“Fit for 55” – The EU commission gets specific

As part of the Green Deal from the fall 2020, the EU has committed itself to a 55% reduction target by 2030 (compared to 1990), and zero-emissions in 2050. This demands a massive effort to curb emissions over the coming decades. The “Fit for 55” package presents some of the key policy initiatives proposed by the Commission to reach the new target.

The proposal includes both new – and more ambitious – reduction targets for a number of sectors, a reform of the emissions trading scheme, an introduction of a carbon tax on imports, and a number of regulatory initiatives.

The proposal implies a significant increase in the price of emissions over the coming decade – both in EU production and on selected imports from outside the union. The European Commission expect CO2 prices at around EUR 85 per tonne in 2030. But this is likely an estimate on the low side.

In general the Nordics will be less affected by the proposals than the rest of the EU, both due to the economic structures of the countries and because we are further ahead in the green transition. Higher EU wide climate ambitions might even help Nordic businesses further along in the green transition.

Reforming the emissions trading scheme

Two highly anticipated proposals in the “Fit for 55” package are aimed at reforming the EU emissions trading system (EU ETS) and the introduction of a tax on the carbon contents of imports – the Carbon Border Adjustment Mechanism (CBAM). The two initiatives are linked. A reform of the ETS system that leads to higher cost of emissions will increase the risk of carbon leakage – transferring emission heavy production to countries outside the EU with less strict emissions standards – but by putting a carbon price on imports, the risk is reduced. In addition, a CBAM might incentivise companies outside the EU to reduce emissions as well, in order to better compete in the EU market.

The reform of the EU emissions trading system involves both more ambitious reduction targets, and a broader scope for the system (see here). The proposal also entails a reduction in the availability of free allowances for some of the most heavily emitting industries, and – if the CBAM proves efficient – free allowances should in time be phased out completely.

The scope of the ETS system will also be expanded. Currently, the sectors included within EU-ETS are power and heat generation, commercial aviation (only within EU borders) and many energy-intensive industry sectors (e.g. oil refineries, paper, chemicals, and cement). The new proposal seeks to expand the scope of the existing EU ETS to maritime transport and set up a separate ETS for buildings (heating specifically) and road transport. By expanding the system to these sectors, developments in the carbon price are also likely to affect consumers more directly than is the case today – e.g. by raising the price of emissions from individual oil furnaces still used widely in the heating of homes in many member states.

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