The ‘Fit for 55’ legislation package aims to steer production, consumption and investments – in the energy sector as well as others – towards decarbonisation and climate neutrality. It is expected to include several items that are crucial for the energy sector to reach the climate goals. In this post I will reflect on the parts that I find the most important from an energy utility’s perspective: renewing the Emissions Trading System (ETS) , directives on renewables and energy efficiency, renewal of the EU energy taxation directive as well as a new Carbon Border Adjustment Mechanism (CBAM).
Emissions trading remains the key
We see the ETS as the key instrument in reducing emissions on market-based terms. Expanding the system to cover more sectors and making it stronger is vital if we want to reach the ambitious new climate targets. All sectors must participate in reducing emissions, and the new climate target should be allocated to different sectors on the basis of cost-efficiency. The ETS reform should enter into force by 2023–24 at the latest if we are to reach the 2030 emission reduction target.
We would like to see carbon pricing gradually extended to cover a larger share of total emissions. This could be done by including more sectors in the ETS or by applying different pricing instruments in other sectors. It may be challenging to determine the best tools for each sector, and most likely there will be several different regulatory instruments in use across sectors. However, it is important that we pay close attention to cost-efficiency, as the methods of emission reductions have a major impact on the price of the energy transition, and on the way, costs are shared between member states.
Furthermore, we cannot ignore aspects of social acceptability and fairness. If, for example, carbon pricing is applied to all heating, the consumer prices for heating would be likely to climb. We need measures to manage the transition and ensure that it is carried out in a way that does not cause undue strain on end users. The same applies to transportation – the costs for an individual driver will surely increase, causing acceptability issues among citizens.
Less carbon leakage…
The EU has strived to prevent carbon leakage and safeguard Europe’s industrial competitiveness. In the Fit for 55 package, a new tool called the Carbon Border Adjustment Mechanism (CBAM) is introduced for this purpose. It would set a CO2 emissions-based cost for products imported from outside the union. This will undoubtedly raise international discussion from the point of view of WTO compliance and global trade policy. While it will support the competitiveness of EU’s own production, it will also encourage other countries to develop their climate regulation and create emissions pricing systems. Such a development is already visible e.g. in Russia. After all, climate change is a global problem and emission reduction a shared responsibility.
…more carbon sinks!
The LULUCF regulation, which concerns greenhouse gas emissions and removals from land use, land use change and forestry, is a significant point of interest, as well. Carbon sinks are an important tool in the battle against climate change. However, it is important to also include technological solutions like CCS/CCU/DAC to remove carbon from the atmosphere or flue gases in the legislation.
Alignment across instruments needed
There is still little information on the content of the Fit for 55 proposals, but some concerns have been voiced regarding the synchronisation of targets and different legislative instruments. Having a number of parallel regulatory instruments governing different production forms runs the risk of inconsistency and overlap. In addition, finding cost-effective means to implement changes may become a challenge.
It is of high importance to provide coordination between the ETS Directive and the parallel revision of the Energy efficiency directive (EED) and Renewable Energy Directive (REDII). Renewables, all low carbon energy sources and technologies (like hydrogen and nuclear) and increased energy efficiency should be treated in an equal manner, as all of these support the achievement of EU’s carbon neutrality target.
Another place for alignment is in energy taxation, which is also a key instrument in reaching climate goals. The Energy Taxation Directive is under revision in the Fit for 55 package, but another significant file is the State Aid Guidelines regulation, which is still under preparation and not included in the July legislation set. Energy taxation and the state aid guidelines should in our view support the transition towards a climate-neutral society and create a common framework for member states.
The change cannot happen overnight – but the decisions must be taken now
The Commission’s proposals in July are only the first step. They will undergo the normal EU legislation process, which may take years. After that begins the national implementation phase, in which the new directives and regulations are incorporated into national legislation. While we want to see fast action, it is a simple fact that these things take time. We also need to look beyond 2030 and even 2050. Investments that play a part in taking us towards a healthier climate are made today, and businesses need to have predictability in order to make those investments. It is therefore crucial that we have clear, well-aligned legislation to set the path towards a climate neutral future.