The Council today adopted its negotiating positions (general approaches) on important legislative proposals in the ‘Fit for 55’ package. Presented by the European Commission on 14 July 2021, the package will enable the European Union to reduce its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.

The member states adopted a common position on EU emissions trading system (EU ETS), effort-sharing between member states in non-ETS sectors (ESR), emissions and removals from land use, land-use change and forestry (LULUCF), the creation of a social climate fund (SCF) and new CO2 emission performance standards for cars and vans.

These agreements pave the way for negotiations with the European Parliament.

EU emissions trading system

The EU Emissions Trading System (ETS) is a carbon market based on a system of cap-and-trade of emission allowances for energy-intensive industries and the power generation sector.

The Council agreed to keep the overall ambition of 61% of emissions reductions by 2030 in the sectors covered by the EU ETS, proposed the Commission.

The Council also agreed to a one-off reduction of the overall emissions ceiling by 117 million allowances (“re-basing”) and to the increase in the annual reduction rate of the cap by 4,2% per year (“linear reduction factor”).

The Council endorsed the proposal to strengthen the market stability reserve (MSR), by prolonging, beyond 2023, the increased annual intake rate of allowances (24 %) and setting a threshold of 400 million allowances above which those placed in the reserve were no longer valid.

The Council agreed to make the launch of the mechanism that activates the release of MSR quotas on the market, in case of excessive price rise, automatic and more reactive.

As regards sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the Council endorsed the proposal to end free allowances for the sectors concerned by the CBAM progressively, over a ten-year period between 2026 and 2035. However, the Council accepted a slower reduction at the beginning and an accelerated rate of reduction at the end of this 10-year period. Support for the decarbonisation of these sectors will be possible through the Innovation Fund. The Council also asked the Commission to monitor the impact of the CBAM, including on carbon leakage at export, and to assess whether additional measures were needed.

As regards the Modernisation Fund, the Council maintained the increase in its volume through the auctioning of an additional 2.5 % of the ceiling, the increase in the share of priority investments to 80 % and the addition of new eligible sectors, as proposed by the Commission. The Council decided to extend the list of member states benefiting from the Modernisation Fund. Natural gas projects will in principle not be eligible for the Fund. However, the Council introduced a transitional measure allowing the beneficiaries of the Fund to continue financing natural gas projects under certain conditions.

The Council also strengthened certain provisions of the Innovation Fund, in particular as regards the capacity aimed at making participation in projects more effective and geographically balanced, while preserving the principle of excellence in project allocation. The Council agreed to pay particular attention to decarbonising the maritime sector under the Innovation Fund.

The Council improved the governance and transparency of both funds.

An additional transitional free allocation can be granted under certain conditions to the district heating sector in certain member states subject to certain conditions, in order to encourage the decarbonisation of that sector.

The Council agreed to include maritime shipping emissions within the scope of the EU ETS. The general approach accepts the Commission proposal on the gradual introduction of obligations for shipping companies to surrender allowances. As member states heavily dependent on maritime transport will naturally be the most affected, the Council agreed to redistribute 3,5 % of the ceiling of the auctioned allowances to those member states. In addition, the general approach takes into account geographical specificities and proposes transitional measures for small islands, winter navigation and journeys relating to public service obligations, and strengthens measures to combat the risk of carbon leakage in the maritime sector.

The general approach includes non-CO2 emissions in the MRV regulation from 2024 and introduces a review clause for their subsequent inclusion in the EU ETS.

The Council agreed to create a new, separate emissions trading system for the buildings and road transport sectors. The new system will apply to distributors that supply fuels for consumption in the buildings and road transport sectors. However, the start of the auctioning and surrender obligations will be delayed by one year compared to the Commission proposal (auctioning of allowances from 2027 onwards and surrender from 2028 onwards). The emissions reduction trajectory and the linear reduction factor set at 5.15 from 2024 and 5.43 from 2028 would remain as proposed by the Commission. The Council maintained the proposal to auction an additional 30% of the auction volume for the first year of the launch of the system, so that it runs smoothly (“frontloading”).

The Council introduced an opt-in for all fossil fuels. It introduced simplified monitoring reporting and verification requirements for small fuel suppliers.

The Council added a temporary possibility for member states to exempt suppliers from the surrender of allowances until December 2030, if they are subject to a carbon tax at national level, the level of which is equivalent or higher than the auction price for allowances in the ETS for the buildings and transport sector.

The Council agreed to phase out free emission allowances for the aviation sector gradually by 2027 and align the proposal with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The EU ETS will apply for intra-European flights (including the United Kingdom and Switzerland), while CORSIA will apply to EU operators for extra-European flights to and from third countries participating in CORSIA. The Council agreed to set aside 20 million of the phased-out free allowances to compensate for the additional costs associated with the use of sustainable aviation fuels (SAFs). In addition, the Council agreement takes into account specific geographical circumstances and, in that context, proposes limited transitional derogations.

Social climate fund

The Council agreed to establish a Social Climate Fund to support vulnerable households, micro-enterprises and transport users to support the creation of an emissions trading system for the buildings and road transport sectors.

