalent accounted removal of CO2 from the atmosphere.

Member States were already complying partly with this obligation under the Kyoto Protocol, but for forestry only and up until 2020. The 2018 LULUCF obligation enshrined the commitment into EU law for the period 2021-2030 and extended its scope to all land uses. The LULUCF Regulation was intended as an incentive for more climate-friendly land-use at national level and especially the preservation of carbon sinks.

Why revise the LULUCF Regulation?

A revision of the LULUCF Regulation is necessary to increase the carbon sequestration potential of EU land and forests in order to achieve the EU’s target of 55% emissions reduction by 2030. Indeed, the Commission estimates that to reach its climate targets, EU removals will need to nearly double from their current level, whereas European forests, the largest carbon sink in the LULUCG sector, are projected to sequester less and less carbon due to ageing forests and increasing biomass harvests.

Contrary to the current Regulation, the revision also takes into account the synergies between the LULUCF sector and other land-related sectors, especially agriculture, and policies, in particular the carbon farming initiative announced in the Farm to Fork Strategy and the certification of carbon removals announced in the Circular Economy Action Plan, which are both planned to be put forward in 2023.

What is included in the revision?

The revision states that by 2035, the EU should aim to achieve climate neutrality in the land use, land use change and forestry sectors, but also in the agricultural sector when it concerns non-CO2 emissions (such as emissions from fertilizer use and livestock).

To reach this objective, the LULUCF sets a higher carbon removal commitment for the EU as whole. Under the current rules, Member States are committed to ensure that their greenhouse gas emissions do not exceed removals, calculated as the sum of total emissions and total removals, which the Commission calls the “no-debit rule”. With the revision, higher commitments will take effect as of 2026. Between 2026 and 2030, Member States will have to remove the equivalent of 310 million metric tons of CO2. The overall Union target of net greenhouse gas removals of 310 million tons of CO2 equivalent will be distributed between Member States as annual national targets for the period from 2026 to 2030. The Commission will make a proposal for these individual targets in 2025, as well as for post-2030 EU wide targets.

As of 2031, non-CO2 emissions from the agriculture sector will also have to be accounted for and removed. By 2035, emissions from the LULUCF sector and non- CO2 emissions from the agricultural sector should be reduced to net zero by offsetting through carbon removal and those sectors should generate only negative emissions thereafter.

The revision also makes profit of new technologies to enhance emissions monitoring requirements and includes a new system of governance to track compliance of Member States with their commitments.

Finally, the revision plans that from 2036 onwards, the combined sectors will need to generate additional carbon removals to balance remaining emissions in other sectors (e.g. sectors that have exhausted their emissions reduction possibilities), based on a carbon removal certification system to be presented by the Commission in 2023.

What will be the impact of the revision?

Reaching the new targets of the LULUCF Regulation will mean that Member States will have to adopt policies to improve the sustainable management of land and forests and incentivize the uptake of technological solutions for carbon sequestration by land and forest managers.

With this revision, the Commission hopes to incentivize Member States to price increase in emissions, unstainable land management and biodiversity damage (in application of the “polluter-pays” principle), while rewarding carbon sequestration and sustainable land and forest management practices. This should encourage behavioral change for farmers and foresters, prompting them to increasingly take climate action, but also create new opportunities for new jobs in the bio-economy sector and provide incentives for training, reskilling and upskilling.

However, the proposal already causes concern, especially for Nordic Member States who worry about the financial impact on a sector which represents an important part of their economy (in Finland, the forestry sector employs 15% of industrial workers and in Sweden, the forestry industry employs over 60.000 people).

Environmental groups, such as the World Wide Fund for Nature (WWF), however, deplores the inclusion of non-CO2 emissions from the agriculture sector in the scope of the LULUCF, fearing that it will encourage the sector to rely only on offsetting of emissions rather than actively seeking to decarbonize through innovation and new farming practices.

What’s next?

Following the publication of the proposal, the European Commission has opened a feedback consultation period. Stakeholders may provide feedback on the proposal until 15 November 2021.

The proposal will now be forwarded to the Council of the EU, where it will be dealt with by the Environment Council, where work will start on the file with an exchange of views on 6 October. In the European Parliament, the Environment, Public Health and Food Safety (ENVI) Committee will lead the work on the file with MEP Ville Niinistö (Greens/EFA, Finland) being appointed as rapporteur and MEPs Dan-Ştefan Motreanu (EPP, Romania), Delara Burkhardt (S&D, Germany) and Martin Hojsík (RE, Slovakia) as shadow rapporteurs. The Industry, Research and Energy (ITRE) and Agriculture and Rural Development (AGRI) Committees will provide an opinion.

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No. 9 | 24 September 2021

Highlights of the week

TRANSPORT AND ENERGY MINISTERS DISCUSS FIT FOR 55 PACKAGE: EU Transport and Energy ministers met in Slovenia on 22 September to discuss the Fit for 55 package, and specifically the promotion of energy from renewable sources, energy efficiency and challenges posed by the implementation of mass e-mobility. Energy ministers met first to discuss two of the package’s proposals, the revisions of the Renewable Energy Directive and of the Energy Efficiency Directive. Ministers also addressed the rising energy prices in the bloc, stating that mitigating price increase in the future would include reducing import dependency on fossil fuels by focusing on the use of domestic, low-carbon sources. The energy ministers’ meeting was followed by a joint informal meeting of transport and energy ministers. They discussed policy measures and the regulatory framework for planning charging infrastructure for road transport. The debate showed that the transport and energy sectors will have to work hand in hand to find and implement solutions to support e-mobility at regulatory, technological and implementation levels.

CZECH REPUBLIC TO DEMAND CHANGES TO CO2 CAR STANDARDS REVISION: Czech Republic’s Prime Minister, Andrej Babis, announced during an online debate ahead of the country’s legislative elections that the Member States will demand major changes to the Commission’s proposal for a revision of CO2 emissions performance standards for cars and vans. The proposal as it stands now would effectively ban the sale of combustion engines by 2035, which Prime Minister Babis called nonsense, as it would destroy the car industry. He also foresees difficult debates between Member States on the Fit for 55 package as a whole.

EPP GROUP ANNOUNCES GREEN DEAL TEAM: The European People’s Party (EPP) group in the European Parliament announced on 21 September the creation of its “Green Deal” team, composed of five MEPs who have been assigned key roles for Fit for 55 files. Within the ENVI Committee, MEP Peter Liese has been designated as rapporteur for the revision of the EU ETS, MEP Esther de Lange for the proposal on the Social Climate Fund, MEP Jessica Polfjärd will lead the work of the Effort Sharing Regulation, MEP Sunčana Glavak will be rapporteur for the EU ETS as regards to aviation and MEP Markus Pieper has been assigned the revision of the Renewable Energy Directive.

SOUTHERN EU MEMBER STATES PLEDGE COMMITMENTS ON CLIMATE CHANGE: The Heads of State and Governments of Croatia, Cyprus, France, Greece, Italy, Malta, Portugal, Slovenia and Spain, as well as the European Commission President, Ursula von der Leyen, gathered on 17 September for the 8th Summit of the Southern Countries of the European Union. On this occasion, they adopted the Athens Declaration on climate change and the environment. Taking stock of the devastating wildfires that plagued Southern Europe this summer, participating Member States reiterated their commitment towards reaching climate neutrality by 2050, in line with the European Climate Law. To this effect, Member States commit to the objectives of the European Green Deal and to progress on legislative proposals as part of the Fit for 55 package. Member States also made specific commitments on mitigating climate change in the Mediterranean region, with a special emphasis on protecting biodiversity, forests and the marine environment.

Deep dive – Revision of the Effort Sharing Regulation

As part of the Fit for 55 package, the European Commission presented a proposal for a revision of the 2018 Effort Sharing Regulation.

What is the Effort Sharing Regulation?

The Effort Sharing Regulation (ESR) assigns emissions reduction targets for each Member State for sectors of the economy not covered by the EU Emissions Trading System (EU ETS). The ESR currently regulates emissions from transport, buildings, agriculture, industry and waste, which combined represent about 60% of the EU’s total greenhouse gas (GHG) emissions. The current regulation states that these sectors must reduce emissions by 30% by 2030 compared to 2005.

The effort needed to reach this objective is shared between Member States, with national targets calculated on the basis of each Member States’ wealth as measured by GDP per capita. Under the current regulation, Sweden, the wealthiest Member State needs to reduce its emissions by 40% by 2030, whereas the poorest, Bulgaria is allowed to keep its 2005 emissions stable until 2030. Added up, the national targets should allow to reach the Effort Sharing Regulation’s overall 30% emissions reduction target. Within these targets, the ERS sets the amount of emissions a Member State is allowed to emit each year, called the Annual Emission Allocation (AEA).

