The European Green Deal1 sets the blueprint for the EU’s transformational change. It sets up the building blocks for the future economy with landmark strategies on biodiversity, circular economy, zero pollution, sustainable and smart mobility, renovation, sustainable food, hydrogen, batteries, offshore renewable energy and others.

The package of programs “Fit for 55” is the first part of the European Green Deal, which is designed to reach the EU's climate target of reducing greenhouse gas (GHG) emissions by 55 percent over the 1990 levels, by the year 2030. The 2030 Climate Target Plan assessed the opportunities and costs of the green transition and indicated that the balance is positive if one gets the policy mix right, which for the EU is based upon fairness, cost-effectiveness, and competitivity. The package performs these functions2:

  • puts a price on carbon in more sectors, which brings significant additional revenues to ensure a fair transition and makes clean solutions cheaper;
  • supports greater renewable energy use and more energy savings;
  • facilitates growing sales of clean new vehicles and cleaner transport fuels;
  • ensures that industry can lead the transition and gives it the certainty it needs for boosting investment and innovation;
  • focuses on taxing energy sources in line with our climate goals and environmental objectives;
  • translates the polluter-pays principle into practice;
  • aims to reverse the declining trend in nature’s capacity to remove carbon from the atmosphere;
  • helps to ensure that our climate goals are not undermined by the threat of carbon leakage, by encouraging global climate action.

“The legislative proposals are backed by impact assessment analysis, which takes into account the interconnection of the overall package. The analysis shows that an over-reliance on strengthened regulatory policies would lead to unnecessarily high economic burdens, while carbon pricing alone would not overcome persistent market failures and non-market barriers. The chosen policy mix is therefore a careful balance between pricing, targets, standards and support measures.”2

The pricing policies build on the strength of the existing EU Emission Trading System for the energy-intensive sectors, which started in 2005 and now covers 15,000 factories. The trading system is updated and extended to include road transport and buildings. “This will be done in a separate system focused on upstream fuel suppliers, putting the responsibility on fuel producers to comply with the system, rather than requiring individual households or road transport users to take part directly. Emissions from road transport and building sectors will be capped, with the cap reduced over time so that total emissions fall.”2

The US has no such system for carbon emissions but had a successful experience of emission trading with sulfur dioxide (the Acid Rain Program) that could serve as a guide. The “Fit for 55” program includes an updated Energy Taxation Directive that will introduce higher and uniform carbon taxes on fossil fuels. Many European countries have already introduced such taxes, while some have not, as is the case of the US. Carbon taxes will be introduced gradually, and among the support measures there is a fund to support medium and low-income families, who will be compensated for the tax.

Among the pricing and tax measures there is the innovative Carbon Border Adjustment Mechanism (CBAM). “If international partners do not share a comparable ambition to the EU, there is a risk of carbon leakage whereby production is transferred from the EU to other countries with a lower ambition for emission reduction. If this risk materialises, there will be no reduction in global emissions. This is why, as outlined in further detail in Section 4 of this Communication, the Commission is proposing a Carbon Border Adjustment Mechanism (CBAM), putting a price on imports of a limited number of high-polluting goods based on their carbon content.”2 It is similar to the one recently proposed by Democrats in the US3. This mechanism is extremely significant because it removes the free-rider and enforces compliance to international objectives, usually lacking in voluntary agreements.

The second key policy instrument, setting targets, is applied to four areas: effort sharing, land use and forestry, renewable energy, and energy efficiency. Targets are set for Effort Sharing to allow each Member State to realise its goals; setting the national targets based on GDP per capita, with adjustments made to take national circumstances and cost efficiency into account. Something analogous might be helpful to set targets for the states in the US.

In the updated Land Use, Land Use Change and Forestry (LULUCF) Regulation, “the new proposal looks to reverse the current trend of diminishing CO2 removals and increase the quality and quantity of the EU’s forests and other natural carbon sinks. It proposes to set an EU target of net greenhouse gas removals in the LULUCF sector of 310 million tons of CO2 equivalent by 2030. Specific national targets are proposed to contribute to this shared goal.”2 “The Renewable Energy Directive proposes to increase the overall binding target from the current 32% to a new level of 40% of renewables in the EU energy mix… The revision of the Energy Efficiency Directive proposes to increase the level of ambition of the energy efficiency targets at the EU level and to make them binding. This should lead to a 9% reduction in energy consumption by 2030, compared to the baseline projections.”2 Every country must carefully decide how to set its targets.

