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The EU has proposed a radical climate policy reform that will have a profound impact on the carbon market, aviation and shipping, energy, steel and aluminum, and other areas and industries.
To ensure that the EU's greenhouse gas emissions are reduced by at least 55% by 2030 compared to 1990 levels, the EU published a thousands of pages long "Fit for 55" reform package on July 14.
The release contains a broad range of reforms covering key EU climate policies and related laws on transport, energy and taxation, including proposals to strengthen eight existing legal provisions and five new initiatives. The European Commission says this requires a "careful balance" between pricing, targets, standards and support measures.
For the power and industry carbon market, which has existed for more than 15 years, perhaps the most influential change is the targets themselves. The proposal raises the 2030 target from 43 percent to 61 percent compared to 2005 emissions, equivalent to a more than 50 percent reduction in covered emissions between 2020 and 2030, while also proposing to include shipping in the carbon market from 2026.
A draft of some of these documents was leaked in late June and has been widely discussed. Some of the reforms have received strong support from some member states, but they have also attracted strong opposition from others. For example, the proposal to include building heating and road transport in the carbon trading system has drawn criticism from countries such as Poland, but it is a priority for the German policy thrust.
According to Johanna Lane, a policy advisor at the European climate think tank E3G, it will be difficult to reach a "grand bargain" between member states on the priorities of the "Fit for 55" package, especially since the European Parliament will have a say in the process.
In addition, NGOs, activists, various sectors of industry and even opponents of climate action will be lobbying for discussions on the reform plan. But a recent Eurobarometer poll shows that there is overwhelming support for the EU's ambitious climate action. Negotiations on the package will take several years and may involve in-depth discussions on national priorities in each area.
Domien Vangenechten, an E3G policy advisor on industrial transformation and industrial decarbonization, told 21st Century Business Herald that the creation of a second carbon market for the buildings and road transport sectors is the controversial part of the European Commission's proposal, which would be independent of the existing carbon markets for electricity, heat, industry and aviation.
"The European Commission wants to increase climate ambition in buildings and road transport, two areas that have so far been considered difficult to decarbonize, through policy, economic instruments such as making electricity and heat, which are already subject to carbon price limits, more competitive than heating fuels."
However, many member states, members of the European Parliament and other stakeholders are skeptical of the idea. France has now come forward to question the rationale for the measure, with Pascal Canfin, a member of the European Parliament from France, even calling it "political suicide. But the proposal was affirmed by Germany.
Cambridge Econometrics Society previously released a report that the scope of the European carbon market to expand to road traffic and building heating two areas, will have an impact on low-income households, but at the same time the measures in these two areas of emissions reduction effect is not as effective as imagined.
The regressive nature of carbon pricing itself could have a negative impact on poorer households. Pierre Leturcq, a European policy analyst at the Jacques Delors Institute, a European think tank, said in an interview with 21st Century Business Herald that recent studies have shown that the above proposal could have a significant socio-economic impact, especially on low-income households in Europe that are vulnerable to energy poverty. Their purchasing power may be seriously affected by the increase of fuel prices and heating prices.
Because of the potential knock-on effects of the above-mentioned creation of carbon markets for buildings and road transport, Domien said, "It is not clear whether this proposal will survive the upcoming negotiations."
To compensate for this, the European Commission has proposed the creation of a social climate fund with a budget of 10 billion euros to provide 144 billion euros in financial assistance to energy-poor households over a seven-year period.
Equally ambitious among the 13 legislative proposals is the proposal to increase the annual linear discount factor for emission allowance volumes under the EU Emissions Trading System (EU ETS) from 2.2 percent to 4.2 percent. By 2030, this measure would reduce emissions from sectors covered by the EU ETS by 61%.
Carbon Boundaries or Affecting China's Steel and Aluminum Exports The EU's reform package has a broad premise that total emissions reductions are yes - a 55% reduction in greenhouse gas emissions from 1990 - and that total carbon emission controls for emission reduction mechanisms such as carbon market allowances, carbon boundary adjustment mechanism allowances, and the amount of allowances generated by the new carbon market will all be within this framework will be planned. Some carbon market analysts predict that the average carbon price in Europe in the second half of this year will be about 56 euros per ton.
Sam Van den plas, policy director of Carbon Market Watch, a carbon market research organization, said that, in fact, the evolution of the EU carbon price in the short term is difficult to predict because it depends on several external factors, such as the price of coal and natural gas, and the economic recovery associated with the impact of the epidemic.
But in the long term, it seems that the carbon price is going to grow with the volume of carbon market quotas and the continuous tightening of climate policies. After the last European carbon market reform in 2018, the carbon price gradually increased from €5/ton to €20-30/ton over a few years. Recently the European carbon price has almost doubled again, rising to around €55/t. Domien believes that this is because European carbon market participants see the upward trend in carbon prices as part of a European green deal.