The Effort Sharing Regulation does not specify how and with what policies Member States should reduce their emissions to reach the defined target. Moreover, to limit the cost of complying with the defined targets, Member States are allowed to make use of various flexibilities”. The flexibilities available to Member States include the possibility to bank overachievement of the target in a certain year for use in a future year, or to borrow AEA units from upcoming years for up to 5% of the Member State’s annual target. Member States are also allowed to trade AEA units with each other.

Other flexibilities also exist in relations to other emissions-reducing instruments, such as the EU ETS or the Land Use and Land Use Change and Forestry (LULUCF) Regulation. Until 2030, Member States that have national reduction targets significantly above the EU average are free to use a limited number of allowances from the EU ETS to offset emissions from the Effort Sharing Regulation. All Member States are allowed to use a limited amount of credits granted under the LULUCF Regulation yearly (e.g. for planting trees, for proper management of cropland and grassland) to offset emission under the ESR.

Why revise the Effort Sharing Regulation?

When the Effort Sharing Regulation was adopted in 2018, the EU’s overall emissions reduction target was 40% by 2030. The targets set out in the ESR are therefore not in line with the EU’s new climate target of 55% emissions reduction by 2030, as set in the EU Climate Law. Under the revision, all Member States would see their reduction targets upped by 10 to 15%, including poorer Member States such as Bulgaria or Romania, which currently do not have to reduce their emissions or by very little. Member States such as Germany, Sweden, the Netherlands, or France would have to reduce their emissions by 47% to 50%.

Moreover, the ESR needs to be updated to align with the revision of the EU ETS also put forward by the European Commission as part of the Fit for 55 package. However, despite the inclusion of transport and buildings into the scope of the EU ETS, these two sectors are also still covered by the proposed ESR revision, as the Commission notes that it would be premature to leave the aimed decrease in emissions from buildings and road transport exclusively to emission trading.

What will be the impact of the revision?

The proposed revision aims at considerably increasing current emissions reduction requirements for Member States, including for Member States that were not impacted by the current regulation. This is expected to trigger difficult negotiations between the Commission and Member States, as did the 2018 ESR proposal.

Nonetheless, the proposal passed largely unnoticed, somewhat eclipsed by the more high-profile proposals of the Fit for 55 package and provoked limited public reactions from Member States and from civil society.

NGO Transport & Environment raised concerns with regards to the flexibilities that remain in the proposed revision, fearing that they offer loopholes to Member States to escape their responsibilities by allowing to offset emissions. The NGO also regrets the lack of punitive mechanisms (e.g. fines) for missing targets.

What’s next?

Following the publication of the proposal, the European Commission has opened a feedback consultation period. Stakeholders may provide feedback on the proposal until 15 November 2021.

The proposal will now be forwarded to the Council of the EU, where it will be dealt with by the Environment (ENV) Council, where  work will start on the file with an exchange of views on 6 October. In the European Parliament, the Environment, Public Health and Food Safety (ENVI) Committee will lead the work on the file with MEP Jessica Polfjärd (EPP, Sweden) being appointed as rapporteur and MEPs Javi Lopez (S&D, Spain) and Linea Sǿgaard-Lidell (RE, Denmark) as shadow rapporteurs. The Commission will present the file to the ENVI Committee on 27 September, followed by an exchange of views.

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No. 8 | 17 September 2021

Highlights of the week

CLIMATE CHIEF TIMMERMANS PRESENTS THE FIT FOR 55 PACKAGE TO THE EUROPEAN PARLIAMENT: Taking stock of the findings of the IPCC climate report, European Commission Executive Vice-President, Frans Timmermans, who is in charge of the European Green Deal, presented the Fit for 55 package to the European Parliament during this week’s Plenary session in Strasbourg. Timmermans notably addressed concerns previously raised by MEPs with regards to the social costs of the measures included in the package. Stressing that measures have been taken to assure an equal burden sharing across society, such as the creation of the Social Climate Fund, he warned social considerations should not be used as an excuse to paralyze action. He also emphasized that a rapid transition towards affordable renewable energy can mitigate the potential price hikes on fossil fuel energy. Moreover, he called on the European Parliament and the Council of the EU to propose alternative solutions also allowing to reach the EU’s climate goal if they disagree with the Commission’s proposals.

Following Timmermans’ presentation, representatives from political groups within the European Parliament took the stage to react:

  • Pieter Liese (EPP, Germany) stressed that the EPP was fully supportive of the package, while still looking for ways to improve the proposed measures;
  • Marian Marinescu (EPP, Romania) warned that the inclusion of transport in the EU Emissions Trading System should not put an undue burden on low-income households, and called for investments to support the transition of the transport sector;
  • Mohammed Chahim (S&D, NL) called for all elements of the package to be discussed in a way that does not compromise the cohesiveness of the package and ensures that the burden continues to be shared evenly across EU citizens;
  • Pascal Canfin (RE, France) highlighted that while Renew Europe would support the end of the sale of petrol and diesel cars, the creation of a Carbon Border Adjustment Mechanism and the extension of the EU Emissions Trading System to shipping, the political group is highly skeptical of the extension of the ETS to road transport and buildings;
  • According to Ska Keller (Greens/EFA, Germany), the EU’s target of 55% greenhouse gas emissions reduction by 2030 is not particularly ambitious, which makes it crucial for all measures under the Fit for 55 package to be fully in line with the set ambition;
  • Anna Zalewska (ECR, Poland) raised concerns regarding the social costs of the package, especially with regards to energy price increases;
  • Manon Aubry (The Left, France) warned that she does not consider 55% greenhouse gas reduction by 2030 a sufficient target, calling instead for a 66% greenhouse gas reduction. She also raised doubts about the extension of the EU ETS to buildings and road transport.

GREENS ASK COMMISSION TO SPEED UP INTRODUCTION OF FIT FOR 55 MEASURES: On 13 September, MEPs from the Greens/EFA group in the European Parliament addressed a letter to Commission President, Ursula von der Leyen, and Frans Timmermans asking for a revision of the Fit for 55 package. The letter states that the “code red for humanity” raised by the latest IPCC report, as well as the massive floods and wildfires witnessed all over Europe during the summer put an obligation on the EU to speed up its emissions reduction and show higher ambition. Green MEPs consider that, although the Fit for 55 package is a step in the right direction, the fact that most measures will only start to be implemented from 2030 onwards does not properly address the climate crisis we are facing. Therefore, the MEPs urge the Commission to speed up the introduction of proposed measures but also to introduce additional ones that can deliver significant emission reductions at a faster pace.

2021 STATE OF THE UNION: In September each year, the President of the European Commission delivers the State of the Union address to the European Parliament, taking stock of the achievements of the past year and presenting the priorities of the year ahead. In her 2021 address, Commission President von der Leyen notably addressed the EU’s action on climate change, citing the adoption of the European Climate Law in June and the presentation of the Fit for 55 in July as key milestones of 2021. For the upcoming year, the Commission will notably focus on translating the EU’s climate goals into a global commitment, starting with the COP26 Summit in November.

SURVEY HIGHLIGHTS CLIMATE CHANGE AS KEY CONSIDERATION FOR EU CITIZENS: In view of the European Parliament’s September Plenary session, and the State of the Union address of the Commission President, Ursula von der Leyen, the Commission’s Directorate General for Communication conducted a survey to assemble citizens’ views and expectations on key challenges facing the EU. The survey finds that 93% of EU citizens consider climate change to be the single most serious problem facing the world. 90% think that greenhouse gas emissions should be reduced to a minimum while offsetting the remaining emissions to make the EU economy climate neutral by 2050. National governments, businesses and the EU are seen as the most important actors by EU citizens in the fight against climate change.

Deep dive – Revision of the Alternative Fuels Infrastructure Directive

As part of the Fit for 55 package, the European Commission presented a revision of the 2014 Alternative Fuels Infrastructure Directive (AFID). This Directive requires Member States to develop national policy frameworks to boost the expansion of publicly available refueling and recharging points for alternative fuel vehicles and vessels, notably hydrogen refueling stations and electric charging points.

Why revise the Alternative Fuels Infrastructure Directive?

In view of the measures included in the Fit for 55 package, a revision of the AFID is necessary to align the refueling and recharging points capacity across Member States with the revised CO2 emissions standards for cars and vans, which conforms all new cars registered as of 2035 to become zero-emissions.

Moreover, the Commission published in March 2021 a report on the application and results of the 2014 AFID. It found that adoption of policy measures, and therefore implementation of refueling and charging stations, was very unequal among Member States. This was attributed to the lack of detailed and binding methodology for Member States to calculate targets and adopt measures. Moreover, the report found interoperability issues across Member States between physical infrastructure as well as payment systems. All this led the Commission to conclude that the current AFID could not allow the accomplishment of the EU’s 2030 climate targets, as it was not making the use of low and zero-emissions vehicles easy enough, impairing the potential for wide consumer acceptation.