In technical areas where desired performance can be defined, it is often helpful to establish rules, usually formalised as product standards. The way the rules are met and the financial requirements for meeting them are usually left open. This makes product standards relatively inexpensive for governments, but considerable negotiation is required to establish the reasonable severity of the rules. My personal experience in working on the standards for energy labeling of household appliances in the EU has borne this out. Working closely and frequently with industry, appliance energy consumption was decreased by more than fifty percent over two decades.

The EU has chosen four areas of new rules: stricter CO2 performance for cars and vans; new infrastructure standards for alternative fuels; more sustainable product standards for aviation fuel; and maritime fuels. “The revision of the CO2 emission standards for new cars and vans aims at further reducing the greenhouse gas emissions of these vehicles, providing a clear and realistic pathway towards zero-emission mobility. Consumer demand for zero emission vehicles is increasing sharply already. The Alternative Fuels Infrastructure Regulation will ensure the necessary deployment of interoperable and user-friendly infrastructure for recharging and refuelling cleaner vehicles across the EU, keeping pace with the development of the market and guaranteeing that rural and remote areas will also be covered.”2

“The Commission is also proposing to promote the uptake of sustainable fuels in the aviation and maritime sectors complementing the Emission Trading Scheme for the aviation and maritime sectors which makes polluting fuels more expensive for suppliers. The ReFuelEU Aviation to promote new more sustainable standards for aviation fuel will oblige fuel suppliers to blend an increasingly high level of sustainable aviation fuels into existing jet fuel uploaded at EU airports, as well as incentivise the uptake of synthetic fuels, known as e-fuels.”2 And finally, “the FuelEU Maritime proposal to promote sustainable maritime fuels will create new requirements for ships, regardless of their flag, arriving to or departing from EU ports, by imposing a maximum limit on the greenhouse gas content of the energy they use and making these limits more stringent over time.”2 In my experience, the setting of product standards is an essential area of international collaboration for successful trade.

Support measures are necessary for the areas that are underfunded or require compensation for unwanted impacts of other policies. The Innovation Fund, which supports business and SMEs’ investment in clean energy, will grow its financing for innovative projects and infrastructure to decarbonise industry. Particular attention will be given to projects in sectors covered by the CBAM.

The enhanced Modernisation Fund is a program to support ten Member States to meet 2030 energy targets by helping to modernise energy systems and improve energy efficiency. These Member States have a higher share of fossil fuels in their energy mix, higher greenhouse gas emissions, higher energy intensity, and lower GDP per capita. The new Social Climate Fund “will provide dedicated funding to Member States to support European citizens most affected or at risk of energy or mobility poverty, to accompany the introduction of the Emissions Trading to road transport and buildings… The new Fund will promote fairness and solidarity between and within Member States while mitigating the risk of energy and mobility poverty. It will build on and complement existing solidarity mechanisms.”2 Different countries will have diverse policy combinations with different impacts, which necessitates a thorough examination of the necessary support measures.

In conclusion, the measures in the European Green Deal “Fit for 55” package reinforce and complement each other. The idea of multiple policies, with different trade-offs, to achieve overall objectives is essential. No one would propose the specific EU plan for another country; however, the framework is valuable and exportable. The EU industry is ready to invest but needs predictability and a coherent regulatory framework, access to infrastructure, and support for innovation. Presumably, this is the case for many other nations. The EU economy has been growing by over 62% since 1990 with emissions falling by 24% over the same period; no other nation or continent can claim such results. The European Green Deal “Fit for 55” policy framework should be of interest to others.

References

1 European Commission, 2019, Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and the Committee of the Regions. The European Green Deal, COM/2019/640 final, EUR-Lex.
2 European Commission, 2021, Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and the Committee of the Regions 'Fit for 55': delivering the EU's 2030 Climate Target on the way to climate neutrality, July 14, page 2 EUR-Lex.
3 S&P Global, 2021, US Democrats propose carbon emissions border tax, 20 July, SP Global.