The Fit for 55 package is almost at its completion, what better time to take a moment to reflect on this groundbreaking set of legislative proposals, their objectives and ambitions, as well as their impact on the European Union (EU) economy?
Most of the proposals will soon enter into force and Member States will be tasked to implement them at national level. Organisations will therefore have to face the consequences of the emissions reduction targets and clean energy objectives on their business operations.
What is the Fit for 55 package?
The year 2021 has been a landmark year for the European Union’s green transition. On 14 July the European Commission published the Fit for 55 package, setting rules to achieve at least 55% greenhouse gas emissions reduction by 2030, compared to 1990 levels. The package is one of the deliverables of the European Green Deal and places the EU on a path to become the first climate-neutral continent by 2050.
With its 15 proposals, the Fit for 55 package has been the first of a kind attempt to radically transform the EU regulatory framework on climate and energy. Notably, the package places most sectors of the economy on a trajectory towards net-zero. It focuses on reducing emissions in the energy, industry, transport and building sectors, with an eye for the land-use and forestry sector as well.
Why the need for the Fit for 55 package?
The 55% target was no ground-breaking novelty. It had already been adopted in the European Climate Law, which translated the objectives of the Green Deal into law and determined the course of action towards the climate neutrality by 2050. Why then was the Fit for 55 package needed? The policy package sets concrete obligations on how to meet these targets and revises EU legislation to ensure EU policies are fit for delivering a timely 55% greenhouse gas emissions reduction.
What are the main objectives of the Fit for 55 package?
- Decarbonisation of production processes;
- New and stricter obligations on greenhouse gas emissions for economic activities;
- Strengthening the role of carbon pricing and avoiding carbon leakage;
- Promotion of clean mobility and fuels;
- Transformation of the EU energy system, increasing renewable energy and reducing energy consumption;
- Enhancing the role of natural carbon sink.
The energy and climate transition will require a significant transformation of the EU economy and society towards greener and more sustainable activities. Organisations and companies will have to adjust their business models and long-term strategies to align them with the EU targets and requirements.
The impact of the Fit for 55 package on businesses and organisations
Now that almost all legislative proposals reached the end of their legislative process and new rules are entering into force, your organisation should internally assess where it stands in the path to net-zero and identify challenges and opportunities throughout your value chain.
Even though the Fit for 55 package does not affect you directly, it will likely have an impact on your business partners, on the opportunities to attract capital – strategic to decarbonise your operations – and on the costs of goods and commodities in the EU.
This means that every business operating in the EU will have to start updating their strategy in line with the new rules, reducing their carbon footprint (together with business partners and end-consumers), and translating possible risks into opportunities to ensure that climate ambitions are met, but more importantly continue to support your growth.
Without a doubt, the new rules under the Fit for 55 package will have a huge impact on your operations. At Publyon we are committed to helping companies and organisations navigate regulatory changes and challenges. We offer tailor-made solutions such as EU Policy Impact Scan to provide you with a comprehensive analysis of the EU regulatory framework’s impact on your organisation. Get in touch if you would like to know more about the opportunities and risks for your company.
What are these new Fit for 55 rules?
The section below provides you with an overview of the 15 legislative files that constitute the Fit for 55 package and the main changes that these will bring to the EU economy.
Overview of Fit for 55 legislative files
EU Emissions Trading System
The EU Emissions Trading System (EU ETS) is one of the cornerstones of the EU effort to reduce greenhouse gas emissions. How does it work? The EU ETS is a carbon market based on the “polluters pay” principle. It sets up a “cap and trade” system of allowances for all the sectors falling under the scope.
Currently, the sectors already covered by the EU ETS are electricity and heat generation, energy-intensive industry (e.g., oil refineries, steel, cement, glass and paper production), and commercial aviation. The latest revision of the EU ETS expands the scope to shipping, phases out free allowances for aviation and plans to create a separate ETS for road transport and buildings from 2026 on.
The expanded scope is not the only recent change in the EU ETS. The revision also increases the ambitions of the emissions reduction target from 43% to 62% by 2030. This means that the ETS allowances put in the market every year will be reduced at a faster pace.
Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM) aims to ensure that the climate efforts in the EU do not lead to carbon leakage. This could happen for instance through the relocation of production to non-EU countries with lower climate targets or the import of carbon-intensive products in the EU.
Technically, the CBAM is a carbon tariff, targeting imported goods from carbon-intensive industries outside of the EU, which would fall under the EU ETS. This means the CBAM will apply to cement, aluminium, fertilisers, electric energy production, hydrogen, iron and steel, as well as some precursors and a limited number of downstream goods.
Until the end of 2025, companies will have to report on products’ carbon footprint. From 2026, they will have to declare the greenhouse gas emissions embedded in the imported products and therefore pay the corresponding price.
