EU legislators limber up for intense negotiations on the ‘Fit for 55’ package

After a long, exceptionally hot summer, policymakers are heading back to Brussels to kick off intense negotiations on arguably some of the most important pieces of climate legislation the European Union has ever developed. If adopted, these laws will set emission reduction standards across a variety of sectors, putting the EU on course to reach net-zero emissions by 2050. But will we see agreements reached before the end of the year? Which texts are the most challenging? Our ‘back-to-school’ guide to the EU’s ‘Fit for 55’ package provides you with a helpful re-cap on the latest state-of-play. 

The European Green Deal put the green transition of the EU’s economy and society at the heart of policy making, impacting virtually all EU policy and regulatory initiatives since its adoption in 2019. It sets an ambitious objective to decarbonise the EU and ultimately turn it into the world’s first net-zero economy by 2050 in terms of greenhouse gas (GHG) emissions. This ambition was turned into legal obligations through the European Climate Law, which also introduced the interim target of reducing net GHG emissions by at least 55% until 2030.

To deliver on this 55% reduction target, the European Commission adopted on 14 July 2021 the so-called ‘Fit for 55’ package of measures, comprising over a dozen legislative proposals that touch upon a broad set of policies, including carbon pricing, energy efficiency, taxation, land use, transport, and renewables.

Although the COVID-19 pandemic and Russia’s invasion of Ukraine have brought up concerns regarding the EU’s ability to deliver on its ambitious green agenda, Brussels has continued to reaffirm the EU’s commitment to the European Green Deal. This has been evident in the setup of the €800 billion COVID-19 Recovery and Resilience Facility, which requires that Member States spend at least 37% of their funding allocation on the green transition. Likewise, the recent set of measures to reduce dependence on Russian fossil fuels under the so-called REPowerEU initiative put strong emphasis on accelerating the green transition, including the roll-out of renewable energy.

The next section looks at the state-of-play of the ‘Fit for 55’ package, focusing on some of the most important policies.

EU Emissions Trading System (ETS)

Background: The Commission’s revision proposal aims to align the ETS with the European Green Deal targets. Proposals include a reduced cap and more ambitious linear reduction factor for GHG emissions (61% reduction by 2030), a full phase out of free allowances by 2034, extension of the ETS to maritime transport, and a separate new ETS for buildings and road transport. There are also plans to align the EU ETS with the international carbon offsetting and reduction scheme for international aviation (CORSIA). There is also a proposal to increase the Innovation and Modernisation Funds and new rules on use of ETS revenues. Alongside the revision of the ETS, the Commission has also proposed to revise the Market Stability Reserve (MSR) and Effort Sharing Regulation (ESR).

Latest: The European Parliament adopted its report in June. Rapporteur Peter Liese MEP (EPP, Germany) has taken a more ambitious negotiating position, raising the overall ambition to reduce emissions in the ETS sectors from 61% to 63% by 2030, introduce a bonus-malus-system to incentivise best-performers and innovation and reward the most efficient installations in a sector with additional free allowances. Commercial road transport and buildings system would be included from 1 January 2024, but residential buildings and private transport will not be included before 2029 and only following thorough assessment by the Commission, agreed upon by Council and Parliament.

Adopted on 28 June, the Council’s general approach (on ETS, ETS aviation, MSR, ESR) aligns largely with the Commission’s proposal, with some key changes, namely support for a one-off reduction of the overall emissions ceiling by 117 million allowances (“re-basing”) and an increase in the annual reduction rate of the cap by 4.2% per year (“linear reduction factor”), and a gradual phase out between 2026 and 2035 of free allowances for sectors covered by the Carbon Border Adjustment Mechanism. There is support within the Council for a separate ETS for buildings and road transport (ETS BRT), however the start of the auctioning and surrender obligations would be delayed by one year compared to the Commission proposal (auctioning of allowances from 2027 onwards and surrender from 2028 onwards).  The phase out of free emission allowances for aviation would also be gradual by 2027.  

Next steps: Trilogue negotiations between the European Parliament, Council and Commission have now commenced, with the first taking place on 11 July. Technical discussions will continue in September, and the next political trilogue is expected in October. The ambition is to reach an agreement by the end of 2022.

Carbon Border Adjustment Mechanism (CBAM)

Background: The CBAM aims to put a price on carbon for imports of certain goods from outside the EU to prevent transfer of production to countries that are less stringent regarding GHG emissions. Under CBAM, the import of electricity, cement, iron, steel, aluminium, and fertilizers into the EU will be subject to a levy reflecting parts of the GHG footprint of these goods. It complements the EU ETS by adopting an equivalent regime on imports into the EU (purchasing and surrendering of CBAM certificates) and by coupling the price of CBAM certificates to EU ETS prices. The new mechanism is currently planned come into effect in 2023, with a transitional period until 2025, and full implementation by 2026.

