Fit for 55 mid-July 2022 legislative update

Legislative proposals enter interinstitutional negotiations.

The European Union (EU) is working on revising its climate, energy and transport-related legislation to align the current laws with its EU Green Deal objectives of reducing emissions by at least 55%, when compared with 1990 levels, by 2030 and achieving climate neutrality 2050. All EU policies must contribute to achieving the EU Green Deal objective in terms of the European Climate Law. The European Commission (the Commission) reviews every EU law to ensure its alignment with the EU emission reduction targets. This review is intended to be completed and effective by the time EU Member States update their national energy and climate plans in 2023 so that the new EU climate ambition is reflected within these plans. As part of this review, the Commission has proposed 13 broad legislative changes (dubbed the "Fit for 55" package) and presented these to the European Council in July 2021.

A lengthy process

Before most EU legislation can be passed that is binding on the Member States, approval by all Member States and the European Parliament is required (note there are exceptions, especially as regards tax legislation, which requires a unanimous agreement of the Council and the Parliament only has a consultative role, but environmental legislation is under the ordinary procedure). Essentially, the process involves three main parties:

The Commission, which proposes laws, makes sure EU laws are appropriately applied, and manages EU spending programs;
The European Parliament is made up of directly elected members from each EU country who debate and amend laws; and
The Council of the European Union (the Council) is made up of government ministers from each EU country according to the policy area to be discussed (and who have the authority to commit their governments to the actions agreed on in the meetings) who have who meet to discuss, amend and adopt EU laws.

In a nutshell, the Council, together with the European Parliament, negotiates and adopts EU laws based on proposals from the European Commission. Various stages of discussion, voting, amending texts, re-voting, etc., occur within this process, so while it seems relatively straightforward, it is a rather long and complicated one.

Three parties, one common ground

The table below sets out the positions that have been taken by each of the three parties on different elements of the legislative proposals, which will be taken into the final negotiation stage ("trialogue"), where the final text is to be agreed upon (and become binding EU legislation).

