The EU adopts the Fit for 55 roadmap towards a 55% reduction in emissions by 2030

European Commission has just adopted Fit for 55, a package of proposals that outlines the EU’s path towards climate neutrality via its 2030 Climate Target. Jordan Hairabedian from EcoAct’s Research and Innovation Team explains what exactly that means.

In June 2021, European Climate Law set a new binding target of –55%  greenhouse gas (GHG) emissions by 2030 vs 1990 levels. The final aim is that all economic stakeholders reach climate neutrality by 2050, defined as a balance between the sources of anthropogenic GHG emissions (electricity production, thermal vehicles, buildings etc) and carbon sinks (forests, soils, wetlands).

Last month, the European Commission released 12 updates and new texts with ambitious measures for an effective mitigation, impacting States and companies’ strategies. Final versions are expected to be voted in 2023-2024, after discussions between the EU institutions and Member States.

Four main proposals for scaling up EU legislation regarding climate action

A more ambitious EU Emissions Trading System (EU ETS)

The EU ETS, the cap and trade scheme for key EU emitters sectors, raised its ambition. Currently, it includes power/heat sectors, energy-intensive industries (steel, paper, glass, cement, ceramic) and commercial aviation. The GHG emission reduction target to be reached by 2030 compared to 2005 levels would increase from -43% to -61%. Moreover, the maritime sector will be included from 2023 onwards.

An updated Effort Sharing Regulation (ESR)

The ESR establishes national binding annual GHG emission targets for sectors not included in the EU ETS (~60% of EU emissions): transport, buildings, agriculture, and waste. New mitigation objectives have been suggested by the European Commission: from 30% GHG emissions reduction to 40% by 2030 compared to 2005 levels. Specifically, France would have to increase its reduction efforts in these sectors from -37% to -47.5% by 2030, making the recent Climate & Resilience Law already obsolete as it only commits to a 40% reduction compared to 1990 levels by 2030.

A separate ETS for transport and building

The European Commission proposes to launch a separate ETS based on transport and building construction from 2026, which echoes Germany’s decision to set the price of GHG emissions in these two sectors from January 2021. Transport and building activities would be subject to an annual ~5% linear reduction rate, and a Social Climate Fund would be created with total provisions of €145 billion to support vulnerable households impacted by the new measures.

Towards a Carbon Border Adjustment Mechanism (CBAM)

The Commission also wants to create a new carbon pricing mechanism to reduce risks of carbon leakage and encourage non-EU producers to decarbonize. EU importers of high-carbon imports (iron, steel, electricity, cement, aluminium, fertilisers) would have to buy carbon certificates corresponding to the carbon price they would have paid if the imported goods had been produced in the EU. After a transition phase from 2023 to 2025, the system will become operational from 2026.

How are companies impacted? A sector-based analysis

The “Fit for 55” package’s key impacts on companies and businesses:

Electricity & Energy

• A new annual linear reduction of 4.2% would be applied in the scope of the EU ETS, instead of 2.2%.
• Renewable energy would have to reach a 40% share in the European mix instead of 32.5%.
• More energy efficient and circular energy system would be the rule.
• The sector would receive support from the Innovation Fund and the Modernization Fund.

Industry

• A new annual linear reduction of 4.2% would be applied in the scope of the EU ETS.
• The end of free ETS allowances would be applied from 2036 onwards.
• Iron, steel, and aluminium importers would be most affected by the Carbon Border Adjustment Mechanism, exposing Russia, Turkey and China specifically as main exporters.
• The sector would receive support from the Innovation Fund and the Modernization Fund.

Transport

• A separate ETS would cover road transport from 2026 with a ~5% linear reduction.
• The end of free ETS allowances would be applied in 2036 onwards.
• The specific emission target for new passenger cars and new light commercial vehicles would be 0 g/km by 2035, excluding thermal vehicles which concerns hybrid too.
• Higher taxation for carbon-intensive motor fuels would be planed.
• Sustainable aviation fuels & cleaner maritime fuels are expected to rise.
• New infrastructures for alternative fuels on roads (electric/hydrogen), ports (LNG) and airports (electric) are planned.
• A Social Climate Fund would help minimise the impacts on most vulnerable businesses and people.
• In addition, a new Effort Sharing Regulation target would be set, applying to Member States. Companies of the sector shall prepare to new national measures.

Building

• A separate ETS would cover buildings from 2026 with ~5% linear reduction.
• New energy efficiency target would aim reducing primary and final energy respectively by 39% and 36% by 2030 (instead of 32.5%).
• Higher taxation for carbon-intensive heating fuels would be planed.
• A Social Climate Fund would help the impacts on businesses and people.
• In addition, a new Effort Sharing Regulation target would be set, applying to Member States. Companies of the sector shall prepare to new national measures.

Land-use and forestry companies

• In 2035, land-based climate neutrality would be effective, implying significant mitigation actions from land-use, agriculture and forestry companies, as ecosystems preservation measures for increasing carbon sinks in the scope of nature-based solutions.
• The Union targets 310 MtCO₂ equivalent of net sinks by 2030 (from 225 today).
• New incentives would help farmers develop climate-smart agriculture

Core challenges of the “Fit for 55” package

A few concerns have been raised since the adoption of the package by the Commission, on both form and substance:

• The new targets & measures failed to win unanimous support as explained by Climate Action Network.
• Which measures are likely to be adopted and financed quickly in view of the timetable?
• Concerns are rising on possible new “gilets jaunes” movements, despite a Social Climate Fund.
• Some Commissioners had concerns either about the package itself or how it was pushed forward.

A long negotiation process is starting and could continue for more than two years under the six-monthly EU presidencies of Slovenia, France, Czechia, Sweden and Spain. Many unknowns prevail – Is the package ambitious enough to deliver the EU’s 2030 Climate Target? Will it be adopted quickly as it is? If not, what are the relevant alternatives as the 55% target is binding for Member States? Right now it is unclear but we expect initial answers to emerge in the next few months.