“Europe is now the very first continent that presents a comprehensive architecture to meet our climate ambitions”. With these words, European Commission President Ursula von der Leyen unveiled on Wednesday 14 July the Commission’s proposed legislative package to achieve a reduction in the European Union’s net greenhouse gas (GHG) emissions of at least 55% by 2030 compared to 1990 levels, while putting the EU on a path to climate neutrality by 2050 (both targets set out in the recent ‘Climate Law’).
A balanced package?
Called the “Fit for 55’ package, this roadmap to the EU’s climate goals comprises no fewer than 13 legislative proposals, with the aim of forming a coherent whole.
The package includes measures related to the carbon market: revision of the EU Emissions Trading Scheme (ETS); creation of a Carbon Border Adjustment Mechanism (CBAM); establishment of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
The package also includes regulatory measures, whether revisions of existing EU legislation: Regulation 2018/842 on effort sharing, Directive 2018/2001 on renewable energy, Directive 2018/2002 on energy efficiency, Regulation 2018/841 on land use and forestry, Regulation 2019/631 setting CO2 emission standards for new cars and vans, Directive (2014/94) on the deployment of an alternative fuels infrastructure.
It also proposes new legislation: creation of a Social Climate Action Mechanism; proposal for a regulation on sustainable fuels for aircraft (‘ReFuelEU Aviation’); proposal for a directive to increase the use of sustainable alternative fuels in maritime transport (‘FuelEU Maritime’).
Finally, it also introduces new taxation issues through the revision of the Energy Tax Directive 2003/96.
“We have tried to make a balanced package”, said the Commission’s Executive Vice-President in charge of the European Green Deal, Frans Timmermans.
Of all these proposals (which are detailed in our columns— see other news), the proposal to reform the ETS system is particularly important, both because of its scope and because of its controversial nature.
Strengthening the ETS system
Introduced in 2005, the EU ETS created a carbon market covering emissions from around 10,000 installations in the power sector, manufacturing industry, as well as airlines for flights within the European Economic Area (EEA).
It is based on the principle of cap-and-trade, leading companies covered by the system to either reduce their emissions or buy more emission rights from other players on the carbon market.
In order to strengthen it, the Commission proposes, among other things, that the linear reduction factor—the percentage by which the cap will be reduced each year—be increased from 2.2% to 4.2%, starting from the year after the entry into force of the ETS revision.
This increase is combined with a ‘one-off’ reduction in the emissions cap, “so the new linear reduction factor has the same effect as if it would have applied from 2021 [onwards]”, the revision proposal states.
It continues, “This ensures that the overall quantity of allowances (‘cap’) will decline at an increased annual pace resulting in an overall emission reduction of sectors under the EU ETS of 61% [compared to 43% under the current system] by 2030 compared to 2005”.
Asked when this one-off reduction would take place, a senior EU official said it would have to wait until the new legislation was in place.
However, the Commission does not plan to introduce a carbon price floor.
Free quotas
As for free allowances, the institution wants to phase them out gradually, as it intends to establish a border Carbon Border Adjustment Mechanism (CBAM) designed precisely to avoid carbon leakage.
Under the current ETS, these allowances are fixed until 2025. From 2026 onwards, they will be reduced by 10% per year, to be completely abolished in 2036, according to the proposed revision. Simultaneously with this phase-out, the CBAM should be introduced (‘phase-in/phase-out’).
The Commission also proposes a complete phase-out of free allowances for intra-EEA aviation between 2024 and 2027 (EUROPE will come back to this).
Extension to the maritime sector
As announced in our columns (see EUROPE 12760/2, 12752/1), the revision proposal also includes the extension of the ETS to shipping emissions from 2023.
This would cover emissions from intra-EEA journeys, emissions at berth in a port under the jurisdiction of a Member State, and 50% of emissions from all extra-EEA journeys (inbound and outbound).
Under the proposed revision, the obligation to surrender allowances will apply to the companies operating the ships and will be progressive (for more details see EUROPE 12752/1).
A new carbon market
As predicted in the drafts leaked to the press, the Commission is also proposing to establish a separate, but adjacent to the current system, ETS for emissions from road transport and buildings (heating), as well as the creation of a new fund to mitigate social impacts, in particular for the most vulnerable households (see other news).
“We chose carbon pricing as a clear guiding and market-based instrument with a social compensation”, said Mrs von der Leyen.
Towards a refusal by the Parliament?
Welcoming the Commission’s work, the chairman of the European Parliament’s Committee on the Environment, Public Health and Food Safety (ENVI), Pascal Canfin (Renew Europe, France), reiterated his opposition to the creation of a new ETS for road transport and buildings, as “the associated climate gains are extremely small and the political costs are extremely high”.
In his view, the Commission should have accompanied this proposal with “alternative options” to reduce emissions from these two sectors while maintaining the coherence of the ‘Fit for 55’ package, in order to create the conditions for “an informed debate”. “Today, there is a form of forceful passage of the Commission on this subject”, he said.
He added, “I will therefore work from the European Parliament to ensure that there is a majority to abandon this project”. This is a possible scenario, according to him: “What I see today is that the Greens/EFA are against, the majority of Renew Europe is against, a large part of the socialist delegations (S&D) are against, The Left is against and, for other reasons, ECR and ID are against”.
Asked about the criticism, Mr Timmermans said the Commission had chosen the “best proposal”, but called on its critics to suggest alternatives.
This option, he says, compensates for undesirable social effects, because strengthening and extending the ETS means more revenue from auctioning allowances.
Use of income
Currently funded by auctioning 450 million allowances from 2020 to 2030, the Innovation Fund will be almost doubled in size (including an additional 50 million allowances from the ETS and 150 million allowances from the new ETS), a senior European official said.
Regarding the Modernisation Fund, whose resources come mainly from the auctioning of 2% of total allowances for the period 2021-2030, the proposal foresees to keep this percentage. The objective remains the same: to assist the ten Member States whose GDP per capita at market prices in 2013 was less than 60% of the EU average in their transition to climate neutrality (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Slovakia).
However, the Commission also foresees the auctioning of an additional 2.5% of the ceiling to finance the energy transition of Member States whose GDP per capita is below 65% of the EU average in 2016-2018, through the Modernisation Fund. The 10 countries mentioned above, as well as Greece and Portugal, will benefit from this income.
Finally, it should be noted that the Commission is also proposing changes to the ETS for aviation, in particular to bring it into line with the CORSIA system (EUROPE will come back to this).
See the revision proposal: https://bit.ly/3efi6Ld (Original version in French by Damien Genicot)