The European Green Deal's fitness test – Will the EU’s Fit-for-55 package ensure reaching the climate goal?

This article is part of our dossier "The EU's Fit-for-55 package: The European Green Deal's fitness test".

1. Introduction
2. Revision of the Effort Sharing Regulation (ESR)
3. Revision of the Emissions Trading System (ETS)
4. Revision of the Renewable Energy Directive (RED)
5. Revision of the Energy Taxation Directive (ETD)
6. Carbon Border Adjustment Mechanism (CBAM)
7. Revision of the Regulation on the inclusion of GHG emissions and removals from land use, land use change and forestry (LULUCF)
8. Revision of the regulation setting CO₂ emission performance standards for new passenger cars and for new light commercial vehicles
9. Revision of the Directive on deployment of alternative fuels infrastructure (AFID)
10. Conclusion

1. Introduction

On 24 June 2021, the European Parliament gave the final approval for the EU’s Climate Law — a bill that enshrines the bloc’s 2050 climate neutrality objective as well as the 2030 emission reduction target into legislation. Besides, the law has some other important components: it creates an independent advisory council to track the EU’s climate action course, introduces the concept of a carbon budget to guide the creation of a 2040 emissions reduction target and requires emission removals to exceed emissions after 2050. The most contentious issue in the EU Climate Law was the 2030 target. If it was to be consistent with the Paris Agreement principle of common but differentiated responsibilities as well as the latest available science, the reduction goal should have been at least -65% compared to 1990. Instead, the deal that negotiators struck foresees a reduction of minimum net 55%, meaning that carbon removal, most notably via natural sinks, can be taken into account, albeit their contribution is capped to 225 megatons of CO2.

That is why the whole series of a dozen legislative proposals on how to actually get there is entitled the “Fit-for-55” package. There will be massive consequences for how people drive, insulate their homes, produce things like steel and cement, manage forests and much more. As a major economy is overhauling its climate rules, the world is therefore closely watching what the European Commission will announce on 14 July 2021. More proposals on methane, gas and buildings will come later this year. This article explains where we come from, what the package will entail and which policies we need for a green and just transition. It does not claim to be comprehensive and does not address all files in the package, but rather focuses on the main issues at stake.

2. Revision of the Effort Sharing Regulation (ESR)

The highest volume of emissions at stake is in the revision of the Effort Sharing Regulation[1]. It regulates emissions outside the EU emissions trading scheme – around 60% of total EU emissions - by setting binding national greenhouse gas (GHG) targets for each of the 27 EU Member States. Discussions in the EU Council have shown that the vast majority of Member States want to stick to the basic pillars in the current structure: legally binding reduction targets for each Member State. Luckily, it looks like an expanded emissions trading system for road transport and buildings will not replace them. Member States remain the most important players in European climate policy and can thus be held accountable. Unlike many other EU policies, the targets in the ESR make headlines, feature in election programmes and enable public debate.

National targets will again be controversial and be fought over in lengthy negotiations. Until now, they have been primarily set according to GDP, making the targets of poorer Member States less ambitious than those of richer ones are. Some less well-off Member States could have higher per capita emissions than the EU average in the future, which would make reaching climate neutrality more difficult under the current ESR architecture. Besides economic performance, the next ESR should take into account other factors, such as the emission reduction potential.

Apart from the distribution key, the revision of the ESR must address one of the fundamental problems of EU climate policy: the EU's remaining emissions budget is small and is melting down fast. The European Commission assumes a residual EU CO2 budget of 48 to 60 gigatons - for the period from 2018 to 2050 and with current annual emissions of just under 4 gigatons. The EU Climate Law foresees that the European Commission shall make a proposal for a 2040 reduction goal by mid-2024 that takes into account a budget to be emitted without risking the EU’s commitment under the Paris Agreement. While the ESR cannot change the climate target for 2030 or set national targets for 2040 in the absence of an EU target for that year, it could close loopholes such as the crediting of CO2 removals and include a trajectory beyond the 2020s on the basis of a GHG emissions budget, thereby following the process of the 2040 reduction target according to the EU Climate Law.

