The ‘Fit for 55’ package presented on 14 July, 2021 by the European Commission is a set of legislative proposals on EU Climate & Energy policy that aim to support the delivery of the European Green Deal. The EU has now committed to become the first climate neutral continent in the world by 2050. This requires a major overhaul of the way of life e.g. how the EU produce energy and raw materials, drive, insulate homes, manage land.
To reach net zero within only three decades time the EU increased its greenhouse emissions target for 2030 from the current 40% to 55%. The European Commission also presented a number of strategies to accelerate the energy transition e.g. the Offshore Renewable Energy Strategy (November 2019), EU Industrial Strategy (March 2020; updated June 2021), the Energy System Integration and Hydrogen Strategies (June 2020).
All of these require a huge expansion in wind energy. The Commission’s decarbonisation scenarios see wind accounting for 50% of Europe’s electricity production by 2050 up from 16% today. And 1000 GW onshore (up from 165 GW today) and 300 GW offshore (up from 15 GW today) by 2050 in EU-27. The EU is now building 15 GW per year of new wind by 2025. But to deliver the 55% GHG target the EU need to be building 30 GW per year.
The ‘Fit for 55’ package spells out the measures and actions for how Member States fulfil the new 55% GHG target and the Green Deal Strategies at national level. The package sets out higher 2030 targets, namely 40% renewables target (up from 32% today), 39% energy efficiency target for primary consumption (up from 32.5% today) and 36% for final energy consumption.
The Carbon Border Adjustment Mechanism (CBAM), which structure was presented by the EC, is an integral part of these efforts.
The CBAM will mirror the ETS in the sense that the system is based on the purchase of certificates by importers of carbon-intensive products. CBAM would take the form of a ‘notional ETS’: importers (AKA ‘declarants’) would have to surrender units (CBAM Certificates) by 31 May each year equal to embedded emissions in their imports (1 CBAM Certificate = 1 tonne CO2). The unit price of these CBAM Certificates will be equivalent to the average EUA auction price of the previous week. In this way, imports would (at least in theory) be subject to the same carbon costs as EU producers. The proposal contains formulae for the calculation or determination of emissions embedded in imports of tangible goods. Such emissions cover direct process emissions (scope I) and indirect emissions resulting from electricity use (scope II).
Under the Commission's proposal, importers will have to report emissions embedded in their goods in a transitional phase starting in 2023 and finishing at the end of 2025. The CBAM will apply to direct emissions of greenhouse gases emitted during the production process of the products covered, excluding so-called ‘indirect' emissions (i.e. carbon emissions from the electricity used to produce the good).
Importers will start paying a financial adjustment in 2026, once the full CBAM regime becomes operational, with the objective of facilitating a smooth roll out.
The CBAM will initially apply to imports of the following goods: cement, steel, aluminium, fertilisers and electricity.
In principle, imports of goods from all non-EU countries will be covered by the CBAM. That said, certain third countries who participate in the ETS or have an emission trading system linked to the Union's will be excluded from the mechanism. This is the case for members of the European Economic Area and Switzerland.
By the end of the transition period, the Commission will evaluate how the CBAM is working and whether to extend its scope to more products and services and whether to cover ‘indirect' emissions.
CBAM will be applied to electricity generated in and imported from countries that wish to integrate their electricity markets with the EU until such a point that those electricity markets are fully integrated. At that point, and under strict conditions linked to their implementation of certain obligations and commitments, these countries could be exempted from the mechanism. If that is the case, the EU will revisit any exemptions granted in 2030, at which point those partners should have put in place the decarbonisation measures they have committed to, and an emissions trading system equivalent to the EU's.