EU’s Holy Trinity Against Climate Crisis: Overview of ‘Fit for 55 in 2030’ package

INTRODUCTION

On Apr. 18th, 2023, the European Parliament approved three legislations as part of the “Fit for 55 in 2030 package’ to make the EU climate policies, more ambitious against the fight of climate change. The aim is to reduce the bloc’s greenhouse gas (GHG) emissions by at least 55% by the end of the decade (2030) compared to 1990 levels in the line with the European Climate Law.

Following are the three prominent ambitious features labelled as ‘holy trinity’ of the package: ??

1.??????Extension of emission trading schemes (ETS)

2.????Announcement of Carbon Border Adjustment Mechanism (CBAM)

3.?????Establishment of new EUR 86.7 bn Social Climate Fund (SCF)

1. Extension of emission trading schemes (ETS) ― Upgrading and reforming the carbon market → With the upgrade, the bloc aims to cut the emissions by 62% from 2005 levels by 2030, up from the current 43% reduction target. Additionally, the companies will lose the free CO2 permits they currently receive by 2034 and shipping emissions will be added to the CO2 market from 2024. A separate carbon trading system (ETS II) will also be introduced for homes and cars in 2027 (or 2028 if energy prices are still historically high). This will increase the cost of heating, cooling and driving for consumers and businesses, incentivising a shift to EVs, electrified heat pumps and renovation.

2. Announcement of Carbon Border Adjustment Mechanism (CBAM) ― New rules for high – carbon goods imports → It is the world’s first plan to put a price tag on the imports of high carbon goods such as steel, cement, aluminium, fertilisers, electricity and (brown & grey) hydrogen (because it is mainly produced with coal in non-EU countries). It will be implemented starting from 2026 and fully executed by 2034. The EU lawmakers (MEPs) are of the view that CBAM will incentivise non – EU countries to step up efforts in decarbonising the economy and clean tech and keep the 1.5°C goal within reach. As the emissions from imports contributing to 20% of the EU’s CO2 emissions are increasing. Such a carbon border tax would incentivise other countries to reduce GHG emissions and further shrink the EU’s carbon footprint. Conversely, the intention may be to prevent EU industries being undermine by more – polluting foreign competitors, removing the temptation for EU firms to relocate to regions with lax environmental rules by providing a more level playing field between EU and non – EU producers and eliminating carbon leakage as the implementation of EU ETS makes operating within the region expensive for certain businesses.

3. Establishment of new Social Climate Fund (SCF) → The new just transition fund worth of EUR 86.7 bn (USD 97.2bn) called as 'Social Climate Fund (SCF)' will be formed by 2026 to support vulnerable parties – households, micro – enterprises and transport users, particularly affected by climate transition and rising energy costs. The fund will be financed from auctioning off ETS II and fiscal contributions made by the member states.

WORKING MECHANISM OF Carbon Border Adjustment Mechanism (CBAM)

The CBAM is the mirror of ETS in the sense that the system is based on the purchase of certificates by importers. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in EUR/tonne of CO2 emitted.?EU importers?will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules. Conversely, once a non – EU producer can show that they have already paid a price for the carbon used in the production of imported goods in a third country, the corresponding cost can be fully deducted for EU importer.

FURTHER COURSE

The EU Commission president Ursula von der Leyen said the package “will bring Europe on the right path to becoming the world’s first climate-neutral continent”. After getting approval from European Parliament, the package needs to be formally ratified by the European Council which will succeeded by publishing in the EU Official Journal and enter into force 20 days later.

________________________________________________________________Signing off with love!