Last week, the EU unveiled its 'Fit for 55' proposals, which if adopted would substantively revise the EU's climate and energy policies in order to enable a net greenhouse gas emissions reduction by at least 55% by 2030, compared to 1990 levels.

This is part of the EU's wider plan to make Europe the first climate-neutral continent by 2050. The proposals range from extending the EU Emissions Trading System ('ETS'), accelerating the roll-out of low emission transport modes, harmonising taxation policies with the European Green Deal objectives and increasing the use of renewable energy and sustainable forestry across the bloc.

In this article we review several key proposals in the context of the lead up to COP26.

  1. Transforming the Transport Sector?
  2. A fairer taxation on pollution?
  3. Carbon Pricing and Emissions Trading
  4. Increased Forestry and Renewable Energy Sources
  5. Where to go from here?

1. Transforming the Transport Sector?

The transport industry has long been one of the biggest sources of pollution and greenhouse gas emissions in the EU and currently makes up 1/4 of total EU emissions1. In recent years, it is one of few activities that has seen an increase in emissions levels2, with drops in emissions witnessed over the course of the COVID-19 pandemic fast-returning to their pre-pandemic levels. As a result, the EU's 'Fit for 55' proposals in relation to the transport sector are seen by some as being the most transformational.

The EU is proposing an effective ban on the sale of new petrol and diesel (including hybrid) vehicles by 2035, with a new focus on zero-emission cars, such as electric and hydrogen-powered vehicles. Previous targets to reduce emissions from 37.5%, compared to 1990 levels, within the automotive industry, will also be increased to 55%. Going forward, there will clearly be a need to focus on rolling out enough charging points and hydrogen refuelling stations across the EU to meet the demands of the increased numbers of zero-emissions vehicles.

In the aviation and maritime sector, the EU's revised proposals are seen as critical. A number of stakeholders have long been calling for an aviation and shipping fuel tax, for the reason that it did not make sense to tax fuel in respect of cars and electricity used by trains but not in connection with aviation and shipping.

A full phase-out of free allowances in aviation is expected by 2026 and under the ReFuelEU Aviation Initiative and the EU aims to have 80% of intra-EU flights run on sustainable fuel by 2035. In respect of the maritime industry, vessels arriving at EU ports would need to use 80% low-carbon fuels by 2050 and new legislation is expected to enter into force which would introduce greenhouse gas intensity targets in the shipping industry.

There are also plans to introduce the EU ETS in aviation and maritime in order to encourage the uptake of sustainable fuels such as ammonia. However, there are concerns that this will only encourage a shift away from fossil fuels towards an uptake of unsustainable fuels and liquified natural gas, with the  Executive Director of clean mobility NGO Transport & Environment, William Todts, noting that 'by pushing them to use gas and biofuels, the cure will be worse than the disease', although this view is not held by all within the industry.

2. A fairer taxation on pollution?

Traditionally, taxation has been an area where many EU member states have resisted external interference. Attempts by the EU to change the voting rules so that unanimity is not required from the EU27 on energy taxation have failed in the past. However, the new proposals to update the Energy Taxation Directive (which sets out the framework for the taxation of electricity and energy products) envisage changing this.

Currently, pollution is taxed based on volume, whereas last week's proposals intend to create a hierarchy of energy sources to align the minimum tax rates for heating and transport fuels with EU climate and environmental objectives and remove outdated exemptions and incentives for the use of fossil fuels.

3. Carbon Pricing and Emissions Trading

A new carbon border adjustment mechanism has also been outlined which would tax high-emitting products entering into the bloc, for example, iron and steel, aluminium, fertilisers and electricity. The EU plans to phase this in from 2026 following a trial period. The intention behind the carbon price is to catalyse global change and reduce emissions worldwide without risking carbon leakage which would be detrimental to the EU, both environmentally and economically. This policy agenda has not been popular in the past and some manufacturers in China, amongst other countries, have condemned the proposal, fearing it will lead to increased restrictions on trade.

Carbon leakage

Carbon leakage refers to the situation in which, as a result of more stringent climate policies, companies may choose to move their production abroad to jurisdictions with fewer or less ambitious climate measures, which could inadvertently lead to a rise in global greenhouse gas emissions.

The EU ETS is considered by many to have been one of the biggest successes of the EU's climate efforts and over the last 16 years the EU has managed to bring down emissions from power generation and energy-intensive industries by 42.8%.

It does this through putting a price on carbon and allowing EU governments and companies to trade emissions based on their needs, subject to emissions caps. The latest proposals envisage reducing the emissions cap further and extending the scope of the EU ETS to include more industries, notably the aviation industry. A new and separate ETS system is also expected to be set up to allow for the bartering of emissions in the building and transport sector.

4. Increased Forestry and Renewable Energy Sources

The EU also outlined its revised plans to use the EU's forests and peatlands to absorb carbon emissions, with a target to remove 310m tonnes of CO2 equivalent by 2030. This will be actioned by setting annual national targets by revising the land use, land-use change and forestry regulation (LULUCF) between 2026-2030. Farmers will also be incentivised to take up practises that allow their land to be used as carbon storage.

Renewable sources of energy, such as wind and solar, will be key in reducing the EU's carbon emissions and reducing the burden on carbon sinks. Currently, renewables make up 20% of energy consumption and the EU is proposing to increase this to 40% by 2030 under the Renewable Energy Directive.

5. Where to go from here?

These new EU proposals have been welcomed by many as a sign of a firm commitment and an indication that progress is being made in terms of translating ambitious climate targets into tangible policies.

However, they have been met with criticism in some circles. Leading climate activists have urged the EU to go even further by initiating a complete and accelerated phase-out of fossil fuels so that industries cannot pass on the increased costs to the end consumer. Jorgo Riss, the EU Director of Greenpeace, likens celebrating the new policies to 'a high-jumper claiming a medal for running in under the bar'.

Over the coming two years, the granular details of the proposals will be subject to negotiation between the European Parliament and the 27 EU member states.

Other impacted stakeholders, such as those in industry and non-EU states, will also have an input into the consultation process, and it will be interesting to see how much of the initial proposals survive this process.

Travers Smith will continue to report on the latest developments in this area and in relation to COP26 as they are announced.

Summary of various EU 'Fit for 55' proposals:

  • Reduce carbon emission by 55%, compared to 1990 levels, in the automotive industry
  • A full phase-out of free allowances in aviation by 2026 and 80% of intra-EU flights to run on sustainable fuel by 2035
  • Introduction of a new carbon border adjustment mechanism to tax high-emitting products entering the EU
  • 40% of energy consumption to be derived from renewable energy sources by 2030
  • Remove 310 million tonnes of CO2 equivalent using forestry and peatlands by 2030
  • Harmonise the taxation of energy products with EU energy and climate policies
  • Introduce a Social Climate Fund using the proceeds of emissions trading revenues to assist citizens, micro-enterprises and transport users impacted by the new policies