There was a feeling of déjà vu as the Commission unveiled its enormous climate and energy package on July 14. The ink on the previous 2030-agreement had barely dried as the Commissioners presented another set of regulations for 2030. But this one named ‘Fit for 55’, goes much, much further.
What does the new package say? Coming after the EU pledge to cut greenhouse gas emission reductions by 55% by 2030 and reach climate neutrality by 2050, it aims to turn these commitments into a reality. It builds on the earlier EU climate policy framework and tightens the screws horizontally across the climate and energy policy field. That means, for example, strengthening the EU Emission Trading Scheme (ETS), the National Effort Sharing targets, the targets for renewables, and the emission standards for cars and vans.
In short, the Commission´s proposals are much more ambitious than anything before.
They also shift policy a notch further towards market-based solutions. This is clear from the attempt to broaden the ETS into shipping and aviation and to create parallel systems for transport and buildings. It will mean higher prices for businesses and European citizens - but it is also a clear attempt by the Commission to put a price on these emissions.
At the same time, the Commission is also aiming its sights more firmly at the effort sharing sectors which are expected to cut emissions by a further 11%. This means more stringent and varying binding national emission reduction targets. While the ambition tightens, the package also raises a question if there will be an Effort Sharing system as we know it post 2030.
The package has other novelties too. For example, to soften the expected economic impact of the more extensive ETS, the Commission has proposed another Social Fund on top of the €88 billion Social Fund that was just agreed as part of the EU's long term budget. The new Social Fund will be financed by a 25% slice from the ETS, which would add up to around €72 billion. It looks like the Commission is putting itself more and more into the social space of member states.
Another novelty is the Carbon Border Adjustment Mechanism (CBAM) that will put a levy on products like steel, aluminium, fertilisers and energy. The idea is to level the playing field with third countries, test it first and then make it operational by 2026 onwards. During this transition, the Commission also wants to phase out the current free ETS allowances, so it can become WTO compatible. While the CBAM may make sense from the EU’s perspective, this move could upset many of the EU´s global partners, just ahead of the COP26. These countries will argue that the CBAM is paying for the EU´s green transition, just as they are digging into their own pockets to take climate action.
The Energy Taxation Directive is another controversial proposal in the package. The Commission is once more trying to add more taxes on the most polluting fuels and make cleaner alternatives more attractive. Raising the price of fuel will not be easy, and as the proposal is coming from Brussels, it will face heavy scrutiny by the member states. It is unlikely to be the first file to secure agreement – if agreed at all.
Officials hope that the legislative process would be done and dusted in under two years as some of the initiatives are expected to kick off in 2023. It will now be scrutinised by national governments and MEPs, the EU’s two co-legislators. We can expect the European Parliament to push for more action, and for member states to push for less. It is then up to the Commission to juggle their demands and try to facilitate an agreement, a huge coordinating challenge. But whatever the EU-style compromise that results, it will have a massive impact on business and investment for years – if not decades – to come.