In a bid to further rein in the emission issue, the Council of the EU and the European Parliament reached a provisional political agreement on the ‘Fit for 55’ package that will further reduce emissions and address their social impacts. The deal is provisional pending formal adoption in both institutions.
The Council and Parliament agreed to increase the overall ambition of emissions reduction to 62 percent by 2030 in the sectors covered by the EU ETS.
The EU ETS or the EU Emissions Trading System is a carbon market based on a system of cap-and-trade of emission allowances for energy-intensive industries and the power generation sector.
It is the EU’s main tool in addressing emissions reductions, covering about 40 percent of the region’s total carbon dioxide emissions. Since its introduction in 2005, the EU’s emissions have decreased by 41%.
The co-legislators agreed to increase the annual reduction rate of the cap by 4.3 percent per year from 2024 to 2027 and 4.4 percent per year from 2028 to 2030.
The market stability reserve (MSR) will be strengthened by prolonging beyond 2023 the increased annual intake rate of allowances (24%) and setting a threshold of 400 million allowances.
Cost-efficient emission reduction
The Council and Parliament agreed to create a new, separate emissions trading system for the buildings and road transport sector and fuels for additional sectors, in order to ensure cost-efficient emissions reductions in these sectors that have been difficult to decarbonise so far. The new system will apply to distributors that supply fuels to the buildings, road transport and certain other sectors. Part of the revenues from the auctioning will be used to support vulnerable households and micro-enterprises through a dedicated Social Climate Fund.
The agreement extends the scope of the system to fuels used in certain industrial sectors. As a consequence, it has been agreed to increase the size the Social Climate Fund correspondingly.
Social Climate Fund
The Social Climate Fund would be part of the EU budget and fed by external assigned revenues up to a maximum amount of 65 billion euro. This budgetary architecture allows the fund to benefit from a series of guarantees linked to the European budget, without reopening the EU’s multiannual financial framework.
The Council and Parliament decided to apply a ceiling of 37.5% of the estimated total costs of social climate plans to the possibility for member states to offer temporary direct income support.
The sectors covered by the Carbon Border Adjustment Mechanism (CBAM) include cement, aluminium, fertilisers, electric energy production, hydrogen, iron and steel, as well as some precursors and a limited number of downstream products.
The Council and Parliament agreed to include maritime shipping emissions within the scope of the EU ETS as well. They agreed on a gradual introduction of obligations for shipping companies to surrender allowances: 40% for verified emissions from 2024, 70% for 2025 and 100% for 2026.
Modernisation Fund and Innovation Fund
As regards the Modernisation Fund, its volume will be increased through the auctioning of an additional 2.5 percent of the cap for which 90 percent must be used to support priority investments. Three additional member states will be eligible to receive funding (Greece, Portugal and Slovenia).
The Council and the Parliament also strengthened the Innovation Fund. In comparison to the current size of the fund, an extra 20 million allowances coming from the extension of the scope of EU ETS maritime.
Future projections
Presented by the European Commission on 14 July 2021, the ‘Fit for 55’ package will enable the European Union to reduce its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.
The Council adopted its general approach on the environment-related proposals of the ‘Fit for 55’ package on 29 June 2022.
