Fit for 55 – EU recognises the need for a broad alternative fuels infrastructure across Europe

In the context of the ‘fit for 55’ package, published on 14 July 2021, the European Commission proposed the adoption of a new Regulation for the deployment of an alternative fuels infrastructure; the new Regulation will repeal Directive 2014/94/EU (DAFI).

The initiative seeks to ensure the availability and usability of a dense, widespread network of alternative fuels infrastructure throughout the European Union (EU), with the aim that all users of alternative fuel vehicles (including vessels and aircraft) will be able to move through the EU with ease, enabled by key infrastructure such as motorways, ports and airports. The specific objectives of the proposed Regulation are to: (i) ensure minimum infrastructure to support the required uptake of alternative fuel vehicles across all transport modes and in all EU Member States to meet the EU’s climate objectives; (ii) ensure full interoperability of the infrastructure; and (iii) ensure comprehensive user information and adequate payment options.

Background

The Commission’s proposal represents a recognition that mobility brings many socio-economic benefits to the European public and to European businesses, and also has a growing impact on the environment, including in the form of increased greenhouse gas emissions and local air pollution, and that the EU is still missing a complete network of alternative fuels infrastructure.

The Commission carried out an ex post evaluation of the DAFI, which found that it is not sufficient for the purpose of reaching the EU’s increased climate targets for 2030. The main issues include that Member States’ infrastructure planning often lacks the necessary level of ambition, consistency and coherence, leading to insufficient and not-well distributed infrastructure. Further interoperability issues with physical connections persist, while new issues have emerged over communication standards, including data exchange among the different actors in the electro-mobility ecosystem. Additionally, there is a lack of transparent consumer information and common payment systems, which limits user acceptance. Without further action by EU institutions, this lack of interoperability and easy-to use recharging and refuelling infrastructure is likely to become a barrier to growth in the use of low and zero-emission vehicles, vessels and, in the future, aircraft.

By ensuring that the necessary infrastructure for zero and low-emission vehicles and vessels is in place, this initiative will complement a set of other policy initiatives under the ‘fit for 55’ package that stimulate demand for such vehicles by setting price signals that incorporate the climate and environmental externalities of fossil fuels; such initiatives include the revision of the Emissions Trading System (Directive 2003/87/EC), and the revision of the EU Energy Taxation Directive (Directive 2003/96/EC).

Key provisions

Simplification

The review of DAFI increases the overall policy ambition and also includes some important simplification aspects, which primarily affects charge point operators and mobility service providers. The setting of clear and common minimum requirements aims to align business operations, as businesses will face similar minimum requirements in all Member States, and the new requirements will simplify the use of the infrastructure by private and corporate consumers (who currently face a plethora of use approaches) and enable better business service innovation. With these proposed changes, consumer trust in the robustness of a pan-European network of recharging and refuelling infrastructure may increase and thereby support the overall profitability of recharging and refuelling points, and support a stable business case. It is aimed that all market actors and user groups will benefit from lower information costs and, in the case of market actors, lower legal compliance costs in the medium term, as the requirements for infrastructure provisioning under the proposed Regulation will be better harmonised. Public authorities may also benefit from a coherent EU-wide framework that is aimed at making coordination with public and private market actors easier.

Coverage of publicly accessible recharging points

The proposal sets out specific provisions for the rollout of certain recharging and refuelling infrastructure for light- and heavy-duty road transport vehicles, vessels and aircraft.

Road transport

Member States are required to ensure minimum coverage of publicly accessible recharging points dedicated to light- and heavy-duty road transport vehicles on their territory, including on the TEN-T core and comprehensive network. In particular, Member States must install charging and fuelling points at regular intervals on major highways, at every 60 kilometres for electric charging and every 150 kilometres for hydrogen refuelling.

Further provisions are introduced to ensure the user-friendliness of the recharging infrastructure. These include provisions on payment options, price transparency and consumer information, non-discriminatory practices, smart recharging, and signposting rules for electricity supply to recharging points.

Member States are also required to ensure until 1 January 2025 minimum coverage of publicly accessible refuelling points for liquefied natural gas (LNG) dedicated to heavy-duty vehicles on the TEN-T core and comprehensive network.

Vessels

Member States must ensure installation of a minimum shore-side electricity supply for certain seagoing ships in maritime ports and for inland waterway vessels. The proposal also defines the criteria for exempting certain ports and sets requirements to ensure a minimum shore-side electricity supply.

Member States are also required to ensure an appropriate number of LNG refuelling points in maritime TEN-T ports and to identify relevant ports through their national policy frameworks.

Aircraft

The proposed Regulation sets out minimum provisions for electricity supply to all stationary aircraft in TEN-T core and comprehensive network airports.

Provisions for Member States’ national policy frameworks

The provisions for Member States’ national policy frameworks are reformulated under the proposal, which makes provision for an iterative process between Member States and the Commission to develop concise planning to deploy infrastructure and meet the targets as provided in the proposed Regulation. It also includes new provisions on formulating a strategy for the deployment of alternative fuels in other modes of transport together with key sectoral and regional/local stakeholders. This would apply where the Regulation does not set mandatory requirements but where emerging policy requirements connected to the development of alternative fuel technologies need to be considered.

The approach to governance includes reporting obligations corresponding to provisions for Member States on national policy frameworks, and national progress reports in an interactive process with the Commission. It also sets requirements for the Commission to report on Member States’ national policy frameworks and progress reports.

Data provision requirements

Data provision requirements are set out for operators or owners of publicly accessible recharging or refuelling points on the availability and accessibility of certain static and dynamic data types, including the establishing of an identification registration organisation (IDRO) for the issuing of identification (ID) codes. Under this provision, the Commission is also empowered to adopt further delegated acts to specify further elements as required.

Common technical specifications

The existing common technical specifications are integrated with a set of new areas for which the Commission will be entitled to adopt new delegated acts. These will build on, as deemed necessary,  standards developed by the European standardisation organisations (ESOs).

The proposal also includes detailed provisions on national reporting by Member States to support the implementation of the Regulation, and common technical specifications or areas where delegated acts will need to be adopted to define common technical specifications.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Francesca Morra
Francesca Morra
Partner, Milan
+39 02 3602 1412

 

Fit for 55 – EU proposes energy taxation overhaul to meet its climate reduction targets

As part of the European Green Deal and the Fit for 55 legislative package, the European Commission introduced in July 2021 a legislative proposal for a recast of the Energy Taxation Directive. The amendments are intended to assist the EU in meeting its climate policy objectives, including the 55% net emission reduction target by 2030 and climate neutrality by 2050.

The Energy Taxation Directive (2003/96/EC) was originally introduced in 2003 and laid down a harmonised structure and minimum excise duty rates for the taxation of certain energy products and electricity, based on their volume. The Commission considers that – in light of the EU’s environmental objectives – this approach is no longer fit for purpose. In particular, this is because the current legislation effectively favours the use of fossil fuels rather than encouraging a reduction in greenhouse gas emissions.

Key changes

The objective of the proposed revision is to support a switch to cleaner energy, more sustainable industry and more environmentally friendly choices. To this effect, the proposal introduces the following main changes to the current framework.

