Stockholm (NordSIP) – On the margins of the G7 meeting, the Council of the European Union adopted its negotiating positions for future legislative negotiations with the European Parliament on aspects of the ‘Fit for 55’ package. The member states adopted a sweeping common position on the EU emissions trading system (EU ETS), changes to existing transition funds and the establishment of a Social Climate Fund, emissions and removals from land use, land-use change and forestry and new CO2 emission performance standards for cars and vans.
“The achievement, led by the French Presidency, of an agreement between the member states on the ‘Fit for 55’ package is a crucial step in attaining our climate objectives within the main sectors of the economy. The ecological and energy transition will require the contribution of all sectors and all member states, in a fair and inclusive manner. The Council is now ready to negotiate with the European Parliament on concluding the package, thereby placing the European Union more than ever in the vanguard of fighting climate change,” Agnès Pannier-Runacher, French Minister for the energy transition said.
Presented by the European Commission on 14 July 2021, the package aims to reduce the EU’s net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.
Changes to the EU ETS
The Council’s position keeps the overall 61% target for emissions reductions by 2030 in the sectors covered by the EU ETS that the Commission had proposed. It also agrees to lower the overall emissions ceiling by 117 million allowances and increase the annual reduction rate of the cap by 4,2% per year. The member states also prolong beyond 2023 the increased annual intake rate of allowances (24%) and set a threshold of 400 million allowances above which those placed in the market stability reserve (MSR) were no longer valid. The Council agreed to activate the release of MSR quotas on the market, in case of excessive price rise, automatic and more reactive.
The Council also endorsed the proposal to end free allowances for the sectors concerned by the Carbon Border Adjustment Mechanism (CBAM) progressively, over a ten-year period between 2026 and 2035. However, the Council accepted a slower reduction at the beginning and an accelerated rate of reduction at the end of this 10-year period.
The member states’ position also made room for the inclusion of new sectors into the ETS, such as district heating, maritime shipping (with some redistribution of allowances to account for the disproportionate effect on countries most dependent on maritime transport), buildings and road transport sectors (in a separate EMS funded by the new Social Climate Fund), fossil fuels (via opt-in). The Council agreed to phase out free emission allowances for the aviation sector gradually by 2027 and align the proposal with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
The Funds
The member states also agreed on a number of measures to support the Modernisation Fund and the Innovation Fund, both of which are partially funded by the carbon emission auction sales’ revenues. The Modernisation Fund supports EU member states, such as Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia, which have a GDP 60% lower than the EU average. The Innovation Fund seeks to drive the development and implementation of innovative low-carbon technologies.
The EU governments agreed to support the increase in the Modernisation Fund volume through the auctioning of an additional 2.5% of the ceiling, the increase in the share of priority investments to 80 % and the addition of new eligible sectors, as proposed by the Commission. The position also extends the list of member states benefiting from the Modernisation Fund, and allows for some transitional exceptions to the general exclusion of natural gas projects.
The member states also strengthened certain provisions of the Innovation Fund, in particular as regards the capacity aimed at making participation in projects more effective and geographically balanced, while preserving the principle of excellence in project allocation. The Council agreed to pay particular attention to decarbonising the maritime sector under the Innovation Fund.
The Council also agreed to establish a Social Climate Fund to support vulnerable households, micro-enterprises and transport users, which would be part of the EU budget up to a maximum amount of €59 billion without contributions from member states. In line with this new programme, member states will have to submit a ‘social climate plan’, containing a set of measures and investments to address the impact of carbon pricing on vulnerable citizens. The fund would be established over the period 2027-2032, to coincide with the entry into force of the ETS for the buildings and road transport sectors, with retroactive eligibility of expenditure from 1 January 2026. The Council decided to apply a ceiling of 35% of the estimated total costs of social climate plans to the possibility for member states to offer temporary direct income support.
Effort sharing regulation
The Council agreed to an EU-level greenhouse gas emissions reduction target of 40% compared to 2005, for the sectors not covered by the ETS, namely domestic maritime transport, agriculture, waste and small industries. Together with the buildings and road transport sectors, these sectors combined currently generate about 60% of EU greenhouse gas emissions.
The Council agreed to keep the increased national targets assigned to each member state, as proposed by the Commission. The Council agreed that the linear emissions trajectories for each member state would be adjusted in 2025 only in the event that this leads to higher annual limits for the Member State concerned. The position of the Council foresees an increase in the annual emission quotas that can be transferred between member states to 10% in respect of the years 2021 to 2025, and 20% in respect of the years 2026 to 2030.
In addition, it maintains the proposal to divide the flexibility linked to land use, land-use change and forestry (LULUCF) into two periods.
Land use land-use change and forestry
Among other decisions, the Council’s position also confirmed an overall objective of 310 Mt CO2 equivalent of net removals in the land use, land use change and forestry (LULUCF) sector in 2030. The LULUCF sector covers the use of soils, trees, plants, biomass and timber. This represents an increase of removals of about 15% compared to today. The current rules under which emissions do not exceed removals (the “no debit rule”) will continue to apply until 2025. For the period from 2026-2030, each member states will have a binding national target for 2030.
The Council agreed to enhance flexibilities to support Member States that have difficulties in meeting their targets owing to factors beyond their control affecting the LULUCF sector, including the introduction of an additional flexibility linked to the effects of climate change and organic soils. The Council confirmed the removal of the option of banking LULUCF credits between the two compliance periods (2021-2025 and 2026-2030).
Emission Standards for Cars and Vans
The member states’ position also raises the targets for reducing CO2 emissions for new cars and new vans by 2030 to 55% for cars and to 50% for vans. The Council also agreed to introduce a 100% CO2 emissions reduction target by 2035 for new cars and vans. A progress assessment will be conducted in 2026.
To support this goal, the Council foresees a revision of the deployment of an alternative fuels infrastructure (AFIR) to ensure that drivers can recharge their vehicles across the member states. The Council also agreed to put an end to the regulatory incentive mechanism for zero- and low-emission vehicles (ZLEV) as of 2030.
