The EU Council has adopted a general approach regarding emission reduction and its social impact – Fit for 55
The EU Council adopted a general approach on key legislative proposals included in the “Fit for 55” legislative package. The package, presented by the European Commission on 14 July 2021, will enable the European Union to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels, and to achieve climate neutrality by 2050.
The French Minister responsible for energy transition, Agnès Pannier-Runacher (Agnès Pannier-Runacher), stated that:
“The agreement reached between member states under the French Presidency on the “Fit for 55” legislative package is a significant step towards achieving our climate goals in key economic sectors. Implementing the ecological and energy transition will require a fair and inclusive contribution from all sectors and all member states. The Council is now ready for negotiations with the European Parliament to finalise the package, thereby placing the European Union at the forefront of the fight against climate change more than ever before.”
The French Minister for Energy Transition also noted:
“Member states have adopted a common position on the EU Emissions Trading System (EU ETS), emission sharing between member states in sectors not covered by the ETS (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 passenger cars and light commercial vehicles. 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 cap-and-trade system for energy-intensive industries and the power generation sector.
The Council agreed to maintain the overall goal of reducing emissions by 61% by 2030 in sectors covered by the EU ETS, as proposed by the Commission.
The Council also agreed on a one-off reduction of the total emission cap by 117 million allowances (“re-basing”) and an increase in the annual cap reduction rate by 4.2% per year (“linear reduction factor”).
The Council endorsed the proposal to strengthen the Market Stability Reserve (MSR) by extending the increased annual intake rate (24%) beyond 2023 and setting a threshold of 400 million allowances, above which allowances held in the reserve are no longer valid.
The Council agreed that the activation of the mechanism for releasing MSR allowances into the market in the event of an excessive price increase will be automatic and more responsive.
Regarding sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the Council approved a proposal to phase out the free allocation of allowances to sectors covered by CBAM over a ten-year period from 2026 to 2035. However, the Council agreed to a slower reduction at the beginning of this ten-year period and an accelerated reduction rate towards the end. Support for the decarbonisation of these sectors will be available from the Innovation Fund. The Council also requested that the Commission monitor the impact of CBAM, including carbon leakage in exports, and assess whether additional measures are needed.
Regarding the Modernisation Fund, the Council maintained the increase in its volume by auctioning an additional 2.5% of the total cap, increasing the share of priority investments to 80%, and adding new eligible sectors as proposed by the Commission. The Council decided to expand the list of member states benefiting from the Modernisation Fund. Natural gas projects will, in principle, not be eligible for funding. However, the Council introduced transitional measures that allow fund recipients to continue financing natural gas projects under certain conditions.
The Council also tightened some rules for the Innovation Fund, particularly regarding capacity, aiming to make project participation more effective and geographically balanced while maintaining the principle of excellence in project selection. The Council decided to pay particular attention to the decarbonisation of the maritime sector under the Innovation Fund.
The Council improved the management and transparency of both funds
To promote the decarbonisation of this sector, additional temporary free allocations may be granted to the district heating sector in some member states, subject to certain conditions.
The Council agreed to include maritime shipping emissions in the scope of the EU ETS. The general approach accepts the Commission's proposal for a gradual introduction of the obligation for shipping companies to surrender allowances. As member states highly dependent on maritime transport will naturally be most affected, the Council agreed to redistribute 3.5% of the auctioned allowance cap to these member states. Furthermore, the general approach takes into account geographical specificities and proposes transitional measures for small islands, winter navigation, and voyages related to public service obligations, as well as reinforced measures to address the risk of carbon leakage in the maritime sector.
In the general approach, non-CO2 emissions are included in the MRV regulation from 2024, and a review clause has been introduced for their future inclusion in the EU ETS.
The Council agreed to create a new, separate emissions trading system for the building and road transport sectors. The new system will apply to distributors supplying fuel for consumption in the building and road transport sectors. However, compared to the Commission's proposal, the start of the obligation for auctioning and surrendering allowances will be delayed by one year (auctioning will take place from 2027, and surrendering from 2028). The emission reduction trajectory and the linear reduction factor, set at 5.15 from 2024 and 5.43 from 2028, will remain the same as in the Commission's proposal. The Council retained the proposal to auction an additional 30% of the auction volume in the first year of the system's operation to ensure a smooth start (“frontloading”).
The Council introduced an optional choice regarding all fossil fuels. It introduced simplified monitoring, reporting and verification requirements for small fuel suppliers.
The Council added a temporary option for member states to exempt suppliers from surrendering allowances until December 2030, if they apply a national carbon tax at a level equivalent to or higher than the ETS auction price for the building and transport sectors.
The Council agreed to phase out free emission allowances for the aviation sector by 2027 and align the proposal with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The EU ETS will apply to intra-European flights (including to the UK and Switzerland), while CORSIA will apply to EU operators for flights outside Europe to and from third countries participating in CORSIA. The Council agreed to reserve 20 million of the phased-out free allowances to compensate for the additional costs associated with the use of sustainable aviation fuels (SAF). Furthermore, the Council agreement takes into account specific geographical circumstances and proposes limited transitional derogations in this regard.
Social Climate Fund
The Council agreed to establish a Social Climate Fund to support vulnerable households, micro-enterprises and transport users, to accompany the establishment of an emissions trading system for the building and road transport sectors.
Each member state will submit a “Social Climate Plan” to the Commission, containing a package of measures and investments to address the impact of carbon pricing on vulnerable citizens. The Fund will provide financial support to member states to fund the measures and investments set out in their plans to increase the energy efficiency of buildings, building renovation, the decarbonisation of heating and air conditioning in buildings, and the uptake of zero- and low-emission mobility and transport, including measures that provide direct income support in a temporary and limited manner.
The Council agreed that the Fund will be part of the EU budget and will be financed from external assigned revenues, up to a maximum amount of 59 billion euros. This budgetary structure would allow the Fund to benefit from a range of guarantees linked to the European budget without reopening the EU's multiannual financial framework.
The Fund would be established for the period 2027-2032 to coincide with the entry into force of the ETS for the building and road transport sectors, with retroactive eligibility of expenditure from 1 January 2026.
The Council decided to apply a maximum limit of 35% of the estimated total costs of the Social Climate Plans to the option for member states to provide temporary direct income support.
The Council also agreed that all member states will benefit from the Fund and maintained the allocation method proposed by the Commission. The Council decided not to retain the national contribution (co-financing) provided for in the Commission's proposal. Regarding the management method of the Fund, the Council opted for direct management of results combined with elements of shared management. It therefore decided to offer member states the option of receiving technical assistance for the implementation of the plan's measures.
Effort Sharing Regulation
The Council agreed on an EU-level target to reduce greenhouse gas emissions by 40% compared to 2005 in sectors not covered by the ETS, namely domestic maritime transport, agriculture, waste management and small industrial sectors. The building and road transport sectors will be included in both the new dedicated ETS and the Effort Sharing Regulation.
These sectors together currently generate approximately 60% of EU greenhouse gas emissions.
The Council agreed to keep the increased national targets proposed by the Commission, which are set for each member state. It added a reference to the fact that achieving the regulation's objectives requires a convergence of efforts by all member states over time, while taking into account specific national circumstances. The Council agreed that the linear emission trajectories for each member state will only be adjusted in 2025 if it results in higher annual limits for the relevant member state, in order to ensure predictability and take into account the impact of unforeseen events, such as the COVID-19 pandemic, on emissions.
Specifically, under the general approach, the amount of annual emission quotas that can be transferred between member states is increased to 10% for the 2021-2025 period and 20% for the 2026-2030 period. The text also makes these exchanges more transparent, particularly through strengthened reporting obligations. This facilitates the use of ETS flexibility, which allows nine member states to more easily use a limited amount of ETS allowances to offset emissions in effort-sharing sectors from 2021 to 2030. It also makes the arrangements for using the additional reserve proposed by the Commission more flexible. Furthermore, it retains the proposal to split the flexibility related 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 soil, trees, plants, biomass and timber. Emissions and removals generated in the LULUCF sector are taken into account in the EU's overall 2030 target.
The Council confirmed that the overall target is 310 Mt CO2 equivalent of net removals in the LULUCF sector in 2030 at the EU level. This is approximately 15% higher than the current volume of removals. The current rules, under which emissions do not exceed removals (“no-debit rule”), will apply until 2025. In the period from 2026 to 2030, each member state will have a binding national target for 2030. Furthermore, the Council set an obligation for each member state to achieve a sum of net greenhouse gas emissions and removals for the entire period from 2026 to 2030 (“2026-2030 budget”). The budget will be based on a trajectory of indicative annual values. The Council decided to maintain the allocation of targets between member states as proposed by the Commission.
The Council committed to increasing flexibility to support member states that have difficulty meeting their targets due to factors beyond their control affecting the LULUCF sector, provided that the Union as a whole achieves its 2030 target.
In particular, the Council introduced additional flexibility regarding the impact of climate change and organic soil, based on objective and measurable criteria and indicators. In order to use this flexibility, the relevant member states will have to submit evidence to the Commission, following a precisely defined methodology. Furthermore, the Council decided to retain the option to exclude emissions from natural disturbances from LULUCF accounts for 2026-2030, provided that no compensation for natural disturbances is used in accordance with the principles of flexibility.
The Council confirmed that the option to bank LULUCF credits between the two compliance periods (2021-2025 and 2026-2030) will be abolished.
The Council confirmed that the Commission will, within six months of the first global stocktake under the Paris Agreement (to be conducted in 2023), submit a report on how to include non-CO2 greenhouse gas emissions from agriculture in the scope of the regulation, and how to set targets for the land-use sector beyond 2030.
CO2 emission standards for passenger cars and light commercial vehicles
The Council agreed to increase CO2 emission reduction targets for new passenger cars and new light commercial vehicles by 2030 – to 55% for passenger cars and 50% for light commercial vehicles. The Council also agreed to introduce a 100% CO2 emission reduction target for new passenger cars and light commercial vehicles by 2035.
The ability for drivers to charge their vehicles in all member states will be ensured by accordingly revising the deployment of 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 regarding plug-in hybrid technologies, and the importance of a viable and socially just transition to zero emissions.
The Council agreed to end the regulatory incentive mechanism for zero- and low-emission vehicles (ZLEV) from 2030.