Revision of minimum excise rates for energy products and electricity

The proposal increases and adjusts minimum rates for energy products and electricity. The rates are intended to reflect the energy sources and their environmental impact and are designed to ensure that the most polluting fuels are taxed the highest:

  • Conventional fossil fuels, such as gas oil and petrol, and non-sustainable biofuels: These are considered to be the most-polluting types of energy and will thus be subject to the highest minimum rate (the so-called “reference rate”) of €10.75/GJ when used as a motor fuel and €0.9/GJ when used for heating.
  • Natural gas, LPG, and non-renewable fuels of non-biological origin: These energy sources are fossil-based and can support decarbonisation in the short and medium term. As such, only two thirds of the reference rate will apply to this category for a transitional period of 10 years, i.e. a minimum rate of €7.17/GJ when used for motor fuel and €0.6/GJ when used for heating. Following this transitional period, they will be taxed at the same rate as conventional fossil fuels, i.e. the full reference rate.
  • Sustainable, but not advanced biofuels: To reflect these products’ potential in supporting decarbonisation, 50% of reference rate applies, i.e. a minimum rate of €5.38/GJ when used as motor fuel and €0.45/GJ when used for heating.
  • Electricity, sustainable biofuels and biogas, and renewable fuels of non-biological origin such as renewable hydrogen: The lowest minimum rate of €0.15/GJ applies. The rate is set significantly below the reference rate as electricity and the listed fuels are capable of significantly supporting the EU’s climate action objectives.
  • Low-carbon hydrogen and other low-carbon fuels: These energy products will also benefit from the minimum rate of €0.15/GJ for a transitional period of 10 years after which they will be subject to a minimum rate of €5.38/GJ.

Importantly, energy products and electricity used for chemical reduction and in electrolytic and metallurgical processes are excluded from the taxation.

Unlike under the current regime, the above minimum rates are to be adjusted annually by the Commission by way of a delegated act, to reflect changes in the harmonised index of consumer prices excluding energy and unprocessed food as published by Eurostat.

Simultaneously, Member States will be encouraged to support vulnerable consumers and households through this green transition, including by way of lump sum transfers or access to financing for low-carbon and energy efficient goods and appliances. Furthermore, Member States will be able to exempt vulnerable and energy poor households from taxation on the supply of heating fuels and electricity.

Extension of excise rates to additional energy products

The proposal extends the taxation to certain previously exempted products, uses and sectors. This includes, in particular:

  • Kerosene used as fuel in the aviation industry, specifically for intra-EU passenger flights. The excise duty for aviation fuel will be increased gradually over a transitional period of 10 years, after which the reference rate (i.e. the highest minimum rate and the same that applies to petrol used in road transport) will apply.
  • Heavy oil used in the maritime industry, specifically in intra-EU ferry, fishing and freight vessels.
  • The use of energy for mineralogical processes.

The extension of taxation to the previously exempted air and maritime transport (and the fishing sector) is driven by the desire to achieve a more equitable distribution of environmental costs in the transport sector.

Furthermore, to encourage a cleaner energy transition, sustainable and alternative fuels will benefit from a zero rate minimum tax rate for a transitional period of 10 years when used for air and maritime / fishing navigation.

Elimination of Member States exemptions / reductions

The current energy taxation framework leaves significant scope for the introduction of national exemptions / reductions for specific energy products / sectors by individual Member States. The Commission notes that – in practice – this has led to a de facto favouring of the use of fossil fuels in the EU (such as various reductions for diesel), while contributing to the fragmentation of the EU’s Single Market (given the different rates applicable to energy use across Member States). As such, the Commission proposes to phase out most of these exemptions, and revise the legislation in a way which leaves much less leeway for Member States to apply taxes which are below the minimum harmonised rates.

Comments

The Commission’s proposed revision of the Energy Taxation Directive, if adopted, will have the effect of significantly redrawing the EU’s energy landscape. It will provide consumers with clear incentives for the use of cleaner sources of energy but will inevitably make some of the more traditional (and polluting) energy sources (such as petrol) more costly. The Commission expects that this will be counterbalanced by Member States adopting national measures to support the most vulnerable households, but what happens in practice remains to be seen.

In terms of legislative procedure – given that the proposal concerns the harmonisation of taxation (more specifically that of excise duties) – it will have to adopted by way of the “special legislative procedure” which requires unanimity in the Council (effectively unanimity among the 27 EU Member States). The European Parliament will have to be consulted but otherwise will play a minor role in this process.

In the Council, some opposition and requests for the softening of the proposal can be expected in particular from Central and Eastern European Member States. This is mainly because of the additional burden the proposal will place on their national economies as well as due to their generally more sceptical views concerning the need to tackle climate change.

The Commission’s proposal envisages the application of the new rules from 1 January 2023. While this is admittedly an ambitious target, given the EU’s emphasis on its Green Deal initiatives, there is a high likelihood that the new legislation will be adopted by then.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Lode Van Den Hende
Lode Van Den Hende
Partner, Brussels
+32 2 518 1831
Eric White
Eric White
Consultant, Brussels
+32 2 518 1826
Lukas Maly
Lukas Maly
Associate, Brussels
+32 2 518 1843

Fit for 55 – EU paves the road for stronger emissions standards for cars and vans

On 14 July 2021, as part of its ‘fit for 55’ package of policies to combat climate change (which we reported on here), the EU has proposed new legislation to strengthen CO2 emissions standards for new passenger cars and light commercial vehicles. The new measures are intended to amend the current framework establishing automotive CO2 emission standards so that it aligns with the EU’s new ambition of reducing greenhouse gas emissions (GHG) by 55% from 1990 levels by 2030.

Context and objectives

In its explanation of the need for the ‘fit for 55’ package, the EU noted that transport is the only sector where GHG emissions have been increasing, with emissions from road transport accounting for almost 20% of total EU GHG emissions. The EU also recognised the importance of the automotive industry for the European economy, with the sector accounting for over 7% of the EU’s GDP and providing jobs to just under 15 million Europeans.

Against that background, the new measures are intended to serve three specific objectives:

  1. contribute to the EU’s climate objectives for 2030 (55% reduction of GHG emissions compared to 1990 levels) and 2050 (climate neutrality in the EU) by reducing CO2 emissions from cars and light commercial vehicles;
  2. provide benefits to consumers and citizens from a wider deployment of zero-emissions vehicles (ZEVS), including better air quality and more affordable ZEVS as a result of (i) increased supply of ZEVS in the market and (ii) long-term energy savings from the use of ZEVS which should offset their initial procurement cost; and
  3. stimulate innovation in zero-emission technologies to ensure Europe remains a leader in automotive R&D investment, and ensure Europe is able to keep up with its competitors (mainly Japan, South Korea, China and the US) in the global race to electrify light vehicles.

Increased GHG reduction targets

The new measures propose to adjust emission targets as follows:

  • increase the 2030 CO2 reduction targets for new passenger cars from 37.5% to 55% of the current baseline level of 95g/km;
  • increase the 2030 CO2 reduction targets for light commercial vehicles from 31% to 50% of the current baseline level of 147g/km, with the revision of CO2 targets for heavy-duty vehicles to be proposed to the EU Commission in 2022;
  • create an EU fleet-wide target of 100% reduction in GHG emissions for all new cars and light commercial vehicles from 1 January 2035 (which would effectively end the sale of petrol and diesel vehicles); and
  • introduce a review mechanism requiring the EU Commission to review the effectiveness and impact of the new measures in 2028 and submit a report to the European Parliament and European Council.

The new arrangements will also introduce other key measures to ensure coherence with existing regulatory standards for automotive emissions. For instance, recognising that manufacturers will have to supply significantly more ZEVS on the market under stricter standards, as of 2030 the incentive mechanism for zero- and low- carbon emission vehicles (ZLEVS) which exists under the current regime will be removed. Under the current regime, manufacturers are incentivised from 2025 to supply ZLEVS to the market on a “bonus-only” basis, with no direct consequences for a manufacturer not meeting the required ZLEV benchmark level. This mechanism will remain in place from 2025-2030 to incentivise manufacturers’ decarbonisation efforts during this period, but the EU Commission considered that allowing it to subsist beyond 2030 would risk undermining the effectiveness of the new measures.