Lastly, the ESR could be strengthened by including the possibility for environmental associations to take the failure to meet national reduction targets to national courts. Article 25 of the Industrial Emissions Directive, for example, already provides for comparable rights.

3. Revision of the Emissions Trading System (ETS)

The main vehicle for pricing GHG emissions in the EU is the Emissions Trading System (ETS). It sets prices for emissions permits needed by over 11,000 power plants and industrial installations, as well as airlines, covering around 40% of the bloc’s greenhouse gases. After years of very low and therefore barely effective prices, a mix of reforms and the pressure of tougher climate legislation has driven prices to more than €50 per ton of emitted carbon today. The number of permits, a limit to free permits and an expansion to new parts of the economy such as maritime shipping is up for debate.  

Ideas of extending emissions trading to the road transport and building sectors are creating a political minefield, as high emitting countries, such as Poland, worry higher fuel prices will hit their economies and people hard. The European Commission seems undeterred by the opposition, and in recent weeks has stepped up its campaign to extend carbon pricing while buffering the social impact through a new social fund. Indeed, the social dimension is key. Between 1990 and 2015, annual consumption emissions of the poorest half of EU citizens fell by 24% while those of the richest 10% grew by 3%. This carbon inequality where poorest people are polluting less but would bear the costs of the transition may widen with a separate ETS for road transport and buildings. Pricing GHG cannot be the only answer to climate change mitigation.

The likely ETS extension on ships is also a touchy subject, as the global shipping industry has warned that covering voyages that start or end outside EU waters could be perceived as the bloc asserting control over waters it does not control which could provoke diplomatic tensions. Yet, just like the case of aviation, covering only intra-EU voyages would limit the environmental impact of the measure.

4. Revision of the Renewable Energy Directive (RED)

Renewable energies are a cornerstone of a decarbonised economy. The Paris Agreement Compatible (PAC) energy scenario by Climate Action Network Europe and the European Environmental Bureau shows that a 100% renewable energy system by 2040 is a prerequisite for limiting dangerous climate change. With the adoption of the Renewable Energy Directive (RED I) in 2009, the EU had set itself an overall target of a 20% share of energy from renewable energy sources in the final energy consumption by 2020. It was substantially revised in 2018 (RED II), setting a new EU goal of a minimum 32% share of renewables in final energy consumption by 2030.

For the new 2030 climate target, not even to mention the Paris Agreement obligations, this growth is still much too weak. NGOs and the renewable energy sector have been pressuring the European Commission to ramp up the 2030 target for green energy from 32% to 50% — but it looks like Brussels is leaning toward setting it between 38% and 40%, according to the European Commission’s 2030 Climate Target Plan (CTP) and a leaked draft of the proposal.

Besides the targets, there is another contentious issue: the role of biomass. Current sustainability criteria consider burning forest wood renewable and carbon neutral - a premise that may have sounded plausible (“trees grow back”). However, wood is increasingly harvested in clear cuts with heavy machinery that deeply damages soils, and burning it emits very the highest amount of CO2 and toxic fine particles of all fuels (fossils included) per unit of energy produced. Given current levels of atmospheric CO2, it is not only ill advised to burn carbon sinks rather than let them grow, but we also do not have the luxury of time for trees to grow back. Subsidies for biomass have further spurred demand and therefore the logging of forests outside the EU. External costs from burning biomass (from GHG emissions, air pollution, biodiversity loss and habitat destruction) are currently not adequately mitigated or priced in. Even though bioenergy rules will probably be slightly strengthened, there has been a lot of criticism on weak sustainability requirements in the so-called impact assessment (the European Commission has to conduct cost-benefit-analyses before proposing any legal action) of the upcoming revision.

