Last week the European Commission released a broad slate of legislative proposals aimed at elevating the ambition of the European Union’s climate policies. The package, called “Fit for 55”, reforms some current climate change programs, expands others, and introduces new market mechanisms with the goal of reducing the bloc’s greenhouse gas emissions 55% below 1990 levels by 2030.

The proposal accelerates the reduction of allowances, phases out free allocation of allowances to the aviation sector, and adds maritime transport to the emissions trading system (ETS). Fit for 55 also envisions a new ETS for the buildings and transport sectors, as well as a carbon border adjustment mechanism.

Below is an overview of the various proposals.

Note that the Commission has forwarded the legislative proposals for debate and adoption by the EU Parliament. Implementation could take a year or more, and we will continue to provide updates as the process moves forward.

For more information on the EU carbon market, please contact our London-based carbon group at: londoncarbon@evomarkets.com or +44 (0)20 7264 4550.

European Union “Fit for 55” Proposal

EU ETS Revisions

Linear Reduction Factor

• Linear reduction factor, which annually reduces the number of allowances, is changed to 4.2% (from the current 2.2%)
• New factor in place as soon as Directive is passed, and there is a one-off downward adjustment of the cap as soon as it is implemented to make it effective from 2021
• Result in 61% reduction in EU ETS emissions by 2030 compared to 2005

Changes to Market Stability Reserve

• Continue with 24% withdrawal rate until 2030 (program was due to revert to a 12% withdrawal rate in 2023)
• Reserve will hold no fewer than 200 million EUAs.
• Operate a ‘buffer’ ensuring no single MSR reduction would take the market supply below 833 million EUAs.
• Include aviation emissions in total allowances in circulation. Include maritime emissions.
• Create new MSR for buildings and transport.

Changes to Aviation under EU ETS

• Consolidate total quantity of aviation allowances at current levels, then apply the linear reduction factor of 4.2% annually from 2024.
• Ramp up the auctioning of aviation allowances: 25% of aviation allowances auctioned in 2024; 50% in 2025; 75% in 2026; and 100% from 2027 onwards
• Establish CORSIA as appropriate climate measure for extra-European flights

Extends scope of EU ETS to cover maritime transport

• Covers all emissions from intra-EU transport and emissions while in berth at EU ports
• Covers 50% of emissions from voyages to or from an EU port
• Rules gradually phased in over period 2023-2025: 20% of emissions are covered in 2023; 45% in 2024 and 70% in 2025
• Companies must surrender allowances for 100% of covered emissions as of 2026

Emissions Trading for Buildings and Transport

• A separate, self-standing system from 2025
• Obligation is upstream in the fuel supply chain. The release of fuels for consumption is the point of regulation
• Sectoral Target: emissions reductions of 43% from 2005 levels by 2030
• In 2025, obligated parties must hold an emissions permit and report emissions for years 2024 and 2025
• Compliance begins 2026

Carbon Boarder Adjustment Mechanism (CBAM)

• Importers surrender certificates based on actual emissions from third-country producers for the products they import into the EU
• Initial covered imports: steel, power, aluminum, cement and fertilizers
• Importer will report the actual emissions embedded in the product and surrender corresponding number of CBAM certificates
• CBAM certificates are sold to importers by Member States and price is based on EUA auction price
• Importers can claim rebate based on their emissions performance or carbon pricing in exporting countries
• Ten-year phase-in period starting in 2026, during which free emissions allocations under EU ETS will be phased out and the CBAM phased in
• Carbon price paid in a country of origin can be used to adjust total required certificates. Importer must verify and keep records of carbon price