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Jiří Dvořák | May 4, 2023

Europe is closer to climate neutrality. The new reforms will be “paid for” by businesses, but also by ordinary citizens, says Dvořák

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The European Union has taken another step that plays an important role in achieving the 2050 climate neutrality targets. As part of a strategy known as “Fit for 55”, five pieces of legislation have been newly adopted to help achieve the 55% greenhouse gas reduction targets by 2030. “There is no doubt that the costs of these new reforms will be paid not only by businesses themselves but also by consumers. In particular, the introduction of ETS II will lead to an increase in energy and fuel prices and will affect ordinary citizens the most,” warns Jiří Dvořák, Partner at Grant Thornton.

The measures adopted cover a wide range of areas from energy to transport and will have a significant impact on major economic sectors. “There is no point in reforming the Emissions Trading Mechanism without extending it to goods from third countries. That is why I see the introduction of carbon offsetting at borders in particular as a positive step that will lead to a more level playing field within the European Union,” Dvořák explains. “However, this system must be set up so that it works properly in practice, otherwise European industry will be at a significant disadvantage,” he adds.  

“As for the Social Fund for Climate Action as a new instrument of financial support, I see it as a responsive step towards the most vulnerable companies and households, but it will not compensate ordinary citizens for the increased costs,” Dvořák concludes. The following text summarises what new legislation has been approved and what areas will be affected.

Reform of the EU Emissions Trading Scheme (EU ETS)

The EU ETS currently charges large companies for CO2 emissions, mainly from power and heat generation, commercial aviation and other energy-intensive sectors. The reform of the scheme aims to achieve a new 62% reduction in greenhouse gas emissions in ETS sectors by 2030 compared to 2005 levels. At the same time, it also foresees faster reduction of the emission cap (a reduction of around 117 million allowances over two years) and the phasing out of free allowances for selected sectors (from 2026 to 2034). The ETS is also to be extended to the maritime transport sector. At the same time, a separate new ETS II for fuels, road transport, buildings and other sectors is being created to put a price on greenhouse gas emissions from these sectors in 2027. Given the financial intensity of these changes, there will also be an increase in funding for the decarbonisation of sectors covered by the ETS – in particular under the Modernisation Fund and the Innovation Fund. A new Social Climate Fund is also to be created.

Emissions from maritime transport

One of the reforms concerns the inclusion of shipping emissions in the EU ETS, with most large vessels to be included almost immediately. In contrast, offshore vessels in particular will first be included in the Regulation on monitoring, reporting and verifying CO2 emissions from maritime transport before being included in the EU ETS. There will be a phase-out for allowances: 40% for verified emissions from 2024, 70% from 2025 and 100% from 2026.

Emissions from aviation

In the aviation sector, free emission allowances will be phased out by 2026. This reform is intended to encourage airline operators to use sustainable aviation fuels. The EU ETS will apply to intra-European flights between 2022 and 2027, while non-European flights will be covered by CORSIA (“net reduction”). A framework for monitoring, reporting and verifying the effects of non-CO2 aviation emissions will also be established.

Buildings, road transport and fuels sectors

For buildings, road transport, fuels and other sectors where decarbonisation has proved to be very difficult, a new separate emissions trading scheme called ETS II has been introduced. This new system will apply to distributors who supply fuels, as well as to the buildings, road transport and other sectors (from 2027 or 2028). This move is intended to encourage a shift to cleaner fuels in transport and to offset the current situation in the buildings sector, where emissions are only partially included in the cost of energy consumption.

Carbon Boundary Alignment Mechanism (CBAM)

The CBAM mechanism aims to prevent the transfer of high-CO2 emitting production to other parts of the world where similar emission reduction systems are not in place, and to potentially favour these imported goods. In the first stage, this mechanism will apply to carbon-intensive sectors such as iron and steel products, cement and aluminium, as well as fertilisers, electricity, hydrogen production and, under certain conditions, indirect emissions. Importers of these goods from third countries will have to purchase a CBAM certificate and pay any difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS. The CBAM will be phased in between 2026 and 2034 and will mainly affect imports of industrial products.

Social Fund for Climate Action

This Social Fund will be a new instrument of financial support for both businesses and people most affected by the introduction of the new emissions trading scheme for buildings, road transport and fuels, as well as other sectors. The Fund will operate in such a way that the revenues from the sale of emission allowances will be put into this Social Fund. The European Commission identifies vulnerable households, micro-enterprises and vulnerable transport users as the main beneficiaries of the Social Fund. The budget foresees up to EUR 65 billion.

Author: Jiří Dvořák, Magdaléna Janigová