Similarly, in light of the increased GHG reduction targets and to avoid market distortion, the exemption currently available to manufacturers responsible for between 1,000 and 10,000 passenger cars per year or between 1,000 and 22,000 light commercial vehicles per year to derogate from their specific emissions target will be removed from 2030 onwards. Only manufacturers responsible for less than 1000 new vehicles per year will be able to apply for this derogation.

Compliance monitoring & reporting

The new regulatory measures will introduce a new requirement for the EU Commission to report on the progress toward zero emissions from road transport and assess the need for possible additional measures to facilitate this transition. The first report will be due by 31 December 2025, and the EU Commission will be required to provide additional reports every two years thereafter.

There are no changes proposed to the  monitoring system already in place to assess Member States’ compliance with the current regulatory requirements. The existing regime requires Member States to report annually to the EU Commission on CO2 emissions and the weight of all newly registered cars and vans, and manufacturers have the opportunity to notify to the EU Commission any errors in this provisional data. Additionally, the current regulation provides that from 2022, Member States’ national authorities will need to provide the EU Commission with data on real-world fuel and energy consumptions of cars and vans.

By proposing no changes to the compliance monitoring regime or to the level of the excess emissions premium (still set at €95 per gram of CO2 per kilometre), the EU aims to ensure that the new regulatory measures will neither increase administrative costs for manufacturers and national authorities, nor enforcement costs for the EU Commission. Excess emission premiums will continue to be imposed on manufacturers when their average specific emissions exceed their prescribed targets in any given year (as provided for under the current regime), and possible revenues from these excess emissions premiums will remain part of the general EU budget whilst decreasing the Member States’ own contributions to the EU budget.

Relationship with the wider regulatory context

The new regulatory arrangements are intended to complement  the Effort Sharing Regulation by reducing road transport emissions and so helping Member States to meet their emissions targets under the Effort Sharing Regulation. As both the new regulatory measures and the Effort Sharing Regulation incentivise electrification of vehicles, they also both contribute to energy efficiency objectives.

By setting CO2 emissions standards and supporting the introduction of new ZEVS to the market, the new measures are also complementary to the Renewable Energy Directive, which will decarbonise the production of electricity used in electric vehicles and incentivise the uptake of low renewable and low carbon fuels.

Finally, there are important inter-dependencies between the new measures and the Alternative Fuels Infrastructure Directive, which, under the ‘fit for 55’ package, will require Member States to deploy additional recharging and refuelling infrastructure, in parallel with the supply of ZEVS.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Tom Marshall
Tom Marshall
Partner, London
+44 20 7466 7470
John Williams
John Williams
Of Counsel, London
+44 20 7466 2392
Reza Dadbakhsh
Reza Dadbakhsh
Partner, London
+44 20 7466 2679
Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 2537

Fit for 55 – EU increases use of energy from renewable sources by 2030 in proposed amendments to the Renewable Energy Directive

Reducing greenhouse gas emissions by 55% by 2030 entails a significant increase in the share of energy production from renewable sources in order to develop an integrated energy system.

In light of the new targets, the 32% share of renewable energy to be developed by 2030 set by the Renewable Energy Directive (RED II) is no longer sufficient and it will have to be increased to 38%-40%, according to the Climate Target Plan forecasts.

At the same time, it will be necessary to implement a series of cross-cutting measures in different sectors, in line with the energy system integration and the strategies for the development of hydrogen, offshore renewable energy and biodiversity.

In a nutshell, the objectives of the revisions proposed for RED II are to increase the use of energy from renewable sources by 2030, to foster a better integration of the energy system and to contribute to climate and environmental objectives, including the protection of biodiversity, also providing a response to the intergenerational concerns associated with global warming and the loss of biodiversity.

The revision of RED II is essential for two reasons: (i) to achieve the climate objective, and to protect the environment and health, and also (ii) to ensure Europe’s energy independence from third countries and contribute to the creation of a strong technological and industrial leadership of the European Union, capable of supporting employment and economic growth.

Background

In the European Commission’s view, acting at a European level, developing renewable energy policies common to all Member States is certainly more efficient and effective than individual actions by Member States and can jointly address the transition of the European energy system in a coordinated manner, avoiding excessive fragmentation of legislation and regulation and providing investors with greater certainty and stability.

Moreover, joint action ensures a net reduction in greenhouse gas emissions and pollution, protects biodiversity and exploits the advantages of the internal market, economies of scale and technological cooperation. In any case, the achievement of a higher share of energy produced from renewable sources will depend, in a final analysis, on the national contributions of each Member State: the more ambitious and cost-effective these are, the more effective the agreed common legal and political framework will have been.

In particular, the Commission considers it necessary for Member States to take action to simplify the authorisation procedures for the construction of renewable energy plants.

In the context of public consultations that preceded the publication of the ‘Fit for 55’, stakeholders pointed out that the lack of simplification of permits and administrative procedures is still the greatest barrier to the development of renewables. Simplifying administrative procedures would facilitate the phasing out of fossil fuels. In this regard, it should be noted that RED II had already introduced clear deadlines for the conclusion of authorisation procedures (generally two years), a single point of contact for applicants as well as the adoption of clear guidelines procedures. Through these provisions, which represent the political compromise reached in the RED II adoption phase, the aim was to tidy up the complex and time-consuming national procedures, which often bear disproportionate deadlines and rules.

The provisions of RED II, to date, have not been implemented in Member States (the transposition deadline was set for 30 June 2021). Therefore, despite requests from industry, the Commission has deemed premature to amend these specific provisions of RED II before any assessment of national implementing regulations can be carried out.

Key amendments

Definition of renewable fuels of non-biological origin

The first amendment concerns the definition of renewable fuels non-biological origin (advanced biofuels). The proposal also sets out the insertion of new definitions, including those of renewable fuels, bidding zone, smart metering system, recharging point, market participant, electricity market, industrial battery, domestic battery, electrical vehicle battery, state of health, state of charge, power set point, smart charging, regulatory authority, bidirectional charging, normal power recharging point, industry non-energy purposes, plantation forest and planted forest.

Public support schemes

Obligations to minimise the risks of unnecessary market distortions resulting from support schemes and to avoid supporting certain raw materials for energy production in line with the cascading principle are strengthened. It is also introduced the obligation to phase out, with some exceptions, support for electricity production from biomass from 2026.

Calculation of the share

The calculation method of the share of energy from renewable energy sources is amended so that (a) energy from renewable fuels of non-biological origin must be accounted in the sector in which it is consumed (electricity, heating and cooling or transport), and (b) the renewable electricity used to produce renewable fuels of non-biological origin is not included in the calculation of the gross final consumption of electricity from renewable sources in the Member State.

Cross border pilot project

Member States are obliged to implement a cross border pilot project within three years and to cooperate on the amount of offshore renewable generation to be deployed within each sea basin by 2050, with intermediate steps in 2030 and 2040.

Energy system integration

Other proposals regard enhancing energy system integration between district heating and cooling (DHC) systems and other energy networks, by requiring Member States to develop efficient DHC to promote heating and cooling from renewable sources (RES). In order to facilitate system integration of renewable electricity, the following measures are provided:

  • Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are required to make available information on the share of RES and the greenhouse gas content of the electricity they supply – in order to increase transparency and give more information to electricity market players, aggregators, consumers and end-users;
  • battery manufacturers must enable access to information on battery capacity, state of health, state of charge and power set point to battery owners as well as third parties acting on their behalf;
  • Member States must ensure smart charging capability for non-publicly accessible normal power recharging points – due to their relevance to energy system integration; and
  • Member States must ensure that regulatory provisions concerning the use of storage and balancing assets do not discriminate against participation of small and/or mobile storage systems in the flexibility, balancing and storage services market.
Industries

With respect to industries, mainstreaming renewable energy in industry is given an indicative target of an annual average increase of renewable energy of 1.1 percentage points and a binding target of 50% for renewable fuels of non-biological origin used as feedstock or as an energy carrier. It also introduced a requirement that the labelling of green industrial products indicates the percentage of renewable energy used following a common EU-wide methodology.

