The EU is officially set to reduce carbon emissions by 55% by 2030! The European Commission has recently presented the ‘Fit for 55’ package. The new legislation contains numerous proposals on how to achieve this target – here’s what you need to know about it!
Revision of the EU Emissions Trading System
At the moment, the EU Emissions Trading System (ETS) is the main regulation targeting direct carbon emission reduction. The system covers the sectors of electricity and heat generation, energy-intensive industries, and commercial aviation within the European Economic Area. The ETS works as a “cap and trade” mechanism: facilities can emit a certain amount of greenhouse gases within the cap and buy (for some sectors, receive for free) emissions allowances. If the facility reduces its emissions, it can trade the excess allowances to those who are over-emitting. Every year, every facility has to prove their amount of allowances match their amount of emissions; otherwise, fines may apply.
The current EU ETS target is to cut the relevant facilities’ emissions by 43% by 2030 compared to 2005 levels. The 2021 cap is at 1,571,583,007 allowances (each allowance covers one tonne of CO2/other GHG). Besides, every year and until 2030 the cap decreases at 2.2%. The ‘Fit for 55’ package includes revision of this Directive including the following provisions:
- The emission cap decreases by 4.2% annually;
- The new revision suggests extending the policy to buildings, transportation, and the maritime sectors;
- Further adjustment of the free allocation of EU Emissions Allowances (EUAs) to level off the interaction between the revised ETS and the new Carbon Border Adjustment Mechanism.
Carbon Border Adjustment Mechanism
This is a new mechanism aiming at reducing carbon leakage and leveling out carbon costs paid by European and foreign industries and manufacturers. The ‘Fit for 55’ package contains several key elements of the newly proposed CBAM:
- Sectors required to comply will be electricity, cement, fertilizers, aluminum, and iron and steel, excluding natural gas and refined products;
- Importers of goods will have to buy CBAM certificates to cover the embedded emissions,
- both direct and indirect emissions,
- one certificate covers 1 tonne of emitted CO2;
- CBAM certificate prices will be set weekly, based on the average prices of EU carbon allowance auctions.
Revision of the Renewable Energy Directive
The EU’s current renewable energy target requires the Member States to secure 32% of their electricity from renewable sources by 2030. Presently, it is difficult to work towards this goal, as some EU countries’ regulatory and business environments impose challenges for renewable energy project developers to bring their projects into operation. Additionally, these environments often impede renewable energy procurement and consumption for offtakers and end consumers. The ‘Fit for 55’ package contains several revisions on the Directive:
- New target for renewable energy set at 40%; new energy efficiency target 38%;
- Increased role of Power Purchase Agreements as an integral tool for renewable energy development, including
- promotion of this type of renewable energy procurement on the national levels,
- reduction of the financial risks for buyers;
- Simplification of the existing administrative and permitting procedures for new renewable energy plants, including more objective and transparent rules, and more predictable and reasonable timeframes;
- Extension of the issuance of GOs for renewable energy to include energy produced with the support of government subsidies.
This is a brief summary of the package, a more detailed overview is available here and in our Q2 Global Renewables Market Report – a comprehensive assessment of current power purchase agreement (PPA) pricing developments, policy updates, insights on PPA evaluation, and trends shaping the global renewable energy market. Download a copy of the full report and sign up to receive future market updates directly to your inbox.
The legislative proposals are available here.