EU Fit for 55: EP adopts EU ETS and CBAM in rebound

23/06/22

On 22 June 2022, the European Parliament adopted the proposal for a revised EU ETS as well as the proposals for the Carbon Border Adjustment Mechanism (CBAM) and the Social Climate Fund. These three proposals are intertwined and after a plenary set back, they had to be renegotiated within the EP’s Committee on the Environment, Public Health and Food Safety (ENVI). Main sticking point was the phase out trajectory of free emission rights in sectors covered by the CBAM. The phase out should now start in 2027 with 93% and reach 0% of free emission rights in 2032.

For these three and the other five Fit for 55-proposals that were adopted on 8 June, the next step is negotiation with the Council of the European Union. An important part of the measures are intended to come into force by 1 January 2023.

What does this mean for your organisation?

In negotiations with the Council, these Fit for 55 Package proposals can still be adjusted. Nonetheless, it is certain that the final version of the package will have a significant impact on companies and individuals, since they need to meet the agreed targets of the European Climate Law: a binding EU 2030 climate target of a domestic reduction of net greenhouse gas emissions (emissions after deduction of removals) by at least 55 percent compared to 1990 levels by 2030.

In particular it will have an impact on companies that are in carbon intensive industries such as iron, steel, aluminium, chemicals and energy. Furthermore, the logistics and transportation sector (including shipping, road transport and aviation), construction sector, and companies owning real estate and/or production sites in the EU that use certain materials from outside the EU will be impacted significantly.

So now is the time for companies to scrutinise their supply and value chains and get a clear view on the related carbon footprint (direct and indirect). Subsequently, options available to reduce the carbon footprint should be investigated. Doing this now, creates the time to implement the required processes and procedures for obtaining the required insights. Subsequently, technical, economic and financial analyses can be performed to assess what abatement options are most suitable. Starting on time also provides for the opportunity to optimise the supply chain, amend procurement contracts and to enter into negotiations/conversations with stakeholders. Doing this in a timely manner, should allow companies to mitigate the additional taxes and levies that will inevitably follow from the measures included in the Fit for 55 Package.

In order to support the business case for investments reducing the carbon footprint, there is a wide range of EU and domestic incentives available. Ideally, both the additional tax measures and the available incentives are an integral part of a sustainable business case assessment.

Details Revision EU ETS

Phasing out of free allowances in sectors covered by the CBAM between 2027 and 2032 following a CBAM factor trajectory of 93% in 2027, 84% in 2028 69% in 2029, 50% in 2030, 25% in 2031, and reach 0% in 2032. This would be three years earlier than originally proposed by the European Commission.
A slight increase of the reduction factor of carbon credits annually to 4.4% until the end of 2025, 4.5% from 2026 to 4.6% from 2029, arriving at an overall reduction of GHG emissions in ETS of 63% by 2030.
Establishing EU ETS II for fuel distribution for commercial buildings and transport, as of 1 January 2025. This would be a year earlier than anticipated by the European Commission. Also additional safeguards are envisaged aiming at preventing citizens from bearing excessive additional energy costs. Private buildings and private transport should be excluded prior to 2029 and implementation of a safeguard that releases 10 million allowances if the average ETS II allowance price exceeds 50 euros before 2030.
Introduction of a bonus-malus-system from 2025, which will provide for additional free allowances (bonus) for the most efficient installations in a sector. As malus, those that do not establish a decarbonisation plan or do not sufficiently act on recommendations, can lose part or all of their free allowances.
Inclusion of maritime transport as of 2024, to cover 100% of the emissions from intra-European routes and 50% of emissions from international routes from and to the EU. Starting in 2027, 100% of emissions from all trips should be included, with the conditional possibility to lower this to 50% in relation to non-EU countries.
Part of the EU ETS auctioning revenue should become an own (general) resource for the European Commission. Both the European Commission and member states are required to spend all of their revenues from EU ETS (I + II) on climate action or on upskilling and reskilling of workers affected by the green transition.
Increasing of the Innovation Fund (to be renamed to Climate Investment Fund) which supports innovation in technologies that contribute significantly to the decarbonisation of the ETS sectors.

Details CBAM

CBAM should apply as from 1 January 2023, whereby during a transition period until 2026 exporters receive 100% free emission rights to ensure a level playing field for companies exporting EU produced goods. After 2026, these free emission rights are reduced in the same pace as the phase out of free emission rights for EU ETS. The period between 1 January 2023 and 1 January 2027 will be used for data collection and analysis of the impact of CBAM on the industries concerned. This means that declarants have to report on a quarterly basis the actual embedded emissions in goods imported during the administrative transitional period, detailing direct and indirect emissions as well as any carbon price paid abroad.
Broadening of the scope of CBAM to polymers, organic chemicals and hydrogen, in addition to the originally proposed products cement, iron and steel, aluminium, refineries, organic basic chemicals, fertilisers and electricity production. Inclusion of organic chemicals and polymers will be subject to an assessment by the European Commission on the technical specificities (embedded emissions calculation, value chains identification, efficiency of the measure). The timeline to include the other ETS sectors at risk of carbon leakage in the CBAM will follow the same reduction path / slope as for the first sectors covered by CBAM.
Also broadening the scope of CBAM to cover indirect emissions. These are emissions deriving from the electricity used by manufacturers.
Introduction of a single, centralised EU CBAM authority, instead of 27 competent authorities.
Upon export of products within the scope of CBAM, an allowance equivalent to the charge on import shall be refunded.
Revenues generated by the sale of CBAM certificates will be EU internal revenues, primarily to cover the costs of the operation and maintenance of the CBAM scheme and to support EU industry through the establishment of sectoral funds for the purpose of tackling competitive disadvantages triggered by CBAM.
The European Commission is asked to implement a review mechanism that monitors any unforeseen gaps in carbon leakage protection arising and avoids any double protection.

Details Social Climate Fund

EU member states can make use of the Fund for:
- temporary direct income support measures (such as a reduction in energy taxes and fees), to tackle the increase in road transport and heating fuel prices; and
- long-lasting structural investments in building renovation, renewable energy and a shift from private to public transport, car-pooling and car-sharing and using active modes of transport to get around, such as cycling. Measures may include fiscal incentives, vouchers, subsidies or zero-interest loans.
The fund is financed by 25% of the expected revenues linked to the inclusion of commercial road transport and buildings in EU ETS II and the revenues from the auctioning of 150 million free emission rights under the ETS II will become available for the Social Climate Fund.

Legislative process and next steps

Together with the proposals of the Fit for 55 package that were adopted on 8 June 2022, now eight Fit for 55-proposals have been adopted by the European Parliament. These are Revision of EU ETS, CBAM, EU ETS for aviation, CORSIA, Effort Sharing Regulation, LULUCF, CO2 emissions standards for cars and vans and Social Climate Fund. For these proposals, the next step is negotiation with the Council of the European Union.

Note that the different legislative proposals of the Fit for 55 package each have different timelines. However, it is widely expected that a large part of the Fit for 55 Package will be enacted by 1 January 2023. Monetary impact in terms of additional taxes could materialise quite soon following the enactment, therefore it is important to start preparing sooner rather than later to identify what the current carbon footprint (direct and indirect) of your operations is and to identify what the abatement options (sustainable business case) are.

Background of the Fit for 55 Package

The aim of the Fit for 55 Package is reducing the EU’s net greenhouse gas emissions by at least 55 per cent by 2030 compared to 1990 levels, and reach climate neutrality by 2050. Next to environmental targets, the package also addresses certain societal aspects of the energy transition. For example, the Climate Social Fund’s objective is to mitigate the societal impact of the extended emissions trading scheme.