In the opinion of policy analyst Pierre, this is a level of carbon price that is consistent with the EU's 2050 climate neutrality target. A higher carbon price would affect the entire EU industry, but it would most likely change the existing rules for some industries that have so far remained reluctant to carry out decarbonization and emission reduction activities in the EU. For example, for steel and cement producers, they will gradually stop receiving free grants.
The current ups and downs in the European carbon price mainly affect the EU power sector, which buys carbon allowances through auctions. At this stage, the vast majority of carbon allowances for energy-intensive sectors such as steel, cement and chemicals are free. the resulting market failure should be corrected, Sam told 21st Century Business Herald. "We call for the local use of the 'polluter pays' principle and the auctioning of all emission allowances to heavy industries, rather than giving them out for free."
The European Commission (European Commission) has previously made predictions in its impact assessment that the European carbon price could reach 85 euros per ton in 2030. In fact many market analysts in Europe are more optimistic, believing that the carbon price will rise even higher, reaching 100-120 euros by 2030.
At present, the expected price of the proposed second carbon market is less clear. In its impact assessment, the European Commission predicts that the carbon price of this carbon market for buildings and transport could reach 48-90 euros per ton in 2030.
The continued escalation of the carbon price could have an impact on China's exports of some commodities when the carbon border adjustment mechanism comes online. The EU plans to gradually replace the existing carbon leakage measures through a carbon border adjustment mechanism over a 10-year period from 2026 to 2036. domien believes that the two main sectors that will be affected in China will be aluminum and steel, which account for 9 percent and 8 percent of total EU imports, respectively. "But both industries will continue to receive free quotas in Europe until 2035."
Ending Energy Tax Exemptions for Airline Shipping Aviation has been part of the European carbon market within the European Economic Area since 2014. So far, covered airlines have received most of their allowances for free, but under the European Commission's proposal, this would be scrapped in favor of auctioning all allowances by 2026.
In addition, the European Commission is proposing to implement ICAO's global offset mechanism, Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which would cover all flights from outside the European Economic Area, including flights to and from China, provided that both the EU and China have implemented CORSIA.
Sam believes that the additional costs that this proposal may incur in the course of trade between China and Europe will be very limited and almost negligible, as CORSIA will not impose any significant costs on airlines.
CORSIA is ICAO's officially recognized system of eligible emission reduction projects, and the mechanism is currently in a voluntary pilot phase from 2021-2023, after which a voluntary phase will be implemented between 2024-2026, followed by a mandatory second phase between 2027-2035. in 2020, ICAO's 219th Council considered and adopted its The Technical Advisory Committee issued an assessment report on the CORSIA eligible emission reduction project system, recognizing the China Voluntary Greenhouse Gas Emission Reduction Project (CCER) as an eligible carbon reduction target provider for the CORSIA pilot period from 2021 to 2023.
Shipping, on the other hand, will be included in the existing carbon market by 2026, and the scope will extend beyond the aviation sector. In the European Commission's proposal, the carbon market would cover all emissions from shipping within the European Economic Area, all emissions during berthing in European ports, and 50% of carbon emissions from inbound voyages and 50% of carbon emissions from outbound voyages.
While there may be some cost and trade impacts associated with the above reform proposals, these impacts will be limited. According to the European Commission's impact assessment, prices of certain products are expected to increase slightly within 0.7% by 2030, while demand for commodities will be barely affected and will fluctuate by less than 1%.
Beyond carbon market mechanisms, the European Commission also wants to link taxes to the energy content and environmental performance of fuels, proposing in a package to remove preferential tax treatment for fossil fuels and promote the growth of sustainable alternatives following a revision of energy tax rules. The regulation is part of a broader package to align the EU economy with stricter 2030 climate targets, which includes different low tax rates on motor fuels, heating fuels and electricity.
The EU introduced the Energy Tax Directive in 2003 and has followed the rules in place at that time for nearly 20 years. The proposed reform aims to ensure that EU energy taxes are more aligned with the new climate goals, proposing a shift from a volume-based energy tax to one based on energy content and the introduction of fuel classifications.
Under this proposal, governments could increase taxes on fossil fuels, also known as CO2-intensive fuels, and reduce taxes on low-carbon fuels. In addition, the proposal proposes new low tax rates, while existing tax exemptions for fossil fuels would be significantly limited. Intra-EU maritime and aviation access is taken into account, and the low tax rate is expected to be increased during a 10-year transition period.
Domien said the proposal can be seen as aiming to go hand in hand with proposed reforms to the European carbon market to rebalance the taxation of fossil fuels and low-carbon energy sources, including electricity.
Notably, EU member governments could impose a fuel tax on international shipping, but the likelihood of that happening is not high, Sam told 21st Century Business Herald, adding that this is because ships can easily refuel outside the EU, so the proposal would have little or no impact on international trade. "The proposal to impose a fuel tax on all flights between the EU is significant. However, it does not include cargo flights or flights outside the EU, so it is also unlikely to have much impact on Chinese companies or China-EU trade."
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