A vision in green: EU floats policy options to meet stricter emissions target

The European Commission (the “Commission”) has announced its intention to increase the current EU target to reduce greenhouse gas (“GHG”) emissions by 2030. On 15 September 2020, in the first State of the Union annual address by President Ursula von der Leyen, the Commission proposed ‘to increase the 2030 target for emission reduction to at least 55%’ compared to 1990 levels. This being part of the overall ‘mission to become the first climate-neutral continent by 2050’.

In order to meet a 55% target, in her address, President von der Leyen revealed plans:

• to revise all EU energy and climate legislation by next summer to ensure it is ‘fit for 55’;
• for 30% of the NextGenerationEU €750 billion to be raised through green bonds; and
• for the creation of new European Hydrogen Valleys, as a replacement for coal.

Any new EU-wide target must be approved by the European Parliament and all 27 EU Member States in order for it to become law.

The European Parliament is expected to vote in early October with heads of state scheduled to debate the target in mid-October. Environment ministers will meet on 17 December, at which time it is hoped that the new target proposal will be agreed.

Initial Impact Assessment

The announcement in the State of the Union address was followed by an Impact Assessment published by the Commission entitled “Stepping up Europe’s 2030 climate ambition – Investing in a climate-neutral future for the benefit of our people” (the “Assessment”).

The Assessment is not yet policy but indicates that the 2030 EU climate and energy framework “requires updating”, stating that the “current 2030 GHG emissions reduction target of at least 40% (compared to 1990 levels) was agreed before the EU climate neutrality objective was adopted and is based on a less ambitious pathway”. The Assessment shows that the Commission considers the current 40% target to be insufficient and “risks incentivising decisions by policymakers and investors that could lock in emissions trends inconsistent with EU climate neutrality by 2050”.

The Assessment sets out the policy and legislative options that are being considered to achieve a 50-55% reduction target and contains an analysis of the impact of these options, which include:

• changes to climate legislation, particularly to the scope and form of the Emissions Trading System (“ETS”); and
• review and intensification of policies on:
• • renewable energy;
  • energy efficiency; and
  • transport

Policy options floated by the Commission within these categories are outlined below. Follow Herbert Smith Freehills’ Energy Notes blog for more information as policy evolves.

A. Changes to climate legislation, particularly the EU ETS

The Assessment discusses various methods of adjusting the EU’s ‘cap and trade’ system for emission allowances, the EU ETS, and its counterpart Effort Sharing Regulation (“ESR”), which imposes binding GHG emission targets on Member States.

(1) Baseline - retaining the current scope of the ETS and ESR

The ETS and ESR remain largely separate, with the ETS continuing to only cover power and heat generation, energy-intensive industry and commercial aviation. All other sectors are covered by the ESR.

(2) Extending the scope of the ETS

The ETS would be extended to cover all forms of building heating and/or road transport, introducing greater accountability of private entities for their emissions and a more effective monetary incentive to reduce them. The Commission highlights these particular sectors because their emissions are dispersed across a variety of sources and national carbon reduction measures in these areas are often lacking. Sectors included within an expanded ETS could be retained within the scope of the ESR as well, or removed and governed solely by the ETS.

(3) Separate EU-wide ETS for new sectors

A separate ETS would be introduced alongside the current system to cover emissions from the additional sectors, buildings and road transport, with its own allowances differentiated from general ETS allowances. This would allow specific monitoring of the impact of price incentives on actors in the newly covered sectors. Sectors under the new ETS would remain covered by the ESR and the additional ETS would serve as a tool to help Member States achieve emission reduction targets. The Commission suggests that this Option 3 could be a transitional step to the integrated ETS of Option 2.

(4) Oblige Member States to create a separate national trading mechanism

The current scopes of the ETS and ESR would be maintained, but an obligation would be imposed on Member States to create a national mechanism to establish a minimum carbon price. This national system would help Member States achieve their targets under the ESR and would include the additional sectors discussed above. Member States would not have to adopt a trading mechanism akin to the EU ETS and could instead use a national carbon tax or set minimum carbon content elements of excise duties.

