Fit for 55: Reshaping global climate leadership and transatlantic cooperation

On July 14, 2021, the European Union (EU) took another major step towards climate neutrality by rolling out a massive roadmap that provides a legislative backbone for the European Green Deal. The Fit for 55 package includes climate, energy, land use, transport, and taxation policies aimed at reducing greenhouse gas emissions 55 percent by 2030, compared to 1990 levels. Will the package push global leaders to turn climate goals into action or will complex negotiations between the 27 EU member states and the European Parliament derail the EU’s efforts to lead on the energy transition? In this rapid response piece, Global Energy Center experts analyze the highlights and implications of the Fit for 55 package.

Innovation has its moment

Fit for 55 is a central global blueprint for converting climate ambition into innovative policies. But it comes framed within a worrying context, as Europe looks back on a lost decade for industrial decarbonization due to lack of support for innovative low-carbon technologies.

On Wednesday, European Commission President Ursula Von der Leyen opened a press conference with a strong message recognizing innovation as an imperative for decarbonization: “We need to move to a new model powered by innovation.” The importance of innovation increases with climate ambition. This is because the ability for more aggressive climate policies to deliver emissions reductions hinges on the availability of decarbonization technologies. At the same time, innovation will be central to encouraging domestic industry support for net-zero goals, while safeguarding jobs and key economic sectors. A vital theme to look for in Fit for 55 is whether it will unlock investment to scale next generation clean energy tech like hydrogen and carbon capture and storage.

At first glance, a strengthened Innovation Fund with “Carbon Contracts for Difference” designated for low-carbon and innovative technologies—and proposed investments for the infrastructure necessary to enable these technologies—is promising but will not be enough by itself (Carbon Contracts for Difference bridge the value of the European Trading System and the cost of decarbonization). Members of European Parliament and member states will need to step up to strengthen the Commission’s plan. They will have to close the current gaps to ensure that the legislation adopted in the end will be sufficient to hit EU climate targets and pave sound decarbonization pathways. Given the current climate emergency, the EU cannot afford to lose another decade and must ensure that the legislation adopted now enables fast and efficient decarbonization.      

Lee Beck is International Director, Carbon Capture at the Clean Air Task Force and a Nonresident Senior Fellow at the Atlantic Council Global Energy Center.

Carbon Border Adjustment makes its debut

Fit for 55 debuts the EU’s plan for a long-awaited Carbon Border Adjustment Mechanism (CBAM), revealing a few key details. First, CBAM advocates might be disappointed with a very cautious rollout; until 2025, importers that fall under CBAM will have to report and declare emissions rather than have their imports adjusted, after which free allowances for those sectors under the EU’s updated European Trading System (ETS) will also begin to phase out over an additional ten-year period. Second, it appears that there will be room for importers to reduce the border adjustment if a verifiable carbon price has already been paid in the originating country. Lastly, the CBAM text stops short of offering significant relief for countries not party to the Organisation for Economic Cooperation and Development (OECD)—which often have more carbon-intensive production—by providing technical assistance with compliance to CBAM regulations rather than the opportunity for waivers or the reallocation of some revenue from CBAM back towards the decarbonization of industry in those places as some had hoped.

The steady implementation of CBAM pushes carbon emissions further center stage for global trade. Combined with a slow rollout and the option for verified reductions for countries with existing carbon pricing, this approach adds gravity to the deployment of corresponding pricing schemes elsewhere, with China’s rollout of its own ETS and the growing momentum behind a carbon price in the United States being the two most notable examples. The impact of price variance between these schemes will eventually become an important area to watch as adjustments are levied. There will also undoubtedly be some hard adjustments especially for non-OECD countries, like India, making New Delhi’s likely response an important touchstone for both Brussels’ implementation of CBAMs in the coming years as well as the future development of similar adjustment schemes by major global importers.

Reed Blakemore is the Deputy Director of the Atlantic Council Global Energy Center.

The role of the Social Climate Fund and ensuring fairness in transition

The highly anticipated Fit for 55 package announced by the European Commission is nothing short of ambitious, a promising illustration of climate multilateralism in a time where leadership by example is crucial on the global stage. The package reflects a certain understanding of the increasingly inextricable pairing of climate and equity goals, and the delicate dance required to do right by both. While necessary, the level of change required to achieve the goals laid out in the package poses undoubtable risk to those economically reliant on the status quo, whether due to direct employment or existing high risk of energy and/or mobility poverty. The proposed Social Climate Fund would provide around €72.2 billion (with anticipated matching contributions from member states) from 2025-2032 for direct income and alternative, indirect support to those impacted by the new building and transport fuels emissions trading system. Although direct financial support cannot be the sole approach to ensuring fairness, it certainly is crucial to alleviating the immediate impacts of a rapid transition, and the allocation of funding to building efficiency renovations and mobility alternatives through the Fund reflects the Commission’s evolving understanding of a holistic approach to transition support. Despite the long road of negotiations ahead, the focus on equity and fairness is foundational to the long-term success of this climate plan and others to come.