Social Climate Fund
The EU ETS and the CBAM will have a profound impact on the EU economy and society, notably raising costs for targeted products and sectors. This will create a new burden on citizens and businesses across the EU.
To support vulnerable households, consumers and SMEs with the implementation of these changes, the EU set up the Social Climate Fund. The fund will be used to finance measures, for example by providing financial support with higher prices for car fuel and heating/cooling at home. It will be financed by the auctioning of ETS allowances and national resources, for a final estimated amount of €86,7 billion.
CO₂ emission standards for cars and vans
Road transport will be severely impacted by the Fit for 55 package. The revision of the CO₂ emission standards for cars and vans will require that average emissions from cars and vans decrease by 55% from 2030 and 100% from 2035.
This means that new cars sold after 2036 will need to respect a zero-emissions standard, paving the way for the electrification of road transport. Does this mean that combustion-engine cars will have no future? Not really. After 2035, vehicles with a combustion engine will be allowed for sales and use, running on e-fuels only.
As the lifespan of cars is around 15 years, the new rules aim to force manufacturers to convert their production into electric and CO₂-neutral cars in order to achieve the full decarbonisation of road transport by 2050.
Alternative Fuels Infrastructure Regulation
The EU’s decarbonisation objectives for transport need (see point above) to go hand-in-hand with a sufficient infrastructure network for recharging and refuelling stations.
For this purpose, recharging and refuelling stations for alternative fuels need to be well-established along the existing Trans-European Transport (TEN-T) Network. The new rules in the Alternative Fuels Infrastructure Regulation (AFIR) require that recharging stations for cars and trucks are installed every 60 km from 2025 and hydrogen refuelling stations are installed every 200 km.
Roads are not the only type of infrastructure covered in the regulation. To decarbonise maritime and aviation, recharging and alternative refuelling stations must also be installed in maritime ports and airports by 2030.
Renewable Energy Directive
The EU’s greenhouse gas emissions reduction target cannot be met without a shift in energy sources. The main pillar in the Fit for 55 package for energy transition is the Renewable Energy Directive (RED), which recently underwent a third revision (RED III). The RED provides an EU framework for the development and uptake of clean energy, from alternative fuels (biofuels, hydrogen, synthetic fuels) to renewable energy sources (solar, wind).
The new rules under RED III set a 42.5% target share of renewable energy in the EU grid by 2030. Moreover, for the first time, RED III includes sector-specific targets for transport, industry, buildings, and district heating and cooling. Why these sectors? According to the Commission, they have been slow taking up renewables over the past years.
Following Russia’s invasion of Ukraine and the consequent decision to phase out Russian fossil fuels from the EU grid, the EU has to further accelerate the uptake of renewable energy sources. This is why the revision of RED adds provisions for fast-tracking renewable energy projects through “renewables acceleration areas”, as proposed by the Commission in the REPowerEU plan.
Land Use, Land-Use Change and Forestry Regulation
The Fit for 55 package includes the revision of the Regulation on the Land Use, Land-Use Change and Forestry (LULUCF), which increases targets for carbon removal and emissions reduction in the land use and forestry sectors.
LULUCF sectors (soil, trees, plants, biomass and timber) play a crucial role in capturing CO₂ from the atmosphere, yet they are also responsible for emitting greenhouse gases. For this reason, the revised rules set an EU target of 310 Mt CO₂ equivalent net removals (carbon sink) by 2030 in LULUCF sectors, supplemented by national trajectories for Member States to achieve this objective.
Effort Sharing Regulation
Transport, buildings, energy-intensive industry and LULUCF are not the only sectors which need to contribute to the 55% emissions reduction target. The Effort Sharing Regulation ensures that road transport and buildings (until they are integrated in the EU ETS), domestic maritime transport, agriculture, waste management and small industries also contribute to the Fit for 55 package objectives.
The revision increases the EU greenhouse gases emissions reduction target from 29% to 40% by 2030, compared to 2005. Each Member State has its national target to achieve by 2030 and cannot exceed its annual greenhouse emissions allocation.
To reduce the carbon footprint of the maritime sector, the FuelEU Maritime regulation provides a framework for the uptake of renewable and low-carbon fuels. The greenhouse gas intensity of energy used should gradually decrease over time, starting by 2% in 2025 to achieve an 80% reduction by 2050.
Passenger ships and containers will have to uptake biofuels, biogas, renewable fuels of non-biological origin (RFNBO) and recycled carbon fuels to achieve these targets. Notably, incentives are given to support the use of RFNBO with high decarbonisation potential (e.g., hydrogen). The new rules will apply from 1 January 2025.
One of the issues that is hampering the decarbonisation of the aviation sector is the low supply and high costs of sustainable aviation fuels (SAF) compared to kerosene. To tackle this issue, ReFuelEU Aviation requires that airlines uplift an increasing percentage of SAF (biofuels, RNFBO – including renewable hydrogen – and recycled carbon aviation fuels) in EU airports every year.