Therefore, the Commission has now put forward a revision of the AFID as part of the Fit for 55 package, which aims to ensure creation of a dense and widespread network of easily usable alternative fuels infrastructure across the EU, especially across key infrastructures such as motorways, ports and airports. This should support the uptake of alternative fuel vehicles needed across all transport modes to meet the EU’s climate objectives. The revision also aims to ensure full interoperability of infrastructures between Member States.

What is included in the revision?

First and foremost, the revision upgrades the current Alternative Fuels Infrastructure Directive into a Regulation, so that targets set for Member States in the deployment of charging and refueling infrastructures will become binding for all Member States, ensuring a uniform uptake across the EU.

Regarding road transport, the revision plans for Member States to have to ensure minimum coverage of recharging and refueling points for light and heavy-duty vehicles. Specifically, the proposal states that on their highways, Member States must install electric recharging points every 60km, and hydrogen refueling stations every 150km.

With regards to maritime transport, the Commission wants Member States to ensure that installations are in place in maritime ports and on inland waterways for a minimum supply of shore-side electricity for ships and vessels. Member States must also ensure that an appropriate number of liquified natural gas (LNG) refueling stations are available in ports of the TEN-T core and comprehensive network. For maritime ports, targets vary depending on their annual number of port calls. For inland waterways, Member States have to ensure that at least one installation providing shore-side electricity supply to inland waterway vessels is deployed at all TEN-T core inland waterway ports by 1 January 2025, and at least one installation is deployed at all TEN-T comprehensive inland waterway ports by 1 January 2030.

For air transport, the proposal sets out minimum targets for electricity supply capacity of all stationary aircraft in airports included in the TEN-T core and comprehensive network. The provision of electricity supply should be ensured at all gates used for commercial air transport operations by 1 January 2025. By 1 January 2030, electricity supply should be ensured at all outfield posts used for commercial air transport operations.

The revision finally aims at simplifying the requirements for charge point operators and mobility service providers and harmonizing them across Member States. This should in turn simplify business operations, easing the use of these infrastructures for consumers and increasing profitability of refueling and recharging infrastructures, attracting new market actors.

What will be the impact of the revision?

With the revision of the AFID, the European Commission hopes to further reduce the dependence of road and waterborne transport, and to a certain extent of air transport, on fossil fuels. With the development of a widespread, reliable and easy to use alternative fuels infrastructure network, the proposal aims to increase user acceptation of low and zero-emissions vehicles.

However, the traditional automotive industry warned that the ambition of the proposed AFID revision is not in sync with the Commission’s proposal for a revision of CO2 standards for cars and vans, which would effectively end the sale of vehicles powered by combustion engines by 2035. According to car manufacturers, the targets introduced for recharging and refueling points are not high enough to ensure a dense and widespread coverage across all Member States.

On the other hand, stakeholders of the electromobility sector positively welcomed the proposal, applauding its reconfiguration into a regulation. The targets included in the proposal were welcomed as a key step forward but called for administrative hurdles to be addressed at national level to ensure a swift rollout of infrastructures by charging operators.

European airports are also positive on the proposal, which would provide a common framework and clear targets for airports in supporting and facilitating CO2 emission reductions from aircraft using their facilities. However, they warned that concerns remain over the ability of airports to finance the required investment.

Maritime ports called for sufficient funding to support ports in developing the needed infrastructure.

What’s next?

Following the publication of the proposal, the European Commission has opened a feedback consultation period. Stakeholders may provide feedback on the proposal until 10 November 2021.

The proposal will now be forwarded to the Council of the EU, where it will be dealt with by the Transport, Telecommunications and Energy (TTE) Council Configuration. In the European Parliament, the Transport and Tourism Committee (TRAN) will be responsible for the file. The Industry, Research and Energy (ITRE) and Environment, Public Health and Food Safety (ENVI) Committees will provide an opinion.

What’s the word on Twitter?

No. 7 | 10 September 2021

Highlights of the week

EUROPEAN COMMISSION VOWS TO MAKE EU GREEN TRANSITION CHAMPION AT GLOBAL LEVEL: In its Strategic Foresight Report 2021, in which it addresses emerging issues and studies potential policy responses, the European Commission pledged to lead global coalitions on climate and environmental actions. The Commission intends to ensure that the EU’s internal climate agenda, and its key initiatives such as the European Green Deal and the Fit for 55 package, are matched at global level. To reach this objective, the EU should continue to play a key role in maximizing support for the green transition at global level and strengthen a comprehensive green diplomacy.

EU TO MISS ITS 2030 CLIMATE GOAL BY 21 YEARS AT CURRENT PACE: A study produced by power company Enel concluded that the EU will miss its climate target of 55% greenhouse gas emissions reduction by 2030 by more than 20 years unless it accelerates its energy transition reforms. To speed up the process, the study called for closer cooperation between Member States on energy transition and for the adoption of a regional approach to help boost market integration. The study also found that investments of around €3.6 trillion are needed to reach the Commission’s 2030 target, but these investments could trigger €8 trillion of economic growth if the full potential of the EU’s Fit for 55 reforms is realized.

ENVIRONMENT COMMITTEE STARTS TO DISTRIBUTE FIT FOR 55 FILES: The Environment, Public Health and Food Safety (ENVI) Committee in the European Parliament started to distribute Fit for 55 legislations between the political groups. Politico reports that the European People’s Party (EPP) will appoint rapporteurs for the revision of the EU Emissions Trading System, including the revised rules for aviation, as well as for the proposal for Social Climate Fund and for the revision of the Effort Sharing Regulation. The Socialists & Democrats (S&D) are allocated to the proposal for the creation of a Carbon Border Adjustment Mechanism and revision of the Market Stability Reserve, as well as the ReFuel Aviation and FuelEU Maritime files. Renew Europe will head the revision of CO2 emission performance standards for cars and vans, as well as the Renewable Energy Directive. This information still has to be confirmed officially.

SHIPPING INDUSTRY PROPOSES GLOBAL CARBON LEVY: A group of leading shipping associations, led by the International Chamber of Shipping and Intercargo, has proposed the creation of global levy on carbon emissions from ships. This proposal, which is supposed to advance the decarbonization of the industry, includes a levy based on mandatory contributions for each ton of CO2 emitted from ships exceeding 5.000 gross tones and trading globally. The revenues would be financing a climate fund that would support decarbonization efforts of the shipping sector, for example the deployment of bunkering infrastructure in ports worldwide to supply cleaner fuels. The proposal was submitted to the International Maritime Organization, to be discussed in November during a meeting of the Marine Environment Protection Committee. The industry considers a global carbon levy preferable to the regional application that would be brought on by the EU’s proposal to include shipping emissions in the EU Emissions Trading System.

Deep dive – CO2  emission performance standards for new passenger cars and light commercial vehicles

As part of the Fit for 55 package, the European Commission presented a revision of the 2019 Regulation setting CO2 emissions performance for new passenger cars and new light commercial vehicles, in order to tackle the rising emissions in road transport. Indeed, emissions from the transport sector have been on the rise since 1990, and road transport is not an exception. Emissions from road transport now represent almost 20% of the EU’s total greenhouse gas emissions, especially impacting air quality in cities.

Why revise CO2 emission performance standards for cars and vans?

The existing regulation sets out targets for energy efficiency and CO2 emissions performance standards for new cars and vans. Specific emission targets are set annually for each manufacturer, effectively putting the burden of reaching those targets on car and van manufacturers rather than on fuel producers.

CO2 emission standards for new passenger cars and light commercial vehicles are key drivers for reducing CO2 emissions in the road transport sector. However, a revision of those standards is necessary to ensure a rate of emissions reduction in line with the EU’s objective of reaching 55% emissions reduction by 2030, and to fit within the framework of the 2020 Sustainable and Smart Mobility Strategy, which includes the objective to boost the uptake of zero-emission vehicles.

What is included in the revision?

The revision plans to adjust the existing targets for newly registered cars and vans. New passenger cars would have to reduce emissions by 55% of the current baseline level of 95g/km by 2030 and by 100% by 2035. For new vans, the targets are 55% and 100%, respectively, of the current baseline level of 147g/km. The current regulation plans for a 37.5% reduction from 2030 onwards for cars and 31% reduction from 2030 onwards for vans.

The proposal also plans to create an EU fleet-wide target of 100% reduction in greenhouse gas (GHG) emissions for all new cars and vans from 1 January 2035. A review mechanism is introduced, requiring the Commission to review the effectiveness and impact of the new standards in 2028.

Moreover, the European Commission announced that a revision of CO2 standards for heavy-duty vehicles (lorries, buses and coaches) would be presented in 2022.