Energy poverty

The recast of RED II also provided for an extended set of measures to force Member States to ensure the accessibility of measures to all consumers, in particular those in low-income or vulnerable households, who would not otherwise possess sufficient up-front capital to benefit.

Transports

RED II is also amended by increasing the ambition level of renewables in transport by setting a 13% greenhouse gas intensity reduction target, increasing the sub-target for advanced biofuels from at least 0.2% in 2022 to 0.5% in 2025 and 2.2% in 2030, and introducing a 2.6% sub-target for renewable fuels of non-biological origin.

This proposal also introduces a credit mechanism to promote electro-mobility, under which economic operators that supply renewable electricity to electric vehicles via public charging stations will receive credits they can sell to fuel suppliers who can use them to satisfy the fuel supplier obligation.

European Union database

The scope of the European Union database is extended so that it can cover other fuels, and not only those in the transport sector. This will enable the tracing of liquid and gaseous renewable fuels and recycled carbon fuels as well as their life-cycle greenhouse gas emissions. The database is the monitoring and reporting tool where fuel suppliers must enter the information necessary to verify their compliance with the fuel suppliers’ obligation.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Lorenzo Parola
Lorenzo Parola
Partner, Milan
+39 02 3602 1405
Andrea Leonforte
Andrea Leonforte
Senior Associate, Milan
+39 02 3602 1379

Fit for 55 – EU adjusts efficiency targets in proposed amendments to the Energy Efficiency Directive

On 14 July 2021, the European Commission published its ‘fit for 55’ package providing a set of measures aimed at reaching the target of a 55% reduction in greenhouse gas emissions by 2030 (compared to 1990 thresholds). Such legislative proposals represent a pragmatic response to the European Green Deal, presented on 11 December 2019, which aims to make Europe the first climate-neutral continent by 2050.

The ‘fit for 55’ package impacts on a variety of policy areas, including energy efficiency and renewables.

The proposal for amendments to the Energy Efficiency Directive

By proposing amendments to the energy efficiency directive (EED), the European Commission acknowledges the fundamental role played by energy efficiency in achieving the full decarbonisation of Europe by 2050 and it recognises that, although the EED strengthened the EU energy efficiency policy framework, it still has some significant weaknesses and, therefore, further efforts are needed.

In light of this, the Commission proposed to amend the EED so as to exploit potential energy savings, which still remains large in a multitude of sectors such as transport, buildings, information and communication technology, industry and households. An increase in energy efficiency and a reduction in energy use can be achieved by reference to the abovementioned sectors by means of concrete actions, to be carried out at Member State level.

The amendments proposed by the Commission are also considered being the most effective solution to alleviate energy poverty levels across Member States (which are continuously increasing due to raising energy costs and unemployment within the European Union).

Background

The Commission’s amending proposal represents a recognition that the existing legislation is insufficient to the roadmap towards climate neutrality. Public consultations launched by the Commission have highlighted that the majority of stakeholders support the necessity of implementing further energy efficiency measures. In particular, 86% of respondents – among business associations, companies and NGOs – expressed views that energy efficiency should be a significant tool so as to achieve the ambitious climate targets for 2030 as well as the European Union’s carbon neutrality by 2050.

Before presenting the package of proposals, the Commission conducted an extensive impact assessment in order to evaluate the opportunities and costs of the green transition and has identified specific measures in order to make it just and fair. The main impact of these proposals will be a decrease in energy use in the European Union, resulting in an enhancement of human health, due to the reduction of the emissions of air pollutants, and an increase of environmental benefits stemming from reduced need for fuel supply, reduced infrastructure needs and lower emissions to water. At the same time, the improvement in energy efficiency will give raise to higher investments in energy savings and transition performance, so that the capital costs are expected to return in a few years.

Additionally, the proposal sets out measures specifically aimed at balancing any possible detrimental impact on those economies that may be significantly affected by changes in industrial structure or employment as a result of the energy transition towards decarbonisation.

In the context of the European framework, Member States will be required to define their own levels, so that, de facto, they will retain the same level of flexibility in terms of selecting their policy mix, sectors and the approach to achieve the required energy savings by 2030.

Key amendments

Alignment of efficiency targets

Efficiency targets are adjusted and aligned with the new energy efficiency target for 2030. The European Union targets are set in terms of the level of final and primary energy consumption to be achieved in 2030. National contributions remain indicative. However, benchmarks and new delivery mechanism are proposed.

Energy efficiency first

A new provision on the Energy Efficiency First principle is introduced. It includes an obligation to consider energy efficiency solutions in policy and investment decisions in both energy and non-energy sectors, including social housing.

Lower public energy consumption

The public sector is obliged to reduce its energy consumption for public services and installations of public bodies. Other subsectors affected by this obligation are transport, public buildings, spatial planning, and water and waste management.

Renovation obligation

The scope of the renovation obligation is broadened, being applied to all public bodies and all administration levels in all public activities sectors (including healthcare, education and public housing). The alternatives that allowed Member States to reach similar energy savings through other measures than renovations have been removed.

Public procurement

Public procurement provisions are strengthened by extending the obligation to take into account the energy efficiency requirements by all public administration levels, and by removing conditionalities with regard to cost-effectiveness, and technical and economic feasibility. Member States may require public bodies to consider where appropriate circular economy aspects and green public procurement criteria in public procurement practices.

Global warming potential

Contracting authorities may require that tenders disclose a Global Warming Potential of new buildings, in particular for new buildings over 2,000 square metres.

Energy savings obligation and energy poverty

Annual energy savings obligations are increased up to 1.5% for all Member States, which are required to implement policy measures as a priority among vulnerable customers, people affected by energy poverty and people living in social housing, enabling funding and financial tools. The national policy mix must ensure that people affected by energy poverty will be not jeopardised by energy savings.

Consumer protection

Consumer protection is strengthened by introducing basic contractual rights for district heating, cooling and domestic hot water in line with the provisions set out under Directive 2019/944 (the Energy Directive). In particular, Member States are required to establish the concept of vulnerable customers by also taking into account final users who have no direct or individual contract with energy suppliers. Obligations towards consumers are also strengthened, providing for, among other things, out-of-court mechanisms for the settlement of disputes.

Certifications

New and different qualification, accreditation and certification schemes are set out for different energy services providers, energy auditors, energy managers and installers. Member States will be required to update these schemes every four years starting as of December 2024.

Energy efficiency investments

Member States are required to report on energy efficiency investments (including on energy performance contracts executed) and to set out project development assistance mechanism at national, regional and local levels to promote investments to help reaching the higher energy efficiency targets.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Lorenzo Parola
Lorenzo Parola
Partner, Milan
+39 02 3602 1405
Andrea Leonforte
Andrea Leonforte
Senior Associate, Milan
+39 02 3602 1379

Fit for 55 – EU aligns emissions trading system with 2030 emissions ambition

The EU Commission has published a proposed Directive to amend the EU (Emissions Trading System) ETS Directive (Directive 2003/87/EC), the Market Stability Reserve (MSR) Decision (Decision (EU) 2015/1814) and the MRV Regulation (Regulation 2015/757). Being part of the EU’s ‘fit for 55’ package, the purpose of these amendments is to align the EU ETS Directive with the EU’S 2030 ambition to reach the legally binding 55% net emissions reductions target by 2030 under the EU Climate Law. Below, we have summarised the key amendments of these proposals.

