Grayling Brussels explores the new package of legislation put forward by the European Commission to reduce emissions by 55% by 2030. What are the main challenges ahead? What should businesses prepare for?

The EU’s legislative green makeover is finally here. As the name implies, the Fit for 55 package intends to bring the EU’s regulatory framework in line with the intermediate emissions reduction target of 55% by 2030 on the path to climate neutrality by mid-century. The targets themselves were made binding by the European Climate Law earlier this year.

The first instalment of the legislative behemoth comes with 12 proposals on both new legislation and revisions of existing rules, covering carbon pricing, renewables, and transport infrastructure, among others. These will be further complemented by the second instalment, including proposals on methane emissions and gas markets, this autumn.

How disruptive is the Fit for 55 package?

The legislative package will have far reaching implications for sectors throughout the EU economy – including on energy, transport, and manufacturing.

Energy

The revised Renewable Energy Directive will boost the use of renewables in all sectors by strengthening the targets (from 32% to 40% of renewables in the EU’s energy consumption by 2030) and sustainability criteria for their use and production. The new rules equally support the use of renewables-based hydrogen. With the Energy Efficiency Directive, the Commission will also enshrine the ‘Energy Efficiency First’ principle and set a binding energy efficiency target at the EU level.

Transport

To curb emissions from road transport, the Commission proposes to strengthen emissions standards for cars and vans and ramp up low and zero-emission mobility by rolling out approximately 3.5 million recharging points by 2030 through the Alternative Fuel Infrastructure Directive. To reach substantial emissions reductions in the aviation and maritime sectors, the Commission is setting up new fuel standards. It is also relying on the revised Renewable Energy Directive to support the uptake of renewable fuels and on the Energy Taxation Directive to repeal exemptions on conventional fuels.

Manufacturing

The Commission puts forward a revision of EU’s Emissions Trading System (ETS) to adjust the cap of total emissions and remove tradeable allowances from the market. Apart from increasing the cost of carbon emissions, the revision brings new sectors under the ETS, such as maritime, road transport and buildings. To avoid “carbon leakage”, the Commission is also proposing a Carbon Border Adjustment Mechanism (CBAM) to put a price on carbon for energy-intensive imports of cement, iron and steel, aluminium, fertilisers and electricity from 2023.

Challenges ahead

Three key challenges surround the proposals launched under the Fit for 55 package: level of ambition, regulatory uncertainty, and international reaction.

First, its level of climate ambition. Previous negotiations on the Climate Law and the EU Taxonomy have demonstrated the high level of politicisation associated with climate files, and work around the new proposals will not be any different. An intensely political tug-of-war on the means of climate action from preferred technologies to sustainability thresholds is expected between the member states, European Parliament groups, and even the Commission’s Directorates. As a result, businesses in Europe and beyond need to prepare for a crucial 24 months ahead that will determine the outcomes of the legislative package for their specific industries.

Second, adding to the prospect of political unpredictability is the regulatory uncertainty caused by the full reopening of the energy policy files, most of which were recently revised as a part of the Clean Energy Package in 2016-2019. For example, the full national implementation of the 2018 Renewable Energy Directive recast was finalised only two weeks ago. It is also unclear to what extent the tightened climate rules will be retroactively applied to existing investments and assets in the different policy proposals.

Third, there will also be international ramifications from the regulatory overhaul of the world’s largest trading bloc. This is particularly true when it comes to the extension of the emissions trading system (ETS) and the establishment of a carbon border adjustment mechanism (CBAM). Reactions from the EU’s trading partners are likely to influence and complicate the internal legislative negotiations on the package.

The European Commission will also want to leverage Fit for 55 during the upcoming COP 26. It remains to be seen if the package can effectively become a stepping stone to secure an agreement ensuring global net-zero by mid-century and keeping the 1.5°C target within reach.

Managing stakeholders’ expectations, a balancing act

The ‘Fit for 55’ hype has created huge expectations. The EU institutions will have to find ways to reconcile competing interests without watering down the green transition, amid intense scrutiny from stakeholders. European Commission Executive Vice-President, Frans Timmermans, recognised that “there’s good and bad for everyone in these proposals, so we need to create a balance”.

BusinessEurope Director General Markus Beyrer presented the European Business community’s wish list requesting “that the package support large scale industrial projects, reinforce measures against carbon and investment leakage and give space for all low carbon and transitional energy sources”.

Along the same lines, civil society actors such as CAN Europe have called for a “Fit for 1.5°C package”. The NGO coalition requested that “the revised legislation go for their maximum of ambition when it comes to reducing emissions” to reach 65% emissions reductions by 2030.

Considering the pressure that handling so many key initiatives at the same time puts on the institutions, policymakers will have to rely on the sectoral expertise of industry stakeholders to determine the best way to foster cost-efficient decarbonisation.

Once the threats and opportunities of the package have been accounted for, it is up to businesses to demonstrate credible transition pathways and the necessity of their sector to a European economy that is fit for 55.

Get in touch with us (EU.energy@grayling.com) and follow the conversation on the Fit for 55 package on Twitter @TheEULobby