European Commission unveils its 'Fit for 55' package

On Wednesday 14 July 2021, the European Commission took a major step to accomplish its ambitious goal of making Europe the first climate neutral continent by 2050, by adopting a package of proposals for the EU's climate, energy, land use, transport and taxation policies to reduce net greenhouse gas emissions by at least 55% by 2030.

Following hot on the heels of the European Climate Law that will enter into force this month, the European Commission is translating an ambitious policy goal into an even more ambitious set of new legislation, redrafting the rulebook across the single market, from aviation and road transport to renewable energy and green taxation.

The new package of proposals is set to shake up the regulatory environment across the economy and affect business and consumers alike. To make sense of the many new proposals, DLA Piper has compiled an overview of the Commission’s flagship initiative below.

As the political and legislative debate around the proposals begin, a window has opened for those affected to reach out to the European institutions and share their experience and expertise. The time for engagement and advocacy has begun and DLA Piper’s Government Affairs and sectoral advisors are ready to support you.

What is the Commission proposing?

The Commission is proposing a comprehensive and interconnected set of 13 legislative proposals (5 new and 8 revisions) that combine the extension of emissions trading to new sectors and a tightening of the existing EU Emissions Trading System; the increased use of renewable energy; greater energy efficiency; a faster roll-out of low emission transport modes; the alignment of taxation policies with the European Green Deal objectives; measures to prevent carbon leakage; and tools to preserve and grow natural carbon sinks.

What changes can we expect?

Updates to existing EU laws

1. Revision of the EU emission trading scheme (EU ETS): ETS is a greenhouse gas emissions trading scheme. The EU ETS works on the cap and trade principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by the installations covered by the system. The cap is reduced over time so total emissions fall. The current scheme covers around 40% of the EU’s total greenhouse gas emissions, and the remaining 60% is covered by the effort sharing regulation (ESR), which addresses emissions from transport, industry and agriculture. The Commission is proposing to lower the overall emission cap even further and increase its annual rate of reduction. It’s also planning to phase out free emission allowances for aviation and align with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and to expand the ETS to cover the maritime sector. A separate new emissions trading system will be set up for fuel distribution for road transport and buildings.
    
2. Revision of the effort sharing regulation (ESR): ESR covers the sectors left out by the ETS, mainly agriculture, transport, buildings and waste. This regulation sets binding national greenhouse gas targets for each EU country, depending on their GDP.
    
3. Revision of the regulation on land use, land use change and forestry (LULUCF): LULUCF sets an overall EU target for carbon removals by natural sinks. Something the EU countries had already committed to under the Kyoto Protocol – the predecessor to the Paris Agreement – but the regulation will see this brought into EU law for the first time for the 2021-2030 period. By 2035, the EU should aim to reach climate neutrality in the land use, forestry and agriculture sectors, including agricultural non-CO2 emissions, such as those from fertiliser use and livestock.
    
4. Amendment to the renewable energy directive (RED): RED performs two main roles: defining what energy sources are regarded as renewable and setting out binding targets for renewables in Europe’s energy mix. The revision will aim at setting an increased target to produce 40% of European energy from renewable sources by 2030. Specific targets are proposed for renewable energy use in transport, heating and cooling, buildings and industry.
    
5. Amendment to the energy efficiency directive (EED): The EED aims to achieve savings of at least 32.5% by 2030. The target is currently non-binding but the European Commission now plans to make it a legal obligation. The revision will set a more ambitious binding annual target for reducing energy use at EU level and guide how national contributions are established and almost double the annual energy saving obligation for Member States. The public sector will be required to renovate 3% of its buildings each year to drive the renovation wave, create jobs and bring down energy use and costs to the taxpayer.
    
6. Revision of the alternative fuels infrastructure directive (AFID): To ensure drivers are able to charge or fuel their vehicles at a reliable network across Europe, the Commission will require Member States to expand charging capacity in line with zero-emission car sales, and to install charging and fuelling points at regular intervals on major highways.
    
7. Amendment of the regulation setting CO2 emission standards for cars and vans: the amendments to this regulation will accelerate the transition to zero-emission mobility by requiring average emissions of new cars to come down by 55% from 2030 and 100% from 2035 compared to 2021 levels. As a result, all new cars registered as of 2035 will have to be zero-emission vehicles.
    
8. Revision of the Energy Taxation Directive (ETD): ETD sets minimum tax rates for energy products, like heating, transport fuels and electricity, but was never adjusted to inflation (adopted in 2003). The Commission is proposing to align the taxation of energy products with EU energy and climate policies, promoting clean technologies and removing outdated exemptions and reduced rates that currently encourage the use of fossil fuels.

New legislative proposals:

1. New EU forest strategy: aims to improve the quality, quantity and resilience of EU forests. It supports foresters and the forest-based bioeconomy while keeping harvesting and biomass use sustainable, preserving biodiversity. It includes a plan to plant 3 billion trees across Europe by 2030.
    
2. A carbon border adjustment mechanism (CBAM): this measure aims to protect European businesses from environmental dumping and prevent “carbon leakage” whereby industries relocate production or new factories abroad in search of lower production costs. CBAM will put a carbon price on imports of a targeted selection of products (cement, fertilisers, iron and steel, aluminium, and electricity).
    
3. A Climate Action Social Facility: the Commission will set a new Social Climate Fund to provide dedicated funding to Member States to help citizens finance investments in energy efficiency, new heating and cooling systems, as well as cleaner mobility to ease the pressure on vulnerable households, micro-enterprises and transport users.
    
4. ReFuelEU Aviation – on sustainable aviation fuels: aims to cut emissions in the notoriously carbon-intensive aviation sector by increasing the amount of green jet fuel used within the EU. It will oblige fuel suppliers to blend increasing levels of sustainable aviation fuels in jet fuel taken on board at EU airports, including synthetic low carbon fuels, known as e-fuels.
    
5. FuelEU Maritime – on greening Europe’s maritime space: Similar to its aviation counterpart, FuelEU Maritime aims to decarbonise the shipping industry by ramping up the use and production of sustainable alternative fuels. It aims to stimulate the uptake of sustainable maritime fuels and zero-emission technologies by setting a maximum limit on the greenhouse gas content of energy used by ships calling at European ports.

Some practical considerations

• The Fit for 55 package aims to bring transport and building into the EU decarbonisation process. As the two sectors account for 22% and 35% of EU emissions respectively, their decarbonisation is essential for the EU to reach its climate targets. Under the Fit for 55 proposals, a standalone ETS for buildings and road transport would enter into operation in 2026.
• An EU-wide minimum tax rate would be applied to polluting aviation fuels – except cargo-only flights, pleasure flights and business aviation – as well as to polluting boat and ship fuel, including fishing vessels. These minimum tax rates would be introduced over ten years, starting in 2023.
• Vehicle CO2 emissions should be cut by 55% by 2030 and by 100% by 2035 – with the important caveat that if manufacturers struggle to meet it, the goal can be postponed to 2040. If met, the 2035 target will be equivalent to a ban on the sales of new internal combustion engine cars.
• The Commission is envisaging tax exemptions for renewable electricity, renewable hydrogen and advanced biofuels and biogases..
• The proposal envisages that the CBAM system initially targets a select number of carbon-intensive goods including cement, iron and steel, aluminium, fertilisers and electricity. EU importers of these goods will be required to buy CBAM certificates, the price of which shall mirror that of the ETS, and surrender them to a newly established CBAM Authority.