Kelsey Forren is an Assistant Director at the Atlantic Council Global Energy Center.

EU Carbon Border Adjustment Mechanisms (CBAMs) provide enough of a glidepath for US trade to mitigate US resistance

The EU’s CBAM proposal includes a substantial list of products including iron, steel, aluminum, cement, fertilizers, and electricity (though countries that import electricity per a specific request for capacity are exempt).

As expected, importers must purchase an EU European Trading System permit reflecting the price that would have been paid under the EU’s cap and trade system for the carbon emissions that are “embedded” in the imported product; that is, the emissions that would have been subject to a “carbon price” in the country of origin if that country had a carbon tax (or, a cap and trade system similar to the EU’s).

Imports get a reduction in the price for amounts “paid” as a “carbon price” in the country of origin, which would seem to include the cost of permits that a facility in the exporting country had to pay under that country’s cap and trade system—or a carbon tax—but not an implied or “virtual” price claimed to be the result of regulations, mandates, or standards.

The carbon intensity of an individual import will be measured by the emissions resulting from its production at a particular facility (not including indirect emissions from electricity used in production) unless the importer cannot satisfactorily support such a measurement. Then, a default value for the country of origin will be applied. This means that, for example, US steel imports, which are generally lower-carbon than the average EU-produced steel, will benefit. This provision also makes “product splitting” a likely strategy; for instance, aluminum produced with hydropower in the Pacific Northwest will be much less expensive to import into the EU than steel produced in the Midwest where 50 percent of power is still generated from coal.  

The actual impact of the proposed levy will be delayed. While the regulation would take effect in January 2023, for the first several years, reporting is required but no payments; then, imports get a deduction in the otherwise-applicable costs of the permit for the value of free allowances given to domestic producers. So, if steel manufacturers in Germany or Sweden get free allowances for 100 percent of their emissions as late as 2025 and after, which the Fit for 55 package seems to anticipate, then steel imports will pay nothing for those years. As free allowances are phased out later in the decade, then the cost of permits will increase.

What this means for imports to the EU from both the United States and other trade partners is a reasonably long glide path before there are significant trade impacts.

There appear to be no “waivers” for less-developed countries, and this will be a controversial issue. The initial pushback and objections to the proposal was likely to come from China, India, and the developing world rather than from the United States.

George Frampton is a Distinguished Senior Fellow and Director of the Transatlantic Climate Policy Initiative at the Atlantic Council Global Energy Center.

Fit for 55 frameworks should encourage nuclear energy builds, but whether there is sufficient political will remains to be seen

The Fit for 55 package includes a series of frameworks to encourage the deployment of zero-carbon energy sources. From the EU Emissions Trading System, which places a price on carbon, to the carbon border adjustment mechanism (CBAM), these technology-neutral frameworks provide a context in which nuclear energy could contribute significantly to power sector decarbonization, as well as applications beyond power like hydrogen production and industrial processes. Experts have argued that a price on carbon could make nuclear energy far more competitive, especially against electricity generated by fossil fuels. Although some countries in Europe are looking at standing up nuclear energy programs or increasing their nuclear energy capacity, the EU’s overall tepid view of nuclear energy—combined with Fit for 55 measures like the Renewable Energy Directive, which privileges renewable energy over clean energy sources—may pose challenges to greenhouse gas reduction efforts.

Jennifer T. Gordon is the Managing Editor and a Senior Fellow at the Atlantic Council Global Energy Center.

