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Fit for 55: Can Europe become the world’s first carbon-neutral continent?

Europe's journey towards becoming the world's first carbon-neutral continent is gathering momentum, with the release of the "Fit for 55" package the latest landmark moment. But what is it, and what does it mean for the built and natural environment?

Fabrizio Varriale, World Built Environment Forum
19 July 2021

Last week the European Commission presented its Fit for 55 legislative package[1] aimed at delivering a 55% reduction in GHG emissions by 2030. This is a set of interconnected proposals that include strengthening eight existing policies and establishing five new ones. Here we unpack the main points of the proposals, sector by sector:

Buildings

The package includes proposals to extend the EU Emission Trading System (ETS) to include greenhouse gas (GHG) emissions linked to the heating of buildings. Currently, the ETS already covers around 30% of such emissions through the regulation of district heating and electricity used for heating purposes. The Commission proposes to set up an ETS market to cover the remaining emissions arising from heating based on fossil fuels. This will be separate from the existing ETS in order not to disturb its established balance. The new ETS for buildings, which will apply from 2026, will regulate upstream fuel providers rather than users (i.e. the occupants). The aim is to push the providers to develop low-carbon fuels.

The recast Energy Efficiency Directive will mandate that Member States ensure at least 3% of the useful floor area of public buildings be renovated to nearly-zero energy standards. The ETS extension does not directly address the urgent need to speed up the renovation rates of privately-owned buildings. However, a communication note attached to the package states that the Commission expects the revised Energy Performance of Buildings Directive to include specific measures to this end. The updated Directive is expected in late 2021.

Transport

In a similar fashion to buildings, the Commission proposes reducing the carbon intensity of existing vehicles by establishing a new ETS for road transport by 2026. The intent is to push the development and uptake of low-carbon fuels. In addition, the Commission proposes tightening the current CO2 emission standards for new cars and vans which will, in effect, make new petrol and diesel vehicles unlawful by 2035. Further proposals include the introduction of an Alternative Fuels Infrastructure Regulation to facilitate the deployment of vehicle recharging and refuelling facilities.

Significant changes to the aviation and maritime sectors are expected through the proposed ReFuelEU Aviation and FuelEU Maritime regulations. Both will impose increasingly stringent limits on the carbon intensity of fuels used to supply airplanes and ships on European airports and ports. The proposed revision of the existing ETS will also cover maritime emissions and phase out the current free emissions allowances currently given to the aviation sector.

The EU Commission proposes tightening the current CO2 emission standards for new cars and vans which will, in effect, make new petrol and diesel vehicles unlawful by 2035.

Energy

An ambitious energy policy is clearly crucial for any decarbonisation effort. The Commission proposes a revision of the targets set out in the Energy Efficiency Directive to drive a 9% reduction in demand by 2030, compared to 2020 levels. Through the revised Renewable Energy Directive the Commission wants to increase the EU-average target for renewables in the energy mix by 2030 from 32% to 40%. National targets will differ according to circumstance in order to drive these aggregated gains. The revised Directive also includes tighter criteria for energy generation from biomass.

The Commission also proposes a revision of the Energy Taxation Directive to align its minimum tax rates with climate and energy objectives. This will include the tax hikes for fossil fuels and lower rates for renewables sources. Existing reductions and exemptions on fossil fuels enjoyed by some economic sectors will be revised.

Land and forestry

The Commission aims to reverse the current decline in European natural carbon sinks, such as forests and wetlands. The revised Land Use, Land Use Change and Forestry (LULUCF) Regulation sets out an overall target for the net removal of 310 million tons of CO2-equivalent from the atmosphere through the LULUCF sector. As per the Renewable Energy Directive, corollary individual national targets will be agreed according to circumstances. Additional measures to increase carbon sinks are included in the EU Forest Strategy. Further such plans will be included in the upcoming New Soil Strategy, EU Nature Restoration Law and Carbon Farming Initiative, expected in late 2021.

Trade

In a bold move, the Commission is proposing the progressive introduction of a Carbon Border Adjustment Mechanism (CBAM) for selected carbon-intensive products. The CBAM is designed to ensure that products imported from markets with lower or no carbon pricing mechanisms will not enjoy an unfair advantage against domestic products. Lawyers are confident that the formulation is compatible with WTO rules. The mechanism is expected to prompt both domestic and foreign manufacturers to innovate on decarbonising their product lines.

The Carbon Border Adjustment Mechanism is designed to ensure that products imported from markets with lower or no carbon pricing mechanisms will not enjoy an unfair advantage against domestic products. Lawyers are confident that the formulation is compatible with WTO rules.

Society and economy

The Commission proposes to increase the existing Modernisation Fund and Innovation Fund, and establish a new Social Climate Fund. The latter will correspond in principle to 25% of the revenues expected from the extension of the ETS to road transport and buildings (€72 billion for the period 2025-2032). This will provide Member States with dedicated funding to support citizens in energy and/or transport poverty, in an effort to balance the potential negative impacts of the ETS extension.

Reception of the package and next steps

The Fit for 55 package has been highly anticipated by Member States, businesses, and NGOs. Oftentimes, climate-related policy is received with mixed feelings and this package is no exception. Some stakeholders argue that it is too demanding, while others complain that is insufficient to address the climate crisis. It is even rumoured that some of the Commissioners are unhappy with the details of the final package.[2]

The extension of the ETS is a particularly thorny subject. The European Environment Bureau (EEB), for instance, has serious concerns about the new ETS for road transport and buildings. Comprised of over 170 European organisations, the EEB fears that additional emissions costs resulting from the proposed changes will be passed on to consumers. Back in 2018, rising petrol prices sparked the gilet jaunes protest movement; French MEPs are particularly unsettled by the prospect of history repeating itself.

The introduction of the CBAM is also a delicate matter, with the EU’s trade partners voicing concerns that the mechanism could unfairly penalise their products.[3]

The package will now undergo the scrutiny of Member States and will need to be approved by the EU Parliament before they become enforceable. This procedure is likely to result in modifications to the proposals. Some policies will also need to be implemented through national regulations – a process that, at times, has introduced variations across Member States. At first look, Fit for 55 would seem to represent a significant step towards the realisation of the ambitious European climate agenda. But it remains to be seen whether it is sufficiently strong to deliver on its promises, while also being politically acceptable to the many, somewhat fragmented, array of stakeholders involved.