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Fit for 55 urgency foreshadows 'difficult negotiations': Global Counsel

Highlights

Fast-track revisions, tough talks

Revision of ETS at core of package

Scope of transport route exposure key

The speed with which the European Commission has had to frame its "Fit for 55" climate package will likely lead to lengthy, difficult negotiations with the European Parliament and EU Council, according to Brussels-based energy expert Giorgio Corbetta of strategic consultancy Global Counsel.

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Normally the Commission has time to consult widely on major drafts to get key stakeholders on board, Corbetta said.

But getting 12 legislative proposals together in a matter of months precludes this.

"It's been a top-down exercise with the Commission rushing to put everything in. Then there will be lots of work fleshing out what the proposals will entail in detail," he said.

As a result, trialogues with the Parliament and Council could be "very long and painful, through the six-month Slovenian Presidency [of the EU Council], and then into the French Presidency – which, by the way, will coincide with national elections in France," he said.

JULY 2021 FIT FOR 55 CLIMATE PACKAGE

Name of initiative
Existing or new
Main sectors, activities affected
Amendment of the Energy Efficiency Directive
Existing
Digital, energy and buildings
Amendment of the Regulation setting CO2 emission standards for cars and vans
Existing
Automobile manufacturing
Amendment to the Renewable Energy Directive
Existing
Energy
Carbon Border Adjustment Mechanism
New
Trade, manufacturing
Effort Sharing Regulation
Existing
Most sectors not included in the EU ETS, such as transport, buildings, agriculture and waste
FuelEU Maritime – green European maritime space
New
Shipping, commodity trading, infrastructure, refining
ReFuelEU Aviation - sustainable aviation fuels
New
Aviation, refining, infrastructure
Revision of the Directive on deployment of the alternative fuels infrastructure
Existing
Energy, transport
Revision of the Energy Tax Directive
Existing
Energy, transport, buildings
Revision of the EU Emission Trading System, including revision of the EU ETS Directive concerning aviation, maritime and CORSIA
Existing
Power generation, manufacturing, aviation, shipping, buildings, road transport
Revision of the Regulation on the inclusion of greenhouse gas emissions and removals from land-use, land-use change and forestry (LULUCF)
Existing
Forestry
Source: Global Counsel

Massive regulation

"The first and obvious thing to say about the whole package is that emission reductions are going to be regulated massively across the board," Corbetta said.

The core of the package would be the revision of the EU Emissions Trading System, the tightening of the mechanism both in terms of the phase-out of free allowances, and inclusion of new sectors, notably maritime.

This linked to Corbetta's third main takeaway, which was that the EC's major target was the transport sector.

"It's the only sector where emissions are above 1990 levels, and there are three or four pieces of legislation that explicitly target emissions from road transport, aviation and maritime/shipping."

Meanwhile Fit for 55 needed to be looked at in the context of the decarbonization package for natural gas, due in the winter.

This would inform the EC's approach to the potential for stranded assets and lock-in effects in the gas sector, Corbetta said.

Also important in terms of context would be the revision of state aid guidelines, and the Trans-European Network regulations for transport and energy, he said.

Stakeholders hope the revision of the state aid guidelines (of which a draft has been leaked recently) will adapt the current competition regulatory framework to the need for European companies to compete with businesses based in less environmentally concerned jurisdictions (particularly in terms of mergers control and state aid).

The TEN-E regulation will introduce new criteria for integrated spatial planning, key to further advance renewable energy development.

Energy tax

Another big issue affecting companies will be the revision of the Energy Taxation Directive on electricity, motor and aviation fuels and most heating fuels.

"This is not the first time the EC had tried to reform indirect taxation, but it has never worked because you need unanimity [in the Council]. This time the EC seems convinced it will get it done because of the urgency of the situation. And when you look at the need to establish a level playing field between renewables and fossil fuels, this is a goal shared by many Member States," Corbetta said.

CBAM

Also of particular concern to industry and manufacturing is the Carbon Border Adjustment Mechanism.

"This is a proposal that has already delivered in some ways, with reactions in the US, China and even Russia, which is looking at establishing its own ETS to protect its exporting industries," Corbetta said.

When it came to EU industry, however, the positives of a level playing field internationally could, for some sectors, be more than offset by the loss of free allocation in the EU ETS, he said.

"The loss of free allocation will be an issue by EU sectors with already high environmental standards. Look at aluminium. A lot is imported but there are very strong European suppliers too, already producing low-carbon aluminium. For them, CBAM is an issue because it would potentially come with the phase-out of free allowances," he said.

"The question is: which sectors are going to be affected by a pilot phase of the CBAM? Depending on who is targeted, you are going to see very different reactions," he said.

An early leak of the proposal shows cement, power, fertilizers and metals will be targeted first.

Long and short routes

Another emerging conflict of interest lay between long- and short-route carriers, be they in aviation or shipping.

Specific discussions around the ReFuelEU Aviation regulation centered on whether the sustainable aviation fuel (SAF) blending mandate would apply to all flights taking off from European airports, regardless of whether their destination is inside the bloc.

"The conflict here is between long-haul flights and smaller airlines. A scope that only affected European flights would benefit the international global companies and distort the level playing, according to smaller carriers," Corbetta said.

Shipping was equally fragmented internally, he said.

"There you can see the division again between big and small companies on the scope of inclusion [in the EU ETS]. Which routes will be affected? Is it just going to be European ones, or half the trade between China and the EU, or is it the whole route that will eventually be subject to the EU ETS?"

Meanwhile, with most large airline carriers in the EU having been bailed out by Member States on condition of becoming more environmentally sustainable, they had limited leverage now to push against a tighter regulation of emissions, and withdrawal of free allocation, Corbetta said.

"The carriers are an important stakeholder but their influence is much less compared to the past. That is why the OEMs (Boeing and Airbus), components manufacturers and the airports have a say," he said.

Road transport

When it came to CO2 emissions standards for cars, the debate was between those Member States with large auto industries – Germany, France and Italy.

"The big discussion here is how the industry will react to tighter emissions standards, and seize the opportunity of electrification from both EV and infrastructural perspectives – which goes to the heart of the alternative fuels infrastructure directive," he said.

Electro-mobility was emerging as a major item on Member States' recovery spending plans, Corbetta noted.

"Given you want to ensure there is enough demand for EVs, the need to address that in buildings is huge. This is definitely going to be addressed not only by the Alternative Fuels Infrastructure Directive but also in the Energy Efficiency Directive," he said.