On July 14, the European Commission announced a package of proposals it calls “Fit for 55,” which are designed to enable the European Union (EU) to meet its declared goals of reducing greenhouse gas emissions to 55 percent of 1990 levels by 2030 and to become climate neutral by 2050. This blog post provides an overview of several relevant aspects of these proposals, with more detailed discussions of those provisions that are likely to have significant impacts on our clients.

Carbon Border Adjustment Mechanism (CBAM).[1] Under this proposal, which would be fully phased in on January 1, 2026, importers of goods into the EU will need to register in the EU and purchase certificates from government authorities to cover the greenhouse gases emitted during production of those goods.

• The price of the certificates will be calculated using the prices of allowances in the EU emissions trading system.
• Starting in 2023, importers will need to submit a declaration by May 31 of each year on the carbon emissions attributable to their imported goods during the previous calendar year. Starting in 2026, importers will also need to surrender certificates corresponding to those emissions. If importers buy too many certificates, they can sell a certain number back to the government at the price they paid (not more than 1/3 of the total purchased). The importers’ declarations will be subject to a verification process.    
• Operators of facilities outside of the EU will be eligible to apply directly to the EU to report on emissions from their facilities, subject to the same verification procedures as importers. Importers may then rely on the operators’ information in their own declarations. 
• Over a period of several years, on a parallel track, the EU will gradually reduce the free-emissions allowances it gives to EU industries. This reduction should cause the price of those allowances to rise, along with the related price of the CBAM certificates. 
• Where the country of origin levies a price on greenhouse gas emissions, those emissions can be deducted from the emissions attributable to the imported products. EU officials have expressed their hope that this provision will encourage other countries to adopt carbon prices of their own and to cooperate with the EU on administration of the CBAM. As Executive Vice-President Timmermans said this week, “companies elsewhere will be incentivised to ‘green’ their production processes. And the CBAM will also encourage foreign governments to introduce greener policies for industry.”
• In the first instance, the CBAM applies only to listed products in the cement, iron and steel, aluminum, fertilizer, and electricity industries. The Commission claims that these five categories are at risk of “carbon leakage,” or the shifting of production away from the EU to other countries that do not put a price on carbon. During the transition period of 2023 to 2025, the EU will decide whether the measure should apply to additional categories of goods beyond these initial five. Because the emissions trading system is also being expanded over time to cover all aspects of the EU economy, and the initial group of 5 product categories covers only a portion of industrial greenhouse gas emissions, one can expect that both affected industry participants in the EU and environmental groups will push to add additional categories to the CBAM.
• Unless the countries where their goods are manufactured also implement carbon-pricing frameworks, covered U.S. companies that access the European market will need to prepare for the CBAM. Beyond understanding the potential economic effects of the mechanism, given the potential 2023 start date for importer certifications, companies should start considering who will be responsible for implementing the EU greenhouse gas accounting process, and begin coordinating with their EU-based importers, especially those that are not part of the same corporate family.

Renewable Energy Initiative. This proposal sets EU and country-level targets for renewable energy production. The following measures impose direct or indirect obligations on manufacturers and may be of particular importance to those companies who export products to the EU:

• The proposal requires member states to develop a legal framework requiring manufacturers of both household and industrial batteries to provide information on battery capacity, state of the battery’s health, state of charge, and power set point, to battery owners as well as third parties acting on their behalf, such as building energy management companies and electricity market participants, under non-discriminatory terms and at no cost. The proposal explains that these requirements are necessary “for flexibility and balancing services from the aggregation of distributed storage assets to be developed in a competitive manner.”
• Battery-powered vehicle manufacturers will have parallel obligations to vehicle owners and others, including electricity market participants and electromobility service providers.
• EU countries are required to ensure that non-publicly accessible battery charging stations can support smart charging and, consistent with the assessments of local regulatory agencies, bidirectional charging capacity.
• Companies that make products “that are labelled or claimed to be produced with renewable energy and renewable fuels of non-biological origin shall indicate the percentage of renewable energy used or renewable fuels of nonbiological origin used in the raw material acquisition and pre-processing, manufacturing and distribution stage,” to be calculated in accordance with EU methodologies.
• The proposal requires that countries phase out support for use of biomass (including wood) in electricity production by 2026. Countries can obtain exceptions from this rule in certain circumstances, including if the facility uses carbon capture and storage.

EU Greenhouse Gas Emissions Trading System. The package will make several significant adjustments to the EU Greenhouse Gas Emissions Trading System. Some key aspects of these adjustments include the following:

• The Commission proposes additional tightening of the cap on carbon emissions for the system as a whole. The proposal also includes (1) maritime transport, (2) road transportation, and (3) buildings in the trading system for the first time. For the latter two, fuel suppliers (instead of vehicle or building owners) will be required to participate in the emissions trading scheme.
• Regarding maritime transport, all intra-European traffic will be included, along with 50 percent of international traffic to or from the EU.
• The Commission’s proposal phases out certain free emissions allowances that it granted to the aviation industry.
• Companies may take credit for products in which “emissions of greenhouse gases ... are considered to have been captured and utilised to become permanently chemically bound in a product so that they do not enter the atmosphere under normal use.”
• Auction revenues from the emissions trading system must generally be used by member states “for climate-related purposes, including to support low income households’ sustainable renovation.”
• The proposal also increases the size and scope of the Innovation Fund, which will be used to support new carbon-reduction technologies.

