The European Commission in December 2019 announced its new European Green Deal, a set of major policy and legislative proposals that position the EU as the global leader on environmental and climate issues. Since then, the Commission has published a draft EU climate law and is seeking stakeholder input on potential revisions to the Energy Taxation Directive and on its proposed EU carbon border adjustment mechanism.
New Law on 2050 Climate Neutrality Objective
On March 4, 2020, the Commission published a draft framework regulation that would make the EU 2050 climate neutrality objective legally binding. The proposed regulation would commit the EU collectively to reaching net zero greenhouse gas emissions by 2050. The proposal also contemplates increasing the EU greenhouse gas emissions target for 2030 from a 40% reduction (compared to 1990 levels) to 50-55%. The proposal does not, however, change the current 2030 target. Absent significant delays due to COVID-19, the Commission will publish a detailed impact assessment in September 2020.
The proposal would give the Commission power to adopt “delegated acts” that set a trajectory of targets over the 2030 to 2050 period. Once finalized, a delegated act will enter into force unless the European Parliament or the Council object within a certain time frame. The Commission also must review the trajectory every five years.
The proposed regulation also would require the Commission to consider amendments to other EU laws that implement the 2030 target, such as the Renewable Energy Directive (which determines the minimum renewables mix in the grid), the Energy Efficiency Directive (with potential requirements to upgrade buildings’ energy efficiency), and the EU Emissions Trading System Directive.
The European Parliament and the Council must agree on the text before it becomes EU law.
Potential Revision of Energy Taxation Directive
In its inception impact assessment for revision of the Energy Taxation Directive, the Commission explains that divergent national tax rates are currently applied in combination with a wide range of exemptions and reductions, which are effectively fossil fuel subsidies. These subsidies concern important sectors, such as aviation and maritime transport, while land transport bears most of the energy taxation burden. One of the Commission’s main objectives in revising the Energy Taxation Directive is to align taxation of energy products and electricity with EU energy and climate policies.
Furthermore, the Commission aims to promote greenhouse gas emission reductions, energy efficiency, alternative fuels (for example, hydrogen, synthetic fuels, e-fuels, advanced biofuels and electricity) and provide incentives for investments in clean technologies.
The initial consultation on the impact assessment ends in April; after a more detailed second consultation, a draft Directive would be anticipated in mid-2021.
Impact Assessment on a Carbon Border Adjustment Mechanism
Rather than proposing an absolute “carbon tax,” in the Green Deal the Commission is instead proposing a “Carbon Border Adjustment Mechanism” (CBAM). The Commission’s CBAM initial impact assessment puts forward various policy options, including a carbon tax on selected products (including both imported and domestic products), a new carbon customs duty or tax on imports, and an extension of the EU Emissions Trading System to imports.
The goal of the proposed CBAM is to counteract “carbon leakage” where companies transfer production from the EU to other countries that have lower climate change standards or when EU products are replaced by more carbon-intensive imports, resulting in no change on a global level. The CBAM would mitigate this risk by aligning the price of imports more directly with their carbon content.
The CBAM is likely to be tested on certain industries first and then expanded over time to other sectors. There has been speculation that cement, steel, and aluminum might be among the first sectors to be targeted. In the future, oil and gas companies that export to Europe may be impacted by lower demand and lower revenues because of the CBAM.
After an initial consultation that ends in April, the CBAM will be subject to a more detailed consultation in the third quarter of 2020, with a draft Directive expected in mid-2021. In addition to general public consultations, the Commission intends to consult with technical experts and other impacted nations through World Trade Organization channels.
Just Transition Mechanism
In January, the Commission revealed details on the Just Transition Mechanism and associated Just Transition Fund, which intend to provide tailored financial and practical support for certain regions and industries to transition to a zero carbon position. The €7.5billion fund will provide grants and stimulate investments in certain eligible territories most affected by the transition away from fossil fuels like coal, lignite, peat and oil shale. The Commission plans that the Mechanism will finance projects ranging from creation of new workplaces, job search and re-skilling assistance for workers, renovation of buildings, and investments in renewable energy, district heating networks, and sustainable transport.
While it is too early to properly assess the impact of the COVID-19 crisis on the Green Deal, it appears likely that at least some timelines may be delayed, and funding for some programs could be reduced. While environmental initiatives might slide down governments’ lists of priorities as they grapple with COVID-19-related economic disruptions, this crisis also may focus public minds on the inter-related issues of environment, social health, security, climate, and sustainable growth as never before.
—Felise Cooper, Romaric Lazerges, Ken Rivlin, Matthew Townsend, and Gauthier van Thuyne of the Allen & Overy global law firm compiled this commentary. Go here to read Allen & Overy’s global response to the COVID-19 pandemic.