The keys to Europes Fit for 55: CO2 pricing, sustainable fuels and border adjustments
21 July 2021
The European Commission unveiled on Wednesday, 14 July, the legislative package known as "Fit for 55" which aims to prepare Europe to become the world's first emission-neutral continent. This proposal sets out the way forward, by the different sectors concerned, and the necessary reforms and actions to be taken, in order for Europe to achieve its 2030 climate goals through a fair, green and competitive transition. To this end, and in line with the commitment of the various countries to the Paris Agreement, the 27 Member States of the EU bloc have pledged to reduce their emissions by "at least -55% compared to 1990 levels". This new package of measures is expected to generate new opportunities in research, innovation and the creation of new 'green' jobs. In the words of the Commission: "The world is at a crucial moment to tackle the major problem of climate change once and for all, and we are the last generation that can act in time to reverse this grave situation".
According to the analysis of Factor Ideas for change, a group specialised in climate solutions, with yesterday's proposal, the European Commission provides the necessary legislative tools to achieve the climate objectives, strengthens 8 existing legislations and presents 5 new initiatives, which will affect a wide range of areas and economic sectors: climate, energy and fuels, buildings, land use and forestry. The proposed policies are based on: CO2 pricing, new targets, standards and support/financing measures.
EU ETS market
The EU ETS is responsible for setting a price on CO2. Over the past 16 years, it has managed to reduce emissions from electricity generators and electro-intensive industries by 42.8 % and now covers 41 % of the total emissions. The Commission proposes that the sectors concerned by the EU ETS should reduce their emissions at least a 61% by 2030 compared to 2005 levels, an increase a 18 % compared to the current target of 43 %. Other key proposals include:
- Re-basing 117 million tonnes and increasing the LRF from 2.2 % to 4.2 %.
- Maintain the MSR phase-out rate at 24 % until 2030.
- Phasing out free allocation for the aviation sector, also included in the EU ETS, and auctioning 100 % of allowances by 2027. In addition, it mentions aligning the sector with CORSIA.
Eric Bernard, corporate trader at Factor Trading, says the measures adopted will help achieve the targets set and make Europe the first emission-neutral continent. "It is the first time in history that we know where we have to go and which way to go. However, the counterpoint is the lack of price control on CO2, as we have seen a roller coaster of price rises and falls in recent times and this makes it difficult for the industry to plan its deliveries and compliance," says Bernard.
The maritime sector has been proposed to be included in the EU ETS
The Commission proposes to include ships over 5,000t regardless of the flag under which they sail. Its intention is for its scope to include ships sailing within the EU and to affect 50 % of the voyages that start or end at a European port. Its implementation will be gradual from 2023 and with 100 % compliance of its emissions in 2026.
Buildings and road transport
Fossil fuels used in road transport and buildings are a major source of pollution, accounting for almost 20 % of emissions, and have so far proved to be difficult to decarbonise. The Commission wants to introduce a new ETS, separate from the current one, and foresees its implementation by 2026. Compliance will be the responsibility of fuel suppliers, with a cap similar to that used in the EU ETS, annual reductions and a specific MSR for this market.
The Commission also sets a 60-90 % reduction in emissions from new vehicles compared to today's emissions and a ban on the sale of all fossil combustion vehicles by 2035.
European forestry strategy and carbon sinks
Member States will also be responsible for capturing and absorbing emissions from the atmosphere. This is why the "Fit for 55" package aims to strengthen the role of natural sinks, and to set a target of 310 million tonnes of CO2 absorption by 2030. The targets in this area will be set at national level and it will be up to the individual states to take the necessary measures to achieve them. By 2035, the EU aims for neutrality in land use, forestry and the agricultural sector, including fertilisers. The forestry strategy, which aims to improve the quality, quantity and resilience of forests, sets a target of planting 3 billion trees across Europe by 2030.
Energy production and use accounts for up to 75 % of total emissions in the EU. Accelerating the energy transition towards cleaner energy production is therefore essential. The new renewable energy directive sets a target of 40% of our energy production to come from renewable sources by 2030. The previous target was set at 32 %. It also increases the targets for the diffuse sectors, which encompasses all those not affected by the EU ETS, setting it at -40%.
CBAM and free allocation
The Commission has put on the table the implementation of the CBAM (carbon border adjustment mechanism), a sort of border adjustment, whose objective is to include the cost of CO2 to those products imported from outside the European Union bloc and which do not prove that their products have already been taxed in their countries of origin. With this, Europe wants to protect industry from possible relocation while encouraging third countries to introduce mechanisms that tax the cost of polluting and raise the problem of reducing emissions to an international dimension.
The Commission is also proposing more sustainable fuels for the aviation and maritime sectors in addition to the ETS. The Commission wants fuel suppliers at EU airports to increase the sustainable fuel mix, as well as to increase the share of the use of so-called "e-fuels". It also leaves the door open to the participation of future innovative newcomers to the sector, such as electricity or hydrogen.
For the maritime sector, the European Commission will ensure and promote the use of efficient and sustainable biofuels, as well as electro-fuels with the best CO2 emission performance.
Factor Ideas for change
Factor has more than 15 years of experience offering technical consulting services in the areas of climate change adaptation and mitigation, carbon footprint analysis, sustainability, circular economy, renewable energy and carbon markets, amongst other things, undertaken on behalf of governments and international organizations, as well as for over 400 companies, with more than 1,100 projects undertaken within 40+ countries.