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"Fit for 55": The EU's new climate goals and the EU ETS, Part II

Simon Goess's picture
Co-founder, cr.hub

Simon Göß studied Environmental and Resource Management (B. Sc.) at the Brandenburg University of Technology Cottbus and Sustainable Energy Technology (M. Sc. Honours) at the Delft University of...

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  • Aug 4, 2021
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Originally published here and co-authored by Christoph Kellermann 

The European Green Deal, presented by the European Commission on December 11, 2019, aims to make Europe the first climate-neutral continent by 2050. With the announcement of July 14, 2021 that the climate targets and measures would be tightened, the EU once again assumed a pioneering role among the major greenhouse gas emitters. The ambitious program envisages drastically reducing emissions by 2030.

 

© Sven Petersen / Fotolia

After the decisions at EU level in mid-July 2021, here is the second part of our series on the proposed changes to the European climate strategy and the effects on the EU emissions trading system (EU ETS). The “Fit for 55” package of measures by the European Commission, with which the goal of reducing greenhouse gases by 55 percent by 2030 compared to the reference year 1990, is now within reach, and months of negotiations between the 27 EU countries and the European Parliament are now ahead of them.

 

An ambitious climate package

The package of more than ten cross-sectoral legislative proposals includes eight revisions of existing legal provisions and five completely new proposals, as shown in Figure 1 (source: EU Commission ).

Measures and proposals of the “Fit for 55” package (source: EU Commission).

Figure 1: Measures and proposals of the “Fit for 55” package (source: EU Commission).

The ambitious goals are initially formulated openly and leave some measures open for the concrete implementation of the goals. In the following, we will discuss the changes to the existing emissions trading system (EU ETS), the planned new emissions trading system for road traffic and buildings, the controversial CO 2 border adjustment mechanism (CBAM) and the new CO 2 standards for vehicles.

Tightening and expansion of the EU ETS

The previous system of the EU ETS covers around 40 percent of total emissions in the EU. The ETS has proven to be one of the most effective instruments for decarbonisation. By expanding it to other emission-intensive sectors, such as air traffic, the effectiveness could be further increased. In the newly developed version of the “Fit for 55” package, the share of EU emissions is to be increased further within a regulated trading system. With EU emissions trading for energy generation, industry, sea and air transport (EU ETS I), the emissions recorded here are to be reduced by 61 percent by 2030 instead of 43 percent compared to 2005 as before. In addition to energy generation, industry and aviation, according to the proposals of the EU Commission, shipping will now also be added from 2026. A stricter reduction factor of the upper limit for emission certificates of 4.2 percent per year was set from 2024. The upper limit should be a one-off amount of 117 million CO2 certificates are lowered.

Similar to the national German emissions trading system, an ETS is also to be introduced for the road traffic and building sectors from 2026. As the two sectors account for 22 percent and 35 percent of EU emissions, respectively, decarbonising them is essential to achieve the EU's climate targets. The emissions recorded in the EU emissions trading system for road traffic and buildings (EU ETS II) should be reduced by 43 percent by 2030 compared to 2005. A reduction factor of the fixed number of certificates to be issued annually of 5.15 percent to 5.43 percent per year has been defined.

At the same time, the building and road transport sectors should continue to be included in the Climate Action Regulation. Nation states must therefore continue to promote their own emission reduction targets and their implementation in both sectors. Figure 2 shows the different reduction targets in the existing and the new EU ETS and according to the Climate Action Regulation.

 

Emission reduction targets by 2030 in different measures and sectors (source: Energy Brainpool).

Figure 2: Emission reduction targets by 2030 in different measures and sectors (source: Energy Brainpool).

 

In the ETS for traffic and buildings, there should be no grandfathering and therefore no free allocation of certificates. Similar to the established EU ETS, a market stability reserve (MSR) is to be introduced to remove unused certificates from the market. 25 percent of the income from the new certificate trading is to flow into a new social climate fund. The money from the Social Climate Fund is intended to support socially disadvantaged citizens and companies in renovating buildings and buying environmentally friendly cars. The fund also makes temporary lump-sum payments to socially disadvantaged households to compensate for the rise in fuel and heating oil prices.

The “Fit for 55” package also provides for an EU-wide minimum tax rate based on energy content for environmentally harmful aviation fuels such as kerosene and for environmentally harmful boat and marine fuels from 2023. This does not apply to pure cargo flights. The basic principle behind the idea of ​​the kerosene tax on intra-European flights is a good instrument to effectively counteract unnecessary air travel. However, this puts countries on the edges of Europe at a disadvantage which, in contrast to the countries of Central and Western Europe, do not have an adequate infrastructure network.