B. Renewable energy policy

The Commission has noted that the potential for further deployment of renewable energy in achieving climate-neutrality is currently unaddressed. Along with market barriers and lack of incentives in end-use sectors such as heating and cooling or transport, also missing is an integrated approach to the development and deployment of renewable technology. The Commission suggests enhancing and expanding measures under the revised Renewable Energy Directive (“RED II”) could result in higher uptake of renewable energy.  Suggested policy options range from no intensification of renewable energy policies to high intensification of policies:

(1) Baseline - no intensification

Focuses on RED II and involves implementation of the existing 2030 framework making use of tools foreseen in the Governance of the Energy Union and Climate Action Regulations, which require Member States to develop national energy and climate policies to be assessed and monitored by the Commission. In addition, the Fuel Quality Directive and EU strategies on Energy System Integration and on Hydrogen will assist in further deployment of renewable energy.

(2) Low intensification

This would focus on intensifying the baseline option with sub-targets and measures for heating and cooling and transport through “complete and rigorous transposition” of RED II, supported by non-regulatory policy instruments including training, information campaigns and project finance.

(3) Moderate intensification

In addition to building on Option 2, this would involve implementation of the Renewable Offshore Energy Strategy, increasing heating and cooling targets, introducing risk mitigation instruments and flanking measures to reduce risks associated with renewable heating and cooling, and increasing the obligation on fuel suppliers in the transport sector.

(4) High intensification

This would comprise higher intensification of renewable energy policies including specific energy mandates for buildings, district heating and cooling and industry, strengthening policies to achieve targets in Option 3 and mainstreaming renewable fuels in transport sectors.

C. Energy efficiency policy

The Commission has identified the energy sector, which currently contributes just over 75% of total GHG emissions in the EU, as being central to the achievement of the target 50-55% reduction in emissions. Suggested policy options range from no intensification of energy efficiency policies by 2030 to high intensification of policies:

(1) Baseline - no intensification

The current policy framework is maintained, including the Energy Efficiency Directive (“EED”), Energy Performance of Buildings Directive (“EPBD”), Energy Labelling Regulation and Ecodesign Directive, amongst others.

(2) Low intensification

Non-regulatory policies would be introduced – financing, additional guidance and reinforced application of the “energy efficiency first” principle – aimed at enabling better implementation of  the EED.

(3) Moderate intensification

The legislative framework surrounding buildings and renovation, industry and ICT would be reviewed:

• Buildings: there would be “targeted reinforcement” of measures in the EPBD, EED and product legislation, along with financial and enabling measures, together aimed at accelerating the renovation of buildings, which would in turn increase energy savings.
• Industry: suggested changes to the industry legislative framework include reinforcement of EED measures to address barriers to cost-effective energy savings and eco-design and labelling requirements for products used in industry.
• ICT: concerns with ICT sector energy demands would be addressed through strengthening and extending EED measures to cover ICT products and data centres.

(4) High Intensification

There would be further intensification of the changes suggested in Option 3.

D. Transport policy

The Commission identifies core transport-related policies directly impacting emissions as those relating to CO₂ emission standards and the carbon intensity of fuels. Other policies affecting emissions include those on modal shift, development of related infrastructure, traffic management, pricing and digitalisation of the transport system. Policy can be intensified in steps:

(1) Baseline – no intensification

Current policies continue, including the binding progressively stricter CO2 emission standards which require manufacturers to reduce emissions and fuel consumption from 2020, 2025 and 2030. Policies aim to drive the uptake of zero and low emission vehicles, the roll-out of recharging infrastructure, the uptake of sustainable alternative fuels and improvements to transport system efficiency. There are specific measures for the aviation and maritime sectors.

(2) Low intensification

Current policies would be slightly intensified and policies would be introduced that impact the carbon intensity of fuels in the maritime and aviation sectors specifically. There would be slightly increased stringency of CO₂ standards for vehicles.

(3) Moderate intensification

Policy measures would be moderately intensified and policies impacting the carbon intensity of fuels would extend across all transport modes, with a particular intensity in the maritime and aviation sectors. There would be further stringency of CO₂ standards for vehicles from Option 2.

(4) High intensification

There would be high intensification of all policies, beyond that in Option 3.

Conclusion

It remains to be seen which of these options are implemented by the Commission and European Parliament and what the specifics of a new EU 2030 climate target will be. In any event, it is likely that there will be material changes to the EU ETS, renewable energy and transport policy.

HSF will follow these changes closely - follow our Energy Notes blog for more information as policy evolves.