July 15, 2021
European Commission proposes legislative package including environmental tax measures to support EU climate ambitions
On 14 July 2021, the European Commission (the Commission) presented its “Fit for 55” legislative package (Fit for 55 or the package). Fit for 55 is a comprehensive step in overhauling European Union (EU) legislation to align it with its increased climate ambitions as stated in the European Green Deal (EGD). It consists of 13 interconnected legislative proposals, including revisions to existing laws and proposals of new legislation. The package is comprehensive and complex in nature and it is expected to virtually impact every industry. While months of negotiations between the 27 EU Member States and the European Parliament will follow, businesses can start to digest and analyze what the changes may mean for their operations and their sustainability transformation plans.
Following the announcement of the EGD, the EU agreed last April to reduce greenhouse gas emissions by at least 55% by 2030, as compared to 1990 levels. Fit for 55 is meant to align the laws to achieve this emissions reduction and transition to a greener economy. The package includes plans to: (i) combine the expansion of emissions trading to new sectors and a tightening of the existing EU Emissions Trading System (ETS); (ii) increase use of renewable energy; (iii) generate greater energy efficiency; (iv) promote a faster roll-out of low emission transport modes and the infrastructure and fuels to support them; (v) align taxation policies with the objectives of the EGD; (vi) introduce measures to prevent carbon leakage; and (vii) provide tools to preserve and grow the natural carbon sinks.1
Fit for 55 contains 13 legislative proposals consisting of revisions to existing laws and new legislation. All the proposals are closely interconnected and each one complements the design of the other as summarized below.2
Revisions to existing laws
- EU ETS – The Commission proposes a substantial modification to the EU ETS by lowering the overall quantity of available emission allowances and sharpening the rate of their annual reduction.3 The Commission also proposes to phase out free emission allowances for aviation and align with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Similarly, the proposal extends the scope of the EU ETS to the maritime transport, covering emissions from intra-EU voyages, from ships at berth in a port under the jurisdiction of a Member State and 50% of emissions from voyages ending at or departing from EU ports. In addition, a separate new emissions trading system is set up for fuel distribution for road transport and buildings to compensate the lack of reduction of emissions in those sectors.
- Effort Sharing Regulations (ESR) – The Commission proposes to assign strengthened emissions reduction targets to each Member State for buildings, road and domestic maritime transport, agriculture, waste and small industries. The targets would be based on Gross Domestic Product per capita to address concerns that richer Member States were trying to shift more of the burden onto the most polluting economies.
- Regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF) – The proposal sets an overall 2030 target for carbon removals by natural sinks equivalent to 310 million tons of CO2 emissions. This would require the 27 EU Member States to care for and expand their carbon sinks (see also EU Forestry Strategy below). The overall aim is to reach climate neutrality in land use, forestry and agriculture sectors by 2035.
- Renewable Energy Directive – The Commission proposes an increased 2030 target to produce 40% of the energy from wind, solar and other clean power sources. It also sets the benchmark of having renewables account for 49% of the energy used in buildings by 2030. Moreover, the sustainability criteria for the use of bioenergy are strengthened to incorporate the cascading principle of uses for woody biomass.
- Energy Efficiency Directive – The proposal sets a binding annual target for reducing energy use at the EU level. The Commission wants Member States to increase the share of renewable energy used in heating or cooling buildings by 1.1% each year and perform renovations to public buildings at a rate of 3% each year to increase energy efficiency. This is expected to create jobs in addition to the environmental benefits.
- Energy Taxation Directive – The Commission proposes to align the taxation of energy products with EU energy and climate policies. Taxation of fuels and electricity would be based on how much pollution they generate rather than volume. The proposal also updates minimum rates, which have been unchanged for almost 20 years, and removes exemptions and reductions offered by national governments that currently encourage the use of fossil fuels.
- Regulation setting CO2 emission standards for cars and vans – As proposed, the new standards would accelerate the transition to zero-emissions mobility by reducing the average emissions of fleetwide CO2 emissions to 55% from 2030 and 100% from 2035 compare to 2021 levels. That gives the Member States about 15 years to get cars that depend on fossil fuels off the road and a few years for the industry to develop the necessary technology and boost local production of battery cells and other components.
- Alternative Fuels Infrastructure Directive – In combination with the CO2 emission standards for cars and vans and to facilitate drivers to charge and fuel their vehicles efficiently, Member States would be required to expand charging capacity that can cater for the demand in zero-emissions vehicles. The Alternative Fuels Infrastructure would also require availability of clean electricity in major airports and ports accessible to aircraft and ships.
New legislative proposal
- Carbon Border Adjustment Mechanism (CBAM) – A key element of Fit for 55, the CBAM aims to prevent the risk of carbon leakage and increase global efforts to reduce carbon emissions. As proposed, CBAM would put a price on certain imports covering, among others, iron and steel, cement, aluminum, fertilizers and electricity. The CBAM is intended to equalize the price of carbon between domestic products and imports and ensure that the EU's climate objectives are not undermined by relocating production to countries with less ambitious policies. CBAM would be introduced gradually starting with a transitional period between 2023 and 2025 where companies would only be required to report embedded emissions and any carbon price paid abroad. Is it then expected to become fully operational from 2026. The CBAM regime is closely connected to the EU ETS revision, particularly the proposed free allowances reduction measures.
- EU Forest Strategy – The Commission aims to improve the quality, quantity and resilience of EU forests by planting at least three billion trees by 2030.
- Climate Action Social Facility – The Commission proposes a new Social Climate Fund to provide €72.2 billion to Member States between 2025 and 2032 to help citizens finance investments in energy efficiency, new heating and cooling systems, and cleaner mobility.
- ReFuelEU Aviation and FuelEU Maritime – As proposed, the ReFuelEU Aviation initiative would require most EU airports to provide greener jet fuel to airlines by 2025. Similarly, the FuelEU Maritime initiative would set a limit on the greenhouse gas content of energy used in ships calling at EU ports, which is expected to stimulate the uptake of greener maritime fuels.
Due to economy-wide implications impacting all industries and consumers, Fit for 55 is expected to trigger months of negotiations between the 27 Member States and the European Parliament. Businesses are encouraged to closely follow developments related to the adoption of the proposals and factor the impacts into their current operations and sustainability transformation plans.
A more detailed communication on the legislative proposals included in the package is under development.
For additional information with respect to this Alert, please contact the following:
Fit for 55 general
Carbon Border Adjustment Mechanism
Emission Trading System
Energy Taxation Directive
Renewable Energy Directive