Considering that manufacturers will have to supply zero-emission carbon vehicles only as of 2030 to meet the new standards, the existing incentive mechanism for zero- and low-carbon emissions vehicles will be removed as of this date, as it will not have a purpose anymore.

The current exemption for manufacturers responsible for less than 10.000 passenger cars per year, or less than 22.000 light commercial vehicles per year, allowing them to derogate from their specific emissions target, will also be removed, in order to avoid market distortion. Only manufacturers supplying less than 1.000 new vehicles per year will continue to be able to apply for this derogation.

What will be the impact of the revision?

The main impact of the proposed revision is that it will effectively end the sale of vehicles powered by Internal Combustion Engines (ICE) using fossil fuels like natural gas, gasoline or diesel from 2035, structurally transforming the EU’s automotive industry which accounts for over 7% of the EU’s GDP and provides jobs to almost 15 million Europeans. The lack of mechanism to account for the potential contribution of renewable and low-carbon fuels in reducing emissions will push auto manufacturers to fully focus on electric and hydrogen-fueled vehicles.

The European Commission expects that the increase in supply of zero-emission vehicles will make such vehicles more affordable for consumers, both for buying and for use. Moreover, with this proposal, the Commission wants to stimulate innovation in zero-emission technologies, strengthening the technological leadership of the EU’s automotive sector to ensure that it keeps up with global competitors such as Japan, South Korea, the US and China, and stimulating employment.

Automotive manufacturers reacted to the proposal with precaution, warning that the new targets will be challenging and calling for increased efforts from Member States to support the structural transformation of the automotive value chain.  Automotive suppliers reacted even more negatively, denouncing the fact that the proposal is not technology neutral, as it claims to be. They also criticize the fact that the proposal does not consider the contribution that renewable fuels or hybrid motors can make to reduce emissions, only focusing on electricity.

The increase of the number of zero-emissions vehicles on European roads will need to be met with adequate recharging and refueling infrastructure, which is why the Commission is also proposing a revision of the Alternative Fuels Infrastructure Directive (AFID), which will be analyzed in detail in our next update. However, auto manufacturers are already warning that the updated targets in the AFID are not high enough to coincide with the increased number of electric vehicles that will be brough by the new CO2 standards.

What’s next?

Following the publication of the proposal, the European Commission has opened a feedback consultation period. Stakeholders may provide feedback on the proposal until 3 November 2021.

The proposal will now be forwarded to the Council of the EU for adoption. In the Council, it is expected that the file will be dealt with by the Transport, Telecommunications and Energy (TTE) Council Configuration. Negotiations are expected to be tense in the Council, between Member States with important auto industries such as Germany and France, as well as Central European countries, and “climate-conscious” countries that have long pushed for the end of fossil fuel, like the Netherlands or Denmark. In the European Parliament, the Environment (ENVI) Committee is rumored to be responsible for the file. The Industry, Research and Energy (ITRE), Transport (TRAN) and Budgets (BUDG) Committees will provide an opinion.

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No. 6 | 03 September 2021

Highlights of the week

PARLIAMENT TO APPOINT KEY MEPS ON FIT FOR 55 FILES: The European Parliament returned from recess on 30 August and activities on the Fit for 55 files are picking up, as the Parliament listed the Fit for 55 package as one of its priorities for the upcoming months. In the coming weeks, the European Parliament is expected to appoint the committees and rapporteurs responsible for negotiating the Fit for 55 files. The Parliament’s Conference of Presidents, composed of the President of the Parliament and the political group chairs, will decide which committee will be in the lead for the file and which committees will provide opinions. Group coordinators within each committee will have to agree on which political group will provide rapporteurs and shadows for the files, which will certainly come after lengthy negotiations. Finally, political groups will appoint rapporteurs and shadow rapporteurs for the files they have been given by coordinators. This process is expected to be finalized in early October.

MEPs DISCUSS IMPACT OF FIT FOR 55 ON THE TRANSPORT INDUSTRY: In an exchange of views with the Commission on the Fit for 55 package, MEPs of the Transport & Tourism (TRAN) Committee recognized that it is important to find sustainable solutions for clean mobility for road, aviation and maritime transport, but several MEPs raised concerns about the costs the package would impose on industry and consumers and questioned the capacity of the Climate Social Fund to mitigate these costs. Green MEPs denounced that the proposed measures do not go far enough and regretted the inclusion of non-renewable hydrogen and Liquified Natural Gas (LNG) as decarbonized energy sources in these measures.

CARBON PRICE RISES ABOVE €60: The carbon price in the EU rose to an all-time high of €61 on 30 August, meaning that companies covered by the EU Emissions Trading System needed to pay that price to purchase carbon allowances. In the same period last year, carbon allowances were traded for half that price. This increase is partly attributed to the announcement of tighter environmental regulations as part of the Fit for 55 package.

Deep dive – The Energy Taxation Directive

As part of the Fit for 55 package, the European Commission presented a revision of the 2003 Energy Taxation Directive (ETD), in order to align the taxation of energy products with EU’s 55% emissions reduction target by 2030. The revision aims at promoting clean technologies and removing outdated exemptions and reduced rates that currently encourage the use of fossil fuels.

What is the Energy Taxation Directive?

The current ETD sets minimum taxation rates for energy products used as motor fuel and heating fuel as well as electricity. Member States are free to set higher rates, which most have done. However, the current ETD was considered outdated and not in line with the Commission’s climate ambition, since current taxation rates have not been adjusted to inflation since 2003, but also because the taxation rates are not based on the fuel’s energy content or environmental impact. Moreover, the current ETD leaves too much flexibility to Member States, allowing them to adopt exemptions and tax reductions which continue to encourage the use of fossil fuels. The lack of uniformity between Member States also impacts the level playing field within the EU’s Single Market.

Therefore, a revision of the ETD was necessary to align its provisions with the EU climate targets.

What is included in the revision?

The revision plans to base the tax rate of fuels on their energy content or environmental impact, rather than on volume. The Commission proposes a new structure of tax rates, grouping energy products per type ranked according to energy content and environmental performance. The most polluting energy products, such as conventional fossil fuels (gas, oil and petrol), are taxed at the highest tax rate, whereas electricity, advanced sustainable bio-fuels, biogas and renewable fuels of non-biological origin (such as renewable hydrogen) are taxed at the lowest rate. Natural gas, LPG and hydrogen produced out of fossil fuel will see their taxation rate gradually increase over a ten-year period. In order for the new Directive not to become outdated too quickly, taxation rates will be indexed to inflation.

Moreover, the proposed revision broadens the scope of the existing ETD, including energy products that were previously not covered. The proposal also plans to reduce the leeway for Member States to set rates below the minimum taxation rates for specific sectors, in order to strongly limit national exemptions and rate reductions. Member States will be allowed to apply reduced rates only in a limited number of cases (such as for renewable energy and primary sector industries such as agriculture).

In accordance with the ReFuelEU Aviation and FuelEU Maritime proposals, also put forward as part of the Fit for 55 package, the proposal plans for the end of current exemptions for the use of fossil fuels in the aviation and maritime sectors. The minimum tax rate for aviation and shipping fuels is planned to gradually increase over a ten-year period. On the other hand, to boost and facilitate their uptake as planned in the above-mentioned proposals, the use of sustainable alternative fuels and other low-carbon fuels will benefit from a zero tax-rate during this transition period.

What will be the impact of the revision?

With this revision, the European Commission expects to use energy taxation as an economic incentive for companies to favor electricity, renewable energy and sustainable alternative fuels, while abandoning the use of fossil fuels.

The proposal was generally positively received by environmental NGOs, which consider that it is an important first step towards internalizing pollution costs in the energy sector. Notably, the end of the exemptions for the maritime and aviation sectors is applauded. However, some environmentalists regret to see that some sectors with high carbon footprint, such as fishing vessels, are still being taxed at a very low tax rates.

The revision is also globally welcomed by the energy sector, including fuel producers. However, they did raise concerns about the different taxation rates for similar fuels depending on their use (e.g. for transport, heating or industrial energy source). The taxation rate should be uniform for all uses. Electricity producers consider that it includes helpful provisions to reduce the risk of double taxation for electricity storage and applaud the abolition of fossil fuel tax benefits. The proposal also fits with the hydrogen sector’s recommendation to reduce fossil fuels subsidies and fiscally reward clean energy technologies. The biofuel sector also welcomed the evolution of the ETD from a volume-based approach to an approach based on energy content.

However, the aviation sector, which is seeing its tax exemption abolished, denounced the proposal as ecologically and economically counterproductive, as it would reduce the aviation industry’s capacity to invest and innovate without reducing emissions. The shipping industry, which is also concerned by the tax exemption abolition, considers that removing this exemption is not a consistent way forward as the international nature of shipping creates difficulties to enforce a tax on any energy source.

