Energy & Natural Resources

Fit-for-55, en route to Fit-for-100

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Under the pressure of climate change and the urgency to act, the European Union has recently adopted the European Climate Law which enshrines into binding legislation the objective of climate neutrality by 2050 as well as an intermediate target of a 55% cut in emissions by 2030 compared to 1990 levels.

Having increased the EU’s target from 40% to 55%, the new Law will require the transport, buildings, industry, agriculture, infrastructure and energy sectors to contribute their fair share to the EU’s climate objective. In line with that new ambition the European Commission unleashed on 14 July a wave of new climate and energy legislation to make the EU “Fit for 55”.

Lost in climate legislation

With carbon pricing at the heart of the regulatory revamp, the EU Emissions Trading System (ETS) will constitute a major pillar of the new “Fit-for-55” package. The Commission will tighten the supply of emission permits under the current ETS in order to accelerate the pace of decarbonisation in the power sector, industrial installations and for intra-EU flights. While maritime transport will now be integrated into the existing carbon market, a separate ETS will be created to cover emissions from road transport and buildings – previously dealt solely by the Effort-Sharing Regulation.

Unlike ETS, the Effort-Sharing Regulation (ESR) sets national targets for emissions reduction – rather than EUwide goals – in sectors like road transport, buildings and agriculture. National targets differ widely, with much more stringent targets for wealthier Member States. The newly-established ETS will complement the ESR in the current scope, which strengthens incentives for national action.

The EU is also trying to export its climate rules through the proposed Carbon Border Adjustment Mechanism (CBAM), by imposing a levy on carbon-intensive imports from third-countries where there is less stringent climate legislation. The aim of this is to avoid “carbon leakage” – whereby high-emitting industries would relocate outside the EU to avoid tighter standards. This will however breed discontent among EU trading partners like China and Russia, which are already invoking a violation of WTO rules, claiming the EU leverages its climate policy to feed Europe’s recovery budget. The imports covered would initially include electricity, cement, fertilisers, iron, steel and aluminium.

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