The key changes are:

  • an expansion of the EU ETS to cover maritime transport;
  • an increase of the linear reduction factor to 4.2% (from previous 2.2%);
  • introduction of emissions trading for buildings and road transport; and
  • confirmation that the normal intake rate for the MSR at 24% will apply until 2030.

EU ETS Directive Amendments

Maritime Transport

From 2018, pursuant to the MRV Regulation, large ships over 5,000 gross tonnage loading or unloading cargo or passengers at ports in the EEA must monitor and report their CO2 The Commission now proposes to extend the EU ETS Directive to cover emissions from these ships from intra-EU voyages, half of the emissions from extra-EU voyages and all emissions occurring at berth in an EU port. The same rules on auctioning, transfer, surrender and cancellation of allowances, penalties and registries that apply to other sectors under the EU ETS will apply. Under the Directive, shipping companies will have to surrender 100% of their verified emissions as of 2026, an obligation which will be phased in between 2023 and 2025 as follows:

Year Surrender Allowances (% verified emissions reported that year)
2023 20%
2024 45%
2025 70%
2026 onwards 100%

During this phase-in period between 2023 and 2025, to the extent that fewer allowances are surrendered, the allowances not surrendered should be cancelled rather than auctioned. The monitoring and reporting rules as well as verification and accreditation rules from the MRV Regulation, as amended, shall apply.

In addition to the general EU ETS rules on penalties, the Directive proposes to introduce expulsion orders, which may prevent entry into an EU port and the ship being detained by the flag Member State. These can be issued against ships if there has been a failure to surrender allowances for two or more consecutive reporting periods.

The Commission has also proposed to present a report to the European Parliament and the Council by 30 September 2028 in relation to the proposed global market-based measure for maritime emissions proposed by the International Maritime Organisation.

Linear Reduction Factor and one-off cap reduction

The linear reduction factor will be increased to 4.2% (from previous 2.2%) from the year following the entry into force of the Directive. The increased linear reduction factor is combined with a one-off downward adjustment of the cap so the new linear reduction factor will be in line with this level of reduction having been applicable for 2021. From this same year, the cap will be increased to reflect the maritime transport emissions to be included in the EU ETS and derived from data from the EU maritime transport monitoring, reporting and verification (MRV) system for the years 2018 and 2019, adjusted from year 2021, by the linear reduction factor.

Use of auction revenues

Currently, 2% of allowances are used to support the Modernisation Fund for Member States with a GDP per capita at market prices below 60% of the EU average in 2013 (Beneficiary Member States). The Commission now proposes that an additional 2.5% of allowances will be used to fund the energy transition of Member States with a GDP per capita below 65% of the EU average in 2016-2018.

Furthermore, to the extent that they are not attributed to the Union budget, all proceedings from auction revenues must be used for climate-related purposes. Adjustments to the EU budgetary framework will be included as part of the upcoming “Own Resources” package including a proposal to amend the multiannual financial framework, a more stringent benchmark approach and establishing conditionality for free allocation.

The free allocation mechanism is based on a product benchmark that is calculated based on the average GHG emissions of the best performing 10% of the installations producing that product in the EU and EEA-EFTA states. Installations that meet the benchmark will receive all allowances required to meet their emissions, but those that do not meet the benchmark will receive fewer allowances. Previously under Phase 4, the benchmarks were to be reduced by an annual minimum rate of 0.2% up to a maximum rate of 1.6%, leading to reductions of the benchmarks between 3% and 24% over the 15 years between 2008 and 2023, the mid-point of the period 2021-2025. Under the new Directive, the maximum annual adjustment will be increased from 1.6% to 2.5% per year as of 2026. The determined Union-wide benchmarks shall be reviewed before 2026.

Furthermore, in order to incentivise the use of low-carbon technologies, free allocation will be made conditional on decarbonisation efforts. Installations which are required to conduct an energy audit under the current Article 8(4) of the Energy Efficiency Directive (Directive 2012/27/EU) (EED) will be required to implement the recommendations, or demonstrate the implementation of measures with emissions reductions equivalent to those made in their respective installations audit report. If they do not comply, their free allocation shall be reduced by 25%. Currently, SMEs are exempted from carrying out an energy audit. It is proposed that this should be changed under the revised EED so that the exemption is instead based on energy consumption.

It was further clarified that sectors which will be covered by a Carbon Border Adjustment Mechanism (CBAM) should not receive free allocation under the EU ETS. There will be a transitional period put in place to adjust to the new regime, with a gradual reduction of free allocation as the CBAM is phased in, to reach no free allocations by the tenth year of the operation of the CBAM.

Carbon Contracts for Difference (CCDs)

The Innovation Fund is intended to be geared towards innovative technologies that would not be commercially viable at scale without support but must be sufficiently mature for application at pre-commercial scale. Support under the Innovation Fund for these projects has been extended to allow it to provide support in the form of price competitive tendering support such as CCDs. In this case, up to 100% of the relevant costs of projects may be supported.

Furthermore, the Innovation Fund is increased by 50 million allowances sourced from auctioning (10 million) and the allowances available for free allocation (40 million).

Modernisation Fund

The Modernisation Fund is a fund to support investments proposed by the beneficiary Member States including the financing of small-scale investment projects to modernise energy systems and improve energy efficiency. The investments made into the Modernisation Fund must be consistent with the objectives of the European Green Deal, the European Climate Law and Paris Agreement. The proposal states that support will no longer be provided to energy generation facilities that use fossil fuels of any kind, as opposed to only solid fossil fuels as is currently the case. In addition, the percentage of the fund that must be invested in priority investments has been increased from 70% to 80%. Examples of priority investments include: the generation and use of electricity from renewables, the support of households to address energy poverty concerns and a just transition in carbon-dependent regions of the beneficiary Member States.

CCUS

Under the proposal, surrender obligations will not arise for emissions of CO2 that have been captured and utilised to be permanently chemically bound in a product so that they do not enter the atmosphere under normal use.

Removal of barriers for innovative low-carbon technologies my modifying the EU ETS scope and benchmarks

Previously, innovative technologies that fell outside of the EU ETS were at a competitive disadvantage. These technologies may fall out of the EU ETS because they change their production process or their total rated thermal input of the combustion units of an installation decreases to less than 20MW. In contrast, efficient technologies just below benchmark level receive more free allocation than they emit.

The proposal attempts to rectify this by making the following changes:

Installations will stay within the EU ETS where they reduce the total capacity of their combustions units to reduce emissions;

  • Making the definitions of activities technology neutral;
  • Referring to production capacities instead of combustion capacities; and
  • Reviewing the benchmark definitions to ensure equal treatment of installations independently of the technology used, including when using low or zero-carbon technologies.
Introduction of emissions trading for buildings and road transport

The proposal establishes a new system for emissions trading for buildings and road transport as a separate self-standing system from 2025. This new system will apply to emissions in relation to release for consumption of fuels which are used for combustion in the buildings and road transport sectors. However, it shall not include: (i) the release for consumption of fuels that are otherwise covered by this Directive (for example; the refining of mineral oil, production of ammonia, and production of coke) unless used for combustion in the activities of transport of GHGs for geological storage; or (ii) the release for consumption of fuels for which the emissions factor is zero.