5. Revision of the Energy Taxation Directive (ETD)

The Energy Taxation Directive (ETD) establishes the framework conditions of the European Union for the taxation of electricity and fuels. Its core component is the setting of minimum tax rates for all Member States, with the intention to ensure the functionality of the EU internal energy market by avoiding distortions of competition through different tax systems, and to contribute to a low-carbon, energy-efficient economy.

Taxes account for a significant share of the final prices of energy products and vary across consumers (industry vs. households), energy products (e.g. electricity vs. gas) and across Member States. For households, they represent on average 40% of the electricity price, 25% of the gas price and 31% of the heating oil price in 2017. Industry, for competitiveness reasons, is usually taxed less than households are. Any changes to tax rules in the EU require unanimous support from Member States, which has prevented any major overhaul in the regulation since 2003. The current tax framework contains a range of incentives for fossil fuels despite climate objectives. In 2019, the EU Commission proposed changing the voting rules toward qualified majority voting.

The European Commission will likely propose that governments link taxation of energy products and electricity to the energy content of the energy sources, coupled with their environmental performance. Countries may probably also reduce or even eliminate taxes on power produced with renewable energy sources. This would make taxes on electricity, motor and heating fuels better reflect their environmental and health impact. It would furthermore be important to review the long list of allowed exemptions and to remove all subsidies to fossil fuels. Exceptions for entire sectors such as aviation, as well as some specific fuels such as liquefied natural gas (LNG) are no longer appropriate.

Besides environmental concerns, there is another rational behind the revision of the ETD: preserving the EU single market. Currently, the ETD does not achieve its primary objective in relation to the proper functioning of the internal market, as the minimum tax rates have lost their effect. Their real value has eroded over time and they no longer have a converging effect on national rates as most Member States tax energy products and, in some cases electricity, considerably above the ETD minima.

The social dimension of this file is crucial. To ease the impact on poorer segments of society, rules could foresee tax reductions for energy products and electricity used by vulnerable households. Public revenues generated via energy taxation can be used to fairly redistribute the economic burden across society and support the most vulnerable, while also providing an opportunity to reduce labour taxation.

6. Carbon Border Adjustment Mechanism (CBAM)

High carbon prices in the EU create the danger of so-called carbon leakage — a term for companies moving their activities to jurisdictions with laxer rules and then shipping goods back into the EU. The EU’s plan to counteract this risk is called the Carbon Border Adjustment Mechanism (CBAM). The European Commission is expected to propose an import levy on steel, aluminium, cement, fertiliser and electricity, to be phased in from 2023. The levy would mirror ETS prices. This also raises the question of free allocations of pollution permits whose raison d’être is a prevention of carbon leakage as well. Lobbying to keep free allowances is fierce, but keeping them while setting a carbon border levy look likely to fall afoul of World Trade Organization rules. CBAM revenues would feed into the EU’s budget.

CBAM also has geopolitical implications. The US for example does not have a national carbon price and the US Special Climate Envoy John Kerry said that the EU should only consider CBAM as “last resort” if all other options to achieve global decarbonisation fail. There may also be repercussions with EU neighbours like Russia, Turkey and Ukraine and other global players, like Brazil, South Africa, India and China.

Even among EU Member States, support for the measure — pushed by France — is not certain. Large exporters such as Germany are worried about possible trade retaliation. The European Commission’s proposal will need backing from a qualified majority in the EU Council — and so far, only nine have voiced support.

If a CBAM is to be implemented, two things are to watch closely: free allowance must be phased out and revenues must be used with common but differentiated responsibilities as guiding principle. The European Parliament as well as several thinks tanks and NGOs have rightly pointed out that revenues go exclusively towards decarbonisation efforts, domestically and crucially also in countries which will be affected by the CBAM due to their high-carbon production methods.