Removing tax and other incentives for fossil fuel use

The EU Fit for 55 package brings together policy and regulatory approaches to achieve the EU’s greenhouse gas emissions reduction target by 2030. The diverse elements of the package deserve careful consideration in terms of their costs and benefits, including how they interact with each other. Despite the 2020 reduction in the EU’s primary energy consumption of about 8.5 percent, especially in the oil sector, the role of fossil fuels in the EU’s primary energy use remains high at over 70 percent. The package recognizes the priority of reducing fossil fuels emissions by giving special focus to transport and buildings sector initiatives, which are important consumers of fossil fuels and, together, account for over 60 percent of EU emissions. To address the emissions in these critical sectors, the package includes measures related to fuel substitution, taxation reform, improved efficiency standards, and new emissions trading mechanisms. In this respect, the proposal to revise the Energy Taxation Directive appears, although no specific targets are included, to be potentially important—if also challenging—due to the complexity of member states’ tax regimes. But clearly removing tax exemptions and incentives for fossil fuel use is necessary to ensure consistency in EU policy and to coordinate with the proposed revision of the EU Emissions Trading System. 

Robert F. Ichord, Jr. is a Nonresident Senior Fellow at the Atlantic Council Global Energy Center.

Fit for 55: Energy efficiency gets the spotlight it deserves

The EU is focusing on reducing energy inefficiency in its journey to net zero. The 578-page Energy Efficiency Directive calls for a final and primary energy consumption reduction of 36-39 percent, close to doubling the previous energy efficiency target. Additionally, member states would be required to annually renovate at least 3 percent of the floor areas of public buildings. The new efficiency targets are poised to create new jobs, improve energy security, spur innovation across the energy sector, and unleash new opportunities for transatlantic cooperation on new technologies and best practices. 

Olga Khakova is the Associate Director for European Energy Security at the Atlantic Council Global Energy Center.

World’s first tax on carbon imports in the EU’s Fit for 55 package: Difficult policy innovation that could go mainstream

The EU’s Fit for 55 climate legislative package is aimed at recalibrating sectoral policies towards a tougher 2030 interim climate target. The package covers a broad swath of measures across renewables, transportation, buildings, land use, forestry, and agriculture sectors, marrying climate policy tools to social objectives with the notable announcement of the Climate Social Fund. The package entails more ambitious targets for renewables production, energy efficiency gains, and road transportation emissions reductions backed by alternative fuels regulation that would facilitate electric charging and hydrogen refueling infrastructure. The most notable policy innovation comes with the revision of the 2003 EU energy taxation policy and the proposal for a carbon border adjustment mechanism (CBAM). The new tax measures are aimed at creating adequate price signals for energy commodities and carbon-intensive products to accelerate the energy transition. In addition to the rekindled EU Emissions Trading System (ETS) and existing EU member state carbon taxes that vary widely—from less than a $1 per ton of carbon emissions in Poland to $137 per ton ton in Sweden—CBAM is poised to be the key climate tool for pricing carbon from goods that originate outside the EU. But there are divergent views on the final architecture of the CBAM proposal and its efficacy in terms of delivering actual emissions reduction gains in the identified steel, cement, fertilizer, and power sectors. CBAM also faces an uphill battle from other jurisdictions. As countries work to deliver on climate pledges, the number of carbon taxes and emissions trading systems around the world is increasing. Currently, 21.5 percent of global greenhouse gas emissions are covered by active carbon pricing instruments, representing an increase since 2020, when only 15.1 percent of global emissions were covered. The EU’s pursuit of the world’s first carbon pricing measure on imports may set a precedent for other countries akin to the expansion of emissions trading systems globally since the inception of the EU ETS in 2005. While some question whether CBAM is compatible with World Trade Organization (WTO) rules, the EU’s measure may spur new actions for making the WTO fit for the 21st century climate agenda.

Irina Markina is a Nonresident Senior Fellow at the Atlantic Council and a Global Sustainability Manger at Baker Hughes.

Hard road still ahead of the European Union

The real fight is still ahead of the EU, between member states and in the European Parliament. While European Commission President Ursula Von der Leyen (allied with Vice President Frans Timmermans) favors a more ambitious approach, Internal Market Commissioner Thierry Breton supports a more cautious plan. The latter is supported by member states in the East, which fear a social backlash despite a €72 billion fund allocated to lower-income households across the EU that would disproportionately benefit Eastern member states

Amb. András Simonyi is a Nonresident Senior Fellow at the Atlantic Council Global Energy Center.

The Global Energy Center develops and promotes pragmatic and nonpartisan policy solutions designed to advance global energy security, enhance economic opportunity, and accelerate pathways to net-zero emissions.

Related Experts: Reed Blakemore, Lee Beck, Kelsey Forren, George Frampton, Jennifer T. Gordon, Olga Khakova, Irina Markina, and András Simonyi

Image: Facade of the European Parliament Paul Henri-Spaak building in Brussels, Belgium (Guillaume Périgois/Unsplash)