The scope of the sectors of buildings and road transport is defined on the basis of relevant sources of emissions included in the 2006 IPCC Guidelines for National Greenhouse Gas Inventories. The regulated entities are defined in line with the system of excise duty of Council Directive (EU) 2020/262. The emissions cap will be set from 2026 based on data collected under the Effort Sharing Regulation and emissions targets for the sectors of buildings and road transport (to reach 43% 2005 emissions by 2030).

Under this new system, the MRV obligations will be largely aligned with those established for stationary installations and aviation. In the first year, regulated entities are required to hold a greenhouse gas emissions permit and to report their emissions for 2024 and 2025, with allowances and compliance obligations applying from 2026. The total quantity of allowances for 2028 will be adjusted on the basis of the available MRV data for the period 2024-2026. The linear reduction factor will only be revised if the MRV data is significantly higher than the initial cap. A MSR will be in operation from the start. From 2026, Allowances for the new emissions trading will be auctioned unless placed in the MSR and a certain amount of allowances will be front-loaded.

The proposal has also stated that emissions trading for road transport and buildings will contribute to the already existing low-carbon funds. 150 million allowances will be made available to the Innovation Fund to stimulate the green transition.

The Commission will propose a review of the rules by 1 January 2028 if necessary.

MSR Decision amendments

The MSR is managed in accordance with Decision (EU) 2015/1814. As part of the Fit for 55 Package, the Commission has proposed a new Decision to amend Decision (EU) 2015/1814, and has made a number of further proposed amendments to the MSR regime within the proposal for the updated EU ETS Directive. The key changes to the MSR are summarised below.

Taking into account net demand from aviation and maritime

The calculations for the total number of allowances in circulation (TNAC) and the reserve are proposed to be amended to include the previously excluded aviation emissions and allowances issued in respect of aviation if they have occurred, or were issued as of the year following the entry into force of the amendment.

In addition to aviation allowances, maritime allowances will also be included in the calculation of the reserve through modifications to the text to include allowances and emissions in relation to the maritime sector. The difference between verified emissions and allowances surrendered for the maritime sector, which will be cancelled rather than auctioned will be counted towards the TNAC as if the allowances had been issued.

Intake Rate

The intake rate mechanism is amended under the proposal to include a buffer MSR intake when the TNAC is between 833 million and 1096 million. In this case, the intake into the reserve is the difference between the TNAC and the 833 million threshold. This intake will be placed into the reserve for 12 months from 1 September that year. However, where the TNAC is above 1096 allowances, the normal intake rate will apply (24% until 2030).

In conjunction with a further proposal amending the MSR decision, the 24% intake rate and the minimum amount to be placed in the reserve of 200 million allowances, which were due to expire in 2023, are now proposed to continue until 2030.

The TNAC calculation has been amended so that only allowances issued and not put in reserve are included in the supply of allowances. In addition, the number of allowances in the reserve is no longer subtracted from the supply of allowances. The Commission has noted that these changes should have no material impact on the result of the calculation.

Invalidation mechanism

From 2023, allowances in the MSR above the level of auction volumes of the previous year will not be valid. As the level of auction volumes of the previous year is dependent on the cap and the operation of the MSR, to ensure the level of allowances in the reserve is more predictable, it is proposed that the number of allowances in the reserve is limited to 400 million allowances.

MSR for the emissions trading for road transport and buildings

An MSR will operate for emissions trading of road transport and buildings, with a number of allowances for these new sectors created in the reserve. The intakes and releases of allowances will be based on the thresholds for the surplus of allowances in that market.

Measures are established to allow for release of additional allowances from the MSR, with the triggering mechanism for the release based on the increase in the average allowance price as opposed to the surplus of allowances in the market.

Amendments to the Effort Sharing Regulation

The Effort Sharing Regulation (Regulation 2018/842) (ESR) establishes an annual emissions budget for each member state that declines at a linear rate towards its individual nationally binding ESR target for 2030. This mostly concerns sectors that are not included in the EU ETS. As part of the Fit for 55 Package, a separate proposal has been published to amend this regulation in accordance with the revised EU targets. The envisaged changes to the ESR are summarised below..

It is proposed that the scope of the ESR be adjusted to take into account the proposed inclusion of maritime transport into the EU ETS as detailed above. Specifically, Malta will be given access to an increased ETS flexibility (from 2% to 7%) and has been provided with a deadline to indicate whether it intends to use this.

Furthermore, it is proposed that the framework under which the Commission will set the new Member States’ annual emission levels in the years 2023-2030 will be updated. This will include updating the national annual emission allocations and making use of the new data that will become available in accordance with the 2025 review to allow an adjustment of the annual emission allocations for 2026-2030.

It is proposed that use of the Land Use, Land-Use Change and Forestry (LULUCF) flexibility will be split into two five-year periods and each period will be subject to a cap corresponding to half the total amount. If a Member State exceeds its removals in the 2021-2025 period, the amount exceeded will be deducted from the Member State’s annual emission allocations.

Any unused LULUCF credits at the end of the second compliance period may be used to set up a voluntary additional reserve. This reserve is to be used by Member States in order to comply with their ESR 2030 target, subject to the condition that the 55% reduction EU-level target is reached with a maximum contribution of 225 MtCO2Eq of net removals in accordance with the European Climate Law.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Jannis Bille
Jannis Bille
Associate, London
+44 20 7466 6314
Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 2537

Fit for 55 – EU aims to protect against carbon leakage with a carbon border adjustment mechanism (EU CBAM)

On 14 July 2021, the European Commission (the Commission) published its proposed regulation which would establish a carbon border adjustment mechanism (EU CBAM) (the Regulation), and is intended to come into effect, subject to transitional provisions, from 1 January 2023.

The Regulation would require importers of certain goods to purchase a number of electronic certificates, each certificate corresponding to one tonne of embedded emissions in certain goods (CBAM certificate), in order to cover the total embedded emissions in imported goods. Although the obligation to purchase CBAM certificates and account for embedded emissions rests on importers, it is likely that the EU CBAM will have important impacts on international producers.

The role of a CBAM

As explained in our previous blog post here, a CBAM can be used to protect against the risk of carbon leakage and preserve the competitiveness of domestic operators. Carbon leakage occurs if, due to costs incurred in relation to climate policies, businesses in certain sectors transfer an underlying economic activity and its associated emissions to a different country with less onerous climate policies. This can lead to an increase in emissions globally.

A CBAM may prevent carbon leakage as all goods within its scope, whether produced domestically or internationally, would be subject to carbon costs, thereby discouraging businesses from relocating their operations elsewhere, or importing goods from countries with less ambitious climate policies.

Goods within scope of the EU CBAM

The goods within the scope of the EU CBAM include cement, electricity, fertilisers, iron, steel and aluminium. With the exception of electricity, the production or manufacture of these goods all figure on the ‘Carbon Leakage List‘ under the EU Emissions Trading System (EU ETS), as sectors and subsectors deemed at risk of carbon leakage for the period 2021 to 2030. However, not all sectors and subsectors on the Carbon Leakage List are within scope of the EU CBAM.

The mechanics of the EU CBAM

The EU CBAM applies when the above goods are imported into the Union’s customs territory from a third country. It would not apply to goods originating in countries and territories listed in Annex II of the Regulation, which include Iceland, Liechtenstein, Norway and Switzerland. A process is proposed for other countries to be exempted.

Annual declaration

Before any goods within the scope of the EU CBAM are imported, an importer must apply to the competent authority in the Member State where it is established for authorisation to import those goods into the customs territory of the Union. Each Member State is required to designate a competent authority to administer the EU CBAM.

Once authorised, an importer must submit to the competent authority a declaration by 31 May each year (CBAM declaration) for the calendar year preceding the declaration. A CBAM declaration must include certain information relating to the embedded emissions in imported goods, and the total number of CBAM certificates which will be surrendered.

