The ‘Fit for 55’ climate proposals explained by Elisabetta Cornago
The costs of the Commission’s proposals to meet the EU’s 2030 climate goals need to be distributed in a more progressive way. Despite the jokes about Fit for 55 sounding like a fitness programme for the middleaged, the climate policy package presented by the European Commission on July 14th is a historic milestone. With its 13 proposals, the Commission has charted a path towards reducing EU-wide greenhouse gas emissions in 2030 by 55 per cent, relative to 1990 levels, as required by the Union’s recently-approved Climate Law. The proposals will face political resistance, because they involve increasing carbon prices for both businesses and households. The key to making the package a reality is to put compensation front and centre, through income support to address energy poverty and investment support for industry’s decarbonisation efforts. The EU Emissions Trading System (ETS) places a yearly cap on EU CO2 emissions by requiring the businesses covered to buy carbon permits from a fixed pot. It currently covers heavy industrial sectors, electricity generation and intra-EU flights. However, European heavy industry and aviation have so far obtained most of their emissions allowances for free, so that they can remain competitive with foreign businesses, most of which do not pay for carbon emissions. This has reduced incentives for low-carbon innovation, and led to industrial emissions falling more slowly than those from the electricity sector.
The Fit for 55 package aims to accelerate decarbonisation by gradually reducing the overall amount of emissions allowed under the ETS. The number of free ETS allowances for individual plants already depends on benchmarks that reflect the emissions of the most efficient plants in that sector. The new proposal would provide fewer free allowances to plants that do not undertake the decarbonisation efforts suggested by energy auditors. The package will also directly support innovation and investment in heavy industry: a greater share of the ETS’s revenues will be allocated to innovation subsidies, and ‘carbon contracts for difference’ will be introduced. These contracts will guarantee investors a fixed carbon price, higher than the current one, for a set period of time if they innovate and invest in decarbonisation. Some clean technologies that are in the early stages of deployment are too expensive, given current carbon prices. At the end of the contract, the firm can sell, at market price, the ETS allowances that it did not use thanks to green investment, and receive the difference between the market carbon price and the higher, contracted carbon price. In essence, the Commission is bringing forward higher carbon prices for industrial innovators. The package also proposes to level the playing field between domestic and foreign producers