What’s next?

Following the publication of the proposal, the European Commission has opened a feedback consultation period. Stakeholders may provide feedback on the proposal until 27 October 2021.

The proposal will now be forwarded to the Council of the EU for adoption. In the Council, it is expected that the file will be dealt with by the Economic and Financial (ECOFIN) Council Configuration. Taxation being a national competence, an agreement will require unanimity among the 27 Member States, so negotiations can be expected to be long and difficult. The European Parliament is not a co-legislator on this file, as it can only provide a non-binding opinion. The Economic and Monetary Affairs Committee (ECON) will most likely be responsible for the file, with the Environment (ENVI), Industry, Research and Energy (ITRE), Transport (TRAN) and Legal Affairs (JURI) Committees providing an opinion.

What are MEPs saying?

No. 5 | 26 August 2021

Highlights of the week

UN IPCC PRESENTS REPORT ON WIDESPREAD, RAPID AND INTENSIFYING CLIMATE CHANGE: The United Nations’ Intergovernmental Panel on Climate Change (IPCC) presented on 9 August its sixth assessment report on climate change. The IPCC drafts reports providing governments with scientific information on climate change, its impact and future risks that may be used to develop climate policies. In its sixth report, the IPCC warns that some of the unprecedented and human-driven changes observed in climate are already irreversible, for over hundreds of years. The report predicts that in the coming decades, climate changes will increase in all regions of the world, with increasing heat waves, longer warm seasons and shorter cold seasons. In Europe, the IPCC warns that frequency and intensity of heat waves will continue to increase, leading to more frequent wildfires, as already seen this summer in Greece or in the south of France. In Northern Europe and Eastern Europe, extreme rainfall and related flooding, as witnessed in Germany and Belgium, will become more common. Irreversible rising sea levels will lead to more frequent and severe coastal flooding, as well as coastal erosion.

The report states that the only way to limit climate change is a strong and sustainable reduction in emissions of CO2 and other greenhouse gases, which the EU is trying to achieve with its Fit for 55 package. However, the experts warn that it could still take 20 to 30 years for global temperatures to stabilize.

EU COMMISSION’S HYDROGEN STRATEGY RAISES DOUBTS ON “BLUE HYDROGEN”: A scientific report published on 12 August warned that the production of hydrogen from natural gas associated with carbon capture and storage, also known as “blue hydrogen”, is responsible for high greenhouse gas emissions, namely of both carbon dioxide and methane. The report finds that producing blue hydrogen is actually more polluting that directly burning natural gas or diesel oil, because production and carbon capture processes require a lot of energy, usually powered by fossil fuels. This raises questions on the EU’s Hydrogen Strategy, which plans for increased production of blue hydrogen in the EU, to replace natural gas and provide clean energy for sectors that cannot rely on electric power, such as heavy transports.

EU URGES MAJOR ECONOMIES TO ADOPT CLIMATE COMMITMENTS BEFORE COP26: The EU’s High Representative for Foreign Affairs, Josep Borrell, called on 12 August for the world’s biggest economies to adopt “ambitious enough, measurable, and verifiable” climate targets for 2030, including a commitment to eliminate their greenhouse gas emissions, in time for the November COP26 Climate Summit. The EU and the US both have committed to reaching net-zero emissions by 2050. The EU is now trying to pressure China, India and Russia to adopt similar commitments before the COP26 Summit, which will be held in Glasgow, Scotland. With the policies included in the Fit for 55 package, the EU wishes to lead by example and push other countries to adopt similar climate ambitions and undertake structural economic transformations.

FRANCE ADOPTS CLIMATE AND RESILIENCE LAW: France formally adopted on 24 August its “Climate and Resilience” law, which is supposed to allow France to achieve a target of 40% greenhouse gases emissions reduction by 2030. Among other measures, the law creates low-emission zones in cities of over 150 000 inhabitants, plans for financial support for households to switch to a low-emission vehicle, bans domestic flights if the trip can be made by train in less than two and a half hours, creates an environmental label to inform consumers of the environmental impact of products and establishes an obligation to install solar panels or planted roofs when building or renovating large buildings. However, environmentalists, as well as certain French institutions such as the National Council for the Ecological Transition and the Social, Economic and Environmental Council, raised doubts that the law is not ambitious enough to allow France to achieve a 40% greenhouse gases emissions reduction, let alone the 55% EU target.

Deep dive – The ReFuelEU Aviation and FuelEU Maritime Initiatives

As part of the Fit for 55 package, the European Commission presented two initiatives to tackle aviation and maritime fuels, which cause significant emissions. The ReFuelEU Aviation initiative obliges fuel suppliers to blend increasing levels of sustainable aviation fuels in jet fuel taken on-board at EU airports. Similarly, the FuelEU Maritime initiative aims at boosting the uptake of sustainable maritime fuels by setting a maximum limit on the greenhouse gas content of energy used by ships calling at EU ports.

Why fuel legislations for the aviation and maritime sectors?

Both the aviation and maritime sectors are seeing their greenhouse gas emissions grow. The carbon footprint of the aviation industry is estimated to have doubled in the past 20 years, and as explained in the FuelEU Maritime proposal, ship traffic to or from EU ports accounts for 3 to 4% of the EU’s CO2 emissions.

Therefore, policy action is necessary to tackle emissions of both the maritime and aviation sector, and improve the energy efficiency of aircrafts and ships. Otherwise, the EU’s 55% greenhouse gas emissions reduction by 2030 will not be met. Considering that they are sectors that cannot rely on electric power, the Commission’s proposals focus on boosting the uptake of sustainable fuels.

What is included in the proposals?

The ReFuelEU Aviation initiative creates a “blending mandate” for sustainable aviation fuels, obliging fuel suppliers to include a minimum share of sustainable aviation fuels in jet fuel taken on-board at EU airports. Sustainable aviation fuels should account for at least 5% of all aviation fuels by 2030 and gradually increase to reach 63% by 2050. Currently, sustainable aviation fuels only represent less than 0.1% of all jet fuel used. This is due to limited production capacity and high production costs compared to traditional fuels such as kerosene.

By this blending mandate, the Commission chose not to impose a requirement on each airline, but rather to oblige EU airports to carry a share of sustainable aviation fuels, meaning that all tanking aircraft in the EU will use sustainable aviation fuels.

The FuelEU Maritime initiative adopts a different approach to limit greenhouse gas emissions. The regulation sets a limit on the yearly average greenhouse gas intensity of the energy used on-board by a ship. By setting this limit, the Commission aims at incentivizing ship owners and shipping companies to increase the uptake of less polluting fuels, but does not set any obligation on which alternative fuels must be used, leaving room for flexibility. The regulation will not only cover inter-EU voyages, but also a share of the energy used by ships for voyages between a port under the jurisdiction of a Member State and a port under the jurisdiction of a third country. The measures laid out in the regulation will apply to all ships, regardless of their flag.

What will be the impact?

With both initiatives, the Commission aims at boosting the production and uptake of sustainable fuels.

The ReFuelEU Aviation initiative was positively received by the aviation sector, with the expectation that the uptake of sustainable aviation fuels will play a significant role in enabling the industry to reach net-zero emissions by 2050. The sector welcomed the fact that the European Commission took into consideration the lack of immediate alternative to fossil fuels for aviation and the progressive targets for uptake of sustainable aviation fuels will allow to ramp up production capacity. Certain companies in the sector are willing to go even further than the Commission’s targets, such as Boeing, which announced that its commercial airplanes would be capable to fly on 100% sustainable aviation fuels by 2030.

The shipping industry welcomed the FuelEU Maritime regulation’s flexibility. However, environmentalists, such as the Transport & Environment NGO, worry that the inclusion of Liquefied Natural Gas (LNG) or first-generation biofuels as sustainable fuels will limit the uptake of cleaner fuels such as green hydrogen (hydrogen produced from renewable energy, with very low emissions), which are more expensive but less polluting than LNG, hampering the regulation’s efforts to decarbonize the maritime sector. Indeed, LNG offers minimal emissions reduction compared to traditional fuels and its production also releases high amount of polluting methane.

What’s next?

Following the publication of the proposals, the European Commission has opened a feedback consultation period. Stakeholders may provide their opinion on the FuelEU Maritime initiative and the RefuelEU Aviation initiative until 20 October 2021.

The proposal will now be forwarded to the European Parliament and Council of the EU for adoption. In the Council, it is expected that the file will be dealt with by the Energy Council Configuration. In the European Parliament, the Transport Committee (TRAN) will be responsible for both files, with the Environment (ENVI) and Industry, Research and Energy (ITRE) Committees providing an opinion. Key MEPs, such as rapporteurs and shadow rapporteurs, still need to be appointed.