7. Revision of the Regulation on the inclusion of GHG emissions and removals from land use, land use change and forestry (LULUCF)

The revision of the LULUCF Regulation is a chance to mitigate both the climate and biodiversity crises. The cheapest, most effective and most readily available way to boost carbon sequestration is to protect and restore forests, peatlands, and other natural ecosystems. The current EU legislation does not incentivise this, leading to continuous loss of biodiversity and little to no climate crisis mitigation ambition in the sector.

The EU Climate Law sets net targets, meaning that they take into account carbon removals from the LULUCF sector. This is problematic for several reasons. For example, measuring emissions and removals in the land sector is less accurate because land-based carbon stocks cannot be considered permanent in the same way as reducing fossil fuel emissions and keeping fossil fuels in the ground can. The EU Climate Law sets a limit of 225 Mt of CO2 equivalent to the contribution of removals to the net target. The cap defines that the sectors outside LULUCF will need to reduce emissions by at least 52.8% by 2030 under the net 55% target. Another important implication to the LULUCF sector set by the EU Climate Law is that the EU aims to achieve net negative emissions after 2050.[2]

The current EU regulation for LULUCF was adopted in 2018 as part of the 2021-2030 EU’s energy and climate policy framework that aimed to implement the EU’s GHG emissions reduction target of at least -40% by 2030. The regulation kept the LULUCF sector outside the target with its own rules for accounting for emissions and removals, but allowed Member States to use the LULUCF sink to offset 280 Mt of emissions to cover their obligations under the ESR (see above). Its core component is a “no-debit” rule: EU Member States must ensure that accounted emissions from LULUCF do not exceed accounted removals. However, current accounting rules still allow for significant loss of carbon sinks and stocks and do not provide incentive to increase the capacity to absorb and store GHG. Member States furthermore play a key role in the process of setting reference levels and have an incentive to politically manipulate them to have more lenient LULUCF targets.

In any case, the rule is insufficient to meet European Green Deal objectives; sinks must not just stay the same, but dramatically increase. Across the EU, the lands under LULUCF as a whole remain a net sink, but the tendency is negative as Member States moved on with plans to increase forest harvesting and continued to drain peatlands soils for agriculture, forestry and peat extraction. To achieve a higher net LULUCF goal for 2030 there need to be changes to how we use land across the EU, facilitated by a significant reduction in the consumption and production of animal products, a reform of the EU’s bioenergy rules, and a shift to a more circular economy. The LULUCF Regulation and other relevant files must therefore be aligned, including the EU Biodiversity Strategy, the EU Restoration Law, the Birds and Habitats Directive, the Circular Economy Action Plan and the national strategic plans that are currently being elaborated in the framework of the Common Agricultural Policy.

8. Revision of the regulation setting CO₂ emission performance standards for new passenger cars and for new light commercial vehicles

In recent weeks, it was purported that the European Commission is reflecting on setting a 2035 date mandating zero emissions for car fleets, which would effectively announce the end for internal combustion engines in the EU. It is part of an ongoing rethink of car emissions standards. EU officials are considering ramping up the bloc’s car CO2 emission reduction targets to 60% by 2030 and setting a new 2035 target of as high as 100%.

The current CO2 performance standards imply a fleet wide target of a 37.5% reduction by 2030. That goal was only agreed in difficult negotiations in 2018— a sign of how fast attitudes are shifting on emissions. In fact, the European Commission is following a macro-trend of EU Member States announcing bolder phase out targets for combustion engines (concerning new sales), such as Ireland (2030), Sweden (2030), the Netherlands (2030),  Slovenia (2030), Denmark (2035), France (2040) and Spain (2040). Germany’s federal elections on 26 September 2021 might become the litmus test for the bloc’s tough political battles ahead, as the country is the EU’s most important car manufacturing beacon with over 850.000 direct employees in the sector and contentious vested interests. On the other end of the equation, the car industry’s also witnessed a shift in recent years declaring more and more ambitious targets to have hybrid or even all-electric fleets ready as soon as the late 2020s in some cases. In reality, however, very few remanufactures have already set up concrete strategies on how to actually reach those targets.

