A Good New Year's Resolution for 2023: Understanding the European Climate Package

Carbon quotas for road transport, an end to sales of internal-combustion vehicles, a carbon border tax, a social climate fund, and so on. Announcements from Brussels on climate issues have been coming one after another for several months. Almost all of them stem from a set of documents, the Climate Package, launched more than a year ago by the European Commission. It is probably THE most important legislative package on climate change in recent years, and it is difficult to keep track of it.
That is why we are providing an analysis of the most significant measures and their implications for transportation.

What is the Climate Package?

The Climate Package, also known as “Fit for 55 ,” is a package of legislative proposals put forward in 2021 by the European Commission with the goal of achieving a 55% reduction in GHG emissions by 2030 compared to 1990 levels and carbon neutrality by 2050. This is not a single piece of legislation, but rather 14 different, interrelated pieces of legislation. Transportation is directly or indirectly affected by the majority of these pieces of legislation, including^[1] :

• Reform of the Emissions Trading System—the European carbon market, EU-ETS (SEQE-UE in French)
• The Carbon Border Adjustment Mechanism—also known as the carbon border tax or by its English acronym, CBAM—applies in particular to steel and aluminum and therefore affects manufacturers
• The FuelEU Maritime Initiative
• The REFuelEU Aviation Initiative
• The revision of the AFIR regulation on the deployment of infrastructure for alternative fuels, particularly charging stations
• CO2 Emissions Standards for Cars and Light Commercial Vehicles
• The Revision of the Energy Taxation Directive
• The Social Climate Fund
• The Regulation on Fishing Effort Allocation

Has it been approved yet?

Since this involves not a single piece of legislation but several, the timeline varies for each proposal or subgroup of proposals. At this time, none of the texts in the Fit for 55 package has been formally adopted—that is, approved by both the Parliament and the Council. However, key milestones in the legislative process have been reached, notably with preliminary agreements reached during negotiations between representatives of the various institutions (the “trilogues”) on most of the proposals, which provides a clearer picture of this vast legislative undertaking. Some of the key pieces of legislation, such as those concerning the carbon market, are expected to be definitively adopted as early as the beginning of 2023.

What are the most significant impacts on the transportation sector?

Fewer Changes Than Expected for the Airline Industry

Despite strong pressure to include long-haul flights, the carbon market is expected to continue to cover only theflights within the European Economic Area, excluding flights outside the EU that are covered by the CORSIA system^[2] less ambitious and controversial (see our article). This means that nearly 60% of the aviation sector's emissions are not accounted for^[3].

However, despite this reduced scope, there are a few positive changes worth noting. The large number of free allowances that the sector has received since 2012 are expected to be phased out between 2024 and 2026^[4][5]. Similarly, kerosene, which has not been taxed until now, could be subject to a minimum tax rate as part of the harmonization of energy taxation^[6].

The The Climate Package also opts for alternative fuels, or SAF (Sustainable Aviation Fuel) with a text that is still under discussion, the REFuelEU Aviation, which proposes a minimum blending rate in kerosene of 2% in 2025, 5% in 2030, and 63% in 2050^[7]. This pro-SAF stance is confirmed by the exclusion of SAFs from the calculation of the allowances allocated to aviation in the carbon market^[8].

Important point to note: the non-CO2 emissions, the impact of which is at least equivalent to that of kerosene combustion, are finally being incorporated into European law. Airlines will be required to report these emissions starting in 2025. However, reporting is not the same as taking action, and the Commission has given itself until 2028 to propose new regulations on this matter.

The maritime sector is fully integrated into the quota market

In the maritime sector, European negotiators succeeded where they had failed in the aviation sector. The compromise reached in late November 2022 in Brussels did indeed lead to the inclusion of all flights, including those outside the EU, in the EU-ETS. While the maritime sector was not covered at all by the EU-ETS, intra-European voyages will be 100% covered, and international voyages arriving in or departing from Europe will be 50% covered^[9].

At the same time, the Directive FuelEU Maritime, which is still under discussion, aims to define mandatory emission reduction targets For ships: 2% in 2025, 20% in 2035, and 80% in 2050^[10]. Some have criticized these reduction rates as being too low, since they continue to allow—at least in the short term—a shift from heavy fuel oil to LNG (Liquefied Natural Gas), even though LNG offers only very limited decarbonization benefits^[11].

Road Transportation Affected by Two Key Pieces of Legislation

The first piece of legislation that has been the subject of much discussion for several months now is the one on CO2 emissions standards for cars and light-duty vehicles, which sets the flagship target of End of sales of internal combustion engine vehicles in 2035. However, certain provisions that have found their way into the text could limit its scope, such as a provision allowing for e-fuels generated from green electricity or a clause calling for a review of the text in 2026^[12].

Another issue that has received media attention: the creation an “ETS-Bis” carbon market for road transport.

It was one of the most hotly debated elements of the legislative package, but the agreement reached in late December confirmed that the The road transport sector will indeed be included (along with the construction sector) in a carbon market separate from the existing carbon market. Specifically, this market is expected to take effect in 2027 or 2028 and will have a price cap of 45€ per metric ton. Countries that already have a domestic carbon tax of equal or greater value will be exempt. Thus, Nothing should change for French individuals, which have already been subject to a carbon tax of 44.9€ per metric ton for several years^[13].

Taxes… but also funding

Most of the measures presented take the form of taxes designed to encourage various transportation stakeholders to change their practices. These taxes will generate revenue amounting to several billion euros, which will be reinvested in the transition. Thus, the two existing funds: the Innovation Fund - which aims to support innovative decarbonization projects - and the Modernization Fund - which is aimed at the poorest countries in the EU to help them modernize their energy systems and improve their energy efficiency - are seeing their resources increase. A new fund, the Social Climate Fund, was created, for its partto support the most vulnerable citizens, including through direct assistance to households^[14].

A significant portion of the funds passing through these funds should therefore benefit the transportation sector.

What happens next?

As noted above, none of the texts has been definitively approved yet, but it won’t be long before the first ones are. In the short term, barring any last-minute developments, Parliament and the Council are expected to formally approve the texts on the European carbon market^[15].