H+K Brussels’ Jack Matthijnssens & Wout Gevaert look ahead at what lies next for the European Commission’s Fit for 55 proposal which enters its next phase as MEPs and their Member States prepare for battle.

On 14 July the European Commission (EC) presented its highly anticipated Fit for 55 package. If adopted as published the proposed measures would amount to a complete overhaul of the EU’s climate legislation with the stated aim of cutting emissions by 55% of 1990 levels by 2030. The Commission’s ambition is for the EU to be the first and fastest mover on the road to net-zero, also stimulating other parts of the world to follow its lead. While the proposed measures are far-reaching, the Council and parliament of the EU will thoroughly debate and review them, making it likely that the final measures adopted will be significantly altered from those proposed.

Under the proposals presented the EU’s Emissions Trading System (ETS), where companies buy and trade credits for the emissions they produce, will be expanded to include shipping. In addition a new standalone ETS for road transport and buildings was proposed. Free allowances which compensated industries susceptible to carbon leakage are to be phased out in favour of a Carbon Border Adjustment Mechanism (CBAM). CBAM would oblige companies exporting to the EU to pay a tax that mirrors what domestic producers pay through the ETS. The Commission has argued that the system of free allowances is not conducive to innovation. But without a rebate for exports, industry is likely to argue that this leaves them at a competitive disadvantage when selling products outside the EU. On the other hand the EU may have to brace itself for a challenge at the WTO level if free allowances are to co-exist with CBAM during the initial phase-out period which is proposed to drag on for ten years.

The Commission proposes new CO2 emissions standards which are likely to spell the end of the combustion engine in cars and vans by 2035 in favour of electric vehicles. But the EU lacks the required infrastructure and the Commission has also proposed a set of incentives to improve charging and hydrogen refuelling in Europe. German MEP Peter Liese expressed concern that this measure would impact SME OEM suppliers more than large car manufacturers, saying thousands of SMEs produce combustion engine parts for whom a full transition by 2035 would prove challenging.

Sustainable fuel targets have also been proposed for aviation and shipping, with tax exemptions no longer permitted for kerosene jet fuel and the heavy oil used in shipping. But sustainable aviation fuel (SAF) remains prohibitively expensive and any changes to taxation will require the unanimity of member states, many of which hold significant stakes in national airlines.

The proposal would also see curbs placed on logging in a bid to protect forests, or in EU language, carbon sinks that also include peatlands and wetlands. The use of biomass fuels would no longer be encouraged. The logging and farming sectors would be impacted. The latest edition of the Commission’s renewable energy directive (REDIII) will disincentivise biomass fuels, but farmer lobbies have argued that biofuels can still be less polluting than the fuels heavy vehicles require. New taxation rules have also been proposed for energy, with renewable sources being given lower minimum rates than petrol or diesel. New standards on the energy efficiency of buildings are also part of the Commission’s proposals.

Council and parliament’s review of the proposals will likely take two years and is expected to be fraught with competing interests and difficulties. Some of the battle lines have already been drawn, with many MEPs voicing disapproval of the proposals in meetings of the Industry, Technology, Research and Energy (ITRE) and Environment, Public Health and Food Safety (ENVI) committees in the days after their publication. MEPs were quick to point out that the measures would be likely to negatively impact the EU’s industrial competitiveness and hit low- and middle-income earners hardest. French MEP and chairman of the parliament’s ENVI committee Pascal Canfin warned about the potential social unrest the measures could provoke: ‘we experienced it in France; it gave us the yellow vests’, he said.

There have also been some rumblings of discontent from Council. Luxembourg’s energy minister Claude Turmes was unsure how an ETS on buildings and transport would be priced effectively in an EU where ‘purchase power differs greatly between member states’. Slovenia’s environmental minister Andrej Vizjak said that ‘quite a lot of reservations were expressed’ and that the ETS in particular would be a ‘tough nut to crack’ before wryly adding there would be compromises.

This is a gigantic proposal, quite possibly the most ambitious that the Commission has ever published. Policymakers will treat Fit for 55 as a package because of the strong links between the different files. This creates challenges and opportunities for PA outreach. Successful advocacy will require eyes and ears on all files to identify the fault lines between political positions, national priorities and conflicting economic interests. This also means that creative compromise solutions which break deadlocks in the negotiations will be most welcomed by EU policymakers. There is still much to play for, and a lot will likely change before we see the final shape of how we will get fit for 55.