Latest: The Parliament adopted its negotiating position in June, and similar as for the EU ETS it has taken a more ambitious stance. This includes: earlier application (from 1 January 2023 with a transitional period until the end of 2026, and full implementation for all sectors covered by 2032); a broader scope of covered goods (organic chemicals, plastics, hydrogen and ammonia) and the inclusion of indirect emissions; phase out of free allowances in the ETS sectors covered by the CBAM from 2027 until 2032; and an adjustment mechanism for free EU ETS allocations for the most efficient EU installations that export to non-EU countries without carbon pricing mechanisms.

The Council adopted its negotiating position already in March, following again largely the Commission’s position, with some changes concerning scope, penalties, definitions and the selling of CBAM certificates.

Next steps: The first trilogue took place on 11 July. Considering the close links between the files, the dynamic of trilogues for CBAM will follow the one for ETS.

Land Use, Land Use Change, Forestry and Agriculture Regulation (LULUCF)

Background: The Regulation sets a binding commitment for each EU Member State to ensure that accounted emissions from land use are entirely compensated by an equivalent accounted removal of CO2 from the atmosphere through action in the sector by 2030, the so-called ‘no debit’ rule. It covers all land uses, including wetlands from 2026. The Commission's proposal for the revision of the LULUCF Regulation includes moving away from the 'no-debit' rule from 2026, increasing the carbon sink potential to deliver GHG removals in the current decade, and expanding the scope of the regulation to cover the whole land sector from 2031 by including non-CO2 emissions from the agriculture sector.

Latest: The Parliament adopted its position in June. MEPs support the Commission’s proposal that the EU 2030 target for net GHG removals in LULUCF should be at least 310 million tonnes of CO2 equivalent. MEPs also propose setting-up a natural disturbance’s mechanism from 2026 to 2030 available to Member States who did not reach their annual targets due to so-called “natural disturbances”. Finally, they reaffirm in their position that natural carbon sinks should not be pooled with emissions from the agricultural sector.

The Council adopted its general approach on LULUCF on 28 June, confirming an overall objective of 310 Mt CO2 equivalent of net removals by 2030. Each Member State would have a binding national target for 2030, in addition to a commitment for each Member State to achieve a sum of net GHG emissions and removals for the whole period from 2026 to 2030 (‘the budget 2026-2030’). The Council agreed to enhance flexibilitiy to support Member States that have difficulties in meeting their targets owing to factors beyond their control affecting the LULUCF sector, provided that the Union meets its 2030 target.

Next steps: Trilogue negotiations are expected to start after the summer recess.

Renewable Energy Directive (REDIII)

Background: The Renewable Energy Directive is the legal framework for the development of renewable energy across all sectors of the EU economy. The Commission’s proposal for a revision of the Renewable Energy Directive (REDIII) increases the renewable energy target from the current 32% to 40%. It sets a new target for 49% of energy use in EU buildings to come from renewable energy sources (RES), as well as a new target to increase RES use in industry by +1.1% annually. The existing target of +1.1% annual increase in the use of RES in heating and cooling would become binding and modifies the target for an indicative +2.1% increase in the use of RES in district heating and cooling (an increase from the current +1% target). There are also new targets to decrease GHG intensity of transport fuels, increase advanced biofuels in transport, and a new target for a 50% share of RES in hydrogen consumption in industry.

Latest: The Council adopted its general approach on REDIII in June, supporting the 40% target by 2030 and the various sectoral targets (for buildings (heating and cooling), transport and industry). Member States agreed that by the entry into force of the Directive, no new or renewed financial support should be given to electricity produced from forest biomass in electricity-only installations. The Council calls for decreasing the share of renewable energy in the heating and cooling sector to 0.8% as an annual average between 2021-2025 (1.1% in Commission proposal), raising to 1.1% from 2026 onwards. The contribution of renewable fuels of non-biological origin (RFNBOs) for final energy in industry would be 40% by 2030 and 50% by 2035. The renewable energy consumption target share from RFNBOs for transport by 2030 is lowered to 2.2% (2.6% in Commission proposal).

The Parliament rapporteur Markus Pieper (EPP, Germany) wants to raise the EU’s renewable energy target to 45% by 2030. The draft report adds a new binding target of 70% green hydrogen (RFNBOs) in industry by 2035. In the transport sector, carbon intensity will need to be reduced by 16% by 2030 (compared to 13% in the Commission proposal). The share of advanced biofuels would increase to 2.2% by 2030, and RFNBOs by 5.7% by 2030. His report was adopted in the Industry and Energy (ITRE) Committee in July.

Next steps: A plenary vote on the Parliament’s report is expected for September. Once adopted, trilogues can commence between the Parliament, Council and Commission. This would open the way to reaching an agreement in early 2023.

Energy Efficiency Directive (EED)

What it is: The proposal to revise the Energy Efficiency Directive increases the binding annual target for reducing energy use at EU level. It will guide how national contributions are established and almost double the annual energy saving obligation for Member States. The public sector will be required to renovate 3% of its buildings each year to drive the renovation wave.

