The European Commission published the much anticipated ‘Fit for 55’ package on the 14th of July. The package is a series of policy proposals to assist the EU in meeting the target of a 55% reduction of GHG emissions by 2030 compared to 1990 levels. Negotiations over the package, which includes 8 revisions of existing legislation and 5 new legislation proposals, will begin this Autumn and continue for at least two years.
Emissions Trading Scheme (ETS)
The ETS covers ~41% of the EU’s overall GHG emissions and in 2018 covered 44% of Ireland’s CO2 emissions. The ETS sets an emissions cap which limits the amount of emissions from the sectors it covers including electricity and heat generation, energy-intensive industries and commercial aviation within the European Economic Area. Firms covered under ETS sectors must purchase emissions allowances, the price of which can change over time. The Commission is proposing to lower the overall emissions cap in the ETS and increase the annual rate of reduction of emissions credits. The emissions reduction obligation for ETS sectors for 2030 will increase from 43% to 61% on 2005 levels. The linear reduction factor, the rate at which allowances fall by each year, will increase from 2.2% today to 4.2%. A rebasing of the ETS cap to align with current emissions levels is proposed and the later the directive is applied, the larger the rebasing will need to be.
The Commission proposes to phase out free emission allowances for aviation between 2023 and 2025, introduce shipping to the ETS and establish a new separate ETS for buildings and road transport from 2026 which will have an emissions reductions target of 43% for 2030. In 2028 the EC will assess whether to integrate this new ETS for buildings and transport with the original ETS. The linear reduction factor for the buildings and transport ETS will be 5.15% to begin and increase to 5.43% by 2028. Member States will also be directed to spend all revenue from the ETS on climate and energy-related projects.
Effort Sharing Regulation (ESR)
The Effort Sharing Regulation (ESR) assigns individual binding emissions reduction targets to each Member State for 2030 compared to 2005 level in the sectors road and domestic maritime transport, buildings, agriculture, waste and small industry. Ireland’s target for 2030 was a 30% reduction in emissions and could be increased to 42%. There will be binding annual emissions limits from 2021 to 2030 to meet this target. Ireland fell short of its 2020 target of a 20% reduction in emissions in the non-ETS sectors by approximately 12% and had to purchase compliance to meet its obligations.
Carbon Border Adjustment Mechanism (CBAM)
To prevent carbon leakage and to impose a carbon price on imports, a Carbon Border Adjustment Mechanism is proposed for electricity, steel, cement, chemicals and fertilisers. The CBAM proposes that importers would have to declare the carbon embedded in imported goods and submit the appropriate number of CBAM certificates. The price of the CBAM certificates would be the weekly average of the closing prices of the EU ETS. The CBAM will take into account cases where goods have been imported from countries which already have a carbon price, thus reducing the number of CBAM certificates that may need to be surrendered.
Applying a CBAM to electricity is addressed separately to material products and requires taking into account the methods for its transportation, through constrained, monopoly networks, and the broad set of technologies employed for its production. A reference value for emissions embedded in imported electricity needs to be established to determine the CBAM obligation. There are two alternative options to determine the reference value: (a) average GHG emission intensity of the EU electricity mix and (b) average GHG emission factor of the EU electricity mix. Importers would have the possibility to prove that their installation level emissions are lower than the chosen reference value. Both options contribute to mitigating the risks of carbon leakage by discouraging the build-up of carbon-intensive power generation sources in the vicinity of EU borders which might replace EU-based generators exposed to increasing carbon costs. However, the option based on the carbon emission factor may be more effective in preventing carbon leakage and keeping administrative costs low.
The CBAM is scheduled to be phased in gradually, with a transition period from January 2023 – December 2025 where the CBAM will be a reporting obligation only. The mechanism will be fully implemented by January 2026.