Each member state would submit to the Commission a ‘social climate plan’, containing a set of measures and investments to address the impact of carbon pricing on vulnerable citizens. The fund will provide financial support to member states to finance the measures and investments identified in their plans, to increase the energy efficiency of buildings, the renovation of buildings, the decarbonisation of heating and air-conditioning in buildings and the uptake of zero-emission and low-emission mobility and transport, including measures providing direct income support in a temporary and limited manner.

The Council agreed that the fund would be part of the EU budget and fed by external assigned revenues up to a maximum amount of 59 billion euro. This budgetary architecture would allow the fund to benefit from a series of guarantees linked to the European budget, without reopening the EU’s multiannual financial framework.

The fund would be established over the period 2027-2032, to coincide with the entry into force of the ETS for the buildings and road transport sectors, with retroactive eligibility of expenditure from 1 January 2026.

The Council decided to apply a ceiling of 35% of the estimated total costs of social climate plans to the possibility for member states to offer temporary direct income support.

The Council agreed that the fund would benefit all member states and kept the allocation method proposed by the Commission. The Council decided not to retain the national contribution (co-financing) foreseen in the Commission proposal. With regard to the Fund’s management method the Council opted for direct performance management combined with elements of shared management. It therefore decided to offer the member states the possibility of receiving technical assistance for the implementation of the Plan’s measures.

Effort sharing regulation

The Council agreed to an EU-level greenhouse gas emissions reduction target of 40% compared to 2005, for the sectors not covered by the ETS, namely domestic maritime transport, agriculture, waste and small industries. The buildings and road transport sectors will be covered under both the new dedicated ETS and the effort sharing regulation. These sectors combined currently generate about 60% of EU greenhouse gas emissions.

The Council agreed to keep the increased national targets assigned to each member state, as proposed by the Commission. It added a reference to the fact that achieving the objectives of the regulation requires convergence of all Member States’ efforts over time, while taking into account specific national circumstances. The Council agreed that the linear emissions trajectories for each member state would be adjusted in 2025 only in the event that this leads to higher annual limits for the Member State concerned, for reasons of predictability and so as to take into account the impact of unforeseen events such as the COVID-19 pandemic on emissions.

In particular, the general approach increases the amount of annual emission quotas that can be transferred between member states to 10% in respect of the years 2021 to 2025, and 20% in respect of the years 2026 to 2030. The text also makes these exchanges more transparent, in particular through enhanced reporting obligations. It facilitates the use of ETS flexibility that allow nine member states to use a limited amount of ETS allowances to offset emissions in the effort sharing sectors from 2021 to 2030 easier. It also makes the arrangements for the use of the additional reserve proposed by the Commission more flexible. In addition, it maintains the proposal to divide the flexibility linked to land use, land-use change and forestry (LULUCF) into two periods.

Land use land-use change and forestry

The land use, land use change and forestry (LULUCF) sector covers the use of soils, trees, plants, biomass and timber. Emissions and absorptions generated by the LULUCF sector are taken into account in the EU’s overall 2030 target.

The Council confirmed an overall objective of 310 Mt CO2 equivalent of net removals in the LULUCF sector in 2030 at EU level. This represents an increase of removals of about 15% compared to today. The current rules under which emissions do not exceed removals (the “no debit rule”) will continue to apply until 2025. For the period from 2026-2030, each member states will have a binding national target for 2030. In addition, the Council set each member state a commitment to achieve a sum of net greenhouse gas emissions and removals for the whole period from 2026 to 2030 (‘the budget 2026-2030’). The budget will be based on a trajectory of indicative annual values. The Council decided to maintain the distribution of targets between member states as proposed by the Commission.

The Council agreed to enhance flexibilities to support Member States that have difficulties in meeting their targets owing to factors beyond their control affecting the LULUCF sector, provided that the Union as a whole meets its 2030 target.

In particular, the Council introduced additional flexibility linked to the effects of climate change and organic soils, based on objective and measurable criteria and indicators. In order to have access to that flexibility, the Member States concerned will need to submit evidence to the Commission following a well-defined methodology. Furthermore, the Council decided to maintain the option of excluding emissions from natural disturbances from LULUCF accounts during the period 2026-2030, subject to not using the compensation for natural disturbances under flexibilities.

The Council confirmed the removal of the option of banking LULUCF credits between the two compliance periods (2021-2025 and 2026-2030).

The Council agreed that the Commission would submit a report within six months of the first global stocktake under the Paris Agreement (to be carried out in 2023), on including non-CO2 greenhouse gas emissions from agriculture in the scope of the regulation and the setting of post 2020 targets for the land use sector.

CO2 emission performance standards for cars and vans

The Council agreed to raise the targets for reducing CO2 emissions for new cars and new vans by 2030 to 55% instead for cars and to 50% for vans. The Council also agreed to introduce a 100% CO2 emissions reduction target by 2035 for new cars and vans.

Enabling drivers to recharge their vehicles across the member states will be ensured by the related revision of the deployment of an alternative fuels infrastructure (AFIR).

In 2026, the Commission will assess the progress made towards achieving the 100% emission reduction targets and the need to review these targets taking into account technological developments, including with regard to plug-in hybrid technologies and the importance of a viable and socially equitable transition towards zero emissions.

The Council agreed to put an end to the regulatory incentive mechanism for zero- and low-emission vehicles (ZLEV) as of 2030.

Source: European Council