More ambitious CO2 fleet targets for cars are key to get emissions off European roads which is an important climate policy lever given the fact that the transport and mobility accounts for 30% of CO2 emissions within the EU. As sometimes overlooked, CO2 performance standards are also instrumental to accelerate the uptake of battery electric vehicles (BEVs), being a strategic precondition for transforming the European automotive sector while maintaining key segments of the value chain in the EU.

9. Revision of the Directive on deployment of alternative fuels infrastructure (AFID)

Directly linked to the expansion of e-mobility and alternatives to replace the combustion engine in the EU is the question of charging infrastructure. Encouraged by a significant boom in the last two years, the EU seems ready to turn the page on lengthy hen-egg-dilemma discussions of what to prioritize first, raising the low number electric vehicles (EVs) or the low number of charging points. Since the actual market share of e-vehicles of new passenger cars sales in 2020 went up to 10,5%  (up from 1,8% in 2018), it has become increasingly clear that the EV demand growth will soon require a substantial increase of new charging points in the EU and the political framework to bring about these new infrastructure investments. Since the current EU directive on the deployment of alternative infrastructure (AFID) was originated in 2014, it is crucially lagging behind to adequately address these more recent developments.

A closer look at the current distribution of EV charging points across the EU reveals the necessity for a sufficiently differentiated approach to revamp the AFID and tailor it to Member States actual progresses and needs. Regional and socio-economic disparities mark a stark contrast between a high number of charging points in wealthier and a low number in poorer Member States. A detailed methodology specifying for EU countries how to coherently calculate measures and adopt more ambitious charging infrastructure targets is so far missing in the current legislation. This is also true for including technical standards such as interoperability and transparent information exchange requirements, which in return is a clear deficit for incentivizing Member States to be more ambitious in the rollout of infrastructure. Progressive NGOs call out to the European Commission to also include higher targets for trucks and light commercial vehicles.

Beyond e-mobility, the AFID also touches upon biofuels (e.g. from corn, palm oil or rapeseed) and the use of synthetic fuels and is therefore linked to the Renewable Energy Directive (RED -see above) in some aspects. However, focusing too much on higher targets on these fuel types bear a number of risks regarding sustainability: not only does this pose a threat as it may introduce an inefficient unsustainable competition between choosing the right end use for agricultural crops (food vs. fuels). In the case of chemically manufactured synthetic fuels (being less energy efficient in general due to conversion losses), this might also prolong the phase out period for combustion engines as an unintended side effect, since they would be burnt in conventional cars.

10. Conclusion

The EU’s Fit-for-55 package is an ambitious overhaul of climate legislation in the world’s biggest single market. It will include both, substantial improvements and additional rules. Whether it really is fit for the net 55% reduction target remains to be seen. Given the target, it is fair to say that it will not be fit for 1.5 though: the EU continues to lag behind its Paris commitments to limit global temperature increase to 1.5 Celsius compared to pre-industrial levels – even with this package. There is also an opportunity, though, to make the series of proposals a “Fit for 2030” package to honour environmental and social commitments in the European Green Deal. In fact, the negotiations on the Fit-for-55 package might very much spell a verdict on the European Green Deal itself, and decide whether it can actually become the European policy driving force required to move our continent to a sustainable pathway within planetary boundaries. After a rather disappointing EU Climate Law, a botched Common Agricultural Policy and different notions of continued investments in fossil gas (for example in recovery plans), all of which did not (fully) listen to science, EU policy-makers should now do so with this comprehensive package.

The Heinrich-Böll-Stiftung European Union office will be accompanying the Fit-For-55 negotiation journey, giving a platform to key policy-makers, civil society and our foreign offices. Stay tuned!