During the transition period, the EU CBAM shall apply as a reporting obligation: importers must report the information above, as well as the carbon price due in a country of origin for the embedded emissions in imported goods.

CBAM certificates

By 31 May each year, each importer must surrender to the competent authority a number of CBAM certificates that corresponds to the embedded emissions in its CBAM declaration.

Embedded emissions are defined as direct emissions released during the production of the goods, i.e. emissions from the production processes of goods over which the producer has direct control.

The Regulation provides that the amount of embedded emissions will be based on the actual direct emissions of goods. If this cannot be determined, a default value will be used. The Commission shall adopt implementing acts to establish detailed rules regarding the methods for calculating the actual embedded emissions of imported goods. Operators and installations in third countries will have the option of registering in a central database: once the embedded emissions of their goods have been verified, importers may use these embedded emissions figures in their CBAM certificate calculations.

The default value will be set in accordance with the average emission intensity of each exporting country for each of the goods within the scope of the EU CBAM (other than electricity), increased by a mark-up. If reliable data is not available, the default values will be based on the average emission intensity of the 10% worst performing EU installations for that type of goods.

Importers will be able to purchase CBAM certificates from the competent authority in the Member State in which they are registered. CBAM certificates will be sold at the price calculated by the Commission, which shall be the average price of the closing price of EU ETS allowances on the common auction platform for each calendar week. Each CBAM certificate will be valid for two years, which will enable importers to take advantage of fluctuations in the price of EU ETS allowances.

Reduction to reflect carbon price paid in a country of origin

In its CBAM declaration, an importer may claim a reduction in the number of CBAM certificates to be surrendered, in order to take into account a carbon price paid in the country of origin. The Commission is empowered to adopt implementing acts to establish the methodology for calculating the appropriate reduction, the conversion of a carbon price paid and the certification process for these.

The number of CBAM certificates to be surrendered may also be reduced in light of EU ETS allowances which would be freely allocated to EU producers of the same products (see below).

Interaction with the EU ETS

The EU ETS will continue to apply to the goods within its scope produced in the EU, whilst the EU CBAM will create a carbon price for goods (within the scope the Regulation) imported into the EU.

Although there are differences in scope between the EU ETS and the EU CBAM, the Regulation demonstrates that the two carbon pricing systems will not operate in separate vacuums. In addition to the link to the EU ETS allowance price (see above), the Regulation also provides that the number of CBAM certificates to be surrendered will be adjusted, to reflect the extent to which installations producing goods within the scope of the EU CBAM are entitled to free allocation of allowances under the EU ETS. The methodology of this calculation will be adopted by the Commission in an implementing act.

Further, in the event of non-compliance with the Regulation, i.e. if an authorised importer fails to surrender sufficient CBAM certificates by 31 May each year, the authorised importer shall be liable to a penalty identical to the excess emissions penalty under the EU ETS. However, payment of such a penalty would not relieve an authorised importer from the obligation to surrender the outstanding number of CBAM certificates in a particular year.

Impact on the UK

As the UK is now a third country under the Regulation, EU importers would be liable to comply with the EU CBAM when importing certain goods (see above) from the UK. The Regulation empowers the Commission to adopt implementing acts to establish the methodology for calculating the reduction in the number of CBAM certificates to be surrendered in light of carbon prices paid in a third country. The Regulation also includes a transitional period during which such acts may be adopted.

However, until the reduction methodology is established, EU importers of UK-produced goods may experience a degree of uncertainty, with goods subject to the UK ETS upon production in the UK, and also to the EU CBAM upon import to the EU.

Comment

Ahead of the publication of the Regulation, a number of commentators raised concerns that an EU CBAM could be anti-competitive and protectionist in nature. The Commission stresses that it has taken such concerns into consideration in the design of the EU CBAM, as the final version of the Regulation contains a number of features which it claims addresses such concerns:

  • The price of CBAM certificates is linked to the EU ETS price. As the goods within the scope of the EU CBAM (when imported from third countries) are within the scope of the EU ETS when produced in the EU, all such goods in the EU will be subject to a carbon price, set at a similar level. This would in theory prevent carbon leakage (see above), as importers would not be able to obtain cheaper goods by importing from a country with less onerous climate policies.
  • The Regulation also provides for a reduction in the number of CBAM certificates to be surrendered in the event that domestic EU producers of such goods would be entitled to free allowances. This feature aims to ensure that EU producers and EU importers compete on a ‘level playing field’: if an EU producer would have been entitled to freely allocated allowances for producing the imported goods, the importer will be required to surrender fewer CBAM certificates (thereby reducing the carbon price paid by the importer). Because of the different bases of calculation of free allowances and CBAM certificates, it may be complicated to implement this mechanism in a way that is non-discriminatory in all cases.

In spite of the Commission’s assertions that the effects of the EU CBAM will be EU-focussed, concerns have been raised that it will have a significant impact on producers in third countries. The price of imported goods within the scope of the EU CBAM is likely to increase, which may reduce the price competitiveness of these products within the EU single market. Alternatively, if such a price increase were not passed on to consumers, the value of the imported goods may decrease, as EU importers may try to off-set the new carbon cost of these products against their initial purchase price.

Although the primary aim of the EU CBAM is to prevent the risk of carbon leakage, the Commission has suggested that it may encourage the use of more greenhouse gas emissions-efficient technologies by producers from third countries. It remains to be seen whether this will be the case, and whether the EU CBAM will trigger other countries to adopt more ambitious domestic climate policies.

We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612

Jannis Bille
Jannis Bille
Associate, London
+44 20 7466 6314

Lode Van Den Hende
Lode Van Den Hende
Partner, Brussels
+32 477 883 709

Eric White
Eric White
Consultant, Brussels
+32 2 518 1826

London Climate Action Week – 26 June to 4 July 2021

We are proud to be a part of London Climate Action Week 2021 (LCAW), the annual event bringing together world-leading climate professionals and communities across London and beyond to find practical solutions to climate change.

Founded in 2019, LCAW is the largest independent climate change event in Europe, helping to shape our future into one that is net-zero, equitable and resilient. Rooted in London, our diverse, international city, LCAW uses its global perspective to spark climate action around the world.

We will be participating in sessions throughout the week which we hope you will be able to join us at:


How can corporates manage the climate transition

Monday, 28 June 2021, 4.00pm GMT

This event looks at the context in which corporates are responding the climate transition, how to develop strategy and seize opportunities and how to manage uncertainties in relation to climate disclosure and reporting.

Silke Goldberg and Lewis McDonald will be joined by Vanessa Havard-Williams and Rachel Barrett from Linklaters for this discussion.

REGISTER >


Climate Change Disputes: Public International Law – too hot to handle

Tuesday, 29 June 2021, 2.00pm GMT

The Paris Agreement signed by 195 countries in 2015 enshrines a commitment to limit the increase in global temperature to well below 2°C compared to pre-industrial levels, in order to avoid the worst effects of climate change. The upcoming COP26 summit will urgently address measures to be taken by States to meet this commitment in light of the continued rapid rise in global temperatures. But the scale of regulatory change and commitment required will test state policy-making and impact across business communities. This session will address the issue of climate change disputes from the perspective of public international law and specifically cover recent and potential climate change-related claims against states, including investor-State disputes, and the prospect of reform of investment treaties, such as the ECT, to accommodate climate change objectives.

Andrew Cannon will be joined by panellists from Jones Day, Clifford Chance, Twenty Essex and Queen Mary University of London.