Controversial: the CO 2 border adjustment mechanism

From 2023, with a transition period of 3 years until 2026, a CO 2 border adjustment mechanism or Carbon Border Adjustment Mechanism (CBAM for short) is to be introduced. The CBAM corresponds to a kind of climate tariff and is payable on products that have been manufactured in a carbon-intensive manner outside the EU. This controversial mechanism is intended to ensure a level playing field between companies from the EU area and companies from other economic areas. Any competitive disadvantage that EU companies could suffer as a result of the stricter climate targets is to be compensated for.

The CBAM is intended to tax emissions-intensive imports based on the price in European emissions trading. Initially, the CBAM will only apply to selected goods, including cement, iron and steel, aluminum, fertilizers and electricity. The importing companies are then obliged to buy CBAM certificates, the price of which should correspond to that of the certificates in the existing EU ETS for energy generation and industry. However, the current draft is criticized as being too bureaucratic, as a new CBAM authority has to be set up.

This CO 2 compensation mechanism is intended to prevent “carbon leakage”. “Carbon leakage” describes a situation in which there is a shift of carbon dioxide emissions to third countries outside a region with stronger climate ambitions, in this case the EU. The CBAM can be used as a leverage to persuade previously less ambitious countries and companies to do more climate protection if they want to sell their goods in the EU. However, this compulsion for more climate protection is difficult to design and administer in accordance with the international trade rules of the World Trade Organization. There could possibly be retaliatory measures from other trading partners.

At the same time, with the introduction of the CBAM, the previously partially free allocation of certificates to European industry is to be gradually replaced. The number of freely allocated CO 2 certificates is to decrease by 10 percent annually from 2026 and to expire completely in 2035. The industry claims that this companies that export products from the EU, would penalize and to a shift of CO 2 could lead emissions because EU companies then the CO 2 EU emissions trading system would have to pay in prize. Figure 3 shows the CBAM schedule.

 

Timetable of the CO2 border adjustment mechanism in the EU (source: Energy Brainpool).

Figure 3: Timetable of the CO 2 border adjustment mechanism in the EU (source: Energy Brainpool).

 

Zero emission vehicles by 2035?

The news that has been discussed the most in the media is the goal of reducing emissions from new vehicles by 55 percent by 2030 and by 100 percent by 2035. Due to the manufacturers' technical and economic difficulties, however, there remains a back door: the regulation on zero-emission vehicles could be postponed to 2040. In general, as things stand today, this measure means increased electrification of traffic and the end of the age of conventional internal combustion engines. Some vehicle manufacturers are planning to do without combustion engines completely by 2030 or at least to sell all of their vehicles in electric versions.

Such electrification, however, has far-reaching implications for ensuring continued grid stability and security of supply. This can only be achieved with an expansion of flexibility options on the part of the electricity grid and market, as well as with a very large expansion of carbon-free generation options. Furthermore, uniform regulations regarding bidirectional charging must be issued so that electric cars can also serve as storage. In order to ensure grid security and security of supply in the future, power grids must become intelligent so that they can react individually depending on the feed-in or load situation. This should take place in the interaction of smart meters and the necessary communication technology, which would have to be installed in every household.

What are the next steps?

In summary, the changes to emissions trading in the “Fit for 55” package are a correct and important step by the EU towards greenhouse gas neutrality. In combination with the increased targets in the Renewable Energy Directive (40 percent of final energy consumption instead of 32 percent by 2030), energy efficiency and also a target of 310 million tons of negative annual emissions from CO 2 sinks in the LULUCF sector ( Land use, changes to it and forestry), the EU can take on a progressive pioneering role in reducing global CO 2 emissions (see Figure 4, source: EEA ).

 

Historical development of European CO2e emissions and target for 2030 (source: EEA).

Figure 4: Historical development of European CO 2 e emissions and target for 2030 (source: EEA).

 

However, the climate package is not yet binding laws. The schedule for the entry into force of the final regulations at the end of 2023 and the end of 2024 is still some time in the future, despite the need for climate policy, but is ambitious due to the political discussions. In order to achieve the new ambitious goals, the guidelines described in the new climate package must not be watered down or postponed further in the negotiations and legislation in the individual member states that will now follow.

The principle of climate justice must also be more in focus so that a climate-neutral Europe can be achieved for all social classes. Ultimately, a detailed master plan is required with corresponding regulations for the promotion of key technologies with which climate neutrality can be implemented gradually and beyond the 2030 goals.

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