The Nickel Report

Yesterday, the European Commission (the Commission) – the executive branch of the European Union (EU) – adopted a package of proposals to deliver on the EU’s ambitious target of reducing greenhouse gas (GHG) emissions by at least 55% by 2030. These proposals – collectively known as “Fit for 55” – are only part of the suite of legislative tools, legal obligations, and policies to be rolled out under the European Green Deal, a broad non-binding action plan intended to make the EU’s economy more sustainable and help Europe become the world’s first climate-neutral continent by 2050. The comprehensive package of twelve policies proposed yesterday contains the following key initiatives:

• EU Emissions Trading Scheme (ETS): The existing EU ETS was established in 2005 and now covers 45% of the EU’s GHG emissions. The Commission proposes to lower the emission cap and increase its annual rate of reduction. This revision to the ETS will also phase out free emission allowances for aviation, and create a new ETS for fuel distribution for road transport and buildings. The Commission further proposes that member states spend the entirety of their revenues from the ETS on climate and energy projects. The EU, linked its ETS with the Switzerland ETS in 2020 – the first international treaty linking ETSs – and there is an expectation that the EU ETS will be linked to the new United Kingdom ETS.
• Carbon Border Adjustment Mechanism: The proposed carbon border tax will put a carbon price on imports of selected products with the goal of preventing “carbon leakage” whereby carbon-intensive industries would relocate outside the EU. As previously noted, a carbon border adjustment mechanism could be an issue where the EU and the United States could collaborate, as US-EU frameworks could create a unified front on climate, establish a de facto trade block, and create incentives for carbon-intensive, exporting-focused sectors in other countries that want access to US and EU markets. The same day “Fit for 55” was announced, there were reports that President Biden and Senate Democrats plan to include in budget legislation a tax on imports from nations that do not have aggressive policies to mitigate climate change.
• Land Use, Forestry and Agriculture: The EU aims to reach climate neutrality in the land use, forestry, and agriculture sectors by 2035. The forestry proposal contains an overall target for carbon removals through natural sinks equivalent to 310 million tons of CO₂ emissions by 2030. Member states will be required to set national targets to expand their carbon sinks in pursuit of these goals. The proposal also supports sustainable forestry, preserves biodiversity, and sets out a plan to plant three billion trees across Europe by 2030.
• Renewable Energy: The Commission proposes to increase the EU’s renewable energy target to produce 40% of their energy from renewable sources by 2030. The proposals sets out specific targets for renewable energy use in transport, heating, cooling, buildings and industry. The proposal also strengthens sustainability criteria for the use of bioenergy.
• Energy Efficiency: The proposed energy efficiency directive will almost double the annual energy saving obligations for member states and will require the public sector to renovate 3% of its buildings each year to bring down energy use.
• Road Transportation: The Commission will require all new cars to be zero-emission starting in 2035. To achieve this, average emissions of new cars will be required to come down by 55% by 2030 and 100% by 2035 from 2021 levels. Member states must expand their charging capacity on major highways for electric charging and hydrogen refueling.
• Aviation: The ReFuelEU Aviation Initiative will require fuel suppliers to blend increasing levels of sustainable fuels in jet fuel available at EU airports.
• Maritime: The FuelEU Maritime Initiative will set a maximum limit on the GHG content of energy used by ships at European ports in order to stimulate the use of sustainable maritime fuels.
• Energy Taxation: The Commission proposes to align the taxation of energy products with EU energy and climate policies to mitigate effects of the energy tax competition.
• Effort Sharing Regulation: The Commission proposes to update the EU effort sharing regulation, by strengthening the binding annual GHG emission targets for member states in key sectors including buildings, transportation, agriculture, waste, and small industries.

As a matter of process, EU policies are first proposed by the Commission, and then reviewed, amended, and adopted by the European Parliament and Representatives from the 27 member states. So these proposals will now be negotiated among key stakeholders prior to adoption and implementation.

The timing of yesterday’s announcement further puts down the EU’s marker heading into COP26 – the 2021 United Nations Climate Change Conference – in November where the global community is expected to chart an updated path to implement the Paris Agreement and limit global warming to 1.5ºC.