How the EU is paving its road to net-zero

European Commission President Ursula von der Leyen last week declared that “the fossil fuel economy has reached its limits,” as she unveiled a sweeping new policy package designed to accelerate decarbonization efforts across the bloc and mobilize billions of Euros of investment in green infrastructure.

Dubbed the “Fit for 55” strategy, the new wave of policy proposals aims to provide a “concrete roadmap” for reaching the EU’s recently agreed goal of cutting emissions by at least 55 percent against 1990 levels by 2030, putting the continent on track for achieving net-zero emissions by 2050.

“The European Green Deal is our growth strategy that is moving towards a decarbonized economy,” said von der Leyen. “Europe was the first continent to declare to be climate neutral in 2050, and now we are the very first ones to put a concrete roadmap on the table. Europe walks the talk on climate policies through innovation, investment and social compensation.”

Her comments were echoed by Frans Timmermans, executive vice president for the European Green Deal, who said the package was the EU’s response to a “make-or-break decade in the fight against the climate and biodiversity crises.”

“The European Union has set ambitious targets and today we present how we can meet them,” he said. “Getting to a green and healthy future for all will require considerable effort in every sector and every member state. Together, our proposals will spur the necessary changes, enable all citizens to experience the benefits of climate action as soon as possible, and provide support to the most vulnerable households. Europe’s transition will be fair, green and competitive.”

The European Commission said the package would cover climate, energy, land use, transport, taxation and trade policies, in a bid to deliver a “comprehensive and interconnected” program for decarbonizing the world’s largest single market.

The new proposals are set to have huge implications for businesses and investors right across the bloc, and beyond.

They would extend the coverage of the EU emissions trading scheme (ETS) and tighten the rules governing the bloc’s carbon market to push up carbon prices; set more ambitious targets for renewable energy and energy efficiency; accelerate the roll out of low carbon transport infrastructure and impose more demanding emissions standards on new cars and vans; align taxation policies with climate goals, including through ending fuel tax exemptions for private jets and offering tax breaks to clean technologies; impose new requirements on shipping and aviation operators to source more sustainable fuels; and introduce new measures to enhance natural carbon sinks.

Crucially, the package also includes proposals to prevent so-called “carbon leakage” through the introduction of a carbon border adjustment mechanism that will put a price on carbon emissions associated with imported projects from jurisdictions without credible carbon pricing policies in place.

The commission said the new mechanism would “ensure that European emission reductions contribute to a global emissions decline, instead of pushing carbon-intensive production outside Europe.” It also stressed that the approach would “encourage industry outside the EU and our international partners to take steps in the same direction” and strengthen their own carbon pricing policies.

Specific policy proposals featured in the wide-ranging package include plans to lower the overall emission cap for the ETS and increase its annual rate of reduction, while phasing out free emission allowances for aviation and including shipping emissions in the scheme for the first time in the EU ETS. Meanwhile, a separate new emissions trading system is proposed to tackle emissions from road transport and buildings.

At the same time, member states are to be encouraged to spend the entirety of their emissions trading revenues on climate and energy-related projects, while part of the revenues from the new carbon pricing system for road transport and buildings should address the possible social impact on vulnerable households, micro-enterprises and transport users.

Similarly, at the international level new “effort sharing” regulations aim to ensure emissions targets for different sectors are appropriate for different member states, while funding will continue to flow to help the bloc’s more emissions intensive eastern European states decarbonize.

As such, a dedicated Social Climate Fund is proposed to help member states support citizens’ investments in energy efficiency, new heating and cooling systems, and cleaner mobility. The commission said the Social Climate Fund would be financed by the EU budget, using an amount equivalent to 25 percent of the expected revenues of emissions trading for building and road transport fuels. It is expected to initially provide $85.23 billion of funding to member states, for the period from 2025 to 2032.

New targets for carbon removals by natural sinks are also set to be introduced, alongside a new EU Forest Strategy that aims to improve the quality, quantity and resilience of EU forests and features a plan to plant 3 billion trees across the continent by 2030.

In addition, the EU’s Renewable Energy Directive is expected to be strengthened to require the bloc to produce 40 percent of its energy from renewable sources by 2030, while the commission is proposing that the Energy Efficiency Directive is updated to set a new binding annual target for reducing energy use at EU level. As such, the public sector would be required to renovate 3 percent of its buildings each year to help catalyze a “renovation wave” across the continent.

Similarly, stronger emissions standards for cars and vans are proposed that would require average emissions of new cars to come down by 55 percent from 2030 and 100 percent from 2035 compared to 2021 levels, ensuring all new cars are zero emission from 2035.

For shipping and aviation, the commission is proposing that a new ReFuelEU Aviation Initiative and FuelEU Maritime Initiative are planned to stimulate long term demand for sustainable aviation and maritime fuels.

Some environmental campaigners had hoped for more ambitious targets and policy proposals through the new package, but the measures were broadly welcomed by green groups. Teresa Belardo of the World Economic Forum hailed the package as an “important step in overhauling climate policies and enabling the EU to deliver on its commitments.”

The proposals are likely to face considerable push back from some industrial groups and member states before being finalized, while concerns remain that any attempt to introduce carbon border adjustment tariffs could spark retaliatory trade measures from other countries.

The European Corporate Leaders Group (CLG Europe), which represents a host of major multinational firms — including Microsoft, Unilever, IKEA, Sky, Heathrow, Tesco and Coca-Cola European Partners — urged both the EU’s Council and Parliament to get on with delivering the key legislation as soon as possible.

“Today is an historic moment,” said CLG Europe director Eliot Whittington. “Business and government must work together to ensure that the EU seizes the opportunities to advance on the race to zero and modernize our economies while maximizing economic and social benefits including job creation.”

However, the commission remains optimistic that the bulk of its proposals will be adopted as the bloc moves to bolster its decarbonization plans ahead of the COP26 Climate Summit and boost its fast-growing green industries.

“Our efforts to tackle climate change need to be politically ambitious, globally coordinated and socially fair,” said Commissioner for Economy Paolo Gentiloni. “We are updating our two-decades-old energy taxation rules to encourage the use of greener fuels and reduce harmful energy tax competition. And we are proposing a carbon border adjustment mechanism that will align the carbon price on imports with that applicable within the EU. In full respect of our WTO commitments, this will ensure that our climate ambition is not undermined by foreign firms subject to more lax environmental requirements. It will also encourage greener standards outside our borders.

“This is the ultimate now-or-never moment. With every passing year, the terrible reality of climate change becomes more apparent: today we confirm our determination to act before it is really too late.”