‍Details correct at date of publication

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Vaayu’s Overview of the Fit for 55 Legislation

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Key elements of the European Union’s Fit for 55 package were signed into law on 10th May 2023, formally implementing a set of long-awaited upgrades to the EU’s core greenhouse gas (GHG) reduction legislative framework.

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Fit for 55 was first presented by the European Commission in July 2021 as a set of new legislative proposals and revisions to existing laws which aim to collectively achieve a 55 percent reduction in GHG emissions from 1990 levels by 2030. The 2030 target is a stepping stone to achieving a carbon neutral Europe by 2050, the binding legal target enshrined in the landmark 2021 European Climate Law.

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Measures adopted this month revamp some of the EU’s most important GHG reduction mechanisms and add several new complementary requirements, providing greater coverage and more aggressive reduction pathways for the EU’s largest direct emissions sources.

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Importantly, none of these requirements are likely to directly apply to most retailers of consumer goods, but awareness of the new requirements is important context for every business seeking to reduce its emissions and understand where its contributions fit in the policy landscape. Read more below for an overview of the key measures signed into law.

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Key Legislative Changes

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Revised and expanded EU Emissions Trading System

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The EU’s existing cap-and-trade program (EU ETS) in effect since 2005 has been reformed. Important changes include gradual coverage of maritime transport for the first time, more stringent treatment of aviation emissions, a reduced overall cap and reduction in the number of overall allowances in the system, and a gradual phase down of free allowances issued to prevent “leakage” (read on for what this means).

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The EU ETS has long been the foundational GHG reduction tool applied within the EU, covering approximately 40 percent of direct emissions from high emitting sectors such as electric power and heat generation, oil refineries, high-emitting manufacturing like steel, cement, and chemicals, and aviation.

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New Carbon Border Adjustment Mechanism

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The new Carbon Border Adjustment Mechanism (CBAM) is a necessary complement to the ETS to prevent emissions leakage, a recurrent problem faced by all cap-and-trade programs. The problem arises because placing obligations on high-emitting industries within the geographic boundaries of one region can cause goods from other parts of the world that are not subject to the obligations to become cheaper by comparison, thus driving increased demand for those goods and effectively shifting emissions elsewhere rather than reducing them.

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The CBAM aims to mitigate this issue, by applying a tax to importers of carbon-intensive products, such as iron and steel, aluminum, cement, fertilizer, hydrogen, and electricity. This mechanism in effect replaces the free allowances previously issued to these sectors under the EU ETS.

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New Supplemental ETS for Buildings and Road Transport

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A new, secondary emissions trading system will be implemented from 2027 to complement the existing EU ETS and cover additional sectors, including buildings, construction, road transport, and smaller industrial sectors. The covered actors subject to the requirements, however, are the distributors of fossil fuels to these sectors, rather than the end users like building owners or operators of transportation fleets.

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New Social Climate Fund

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In part to mitigate the anticipated economy-wide costs that more stringent emission reduction requirements may cause, a new Social Climate Fund will be used to fund energy efficiency investments and support vulnerable groups, including potential direct income support, funded through revenues from the measures above.

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Are You Sharing Details of the Fit for 55 Legislation with Your Team?

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While the Fit for 55 requirements likely won’t directly apply to most retailers of consumer goods, awareness is crucial in understanding the wider landscape of emissions reductions. Examine the details offered here by the Vaayu Climate Strategy team and provide this free tool to your team so they may start making plans.

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At Vaayu, we help brands and retailers understand how their contributions fit in the policy landscape, making reducing their carbon emissions a priority. Get in touch to find out more.