Social Climate Fund. The Commission announced that it will establish a Social Climate Fund to be funded with €72.2 billion from 2025 to 2032. 

• The Fund is designed to assist countries in mitigating the effects of expanding the greenhouse gas emissions trading system to include the building and transportation sectors.
• Funds will be available to EU countries that implement the extensions of the emissions trading scheme. Countries must submit a plan to the EU explaining how they will use the funds to “finance measures and investments to increase energy efficiency of buildings, to implement energy efficiency improvement measures, to carry out building renovation, and to decarbonise heating and cooling of buildings, including the integration of energy production from renewable energy sources” and “finance measures and investments to increase the uptake of zero- and low- emission mobility and transport.”
• The Commission envisions that the Fund will be used for temporary direct income support measures and subsidies for such actions as retrofits of buildings. An estimated 35 million buildings could be renovated by 2030 under the Fit for 55 package as a whole.

The Commission also proposed the following as part of the “Fit for 55” package: 

• CO2 Emissions Standards for Cars and Vans. The proposal targets a 100 percent reduction in CO2 emissions from 2021 levels by 2035, which would effectively prohibit combustion engines in the EU (unless they burn hydrogen). The Commission will review the effectiveness of the new regulation in 2028.   
• Energy Efficiency Directive. This proposal will set stricter targets for energy efficiency and will require the public sector in each EU country to renovate 3 percent of public buildings each year to make them more energy efficient. The measure will also add new requirements for energy auditing in EU companies and, among other things, require monitoring of the energy use of data centers to facilitate the later development of data center “sustainability indicators.”
• Alternative Fuels Infrastructure Regulation. This proposal mandates minimum coverage levels for the installation of publicly available charging infrastructure for electric vehicles, hydrogen refueling, LNG at maritime ports and for heavy-duty trucks, electricity supply for stationary aircraft (e.g., aircrafts parked at gates), and shoreline electricity supply for both oceangoing and inland ships. The provision also requires operators of fueling stations for alternative fuel vehicles to accept all manners of payment accepted in the EU, including ad hoc payments on the spot (i.e., contracts for service will not serve as a barrier to use). In addition, alternative fueling stations in transportation will need to be made accessible to older individuals and those with disabilities.
• FuelEU Maritime Initiative. Under this proposal, shipping companies will be responsible for (1) reporting on the greenhouse-gas intensity of the energy used in ships that call on ports in the EU and (2) complying with regulatory limits on the greenhouse gas intensity. (All energy from intra-European voyages will be counted, and half of the energy for voyages from or to countries outside the EU.) Shipping companies will be required to obtain “FuelEU certificate of compliance” from accredited verifying bodies. The regulation applies to all ships above a gross tonnage of 5000, with certain exceptions such as for warships, wooden ships of primitive build, and ships not propelled by mechanical means.
• ReFuelEU Aviation Initiative. Under this proposal, aviation fuel suppliers to EU airports must supply their customers with an increasing percentage of sustainable aviation fuel, starting with 2 percent in 2025 and ending with 68 percent in 2050, of which 28 percent must be synthetic aviation fuel. Given currently available technologies, these targets are aggressive. 
• Energy Taxation Directive. The Commission proposed revisions to the Energy Taxation Directive that are largely designed to reduce tax preferences for fossil fuels and increase incentives for renewable alternatives, including biofuels, synthetic fuels, and hydrogen. The Commission proposes to tax energy content—rather than volume—and to group energy products for taxation purposes by environmental performance. 
• EU Forest Strategy. The Commission proposes adjustments to the EU Forest Strategy to protect old growth forests, set binding restoration goals, plant 3 billion trees by 2030, encourage sustainably harvested wood in the construction sector, and increase resources for monitoring and forest management. 
• Land Use, Forestry, and Agriculture Regulation. This proposal sets Europe-wide and national goals for carbon reduction from these industry sectors and seeks to simplify carbon accounting rules. The main objective is to achieve carbon neutrality in land use, forestry, and agriculture by 2035. In the agriculture sector, the EU will take into account non-CO2 emissions from fertilizer use and livestock for the first time.

These proposals are still subject to negotiation and will take some time before they become law. Given the importance of these proposed measures and other EU policies to clients who work in and with the EU, or plan to do so, Wiley is monitoring them closely.

[1] For information on similar CBAM legislation pending before the U.S. Congress, please read Wiley’s recent Client Alert.