COP27 and the EU energy sector – great expectations

The EU enters the COP27 summit with an ambitious vision to tackle climate change – will rhetoric match reality?

The EU's climate commitments

On 4 October 2022, the Council of the European Union reiterated the commitment of the EU and its Member States to lead by example in ambitiously contributing to the implementation of Paris Agreement goals and the Glasgow Climate Pact (the EU Resolutions). In recent years, the EU has implemented, and subsequently proposed amendments to, an ambitious framework of climate-related targets and policies. The European Climate Law sets out in law several targets, including:

• reducing net greenhouse gas (GHG) emissions by 55% by 2030, as compared to 1990 levels; and
• for the EU to be climate neutral by 2050 (as originally set out in the European Green Deal).

To meet these targets, the European Commission has adopted a range of ambitious proposals, notably through the 'Fit for 55' package, including:

• a revision to the EU Emissions Trading System (EU ETS) Directive, which (among other amendments) would increase emission reductions to be achieved by 2030 (moving from 43% to a 61% reduction below 2005 levels), reduce free allocation and expand the scope of the EU ETS to include shipping emissions;
• an amendment of the Energy Efficiency Directive, which would increase the target for reducing primary energy consumption by 39% by 2030, up from the current target of 32.5%; and
• an amendment to the Renewable Energy Directive, which would require member states to collectively ensure that the share of energy from renewable sources in the EU's gross final consumption of energy in 2030 is at least 40%.

For more information on the European Commission's 'Fit for 55' proposals, see our posts here.

Recent legislative developments

In 2021, the EU imported more than 40% of its total gas consumption, 27% of oil imports and 46% of coal imports from Russia. As a result, the Russian invasion of Ukraine and the sanctions that were subsequently imposed have raised serious questions about security of supply in the EU. To reduce dependence on Russian fossil fuels and ensure the security of supplies, the European Commission developed the REPowerEU Plan.

The most notable feature of the REPowerEU Plan is its focus on securing energy supplies by accelerating the energy transition, diversifying supply sources and increasing energy savings. The proposed measures include boosting the proportion of energy from renewable sources to 45% by 2030 and raising the energy efficiency target from 9% to 13% compared to the 2020 reference scenario. This contrasts with security of supply measures taken by certain countries, which have included increased use of fossil fuels. For example, as part of its efforts to secure supply, the UK has announced a new licensing round that is expected to lead to over 100 new oil and gas licences. However, it should be noted that despite the overarching EU regulatory response, certain Member States have also turned to fossil fuels (including notably Germany, which reactivated a number of coal-fired power plants to save gas).  

The EU is also actively involved in discussions relating to the finalisation of a cap on the price of Russian crude oil. As any cap would need to be unanimously agreed by all EU Member States, this has proved controversial.

However, alongside its regulatory response to the Russian invasion of Ukraine, the EU has continued to progress its climate agenda through the negotiation and finalisation of the Fit for 55 proposals.

Future direction of the EU energy sector

Although several of the proposals mentioned above are yet to be formally approved or enter into force, the targets and measures within these demonstrate the European Commission's climate ambition and the likely trajectory of any future developments. However, this ambition may not translate into legislative reality as some of the proposals have been challenged in negotiations. For example, a bill containing the proposed amendments to the EU ETS has returned to committee stage for further discussion after being rejected by MEPs in June.

As several measures are yet to be formally adopted, the extent of the impact on the energy sector remains to be seen. However, given the direction of the European Commission's recent proposals, it is likely the energy sector will remain a key focus of regional climate policies given that the production and use of energy accounts for more than 75% of the EU's GHG emissions.

Ahead of COP27, the EU Resolutions stressed the importance of making finance flows consistent with a pathway towards low GHG emissions and climate-resilient development. The EU Resolutions also noted that regulatory and policy frameworks with incentives are required to attract public and private investment needed to meet the challenges presented by climate change.

It is expected that climate finance will be an area of focus at COP27, which is taking place in Egypt between 7 and 18 November. The EU Resolutions outline the EU position that private investment will play a significant role in these goals. While the COP27 negotiations are unlikely to directly impact private energy companies, such firms will likely be indirectly impacted through regulation or policy frameworks adopted following the summit.

And with the EU viewed as being in the vanguard of efforts to develop policies and regulation to drive the global response to climate change, developments emerging from COP27 will be watched intently by the industry.

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