EU Fit for 55: EP needs to renegotiate key proposals

15/06/22

On 8 June 2022, the European Parliament voted against the adoption of the proposal for a revised EU ETS. The main cause appears to be disagreement between the various parties in the Parliament on the start of the phase out of free emission rights. As the proposals for the introduction of the Carbon Border Adjustment Mechanism (CBAM) and the Social Climate Fund are intertwined with the revised EU Emission Trading System (EU ETS) on this specific aspect, all three proposals have been referred back to the EP’s Committee on the Environment, Public Health and Food Safety (ENVI) for renegotiation.

After this plenary setback, the three biggest political groups (EPP Group, S&D Group and Renew Europe) seem to have reached an (informal) agreement on the ETS reform and the CBAM, on Tuesday evening 14 June 2022. The updated key proposals of the Fit for 55 package have now been resubmitted for voting by the full European Parliament, which is planned for 22 June 2022.

Further detail of the agreement

On 14 June 2022 the European political groups EPP Group, S&D Group and Renew Europe reached an agreement on the following items.

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.
Extension of the scope of CBAM to polymers, organic chemicals and hydrogen. 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.
Inclusion of an export rebate for the EU production subject to carbon pricing and intended for export markets. The Commission will have to assess the WTO-compatibility of this measure and where appropriate make further proposals, such as a green export rebate meant for the most climate efficient EU industries or any other measures deemed appropriate by the Commission.
A slight increase of the reduction factor of carbon credits annually from 4.5% to 4.6% in 2029, arriving at an overall reduction of GHG emissions in ETS of 63% by 2030.

Legislative process and next steps

The other five proposals of the Fit for 55 package which were put to the vote, have been adopted by the European Parliament. These are EU ETS for aviation, CORSIA, Effort Sharing Regulation, LULUCF and CO2 emissions standards for cars and vans. 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. As a monetary impact in terms of additional taxes could materialise quite soon following the enactment, 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 with the Fit for 55 Package is to reduce 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.