The Fuse

Europe Announces Sweeping Climate Plan

by Nick Cunningham | July 15, 2021

On July 14, the European Union unveiled a highly-anticipated package of climate proposals, arguably the most ambitious suite of policies globally, which could finally begin to accelerate the energy transition in a decisive way.

The overarching goal is to cut greenhouse gas emissions across the continent by 55 percent by 2030, from a 1990 baseline. The proposals are far-reaching, impacting transportation, aviation, industry, electricity and more. But several questions remain before the proposals can be put into law.

Europe’s “Fit for 55”

The European Commission unveiled its closely-watched “Fit for 55” package, a sweeping set of climate policies aimed at cutting emissions in short order. “Our current fossil fuel economy has reached its limit,” European Commission President Ursula von der Leyen said at a press conference. “We know that we have to move to a new model.”

“We know that we have to move to a new model.”

One of the key proposals would be reforms to the emissions trading system (ETS), a cap-and-trade regime across the EU that ratchets down emissions at power plants and factories. The plan calls for reducing the allowances at a faster clip, effectively tightening the cap on emissions. Brussels also wants to add in the shipping sector into the ETS for the first time.

Another proposal would effectively phase out sales of the internal combustion engine by 2035 via stiff CO2 targets. The proposal has split major European automakers, although VW, the world’s largest car manufacturer, jumped on board because the German company is going all-in on electrification.

The EU is also proposing taxes for jet fuel to target emissions in the aviation sector, a tricky sector to clean up. Another category of proposals aims to cut emissions from households and buildings. The bloc will also require 40 percent renewable energy by 2030.

The sweeping changes aimed at steering Europe away from fossil fuels also includes a controversial proposal aimed at protecting the competitiveness of the European economy as it undergoes transition. The so-called carbon border adjustment mechanism (CBAM) would impose a tariff on imports of steel, aluminum, cement, fertilizers and electricity if those commodities come from polluting and unregulated sources outside of the EU. The aim is to level the playing field against industries elsewhere in the world that operate in jurisdictions where carbon is unregulated or unpriced. It would begin in 2026.

“Countries that have ambitious programs with respect to climate change have a very legitimate interest in ensuring that they address carbon leakage,” U.S. Treasury Secretary Janet Yellen said Tuesday during meetings with EU officials in Brussels, while arguing that the U.S. should qualify under that standard. U.S. officials are wary and fumbling with awkward messaging, talking up their own climate action but warning the EU against a carbon border levy.

The costs of the aggressive transition to cleaner energy could impact consumers. The EU has proposed a fund of 70 billion euros to go to governments to provide assistance to low-income people, raised by new taxes and proceeds generated from reforms to the ETS.

The German environment ministry has called the entire package “nothing less than a new industrial revolution in the European Union.”

Questions and political wrangling remain

“Make-or-break decade.”

Frans Timmermans, who has headed up the Commission’s work on Europe’s so-called “Green Deal,” pointed to the urgency of the moment, calling the road ahead a “make-or-break decade in the fight against the climate and biodiversity crises.” But he also hinted at the political fights ahead with European industry and with member governments and non-European countries. “Nothing we presented today is going to be easy. It’s going to be bloody hard,” he added.

The July 14 announcement kicks of months of negotiations before the measures become law.

France, for example, is resisting a full phaseout of the internal combustion engine by 2035. Timmermans said that he expects the actions on transportation and home heating to gin up the most pushback.

But other corporate giants support the action, including a group of 40 EU lawmakers and CEOs. “We must not fall behind in our actions. Now is the time to act and be resolute,” a joint letter from business leaders, including BASF SE, Allianz SE, Volvo AB, ThyssenKrupp AG, Siemens AG and 17 other companies, according to Bloomberg News.

At the same time, some environmental groups blasted the EU for not going far enough. EEB, a coalition of more than 100 environmental groups from across Europe, said that the plan was “unfit and unfair” – a ding at the plan’s nickname – and that the European Commission is “leaving the door open for coal, gas and oil to stay in the EU energy system for at least another two decades while sending the ‘polluter pays’ bill to EU citizens.”

Meanwhile, the two largest polluters in the world – the U.S. and China – are mulling their own actions. China is about to launch its cap-and-trade system that will cover the power sector, aimed at helping China reach peak emissions by 2030.

The Democrats in the U.S. Congress also announced the outlines of a $3.5 trillion infrastructure package, which in theory will include sweeping climate provisions, including a clean energy standard, funding for electric vehicles, a Climate Conservation Corps, and much more. Needless to say, many of the details remain to be seen, and Congressional Democrats have a lot of legislative work to do in the coming weeks and months.

Critics of the EU’s plan say that it is not sufficient to hit necessary climate targets. Nevertheless, it is far more ambitious than other major economies have attempted to date.