Status: On 27 June, the Council adopted its position, agreeing to reduce until 2030 energy consumption at EU level for final energy consumption by 36 % and for primary energy consumption 39 %. The key target of 36 % reduction at EU level for final energy consumption would be binding. The new baseline for these targets corresponds to a 9% reduction target compared to 2020.

In the Parliament, the responsible ITRE committee voted for its report on 13 July, increasing the reduction target to 14.5% compared to 2020.

Next steps: MEPs will vote on the final negotiating position by mid-September in plenary. Trilogues should start shortly after and are expected to be concluded before the end of the year.

Energy Taxation Directive (ETD)

Background: The Commission proposal aims to align the taxation of energy products with EU energy and climate policies, by promoting clean technologies and removing exemptions. It focuses on two main reforms: a new structure of tax rates based on the energy content and environmental performance of the fuels and electricity; and a broadening of the taxable base by including more products in the scope and by removing some of the current exemptions and reductions. A number of national exemptions and rate reductions will be removed. The Commission proposed that the new rules start applying on 1 January 2023.

Latest: The EU Member States have sole competence to adopt legislation on taxation (whereas the Parliament has no competency), on which they decide by unanimity. There have been several rounds of technical discussions between the Member States since the proposal was tabled in July 2021 but finding an agreement remains difficult due to national sensitivities.

Next steps: The current Czech Presidency of the Council has indicated that reaching an agreement on this Directive is key. They delivered a progress report on 10 June 2022, and a policy debate on this file is tentatively pencilled in for a meeting of EU Finance Ministers on 6 December 2022.

CO2 emissions standards for cars and vans

Background: The Commission presented a proposal to revise the Regulation setting CO2 emission performance standards for cars and light commercial vehicles. The main goal of the proposal is to phase out traditional combustion engine and ensure that by 2035, all vehicles sold in the EU are zero-emission vehicles.

Latest: On 8 June, the Parliament adopted its position, supporting the Commission proposal to reach zero-emission road mobility by 2035. MEPs also call for intermediate emissions reduction targets for 2030 to be set at 55% for cars and 50% for vans.

On 28 June, the Council adopted a general approach, agreeing to raise the targets for reducing CO2 emissions for new cars and new vans by 2030 to 55% for cars and to 50% for vans. The Council also agreed to introduce a 100% CO2 emissions reduction target by 2035 for new cars and vans.

Next steps: Trilogue negotiations are expected to start after the summer recess.

Other initiatives

In addition to the legislative proposals outlined in greater detail above, the ‘Fit for 55’ package includes several other specific initiatives. The Alternative Fuels Infrastructure Regulation (AFIR), ReFuelEU Aviation and FuelEU Maritime proposals aim in particular to decarbonise the transport sector in the EU, which is still responsible for close to a quarter of the EU’s GHG emissions. The final element of the package is the proposal to set up a Social Climate Fund, to address the social and distributional impact of the proposed new emissions trading system for buildings and road transport.  Deliberations on these three files and the Fund remain ongoing.

Looking ahead

The European Green Deal represents a historic paradigm shift in the European Union’s policymaking.  Its scale, ambition and potential impacts are commensurate with the unprecedented challenge the EU and the world are facing in the fight against climate change.

So far, both the European Parliament and the Council have made significant progress, adopting their respective negotiating positions on almost all of the proposals. However, once the interinstitutional negotiations (trilogues) begin in earnest in the coming weeks and months, it will be a significant challenge for the three institutions to reach common ground on each of the legislative proposals while maintaining the overall coherence and desired effects of the package.

This will be in particular the case for files where larger divergences exist between the established negotiating positions of the European Parliament and the Council (e.g. ETS, CBAM). What will make the trilogues on ‘Fit for 55’ different from previous legislative efforts is the sheer number of linked files, and especially the fact that changes in one proposal (e.g. regarding specific targets) can have significant knock-on effects on other parts of the package. It will fall in particular on the European Commission to broker a final overall deal that will ensure that once the dust settles the final ‘Fit for 55’ package of laws is indeed still capable of delivering the 55% reduction of GHG emissions by 2030.

Irrespective of the final outcome of the legislative negotiations, the main contours of the future regulatory framework are already discernible and businesses across various industries should start preparing for this new reality. And EU legislators are not stopping at ‘Fit for 55’; there is a slew of other related measures in the pipeline, including the REPowerEU package, the recently agreed Corporate Sustainability Reporting Directive, the new Corporate Sustainability Due Diligence Directive, the new Ecodesign for Sustainable Products Regulation, and the upcoming initiative on banning products linked to forced labour. Read more about these on our Sustainability blog.

Considering the extensive regulatory work that still lies ahead and its far-reaching consequences, this is an exciting moment in EU history, and it is the right opportunity to engage with the EU institutions to shape the sustainable future of Europe.