New EU climate proposals: Fit enough for 55?

The transport industry has long been one of the biggest sources of pollution and greenhouse gas emissions in the EU and currently makes up 1/4 of total EU emissions¹. In recent years, it is one of few activities that has seen an increase in emissions levels², with drops in emissions witnessed over the course of the COVID-19 pandemic fast-returning to their pre-pandemic levels. As a result, the EU's 'Fit for 55' proposals in relation to the transport sector are seen by some as being the most transformational.

The EU is proposing an effective ban on the sale of new petrol and diesel (including hybrid) vehicles by 2035, with a new focus on zero-emission cars, such as electric and hydrogen-powered vehicles. Previous targets to reduce emissions from 37.5%, compared to 1990 levels, within the automotive industry, will also be increased to 55%. Going forward, there will clearly be a need to focus on rolling out enough charging points and hydrogen refuelling stations across the EU to meet the demands of the increased numbers of zero-emissions vehicles.

In the aviation and maritime sector, the EU's revised proposals are seen as critical. A number of stakeholders have long been calling for an aviation and shipping fuel tax, for the reason that it did not make sense to tax fuel in respect of cars and electricity used by trains but not in connection with aviation and shipping.

A full phase-out of free allowances in aviation is expected by 2026 and under the ReFuelEU Aviation Initiative and the EU aims to have 80% of intra-EU flights run on sustainable fuel by 2035. In respect of the maritime industry, vessels arriving at EU ports would need to use 80% low-carbon fuels by 2050 and new legislation is expected to enter into force which would introduce greenhouse gas intensity targets in the shipping industry.

The EU introduced the EU ETS to aviation in 2012, which it claims has reduced the carbon footprint of the aviation sector by more than 17 million tonnes per year, with compliance covering over 99.5% of emissions. The EU are now turning their attention to the maritime sector, with plans to gradually introduce it to the EU ETS from 2023, over a three-year period. However, there are concerns that this will only encourage a shift away from fossil fuels towards an uptake of unsustainable fuels and liquified natural gas, with the  Executive Director of clean mobility NGO Transport & Environment, William Todts, noting that 'by pushing them to use gas and biofuels, the cure will be worse than the disease', although this view is not held by all within the industry.

Traditionally, taxation has been an area where many EU member states have resisted external interference. Attempts by the EU to change the voting rules so that unanimity is not required from the EU27 on energy taxation have failed in the past. However, the new proposals to update the Energy Taxation Directive (which sets out the framework for the taxation of electricity and energy products) envisage changing this.

Currently, pollution is taxed based on volume, whereas last week's proposals intend to create a hierarchy of energy sources to align the minimum tax rates for heating and transport fuels with EU climate and environmental objectives and remove outdated exemptions and incentives for the use of fossil fuels.

A new carbon border adjustment mechanism has also been outlined which would tax high-emitting products entering into the bloc, for example, iron and steel, aluminium, fertilisers and electricity. The EU plans to phase this in from 2026 following a trial period. The intention behind the carbon price is to catalyse global change and reduce emissions worldwide without risking carbon leakage which would be detrimental to the EU, both environmentally and economically. This policy agenda has not been popular in the past and some manufacturers in China, amongst other countries, have condemned the proposal, fearing it will lead to increased restrictions on trade.

The EU ETS is considered by many to have been one of the biggest successes of the EU's climate efforts and over the last 16 years the EU has managed to bring down emissions from power generation and energy-intensive industries by 42.8%.

It does this through putting a price on carbon and allowing EU governments and companies to trade emissions based on their needs, subject to emissions caps. The latest proposals envisage reducing the emissions cap further and extending the scope of the EU ETS to include more industries, notably the maritime industry. A new and separate ETS system is also expected to be set up to allow for the bartering of emissions in the building and transport sector.

The EU also outlined its revised plans to use the EU's forests and peatlands to absorb carbon emissions, with a target to remove 310m tonnes of CO2 equivalent by 2030. This will be actioned by setting annual national targets by revising the land use, land-use change and forestry regulation (LULUCF) between 2026-2030. Farmers will also be incentivised to take up practises that allow their land to be used as carbon storage.

Renewable sources of energy, such as wind and solar, will be key in reducing the EU's carbon emissions and reducing the burden on carbon sinks. Currently, renewables make up 20% of energy consumption and the EU is proposing to increase this to 40% by 2030 under the Renewable Energy Directive.

These new EU proposals have been welcomed by many as a sign of a firm commitment and an indication that progress is being made in terms of translating ambitious climate targets into tangible policies.

However, they have been met with criticism in some circles. Leading climate activists have urged the EU to go even further by initiating a complete and accelerated phase-out of fossil fuels so that industries cannot pass on the increased costs to the end consumer. Jorgo Riss, the EU Director of Greenpeace, likens celebrating the new policies to 'a high-jumper claiming a medal for running in under the bar'.

Over the coming two years, the granular details of the proposals will be subject to negotiation between the European Parliament and the 27 EU member states.

Other impacted stakeholders, such as those in industry and non-EU states, will also have an input into the consultation process, and it will be interesting to see how much of the initial proposals survive this process.

Travers Smith will continue to report on the latest developments in this area and in relation to COP26 as they are announced.