What are MEPs saying?

No. 4 | 29 July 2021

Highlights of the week

PARLIAMENT’S INDUSTRY CHAIR REACTS TO FIT FOR 55: The Chair of the Industry, Research and Energy Committee (ITRE) of the European Parliament, MEP Cristian Buşoi (EPP, Romania), reacted to the package of proposals presented by the European Commission. He stated that many of the proposals fall under the remit of the ITRE Committee, which will work on the proposals with the mindset that it is the EU industry that will enable the green transition. Therefore, the Committee will promote market-based measures. Buşoi also called for unwavering commitment to small and medium-sized enterprises to support them in the considerable efforts required by the proposals. Finally, the ITRE Chair highlighted that in order to ensure that the transition leaves no one behind, careers of workers in energy-intensive industries will have to be supported, particularly in terms of re-skilling and up-skilling. The ITRE Committee is expected to be in the lead on the revision of the Renewable Energy Directive.

EU TRADING PARTNERS DENOUNCE CBAM PROPOSAL: The main trading partners of the EU reacted with worry over the Commission’s proposal for a Carbon Border Adjustment Mechanism (CBAM). China warned that it considers the measure, which will introduce a tariff on polluting goods entering the EU, to go against World Trade Organization rules and would seriously undermine mutual trust in the global community and prospects for economic growth. Russia, which could be impacted the most by the measure considering the volume of electricity, aluminum and fertilizer it trades with the EU, said that the prospect of an additional financial burden for Russia’s economy and companies was extremely unpleasant. Australia denounced the proposal, arguing it would hit jobs and was a form of protectionism. However, the Commission’s proposal also triggered some partners to consider their own carbon border tariffs. For example, Democrat lawmakers in the US are proposing to impose a tax on imports from countries without ambitious climate laws.

EU INDUSTRY EXPRESSES WORRY OVER CBAM PROPOSAL: European industries covered by the EU’s future CBAM have expressed doubts about the proposal. The mechanism is planned to apply to six categories of imports: electricity, iron and steel, aluminum, fertilizers, and cement. Industry is worried that the gradual introduction of the CBAM will coincide with a phase-out of the free emissions allowances they receive under the EU’s Emissions Trading System (ETS), with the risk of making European industry less competitive compared to third-countries not decarbonizing. In order to ensure the competitiveness of EU exports, European industries are asking for export rebates to be introduced in the EU’s climate and trade policy, for products produced in the EU and exported to countries which do not have carbon limitation or pricing policies. European manufacturers additionally warned that with the end of free ETS allowances, industry will have less money available to invest in low-carbon technologies.

EU ENVIRONMENT MINISTERS CRITICIZE PLAN TO EXTEND EU ETS TO BUILDINGS AND TRANSPORT: Environment Ministers of the EU Member States, who met in late July in the Environment configuration of the Council of the EU, expressed reservations and skepticism over the Commission’s proposal to create an EU Emissions Trading System for transport and heating fuels for buildings. Although it was not made public which Member States expressed criticism, some Ministers had expressed their concerns prior to the meeting. The Polish Climate and Environment Undersecretary of State warned that extending the EU ETS to buildings and transport was a political mistake that made the Commission appear as choosing to tax poorer households. Luxembourg’s Energy Minister said that the Commission proposal was counterproductive and would create unnecessary social hardship. France expressed similar concerns. The proposal for the EU ETS is considered to be one of the most politically sensitive files of the Fit for 55 package.

DR2 CONSULTANTS INTERVIEWED ORANGEGAS ON THE FIT FOR 55 PACKAGE: In order to outline the exact impact of the Fit for 55 package, Dr2 Consultants asked Marcel Borger, founder and CEO of OrangeGas, what the new package means for his business. As a clean fuels and energy supplier, OrangeGas finds itself right in the midst of the proposed policy measures. Here you can read more about how OrangeGas has prepared for the publication of the Fit for 55 package, how it views the proposed legislations and how the package will likely impact OrangeGas.

Deep dive – Revision of the Renewable Energy Directive

The European Commission presented on 14 July the proposal for the revision of the Renewable Energy Directive (RED II) as part of the Fit for 55 legislative package. After the revision, the Directive will be abbreviated as “RED III”. The Renewable Energy Directive is the legal framework for the development of renewable energy across all sectors of the EU economy. The existing RED II includes renewable energy targets for Member States as well as targets for the share of renewable fuels in transport. In addition, RED II contains rules for the use of biomass, waste as a raw material for fuels, and forms the basis for the incentive framework for biofuels.

Why revise the Renewable Energy Directive?

Energy production and use accounts for 75% of all EU emissions. Therefore, the European Commission is proposing to revise the Renewable Energy Directive in order to accelerate the uptake of renewable energies and the transition to a greener energy system necessary to achieve the EU’s climate and energy objectives. A revision is also needed to reduce the share of renewable energy coming from biomass, in alignment with the recent EU Biodiversity and Forestry strategies. Currently, 60% of the EU’s renewable energy comes from biomass.

What does the revision include?

RED III mainly increases the RED II 32% renewable energy by 2030 target to 40%. Additional specific targets are proposed for renewable energy use in transport (13% greenhouse gas intensity reduction), heating and cooling (+1.1% annually), buildings (at least 49% of renewable energy), and industry (+1.1% annually). The increased targets aim at increasing the share of renewable energy in highly-polluting areas, to reduce their environmental impact.

Additionally, RED III further promotes the use of biofuels and strengthens sustainability criteria for the use of bioenergy by applying the existing land criteria (such as no-go areas) for agricultural biomass also to forest biomass. In line with the EU Hydrogen Strategy, RED III sets sub-targets for renewable hydrogen and hydrogen-based synthetic fuels for transport (2.6% for renewable fuels of non-biological origin) and industry (50% renewable share in hydrogen consumption).

The proposal also includes measures to make it easier for projects of electricity production from wind and sun to receive permits and get connected to electricity distribution grids.

Furthermore, the revision also revises the definition of renewable energy from non-biological origin to cover all liquid and gaseous fuels deriving from renewable sources other than biomass, and includes higher target for the integration of these fuels in the EU’s energy mix, especially in sectors where electrification is not possible.

What will be the impact of the revision?

The European Commission expects that the revision will reduce the EU’s reliance on fossil fuel imports, reducing energy costs for consumers and businesses, and will lead to job creation in the renewable energy sector. The revision will specifically benefit SMEs, as most of the value chain of renewable energy deployment is operated by SMEs.

However, the proposal received mixed reviews from industry. The proposal was positively welcomed by the wind energy sector, as well as the solar power sector. However, for the bioenergy sector, the revision and the specifically the review of sustainability criteria for biomass could increase red tape for biofuel producers and impair the EU’s renewable energy ambitions.

Moreover, for environmental groups and associations, the revision is not ambitious enough to contribute sufficiently to the EU’s -55% by 2030 target. A 50% renewable energy target would have been better. Additionally, certain NGOs, such as Greenpeace, consider that the proposal is not in line with the EU Forestry Strategy, as biomass from wood continues to count towards renewable energy targets.

What’s next?

Following the publication of the proposal, the European Commission has opened a feedback consultation period between 16 July and 21 September 2021.

The proposal will now be forwarded to the European Parliament and Council of the EU for adoption. In the Council, it is expected that the file will be dealt with by the Energy Council Configuration. In the European Parliament, it is not yet decided which Committee(s) will be responsible, but most likely the Industry, Research and Energy Committee. Key MEPs, such as rapporteurs and shadow rapporteurs, also still need to be appointed.

Slovenia has made it clear that they are not committed to reaching a general approach on RED III within the Council of the EU during its time holding the rotating Presidency. They are leaving this task to France, which will hold the Presidency in the first half of 2022.

What are MEPs saying?

No. 3 | 22 July 2021

Highlights of the week

TIMMERMANS DEFENDS CLIMATE PACKAGE IN EUROPEAN PARLIAMENT: Following the publication of the Fit for 55 package on 14 July, EU Climate Chief, Frans Timmermans, joined the meeting of the European Parliament’s Environment, Public Health and Food Safety Committee (ENVI) for an exchange of views on the proposed climate and energy measures. In general, MEPs congratulated the Commission for the work and efforts it took to finalize the package. Nonetheless, Greens and left-wing MEPs considered that the proposals could go ever further, for example by setting binding targets for Member States and including the agricultural sector in the proposals. Moreover, many MEPs voiced their concerns about the social implications of the package, fearing that too many repercussions would be felt by poorer households and stressing that compensation mechanisms needed to be ensured. Timmermans will visit multiple European capitals to defend the package, as well as the upcoming G20 summit in Naples.