Airlines will have to uplift a minimum share of SAF starting with a 2% in 2025 rising to 70% in 2050 (including sub-targets for synthetic aviation fuels). The SAF mandate requirements will apply from 1 January 2025, while reporting obligations will apply already from 1 January 2024.
Energy Efficiency Directive
Increased energy efficiency in the EU allows for reduced energy prices and supports the reduction of greenhouse gas emissions. This became highly relevant in the context of the energy crisis and the phase out of cheap Russian gas.
The revision of the Energy Efficiency Directive therefore sets higher targets for Member States to reduce final energy consumption at EU level by 11.7% in 2030. The public sector will lead by example, as Member States will need to renovate at least 3% of public buildings every year.
Member States will have to establish their national contribution and trajectory towards achieving the target in their integrated national energy and climate plans (NECPs), which will have to be finalised by 2024.
Energy Performance of Buildings Directive
Buildings will also contribute to the Fit for 55 objectives via the Energy Performance of Buildings Directive, which aims to make buildings more energy efficient by 2030.
The directive will require Member States to boost the renovation of buildings to increase their energy performance, notably for low-performance buildings (G class) and through mandatory renovations. The directive also introduces a new category A0 to the energy performance certificates, corresponding to zero-emission buildings.
The proposal is still under Trilogue negotiations and discussions are ongoing regarding the emission targets by 2030 and 2050.
Energy Taxation Directive
The most contentious initiative under the Fit for 55 package is the proposed revision of the Energy Taxation Directive (ETD). The Commission’s ambition is to align the taxation of energy products and electricity with the European Green Deal objectives. This entails introducing taxation based on the content and environmental impact of the energy source rather than its volume.
The proposed revision of the ETD also removes tax exemptions on fossil fuels while incentivising exemptions on renewable energy and electricity. If adopted, the revision will significantly drive-up prices in the EU.
As taxation is a competence of Member States, the Council of the EU will have to vote unanimously on the proposal. Due to the energy crisis and the increased costs for citizens and businesses, the discussion on the ETD has been stalling for long and no major developments have been achieved since its publication on 14 July 2021.
Gas and Hydrogen Market package
The hydrogen and decarbonised gas market package aims to support the shift from natural gas to renewable and low-carbon gases, while boosting their uptake by 2030. These gases have been identified as the most optimal solution for the decarbonisation of energy-intensive industries (refinery and metallurgy) and hard-to-abate transport sectors (maritime and aviation).
The package’s Regulation and Directive establish a regulatory framework to facilitate market access for the development and decentralised production of decarbonised and low-carbon gases. It also sets rules for dedicated hydrogen infrastructure and integrated network planning.
Trilogue negotiations are still ongoing on the package, which co-legislators aim to close by the end of the year.
Reducing methane emissions in the energy sector
Methane is the second most important greenhouse gas after carbon dioxide. Because of the substantial impact of methane on climate change, the Commission proposed new rules to reduce methane emissions in the energy sector.
The Regulation creates obligations for oil, gas and coal companies to improve their reporting and measuring obligations on methane emissions. They will also have to comply with mandatory leak detection and repair and a ban on releasing methane directly in the atmosphere.
Co-legislators kicked off Trilogue negotiations at the end of August and they aim to reach an agreement by the end of the year.
Looking ahead: national implementation and 2040 targets
By the end of the current legislative term, most of the Fit for 55 proposals will have been published in the Official Journal of the EU and will have entered into force (with the likely exception of the Energy Taxation Directive).
This means that the EU legislative process is concluded for these legislations and the ball will be passed to the Member States. Why? Member States will have to transpose the legislative texts into their national law. Organisations should keep in mind that Member States will not have any flexibility on how they implement regulations at national level.
However, directives are another story. Member States have more room for manoeuvre to implement the targets and objectives set in the directives. They will have flexibility to determine their own pace and priorities; for instance, as regards RED III, each government can decide the contribution of each sector to achieve the targets.
Furthermore, the pathway to achieve the carbon neutral goal by 2050 set in the European Green Deal will require an intermediary target for 2040. The Commission will therefore propose a Communication on 2040 Climate target in early 2024 setting the trajectory for the period 2030 – 2050 and new legislative proposals under the next term (2024 – 2029).
During their hearings in the European Parliament, the new Commissioner for Climate Action, Wopke Hoekstra, and new Commissioner for the European Green Deal, Maroš Šefčovič, committed to work towards the 90% emissions reduction target by 2040, as recommended by the European Scientific Advisory Board on Climate Change. The ambitious target has already heated up the debate in Brussels, with the industry arguing that 90% is an unrealistic goal.
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