How to get ‘Fit for 55’ in shape for the climate emergency

Some EU governments believe the ‘Fit for 55’ package is too ambitious but, in reality, it is not ambitious enough. More action is needed today because tomorrow will be too late to avoid catastrophic global warming, write Agnese Ruggiero and Andrew Marshall.

This week, European environment ministers met in Luxembourg to discuss the draft ‘Fit for 55’ legislative package, which seeks to slash net emissions in the EU by at least 55% of 1990 levels by 2030. The agenda included the proposed revision of the Emissions Trading System, carbon removals and binding reduction targets. Divisions emerged over the expansion of the ETS to cover road transport.

Last month, MEPs, national politicians and interested stakeholders expressed their views on the huge package of 13 legislative proposals presented by the European Commission. 

Image: Mika Baumeister, Unsplash

Negotiations are projected to continue well into next year or even the year after. However, as the climate-induced disasters of this summer highlighted, concrete action is imperative now. 

The Commission’s main proposals revolve around the scaling up of the Emissions Trading System (ETS) to cover a broader array of sectors, introducing a Carbon Border Adjustment Mechanism (CBAM), the Effort Sharing Regulation, a new Renewable Energy Directive, new emissions standards for cars, and the creation of a Social Climate Fund among other proposals.

Where’s the emergency?

Although the Fit for 55 package includes some good elements, EU lawmakers have failed to move with the appropriate urgency required to tackle the climate crisis. If we are to keep rising temperatures within manageable margins, Europe should lead by example. 

In this respect, the 2050 climate neutrality goal is a case of too little, too late and would lead to a 2-3˚C warmer world. Having caused enormous emissions since the Industrial Revolution and still a major emitter today, Europe has a historical and current imperative to up its game and pursue more ambitious targets.  The EU’s 2030 reduction targets must be raised to 65%, in line with what science shows is necessary, with carbon neutrality brought forward a decade to 2040. 

 Less hot air

Emissions prices on the EU’s ETS currently stand at about €60 per ton, which is almost 10 times higher than when the previous revision was proposed in 2015. The current Fit for 55 proposal encouragingly puts forward a faster lowering of the overall cap on emissions, the Linear Reduction Factor (LRF), of -4.2% annually, combined with a one-off adjustment reduction. However, this is not enough to bring industrial emissions down to the levels required to achieve the EU’s climate targets 

Another promising aspect of the proposal is to maintain the intake rate of the Market Stability Reserve (MSR) at 24% instead of reducing it to 12% until 2030. The intake rate is the mechanism used to control the number of allowances in circulation. In the ETS directive currently in force, if the number of allowances in circulation exceeded 833 million, just 12% would be placed in reserve from 2024, instead of the current 24%. This will now no longer occur. 

This, combined with the cancellation of allowances held in the reserve above 400 million, should strengthen the system and ensure carbon reductions year on year. That being said, Carbon Market Watch believes the intake rate must be raised to 36% due to the tool being weakened by the addition of aviation and maritime emissions, reducing the amount absorbed each year by the MSR. 

Furthermore, the proposal finally mandates the full use of growing ETS revenues for climate-related action. This means that making polluters pay can help further accelerate emissions reductions, reaping fruit for the environment and the longer term sustainability of our economic system. 

Carbon Market Watch welcomes the addition of shipping to the ETS after years of indecisiveness by the International Maritime Organisation. Although it only covers 50% of incoming and outbound voyages and has a slow phase in (until 2026), there will, fortunately, be no free allowances.

Taxing questions

Emissions from energy-intensive industries have stagnated in the last decade while emissions from the power sector have fallen over 35%. The poor performance of these industries was largely due to the current system of handing out free allowances. In addition to failing to cut their emissions, energy-intensive industries have, perversely, made up to €50 billion in windfall profits from the system between 2008-2019

The EU believes the proposed Carbon Border Adjustment Mechanism (CBAM) is more likely to lead to the decarbonisation of these industries than free allowances have done and without the risk of corporate profiteering off the system. 

Put simply, CBAM is a tax on the carbon content of some materials entering the EU to protect producers in Europe. This, in theory, should allow them to bear the cost of reducing emissions without being undercut by cheaper highly polluting competitors from outside the bloc. 

However, there are troubling issues with the proposed CBAM that undermine its effectiveness.

First, free allowances will still be in place during the phase in of the CBAM, 2026-2035. This overlap is extremely damaging and goes against the ’polluter pays’ principle, effectively subsidising European polluters for another 14 years while reducing the carbon price signal imposed on foreign producers. If the CBAM is implemented, it must replace free allowances from the start. 

Other problematic elements of the CBAM revolve around which countries it affects, which materials it covers and where the revenues generated will be used.

Firstly, low-income countries, many of whom rely on exports to European nations to survive and have often been hardest hit by the coronavirus crisis have not been exempted from the proposed CBAM. A European carbon price on imports could hurt these countries disproportionately, harming their ability to develop. Provisions to exempt least developed countries and small islands in line with the United Nations Framework Convention on Climate Change’s principle of common but differentiated responsibilities should be included in the CBAM regulation.

Secondly, the revenues are currently earmarked to repay the Next Generation EU Facility, the EU COVID-19 recovery package. As the CBAM is a climate instrument, its revenues should not only be used to repay the funds used for the COVID-19 recovery, but also to finance international climate action, especially in poorer countries, and boost climate resilience. If we are trying to encourage others to lower their emissions too, this must be the goal. 

As Fit for 55 enters the long tunnel of the legislative process, it must emerge from the other side into the light rather than the darkness or a murky twilight. As the urgency of the climate emergency becomes more apparent every day, it will require a clear moral compass and collaboration between states, citizens, companies and countries if climate objectives are to be achieved. More action is needed today because tomorrow will likely be too late.