The European Union (hereafter: EU) is starting the green revolution. Following the EU Commission’s FIT for 55 proposal, new legislation is on its way to achieve climate goals.
On to a climate-neutral Europe
The European Union strives for Europe to become the first climate-neutral continent by 2030. A good example of this ambition is the EU being a party to the Paris Agreement. By becoming a party, the EU committed to comply with the climate targets set in this agreement. The European Commission has set strong climate targets to guide the Member States into the green transition:
- A minimum of 55% in cuts in greenhouse gas.
- Above a 32% share of renewable energy (currently proposed to be increased to 40%).
- At least a 32.5% improvement in energy efficiency (currently proposed to be increased to 36 – 39%).
European Green Deal
The European Council and European Commission developed a climate action plan called the European Green Deal (EGD). The EGD provides a climate action plan for nine policy areas, each consisting of dedicated regulations, strategies and funding sources. The nine policy areas are the following:
- Climate, to become the first climate neutral continent by 2050.
- Energy, for a clean and efficient energy transition.
- Environment and oceans, to protect biodiversity and ecosystems.
- Agriculture, to achieve a healthy food system for people and the planet.
- Transport, to provide efficient, safe and environmentally friendly transport.
- Industry, to create an industrial strategy for a competitive, green and digital Europe.
- Research and innovation, to drive transformative change.
- Finance and regional development, to make sustainable investments to deliver the EGD.
- New European Bauhaus, to connect the EGD to our living spaces and experiences.
Fit for 55
To meet the EGD targets, a set of policies under the name Fit for 55 has been designed. Fit for 55 focuses on specific topics of the EGD and aims to reduce 55% of the greenhouse gas emissions by 2030 in comparison to the levels in 1990. To be more precise, the primary objectives of the package include:
- Guaranteeing environmental integrity and addressing solidarity.
- The European Union Emissions Trading System (EU ETS) will be tightened and strengthened, helping to ensure effort sharing with relevant targets.
- Additional policies will help ensure the implementation of carbon prices.
- All revenues from carbon pricing aim to positively influence final consumers.
A good example is the proposal for the share of renewable energy by 2030. Initially, the target was set at 32%. However, almost three-quarters of greenhouse gas emissions in the EU comes from the energy sector. Therefore, the European Commission proposed to increase the target to 40%.
In this article, we will zoom in on the following aspects of Fit for 55:
- EU Emission Trading System
- Social Climate Fund
- Carbon Border Adjustment Mechanism
- Energy Taxation
1. EU Emission Trading System
Fit for 55 sets an ambitious target for the EU Emission Trading System (hereafter: EU ETS). The EU ETS is the most important instrument to achieve the climate targets. It was introduced in 2005 and already shows its importance for the climate targets, since it already has led to a 41% decrease in emissions.
The EU ETS provides a trading possibility in emission rights in energy-intensive markets and the electricity-production markets. This is based on a ‘cap and trade’ principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by the users of the system. Besides this, the cap is reduced over time so that total emissions will decrease. Within the cap, users can trade emissions allowance. The total number of allowances available is limited. This incentives emission reductions and promotes investment in innovative, low-carbon technologies, whilst trading brings flexibility that ensures emissions are cut where it costs least to do so.
Currently, the system applies to 1) energy-intensive ‘industrial installations’, 2) electricity and heat plants and 3) commercial aviation. The Fit for 55 plans contain an expansion of the application of the EU ETS to emissions in maritime transport; faster reduction of emission rights (from a cap reduction rate of 2,2% to 4,4% per year) and phasing out free emission rights in certain markets; the implementation of the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) through the EU ETS; more resources for the modernization fund and innovation fund; and revising the market stability reserve.
Besides this, a new, autonomous emission trade system for buildings, road transport and usage of fuels in other markets is created. This new system is called ETS II.
2. Social Climate Fund
Fit for 55 proposes a social climate fund. The purpose of this fund is addressing social and distributional effects of the new emissions trading system for buildings and road transport.
The Member States will have to make social climate plans. Based on these plans, the social climate fund will support measures and investments for the benefit of households, micro-enterprises and transport users.
The fund can also temporarily cover direct income support. The fund will be part of the EU budget and will be funded from auctioning ETS II allowances up to an amount of €65 billion, with an additional 25% covered by national resources (amounting to an estimated total of €87,5 billion).
3. Carbon Border Adjustment Mechanism
Fit for 55 introduces a Carbon Border Adjustment Mechanism (hereafter: CBAM) to prevent carbon leakage.
Carbon leakage occurs when emission reducing activities of the EU are being made ‘undone’ by higher emissions from outside the EU, due to movement of production to a non-EU country or the import of carbon intensive products.
The CBAM is a customs rate on carbon intensive products which are imported into the EU. Due to this rate, the price of imported carbon intensive products will increase to the height of the price of domestic products. This way, there will be no price difference – which gives non-EU countries an incentive to also implement an emissions tax.
The CBAM focuses on the import of products in carbon intensive markets. It has to function parallel to the EU ETS and should even complement it, since it works the same way for imported products. Examples of goods that fall in the scope of CBAM are cement, iron, steel, aluminium, fertilizers, electricity and hydrogen.
The CBAM will gradually take the place of EU-mechanisms against the risk of carbon-leakage, especially free EU ETS emission rights.
4. Energy taxation
Fit for 55 proposes to revise the Energy Taxation Directive (hereafter: ETD).
The goal of this revision is 1) matching the taxation of energy products and electricity with EU-policy on energy, environment and climate, 2) protection of the internal market of the EU and 3) staying able to generate revenue for the budgets of the Member States.
An important revision is that fuel will not be taxed according to their volume. The revised energy tax levies based on the energy content and environmental performance. This way, the environmental impact of fuel is better reflected which enables consumers and businesses to make cleaner, more climate-friendly choices.
Another important revision is the way energy products are categorized for taxation purposes. The categorization is also based on environmental performance. In this way, the grouping and ranking of fuels is simplified; fuels that are most harmful for the environment are taxed the most. In other words, fuels that have the most negative impact on the environment will be subject to higher minimum rates.
Also noteworthy is that certain exemptions will be phased out. This way, fossil fuels can no longer be taxed below minimum rates. For example, fossil fuels which are used as fuel for intra-EU air transport, maritime transport and fishing. Given the crucial role of these sectors in energy consumption and pollution, these fuels are no longer exempt from energy taxation in the EU.
A competitive advantage for the green economy
The combination of these tax measures, together with more strict rules on emissions, provide a competitive advantage for the green economy. Last year, a record breaking amount was invested in funds and companies specializing in sustainability. These measures hopefully accelerate this development – by putting a better price on emissions and the negative external effects of emissions are directly reflected in the price and profits of emitters, which makes them less attractive for investments. This will stimulate funds and companies to become sustainable.
We ourselves are enthusiastic about these developments. We are hoping for the green innovation to grow and develop, with taxation playing a positive role. The described measures are a good start, and now they need more foundation to create more impact. Perhaps a sustainable version of the Dutch innovation box could be interesting? Or a 30%-ruling for transitional jobs? We’re curious to see what will happen!