Energy Efficiency Directive (EED)
The recast Energy Efficiency Directive increases the overall EU binding target for energy efficiency improvements from 32.5% to 36% (final energy) and introduces a target to reduce total energy demand by 9% relative to 2020. National targets remain non-binding but indicative Member State contributions to the EU-wide energy efficiency target are to be introduced.
Annual energy savings obligation will increase from 2024 from 0.8 to 1.5% for all Member States, nearly doubling previous requirements. The baseline used for calculations has been updated from the 2007 Reference Scenario to 2020, making the targets more ambitious in effect. The EED also sets a target of 3% each year for the rate for building renovation in the public sector.
The Energy Efficiency First principle is emphasised more. The recast Directive proposes to introduce a legal requirement for Member States to apply energy efficiency solutions in policy, planning and investment decisions. The Commission will issue guidance on how to apply the principle.
Energy Efficiency measures for vulnerable customers and energy poor households are also to be prioritised. Member States are required to introduce priority measures to help people affected by energy poverty make the best use of public funding, and to consider the use of revenues from ETS allowances. The amount of energy savings from energy poor households must be at least equal to the proportion of households in energy poverty.
Renewable Energy Directive (RED)
The RED sets the target for the level of renewable energy in the overall EU energy mix and defines which energy sources can be considered ‘renewable’ and contribute to the target. The revised Renewable Energy Directive increases the EU wide target for renewable energy from 32% to 40%. The EU target will be binding while national targets will be voluntary.
There are many references to electrification and the role of renewable energy in decarbonising other sectors in the recast Directive. Member States are to establish a framework to facilitate and promote the uptake of Renewable PPAs and remove barriers including permitting barriers. The framework should also take into account the need for additional renewably sourced electricity to meet increasing demand from transport, industry and buildings. Member States are also to explore how to reduce the financial risks associated with PPAs, in particular through credit guarantees.
A series of new measures are proposed to facilitate system integration of renewable electricity:
- TSOs and DSOs are to make available info on the RES share and where possible the GHG content of the electricity they supply;
- Battery manufacturers are to enable access to information on battery capacity, state of charge, etc. to battery users;
- Member States are to ensure private recharging points can support smart functionalities and RAs are to assess the potential for private recharging points to contribute to bidirectional charging.
To promote electromobility a credit mechanism is introduced under which operators that supply renewable electricity to EVs via public charging stations will receive credits they can sell to fuel suppliers who can use them to satisfy the fuel supplier obligation. A GHG intensity reduction objective for fuels or electricity in transport is also introduced to increase the renewable share in this sector.
The RED II revision will oblige Member States to establish a cross-border pilot project within 3 years after the Directive enters into force. For each sea basin, a one-stop-shop for permitting is proposed to foster deployment of offshore renewable energy.
Energy Taxation Directive
The revised Energy Taxation Directive introduces the principle of linking taxation to the energy content and environmental performance of energy products and electricity (rather than the volume of energy). Energy products and electricity will be grouped into categories and ranked according to their environmental performance. The application of this taxation principle gives a comparable advantage to electricity and should help foster its use in sectors such as transport. The lowest tax rate will be applied to electricity, advanced biofuels, bioliquids, biogases and hydrogen of renewable origin.
The rate applicable to this group will be set significantly below the reference rate as ‘electricity and these fuels can drive the EU’s clean energy transition towards achieving the objectives of the European Green Deal and ultimately climate neutrality by 2050’. Sustainable alternative fuels and electricity would have a minimum tax rate of zero for 10 years.
Social Climate Fund
The Social Climate Fund Regulation will establish a €72.2 billion Social Climate Fund for 2025 – 2032 to mitigate the social impacts that a new ETS for buildings and transport can have on vulnerable customers. The new Fund will be financed by the EU budget and 25% of revenues from the new ETS for road transport and buildings. Member States can use the fund to provide temporary income support to households and finance energy efficiency projects for buildings. Under the Fund Ireland is due to receive over €737 million over the seven-year period.