'Fit for 55' package extends EU carbon price signal to over two thirds of emissions by 2030

The European Commission’s ‘Fit for 55’ package of proposals would extend EU-wide carbon pricing from around 22 percent of EU greenhouse gas emissions today to over two thirds of EU emissions by 2030, according to an initial analysis by the Institute for European Environmental Policy (IEEP).

This three-fold extension comprises the phase-out of free allocation in the EU Emissions Trading Scheme (ETS), the extension of the ETS to the maritime, road transport and buildings sectors, and the revision of the Energy Taxation Directive (ETD), including the ending of energy tax exemptions for aviation and maritime.

Despite the significant increase, several energy-intensive industrial sectors will continue to benefit from free allocation of allowances under the ETS for many years to come, with these only set to be gradually phased-out from 2026-2036 as the Carbon Border Adjustment Mechanism (CBAM) is phased-in. Ending free allowances for all sectors by 2030 instead would extend a carbon price signal to around 75 percent of EU emissions.

According to IEEP’s analysis, the proposals mean that carbon pricing revenues in the EU could total over €100bn per year by 2030, compared to €14bn in 2019. This includes the new proposal for a Climate Social Fund, which should amount to approximately €10bn per year from 2025-32, amounting to over €100 per capita if directed to the poorest fifth of the EU population. While carbon pricing can have socially regressive impacts, if these revenues are used well, the overall impact of carbon pricing can be progressive – leading to overall benefits for lower income households.

Tim Gore, Head of the Climate and Circular Economy Programme at IEEP said:

"This is a pioneering package to make polluters pay, extending an EU-wide carbon price to over two thirds of EU emissions by the end of the decade.

“Energy intensive industries are the big remaining free riders – the proposal to only phase-out their emission allowance hand-outs by 2036 must be strengthened."

"This extension of carbon pricing could generate over €100bn per year by 2030 – if invested well, these revenues could reverse growing inequalities in Europe and ensure that lower income and marginalised EU citizens benefit from a just low carbon transition."

On the proposed Carbon Border Adjustment Mechanism (CBAM), Eline Blot, trade analyst at IEEP, said:

"The CBAM proposal seems to stretch-out, rather than accelerate, the phase-out of free allowances to EU industry.”

“The CBAM proposal will also pass on additional costs to imports from lower income and climate vulnerable countries. Much of the €2.1bn the EU will collect should be used to support climate vulnerable countries to modernise their supply chains. A just transition should not stop at the EU’s borders.”

IEEP also highlighted agriculture, biomass and land use accounting as critical areas of the package that must be strengthened in the coming legislative processes.

Céline Charveriat, IEEP's executive director, said:

"Today's 'