New tools for the Energy Transition

21. Jul 2021

To meet the ambitious goal of reducing CO2 emissions by 55% by 2030, the European Union has adopted a series of proposals to amend 13 pieces of legislation, along with very interesting supporting documents and impact assessments.
As European Climate Commissioner Frans Timmermans said, “It will be difficult, but the sooner we start, the lower the cost and the impact on our lives.”
There are 3 most significant proposals in pursuit of this effort:


Changes in emissions pricing: ETF
In terms of Co2 emission allowances, the most important instrument is the ETS. This is an emissions trading system in which the number of allowances in circulation is determined on the basis of algorithms established by the directive, and revenues from emissions go to national budgets.
The system currently covers the energy and industrial sectors, which account for 41% of EU emissions.
The draft includes a larger reduction in the number of allowances issued than in the previous document: 4.2 percent less instead of 2.2 percent. This gradual reduction will be accompanied by a one-off reduction of 117 million allowances.
The above measures are expected to lead to further price increases, which have already been high in recent months, exceeding €50. This will significantly worsen the cost-effectiveness of using both coal and natural gas as fuel for power plants, which will affect EU countries with high-carbon power generation, such as Poland, to a greater extent.
To this end, the Commission has decided to extend the scope of the Modernisation Fund, fed by contributions from the richest EU countries, so that Poland will receive 43% of the pot as the main beneficiary of the fund, or 34% (considered insufficient). (deemed insufficient) if the program is expanded to include Greece and Portugal.
Brussels, which also plans to extend the ETS to the construction and transport sectors from 2026, envisages that under this measure fuel producers will also buy emission allowances, albeit initially at reduced prices. Germany is about to introduce a similar system for transport and buildings, with a price of €25 per tonne of Co2 and an estimated price increase (by local consumer association VZBV) of 7 cents per liter (8 for diesel).
To ensure that fuel and heating price hikes do not hit the poorest sections of society, Brussels is planning to create an additional Social Climate Fund, targeting the poorest households and micro-entrepreneurs, with a budget of €72.2 billion between 2025 and 2031, financed in part by a Climate Boundary Tax (CBAM).

Climate Boundary Tax (CBAM).
This is a tax that will apply to importers starting in 2026. Currently, every ton of cement or fertilizer produced in the EU is partially charged for emissions, while a ton of the same steel or ammonia produced in Russia, China or the United States is not.
To begin with, the system will cover trade in cement, steel, fertilizer, aluminum and electricity imported into the EU, providing for a transition period between 2023 and 2026 during which importers will have to report product emissions, but at no cost.
Importers will have to request certificates proving the carbon emissions of the manufacturer whose product they want to import. The Commission estimates that the system will initially cover 1,000 importing companies that conduct 239,000 transactions a year and buy goods from 510 manufacturers around the world. The EU’s main trading partners – China, the United States and Russia – have already voiced concerns about border climate taxation. To address these concerns, Brussels will offer other countries an incentive to introduce their own emissions trading schemes, the cost of which will be deductible from CBAM.
Zero-emission cars
This is also a revolution that has been heralded – Brussels wants every new car registered in the EU to be zero-emission by 2035, able to use electricity, hydrogen or biofuels instead, and to follow this with the development of the necessary infrastructure: electric car chargers spaced every 60km on Europe’s main roads and hydrogen refuelling stations every 150km.

These proposed changes have the potential to significantly alter the landscape of energy markets in Europe, whatever their final form their main aim is to make action to reduce greenhouse gas emissions even more cost-effective