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EU Fit for 55: Council of European Union reaches general approaches relating to emissions reductions

30 Jun 2022

The Council of the European Union on Wednesday (29 June) adopted its negotiating positions (general approaches) on important legislative proposals in the ‘Fit for 55’ package and is now ready to negotiate with the European Parliament on concluding the package. 

The member states adopted a common position on EU emissions trading system (EU ETS), effort-sharing between member states in non-ETS sectors (ESR), emissions and removals from land use, land-use change and forestry (LULUCF), the creation of a social climate fund (SCF) and new CO2 emission performance standards for cars and vans.

These agreements will pave the way for negotiations with the European Parliament.

Presented by the European Commission on 14 July 2021, the package will enable the European Union to reduce its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.

“The achievement, led by the French Presidency, of an agreement between the member states on the ‘Fit for 55’ package is a crucial step in attaining our climate objectives within the main sectors of the economy,” said Agnès Pannier-Runacher, French Minister for the energy transition.

“The ecological and energy transition will require the contribution of all sectors and all member states, in a fair and inclusive manner. The Council is now ready to negotiate with the European Parliament on concluding the package, thereby placing the European Union more than ever in the vanguard of fighting climate change,” she said. 

EU emissions trading system

The EU Emissions Trading System (ETS) is a carbon market based on a system of cap-and-trade of emission allowances for energy-intensive industries and the power generation sector.

The Council agreed to keep the overall ambition of 61% of emissions reductions by 2030 in the sectors covered by the EU ETS, proposed the Commission.

The Council also agreed to a one-off reduction of the overall emissions ceiling by 117 million allowances (“re-basing”) and to the increase in the annual reduction rate of the cap by 4,2% per year (“linear reduction factor”).

The Council endorsed the proposal to strengthen the market stability reserve (MSR), by prolonging, beyond 2023, the increased annual intake rate of allowances (24 %) and setting a threshold of 400 million allowances above which those placed in the reserve were no longer valid.

The Council agreed to make the launch of the mechanism that activates the release of MSR quotas on the market, in case of excessive price rise, automatic and more reactive.

As regards sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the Council endorsed the proposal to end free allowances for the sectors concerned by the CBAM progressively, over a ten-year period between 2026 and 2035. However, the Council accepted a slower reduction at the beginning and an accelerated rate of reduction at the end of this 10-year period. Support for the decarbonisation of these sectors will be possible through the Innovation Fund. The Council also asked the Commission to monitor the impact of the CBAM, including on carbon leakage at export, and to assess whether additional measures were needed.

As regards the Modernisation Fund, the Council maintained the increase in its volume through the auctioning of an additional 2.5 % of the ceiling, the increase in the share of priority investments to 80 % and the addition of new eligible sectors, as proposed by the Commission. The Council decided to extend the list of member states benefiting from the Modernisation Fund. Natural gas projects will in principle not be eligible for the Fund. However, the Council introduced a transitional measure allowing the beneficiaries of the Fund to continue financing natural gas projects under certain conditions.

The Council also strengthened certain provisions of the Innovation Fund, in particular as regards the capacity aimed at making participation in projects more effective and geographically balanced, while preserving the principle of excellence in project allocation. The Council agreed to pay particular attention to decarbonising the maritime sector under the Innovation Fund.

The Council improved the governance and transparency of both funds.

An additional transitional free allocation can be granted under certain conditions to the district heating sector in certain member states subject to certain conditions, in order to encourage the decarbonisation of that sector.

The Council agreed to include maritime shipping emissions within the scope of the EU ETS. The general approach accepts the Commission proposal on the gradual introduction of obligations for shipping companies to surrender allowances. As member states heavily dependent on maritime transport will naturally be the most affected, the Council agreed to redistribute 3.5 % of the ceiling of the auctioned allowances to those member states. In addition, the general approach takes into account geographical specificities and proposes transitional measures for small islands, winter navigation and journeys relating to public service obligations, and strengthens measures to combat the risk of carbon leakage in the maritime sector.

The general approach includes non-CO2 emissions in the MRV regulation from 2024 and introduces a review clause for their subsequent inclusion in the EU ETS.

The Council agreed to create a new, separate emissions trading system for the buildings and road transport sectors. The new system will apply to distributors that supply fuels for consumption in the buildings and road transport sectors. However, the start of the auctioning and surrender obligations will be delayed by one year compared to the Commission proposal (auctioning of allowances from 2027 onwards and surrender from 2028 onwards). The emissions reduction trajectory and the linear reduction factor set at 5.15 from 2024 and 5.43 from 2028 would remain as proposed by the Commission. The Council maintained the proposal to auction an additional 30% of the auction volume for the first year of the launch of the system, so that it runs smoothly (“frontloading”).

The Council introduced an opt-in for all fossil fuels. It introduced simplified monitoring, reporting and verification requirements for small fuel suppliers.

The Council added a temporary possibility for member states to exempt suppliers from the surrender of allowances until December 2030, if they are subject to a carbon tax at national level, the level of which is equivalent or higher than the auction price for allowances in the ETS for the buildings and transport sector.

The Council agreed to phase out free emission allowances for the aviation sector gradually by 2027 and align the proposal with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The EU ETS will apply for intra-European flights (including the United Kingdom and Switzerland), while CORSIA will apply to EU operators for extra-European flights to and from third countries participating in CORSIA. The Council agreed to set aside 20 million of the phased-out free allowances to compensate for the additional costs associated with the use of sustainable aviation fuels (SAFs). In addition, the Council agreement takes into account specific geographical circumstances and, in that context, proposes limited transitional derogations.

Note: The full statement by Council of the European Union can be viewed here


Photo credit: Guillaume Périgois on Unsplash
Published: 30 June, 2022

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