POLITICAL GROUPS REACT TO FIT FOR 55 PUBLICATION: In the aftermath of the Fit for 55 publication, political groups within the European Parliament issued press releases in response to the publication.

The Europeans People’s Party (EPP) underlined the need for a credible social instrument in order to make sure “low-income families, middle class home owners or car owners in rural areas without public transport” don’t have to pay the highest bill.

The Socialists & Democrats (S&D) group welcomed the “ambitious and bold” commitments of the Commission, and is committed to working in the next months to ensure the measures are socially just and environmentally efficient.

Greens MEPs deplored that some proposals lack the ambition to create the right incentives for the ecological-transitions, seeing too many gaps and exemptions.

Renew Europe called the package “the most important legislative initiative of the decade”, and will work to ensure that all measures can transform the society without breaking it socially. The group’s press release also calls for Member States to take active responsibility on the implementation of the package.

European Reformists and Conservatives (ECR) are “highly concerned” with the Commission’s approach for reaching climate neutrality by 2050, fearing that it will endanger jobs in industry and lead to social movements similar to the yellow jackets in France.

MEPs from the left (GUE/NGL) also welcomed the package, but stressed that the shift in the economy must be accompanied with robust social support so that the green transition does not punish those in a precarious situation, workers and low-income households.

MEMBER STATES SKEPTICAL ON EU ETS REVISION: Following the publication, Member States’ governments started reacting on the package. Reactions mainly concerned the revision of the EU ETS. Spain’s Minister for Ecological Transition, Teresa Ribera, raised concern on the inclusion of road transport and building emissions under a new EU ETS scheme, and expressed worry over increased prices on the EU’s carbon market, calling for price control. The Ecological Transition Ministry in France also issued a statement warning of the country’s reservation about the relevance of extending the EU ETS to road and building emissions, fearing social consequences.

REPORTS OF TENSION WITHIN THE COLLEGE: Reports of tensions within the College of Commissioners over the finalization of the Fit for 55 package are coming from the Brussels bubble. Reports say that some Commissioners expressed concerns about the initiative and the way it was pushed forward by the Commission President, Ursula von der Leyen. Main criticisms concerned the failure to tie the measures of the package to own-resources legislation, that would be needed to finance the changes introduced by the new legislations, and the impact of the package on vulnerable households, industries and SMEs. Complaints also concerned the time-pressure that Commission staff was put under to deliver the package, noting that consultation periods should have started earlier.

Deep dive – The EU Emissions Trading System

Introduced in 2005, the EU Emissions Trading System (EU ETS) is the EU’s internal carbon market, working on a cap-and-trade principle. This means that a cap is set on the amount of greenhouse gases emissions of sectors covered by the system. Over time, the cap is destined to be reduced in order to decrease emissions. Within the cap, installations receive a certain amount of free allowances, and may buy additional ones or trade them with one another. Currently, the sectors covered by the existing EU ETS include power and heat generation, energy-intensive industrial sectors and aviation within Europe. As part of the Fit for 55 package, the European Commission announced a revision of the EU ETS Directive.

What does the proposal for a revision include?

With the revision of the EU ETS Directive, the Commission is proposing to upgrade the overall emissions reduction target by 2030 from -43% to -61%. To reach this target, the Commission proposes to increase annual emissions reduction to 4.2%, instead of the current 2.2% per year. This will be achieved through a reduction of emissions allowances within the cap.

It is additionally proposing to include emissions from the maritime sector in the scope of the scheme, submitting them to the same targets. Shipowners will have to buy emissions permits for ships sailing within the EU. The proposal also plans for 50% of emissions from international voyages starting and ending in the EU to be covered as well. Shipping should be added to the EU ETS gradually from 2023 and phased in over a 3-year period.

It is also proposing to phase out free allowances for aviation, which is already covered by the EU ETS.

Finally, the Commission is proposing to create a new, separate emissions trading system for emissions from fuels used in road transport and buildings (heating fuels). This separate scheme should be operational by 2025. Potential increased costs for consumers would be compensated by the Social Climate Fund.

Allocation of free emissions allowances will continue for industrial sectors at risk of carbon leakage (i.e. businesses transferring production to third countries with lesser emissions constraints), notably manufacturing industries, to safeguard their competitiveness. However, with the reduction of the overall emissions cap, the number of free allowances will also be reduced, but only from 2025.

Why revise the EU ETS?

With this proposal for a revision, the European Commission aims at strengthening the contribution of the EU ETS to the fight against climate change and ensuring that the 55% emissions reduction by 2030 is reached.

By including emissions from the maritime sector, as well as road transport and buildings, the Commission hopes to incentivize the transition towards more sustainable fuels in these energy-intensive sectors. Indeed, emissions from these sectors have not decreased since 1990 and are even expected to continue increasing if no measures are taken. Investments needed for the low-carbon transition will be supported by funding from the Innovation Fund and Modernization Fund.

What will be the impacts of the revision?

The revision will impact all sectors covered by the EU ETS, which will inevitably have to limit their emissions to fit within the reduced cap or face hefty fines. The revision will however most strongly impact the aviation and maritime sectors, as well as road and building sectors.

On maritime, there is a worry that the inclusion of international voyages towards and from EU ports in the scope will upset the EU’s trading partners, and negatively impacting the competitiveness of the EU at global level. Moreover, shipping companies failing to comply with the EU ETS could face a ban from entering and docking at EU ports, at the request of a Member State.

On aviation, the phasing out of free allowances will increase costs for EU airlines, negatively impacting their competitiveness compared to third-country carriers not subjected to the same costs.

On the creation of a separate ETS for emissions from road transport and heating fuels for buildings, concerns have already been raised on the cost repercussion this could have on private consumers and households. Indeed, setting a cap on such emissions will inevitably lead to cost increases for vehicles manufacturers and fuel producers, which many worry will fall back on consumers.

What’s next?

The European Commission has opened a feedback period on the revision. Stakeholders can provide feedback on the overall revision of the EU ETS and on the updated rules for aviation until 14 September 2021.

The file will also now move on to the Council of the EU and the European Parliament for negotiation and adoption. The file will be discussed in the Environment Council and is expected to be assigned to the Environment (ENVI) and Transport (TRAN) Committees within the European Parliament.

What are MEPs saying?

No. 2 | 15 July 2021

Highlights of the week

VDL MEETS EUROPEAN PRESS: European Commission President Ursula von der Leyen granted a joint interview to five European media outlets (Le Monde, Süddeustsche Zeitung, La Stampa, La Vanguardia, The Guardian) on 13 July, a day ahead of the official presentation of the Fit for 55 package. In the interview, von der Leyen notably defends the approach behind the package and justifies the decision of creating an additional EU carbon market for road transport and buildings, a decision that raised concerns over potentially increased prices for consumers. Von der Leyen announced that this will be counterbalanced by the creation of a Social Climate Fund.

DELIVERING THE EUROPEAN GREEN DEAL: After weeks of anticipation, the European Commission presented on 14 July its Fit for 55 legislative package. Following a final meeting of the College of Commissioners, Commission President Ursula von der Leyen lead a press conference to present the package, joined by Commission Executive Vice President Frans Timmermans (in charge of the European Green Deal) and Commissioners Paolo Gentiloni (Economy), Adina Valean (Transport), Janusz Wojciechowski (Agriculture), Kadri Simon (Energy) and Virginijus Sinkevicius (Environment, Oceans and Fisheries), who all participated in the preparations of the legislations included in the package. A dedicated website was also launched where both the legislative proposals and factsheets are accessible.

PAVING THE WAY FOR -55%: During the press conference, Commission President Ursula von der Leyen underlined that this package will set the EU towards a better, healthier and more prosperous future, securing the wellbeing of future generations. She was joined in this statement by Commission Executive Vice President Frans Timmermans, who also stressed that “we are currently in the make-or-break” decade in the fight against climate change, and that we have to ‘put a price on carbon and put a premium on decarbonizing’.

STAKEHOLDER REACTIONS TO THE FIT FOR 55 PACKAGE: The presentation of the Fit for 55 package received mixed reviews from industry stakeholders, with many welcoming the ambition of the Commission but at the same time worrying about the implementation and the too high cost put on consumers. The question of the availability of sufficient low-carbon energy to meet the EU’s need was also raised. On the other hand, actors of the energy transition, such as the electric vehicle charging industry or the wind energy industry, positively received the package.

COUNCIL OF THE EU APPROVES NATIONAL RECOVERY PLANS: This week, the Council of the EU finalized the approval of 12 National Recovery Plans (Austria, Belgium, Denmark, France, Germany, Greece, Italy, Latvia, Luxembourg, Portugal, Slovakia and Spain), which will allow the Member States to access funding from the Recovery and Resilience Facility. Recovery Plans notably have to include investments and reforms in key areas of the Fit for 55 package, such as clean technologies and renewables, energy efficiency of buildings and sustainable transport.

