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    EU Parliament Approves Key Climate Legislation

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    Stockholm (NordSIP) – The EU’s flagship climate policy package ‘Fit for 55’, the ambitious plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, took another step forward this week. On 18 April, the European Parliament finally approved several interconnected pieces of legislation that form the backbone of the package. The lawmakers adopted the reform of the EU’s Emissions Trading System (ETS), the Carbon Border Adjustment Mechanism (CBAM) and a new Social Climate Fund (SCF).

    As expected, there was some pushback, mainly from green, left-wing and far-right groups. 167 Members of Parliament voted against expanding the EU’s carbon market to cover housing and transport fuels, power facilities and heavy industry, arguing that the plans could spark public opposition to rising energy costs. What appeased many, however, was the simultaneous introduction of the SCF aimed precisely at combating energy poverty.

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    Here is a summary of what is hiding behind the three important acronyms, each constituting a key piece of the EU’s legislative puzzle.

    ETS

    The revision of the EU’s carbon market, the ETS, includes fully integrating aviation into the mechanism and extending it to cover shipping emissions. It envisions, among others, phasing out the free allowances to the aviation sector by 2026 and promoting the use of sustainable aviation fuels.

    The ETS’s increased ambition is also evident in compelling power generators and heavy polluters to curb their pollution by 62 per cent by 2030. The reform creates a separate new ETS II for fuel for road transport and buildings that will put a price on GHG emissions from these sectors in 2027. A loophole allows for a one-year delay if energy prices are exceptionally high.

    CBAM

    The Parliament adopted the rules for the new mechanism designed to prevent so-called carbon leakage. By incentivising non-EU countries to increase their climate ambition, the CBAM strives to ensure that EU and global climate efforts are not undermined by production being relocated from the EU to countries with less ambitious policies.

    The mechanism will be phased in from 2026 until 2034 at the same speed as the free allowances in the ETS are being phased out.

    The goods covered by CBAM are iron, steel, cement, aluminium, fertilisers, electricity, hydrogen, and indirect emissions under certain conditions. Importers of these goods would have to pay any difference between the carbon price paid in the country of production and the carbon allowances in the EU ETS.

    SCF

    The EU has reached a deal with member states to set up a Social Climate Fund in 2026 to ensure that the climate transition will be fair and socially inclusive. Vulnerable households, micro-enterprises and transport users particularly affected by energy and transport poverty will benefit from this. When fully in place, the SCF will be funded by auctioning ETS II allowances up to an amount of EUR 65 billion, with an additional 25% covered by national resources.

    The Council of the EU must formally endorse the texts before they can be published in the Official Journal. Once that is done, they will enter into force 20 days later.

    Image courtesy of catazul from Pixabay
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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