REGISTER >


Key contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Lewis McDonald
Lewis McDonald
Global Head of Energy, London
+44 20 7466 2257
Andrew Cannon
Andrew Cannon
Partner, London
+44 20 7466 2852

 

 

Carbon capture, usage and storage – point 8 of the UK Government’s Ten Point Plan

Becoming a world-leader in carbon capture, usage and storage (CCUS) technology is at the heart of the UK Government’s new plan for a “green industrial revolution” released on 18 November 2020 (Ten Point Plan).

The Ten Point Plan makes it clear that by capturing carbon from power generation, low carbon hydrogen production and industrial processes, and storing it underground so that it cannot enter the atmosphere, CCUS technology will play a critical role in addressing the UK’s ambition to become a net zero economy. The Government aims to use CCUS technology to revitalise industrial regions and capture and store 10 Mt of Co2 per year by 2030. Recognising that no one country has yet captured the CCUS technology market, the Ten Point Plan emphasises the UK’s unique position to lead in this respect, with the unrivalled asset of having the North Sea that can be used to store captured carbon under the seabed.

The government sees in CCUS technology a means to contribute to the economic transformation of the UK’s industrial regions, enhancing the long-term competitiveness of the UK industry. In fact, the Ten Point Plan reveals a £1 billion CCUS Infrastructure Fund that will be used to establish CCUS technology in two industrial clusters by mid 2020s, and aim for four of these clusters by 2030, saving the equivalent of 9% of the 2018 UK emissions between 2023 and 2032. The Ten Point Plan concludes that CCUS technology would support up to 50,000 jobs in the UK by 2030, with a sizeable export potential.

There is also a cross-over between CCUS and other elements of the Government’s Ten Point Plan. The Ten Point Plan recognises the link between low carbon hydrogen production growth and the expansion and increase of CCUS infrastructure, and the combination of CCUS technology and hydrogen will render the creation of various CCUS clusters possible in what the Government describes as industrial “SuperPlaces”. To set this plan in motion, the UK government is expecting to execute in 2021 a process for CCUS development, working in collaboration with industry and set out further details of a revenue mechanism for industrial carbon capture and hydrogen projects.

With plans for more than 30 new integrated CCUS facilities announced globally since 2017[1] and increased action by governments worldwide to incentivise technologies that capture carbon emissions, the Ten Point Plan is part of the UK’s plan to becoming a global leader in CCUS technology.

HSF will follow new UK policy papers on CCUS closely – follow our Energy Notes blog for more information as the policies evolve.

[1] www.iea.org/reports/ccus-in-clean-energy-transitions/a-new-era-for-ccus#growing-ccus-momentum

Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 7470
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2537
Reza Dadbakhsh
Reza Dadbakhsh
Partner, London
+44 20 7466 2679

Jet Zero and Green Ships – point 6 of the UK Government’s Ten Point Plan

Shipping and aviation are key contributors to the UK economy, with estimates being that, before the COVID-19 pandemic, they contributed over £40 billion and £20 billion, respectively each year. They are important sectors in achieving the UK’s net-zero ambition, but decarbonising these industries is a challenging exercise. Emissions from international aviation and shipping are not directly included in the Paris Agreement, with regulation left to individual countries, the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO).

The aviation industry is currently experiencing a time of extraordinary shock with impacts being felt on multiple fronts. Revenues have collapsed as a result of an estimated 97% reduction in passenger flights due to the COVID-19 pandemic. Aviation will also be subject to additional emissions costs in the fourth phase of the EU Emissions Trading System (ETS) coming into effect next year due to the annual linear reduction factor reducing the number of emissions certificates available in that phase.

The UK has been looking to decarbonise the maritime industry and introduced the Clean Maritime Plan in 2019 setting out ambitions and commitments to achieve zero emissions by 2050. Much like the aviation industry, the maritime industry has been significantly affected by the pandemic.

In its Ten Point Plan for a “Green Industrial Revolution” (the Ten Point Plan), the Government has committed to “position the UK at the forefront of aviation and maritime technology to push forward low carbon travel”. Taking action to achieve these aims could, according to the Ten Point Plan, deliver up to 5,200 jobs supported by a domestic sustainable aviation fuel (SAF) industry; “future proof” the aerospace industry and increase savings of up to 1MTCO2e[1] by 2032 from clean maritime and 15MtCO2e by 2050 from SAF.

Jet Zero – Sustainable Aviation Fuels

The Government aims to place the UK at the forefront of change in the aviation industry. Under the Ten Point Plan, the UK will have the first SAF clearing house to certify new fuels in Europe. There will also be a consultation on a SAF mandate which will look into blending greener fuels into kerosene to create a market-led demand for alternative fuels. The mandate is expected to start in 2025.

The Ten Point Plan emphasises the need for further research and development (R&D) in this area, especially on new fuel, technology and infrastructure. The Jet Zero Council, a sector-wide partnership set up earlier this year, will work to develop new technologies feeding into the strategy for the net-zero ambition, with a consultation expected in 2021. Under the Ten Point Plan, £15 million will be invested in FlyZero, a 12-month study into “strategic, technical and commercial issues in designing and developing zero-emission aircraft that could enter service in 2030.” In an effort to boost R&D into SAFs, the Ten Point Plan introduces a £15 million competition for fuel plants, to “support the production of SAFs”. There will also be investment in R&D to upgrade UK airport infrastructure in a shift towards battery and hydrogen-fuelled aircraft.

Further information is required on the Government’s proposals for the aviation industry. It remains to be seen whether such proposals are consistent or more progressive than those set out in the ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation. Whilst it is commendable that the UK is committing to invest in SAF research, it is universally accepted that the amounts required to be invested to make SAF and battery / hydrogen-fuelled aircraft viable are far in excess of what has been committed.

Green ships

The UK’s maritime industry is a key aspect of achieving the country’s climate change goals. The UK wants to decarbonise shipping as part of its aim to achieve zero emissions by 2050, a standard that is much higher than the IMO’s target of 50% reduction by 2050. However, shipping is an industry that is harder to decarbonise than others: assets are long-life and the industry heavily relies on energy with no alternative fuel yet appropriate for long-distance routes. Decarbonisation will require a large amount of investment.

The Ten Point Plan does not place much emphasis on the industry, other than to say that it has committed to a £20 million investment in the Clean Maritime Demonstration Programme, and that a hydrogen refuelling port will be launched in Teesside.[2]

The Clean Maritime Plan, launched last year, sets out the ambitions for the UK maritime industry for 2035 and 2050. These include: building a number of clean maritime clusters; the UK Ship Register being seen as a global leader in clean shipping and the UK being home to a world-leading zero-emissions maritime sector. The Government also made a number of commitments, including: a call for evidence on non-tax incentives; a consultation on how the Renewable Transport Fuel Obligation can be used in the maritime sector; a study to identify and support UK zero-emission shipping clusters; and support of clean maritime innovation through funding and competitions.

It is yet to be seen what impact the £20 million investment will have on the achievement of these aims, given the total value of the industry.

Conclusion

It is clear that further investment to develop new fuel, technologies and infrastructure is much needed in the aviation and maritime sectors if they are to be decarbonised. We look forward to seeing how the Government’s plans are adapted to revive these industries from the effects of the pandemic in a green and sustainable manner. While the details of their strategy will become clear over the next few years, the Government’s commitments in these sectors are a welcome step in tackling emissions from two industries that form an integral part of the UK economy.

[1] MTCO2e – Metric tons of carbon dioxide equivalent

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/815664/clean-maritime-plan.pdf

Sarah Pollock
Sarah Pollock
Partner, London
+44 20 7466 2786
Robert Moore
Robert Moore
Partner, London
+44 20 7466 2918
Kim Dietzel
Kim Dietzel
Senior Associate, London
+44 20 7466 2387