Deep dive – The Fit for 55 legislative package

The Fit for 55 package is a set of legislative proposals put forward by the Commission to make the EU’s climate, energy, land use, transport and taxation policies fit for reaching the European Green Deal’s objective of reducing net greenhouse gas emissions by at least 55% by 2030.

What measures are included in the Fit for 55 package?

Thirteen proposals were presented by the European Commission as part of the Fit for 55 package, making it the most comprehensive and extensive legislative package ever put forward by the Commission. The aim of these combined policies is to enable the necessary boost of greenhouse gas emission reductions needed in the next decade to reach the 55% reduction target.

The legislations presented include, inter alia, an extension of the EU’s carbon market to road transport and buildings, a tax rate on fossil fuels in aviation and shipping, a ban on the production of combustion engines by 2035 and updated targets on renewable energy and energy efficiency.

Watch this space in the coming weeks, as each proposal will be analyzed in detail.

How will the increased costs generated by these proposals be compensated?

The European Commission additionally proposed a mechanism to compensate the pressure put in the short run by increased environmental standards on individuals and SMEs. The ‘Social Climate Fund’ is proposed to provide funding to EU Member States to help citizens finance investments in energy efficiency, new heating and cooling systems and cleaner mobility. The EU will provide €72.2 billion from its budget to this fund, and the Commission will propose that Member States to match this funding to reach €144.4 billion. The new fund is welcomed by political groups, although some doubt whether the mechanism can truly compensate the burden for EU citizens and households.

Which sectors will be impacted by the Fit for 55?

Considering that the extensiveness of the package, no sector will be left unimpacted by the Fit for 55 legislations. Evenly distributing the impact and cost of the EU’s climate ambitions among sectors is actually one of the Commission’s goal.

The package will specifically impact the transport sectors (road, aviation and maritime), forestry and land use, building, all energy intensive industries, cars and vans manufacturer, importers of steel, aluminum, and cement. All will have to compose with way more stringent environmental rules, potentially leading to increased operational costs or creating the need for heavy investments to be compliant.

The Fit for 55 package, by setting increased targets for the uptake of alternatively-powered vehicles, for the inclusion of renewable energies in the EU’s energy mix, and for the uptake of alternative fuels for aviation and maritime, can however also create opportunities for frontrunning industries in clean and renewable energies to meet the demand.

What’s next?

Two files of the package remain to be presented by the European Commission, the EU Forestry Strategy and the proposal for a revision of the Energy Taxation Directive. Press conferences will take place on 15 July.

The European Commission will then have to defend its proposals in negotiations between the European Parliament and the Council of the EU. Considering the impact and the sensitivity of the files, the negotiations could take years. Many MEPs notably already denounced the social impact of these proposals, which risk leaving households footing the bill for the higher carbon price on cars, vans or heating. Within Member States, the worry is that the proposals will fuel social movements similar to the ‘Yellow Jackets’ in France.

What are MEPs saying?

No. 1 | 07 July 2021

Highlights of the week

ABOUT THE PROPOSALS: Although the presentation of the Fit for 55 package is scheduled for 14 July, there are some indications of the planned proposals that the Commission will put forward. Dr2 Consultants has some insights on what the EU Emissions Trading System (EU ETS), ReFuelEU Maritime and Aviation, the Energy Tax Directive (ETD), the Renewable Energy Directive (RED2) and the CO2 performance standards for cars initiatives will look like. Get in touch to learn more about the planned proposals or stay tuned for analyses of these initiatives in this series of policy updates.

COORDINATION AMONG MEMBER STATES: All initiatives in the Fit for 55 package are closely interlinked, and as such, the assignment of the initiatives to the respective Council configurations will be complex. At Council level, the Environment Council will be in charge of the EU ETS, the Effort Sharing Regulation (ESR) and the CO2 performance standards for cars and vans. The Transport Council will discuss the Alternative Fuels Infrastructure Directive (AFID), as well as the ReFuelEU initiatives for maritime and aviation. The Energy Council will address the RED2 and the Energy Efficiency Directive (EED). Finally, the Economic and Financial Affairs Council will work on the ETD and the proposal for a Carbon Border Adjustment Mechanism (CBAM).

PARLIAMENT WORK ALLOCATION STILL AWAITS: Whereas the role division at Council level seems to be clear, the European Parliament’s Conference of Presidents and the Conference of Committee Chairs are expected to decide which parliamentary committee will formulate its opinion on the different legislations. It is expected that MEPs from different committees will be co-rapporteurs of a legislation or alternatively, parliamentary committees will have exclusive competences over certain provisions of a proposal. For example: the Environment, Public Health and Food Safety (ENVI) Committee will be assigned to formulate its position on EU ETS, but the Transport and Tourism (TRAN) Committee will have exclusive compentences on the articles related to transport. Due to this complexity, the negotiations are anticipated to progress slowly. 

EUROPEAN COMMISSION STAFF CRUSHED UNDER FIT FOR 55 WORKLOAD: European Commission staff is heavily overloaded due the workload brought by the preparations of the Fit for 55 package on 14 July, according to Politico. Staff in the Directorate-General for Environment (DG ENV) have already been working around the clock on proposals as part of the European Green Deal (e.g. Circular Economy Action Plan, Biodiversity Strategy, Action Plan on Zero Pollution for Water, Air and Soil), and continue to do so to finalize the proposals part of the Fit for 55 package in time for 14 July. The presentation of the package already had to be postponed once from June. Officials from DG ENV warned that the pressure on staff could endanger the Commission’s ability to deliver on all of its objectives and targets under the European Green Deal by 2024, as planned in the strategy. The situation will not be improved by a reduction of human resources finances for the Commission in the EU’s 2021-2027 budget.

Slovenian Presidency of the EU 2021 logo

START OF THE SLOVENIAN COUNCIL PRESIDENCY: Slovenia took over the rotating Presidency of the Council of the EU on 1 July, succeeding Portugal, and will hold the Presidency for six months. Slovenia will therefore lead the negotiations among Member States on the legislative proposals that are part of the Fit for 55 package, which is listed as a priority in the Slovenian Presidency program. You can read our recap of the Transport priorities of the Slovenian Presidency.

Deep dive – The Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism (CBAM) imposes a CO2 charge to be applied on products entering the EU from third countries. The goal of the European Commission is to ensure that the EU’s environmental targets are met while still protecting EU industries by ensuring a level playing field between EU and foreign manufacturers. EU manufacturers having to submit to the EU’s more stringent environmental rules can result in an increase in costs of production and may impact the competitiveness of EU companies compared to their foreign competitors.

With the CBAM, the European Commission specifically wishes to avoid ‘carbon leakage’, which refers to EU industries relocating production abroad in countries with weaker environmental policies, resulting in lower production costs.

How will the Carbon Border Adjustment Mechanism work?

Third country companies importing into the EU products that are targeted by the CBAM will need to report yearly the amount of CO2 emissions “embedded” in the products they export, meaning the amount of CO2 emitted in production. To compensate their CO2 emissions, industries will have to surrender a number of CBAM certificates, purchased to a new authority, corresponding to the total embedded emissions of the products imported into the EU.

Which sectors and countries will the Carbon Border Adjustment Mechanism apply to?

The CBAM will first apply only to goods of certain sectors considered energy-intensive or at high risk of carbon leakage: steel, iron, cement, fertilizers, aluminum, and electricity. However, the proposal plans for the Commission to have the power to extend the mechanism to other sectors, such as paper, glass, oil refinery or chemicals, which was requested by the European Parliament.

The CBAM has the potential to apply to all non-EU countries, but the European Commission will have the competence to adopt delegated acts excluding certain countries from the CBAM, notably those that are integrated in the EU Emissions Trading System (e.g. Iceland, Lichtenstein, Norway), or those having agreement to link their own emissions trading system with the EU ETS (e.g. Switzerland).

What will be the impact of the CBAM?

As it stands now, the CBAM will primarily financially impact non-EU companies importing steel, iron, cement, fertilizers, aluminum, and electricity into the EU, as both costs and administrative procedures to import in the EU will increase. EU companies that are reliant on those imports for their supply chain will also be impacted as they will likely see the impact of these increased costs on the prices charged. However, for EU companies producing these goods, the levelling of the playing field will increase their competitiveness on the EU market.

The introduction of this mechanism might also have effects on international carbon pricing. The latest G7 Summit, held between 11-13 June in Cornwall, UK, notably recognized the potential of carbon markets and carbon pricing to reduce emissions, which could lead to a widespread adoption of such mechanism, or at least to an international agreement on carbon pricing, which could lead to an increase in operational costs for energy-intensive industries.

What are MEPs saying?