Fit for 55 Package Proposal	Topic	Commission proposal (original, before amendments)	EU Parliamentary position	Council position
EU Emissions Trading System (ETS)	Overall emissions reduction ambition in the sector covered by the EU ETS	61% emissions reduction by 2030, compared with 2005	63% emissions reduction by 2030	61% emissions reduction by 2030
	Reduction of overall emissions ceiling (“re-basing”).	One-off reduction in EU-wide quantity of allowances in circulation (number of allowances was not provided)	Reduction in EU-wide quantity of allowances in circulation (120 million allowances over two years)	One-off reduction in EU-wide quantity of allowances of 117 million allowances
	Increase in annual reduction rate of the cap per year (“linear reduction factor”)	4,2% per year	4.4% until the end of 2025, 4.5% from 2026 and 4.6% from 2029	4,2% per year
	Strengthening market stability reserve (MSR)	Increased annual intake rate of allowances (24%) prolonged beyond 2023; threshold of 400 million allowances above which those placed in the reserve are no longer valid.	Agree with the Commission proposal	Agree with the Commission proposal
	Inclusion of maritime shipping emissions in EU ETS	Extend the current EU ETS to the maritime sector from 2023 to 2025; 100% of verified emissions will be surrendered as of 2027.	100% of emissions from intra-European routes to be covered as 2024; 50% of emissions from extra-European routes to and from the EU as of 2024 until the end of 2026; From 2027, 100% of emissions from all trips should be covered with possible exemptions (up to 50%) for non-EU countries subject to certain conditions	Accepted Commission proposal for the gradual introduction of obligations for shipping companies to surrender allowances
	Aviation sector	Phase out free emission allowances gradually by 2027 EU ETS will apply for intra-European flights (including the United Kingdom and Switzerland), while CORSIA will apply to EU operators for extra-European flights to and from third countries participating in CORSIA	Enlarged scope to include all flights departing from European Economic Area (EEA) airports, and not just flights within the EEA Phase-out of free allocations by 2025	Agree with the Commission proposal
New EU Emissions Trading System (ETS2) for buildings and road transport sectors	Commencement date	Emissions trading should start in 2025 (during this year, regulated entities should be required to hold a greenhouse gas emissions permit and to report their emissions for the years 2024 and 2025) Issuance of allowances and compliance obligations applicable from 2026	Emissions trading should start in 2025 (during this year, regulated entities should be required to hold a greenhouse gas emissions permit and to report their emissions for the years 2023 and 2024) Issuance of allowances and compliance obligations applicable from 2025 Residential buildings and private transport will be exempt until 2029 (and only subject to a thorough assessment and new legislative proposal).	Auctioning of allowances from 2027 onwards Surrender obligations from 2028 onwards
	Emissions reduction trajectory and linear reduction factor	5.15 from 2024 and 5.43 from 2028	Agree with the Commission proposal	Agree with the Commission proposal
	Additions not covered in original proposal	N/A	N/A	Opt-in for all fossil fuels Simplified monitoring, reporting & verification for small fuel suppliers Temporary possibility for member states to exempt suppliers from the surrender of allowances until December 2030 if they are subject to a carbon tax at the national level, the level of which is equivalent to or higher than the auction price for allowances in the ETS for the buildings and transport sector.
Carbon Border Adjustment Mechanism (CBAM)	Ending fee allowances for sectors covered by CBAM	Gradually phase out free over ten years (10 percentage points every year from 2026 to 2035)	Free allowances are to be phased out from 2027 and disappear by 2032.	Slower reduction at the beginning of a ten-year period (2026 – 2035); accelerated rate of reduction at the end.
	Covered products	Cement, iron and steel, aluminum, fertilizer, electricity (organic materials specifically excluded)	Include polymers (the entire Chapter 39), organic chemicals (Chapter 29), hydrogen, ammonia	Agree with the Commission proposal
	Covered emissions	Direct emissions only (European Commission to evaluate, at the end of the transition period, whether the CBAM scope should be extended to include indirect emissions)	Include indirect emissions (i.e., emissions arising from electricity used by manufacturers)	At the end of the transitional phase, indirect emissions could be included (note: not will be included)
	Additions not covered in the original proposal			Requested the monitoring of the impact of CBAM, including carbon leakage at borders
	Modernisation Fund	Increase in volume through the auctioning of an additional 2.5% of the ceiling Increase in the share of priority investments to 80% Addition of new eligible sectors	Agreed with the Commission proposal, plus: Support from the Modernisation Fund should only be granted to the Member States that have adopted legally binding targets for achieving climate neutrality by 2050 at the latest, as well as measures for the phasing out of all fossil fuels in a timeframe consistent with set targets.	Agreed with the Commission proposal, plus: Addition of new eligible sectors Transitional measure allowing the beneficiaries of the Fund to continue financing natural gas projects under certain conditions
Effort Sharing Regulation (ESR)	EU-wide greenhouse gas emissions reduction target	EU-level emissions reduction increase from 29% to 40% by 2030, compared with 2005 Increased national targets	Agree with the Commission proposal	Agree with the Commission proposal
Effort Sharing Regulation (ESR)	Member state linear emissions trajectories	Adjusted in 2025 only in the event that this leads to higher annual limits for the Member State concerned	Annual emissions allowances are set for the whole period 2023 - 2030	Agree with the Commission proposal
Social Climate Fund (SCF)	Fund to support vulnerable households, micro-enterprises and transport users to support the creation of an emissions trading system for the buildings and road transport sectors	Allocate a total of €72.2 billion over the 2025-2032 period through an allocation methodology.	Allocate up to €72 billion until 2032 through an allocation methodology.	Fund to be part of the EU budget, fed by external assigned revenues up to a maximum amount of €59 billion. Established over the period 2027-2032, to coincide with the entry into force of the ETS for the buildings and road transport sectors; retroactive eligibility of expenditure from 1 January 2026
Land Use, Land Use Change and Forestry (LULUCF)	Overall net removal objective in the LULUCF sector at EU level	At least 310 million tonnes of CO₂ equivalent net removal by 2030, distributed among the member states as binding targets.	At least 310 million tonnes of CO₂ equivalent net removal and at least 50 Mt removal target from carbon farming by 2030	Agree with the Commission proposal
Land Use, Land Use Change and Forestry (LULUCF)	Additions not covered in the original proposal		The expanded scope that covers the entire land sector from 2031, with an EU target of achieving climate-neutrality in the land sector by 2035	Each member state to commit to achieving a sum of net GHG emissions and removals for the whole period from 2026 to 2030
CO₂ emission performance standards for cars and vans	CO₂ emission reduction targets	55% reduction for new cars by 2030 50% reduction for new vans by 2030 100% emissions reduction by 2035 for new cars and vans	Zero-emission road mobility by 2035	Agree with the Commission proposal
CO₂ emission performance standards for cars and vans	Additions not covered in the original proposal			End the regulatory incentive mechanism for zero- and low-emission vehicles by 2030
Energy Efficiency Directive	Revision of current EU-level target	An increase from 32.5% to 36% for final energy consumption, and 39% for primary energy consumption	Parliamentary sitting date planned for September 2022	Agree with the Commission proposal
ReFuelEU Aviation	Minimum share of a sustainable aviation fuel that should be made available at EU airports	Supply of sustainable aviation fuels should become mandatory starting in 2025 (2%) 32% by 2040 63% by 2050	2% in 2025 37% in 2040 85% by 2050, taking into account the potential of electricity and hydrogen in the overall fuel mix	Agree with the Commission proposal
	Definition of sustainable fuels	Liquid, drop-in aviation fuels (synthetic aviation fuels and biofuels produced from agricultural or forestry residues, algae, bio-waste or used cooking oil), that are fully fungible with conventional aviation fuel and compatible with existing aircraft engines Exclusions: Feed and food crop-based fuels	Agree with the proposal, with the following amendments: Include: Renewable electricity and hydrogen Recycled carbon fuels produced from the waste processing gas Exhaust gas deriving from the production process in industrial installations Some biofuels produced from animal fats or distillates (included only until 2034) Exclude: Fuel derived from palm oil, soy-derived materials and soap stock	Agree with the Commission proposal
	Additions not covered in original proposal	-	Create a Sustainable Aviation Fund (2023 - 2050) to accelerate the decarbonization of the aviation sector and support investment in sustainable aviation fuels, innovative aircraft propulsion technologies, and research for new engines.	-

A glimpse into the future

While there is still uncertainty regarding what form the final legislation will take and when it will come into effect, the above provides businesses who want to start preparing for the upcoming changes now (or just want to know what they could expect) some clarity as to what can be expected.

To future-proof operations, businesses should already put clear and implementable transition strategies in place to adapt to the upcoming changes and achieve the long-term goal of net zero emissions.

For more information about the impact of the Fit for 55 package on your company, please contact one of our experts.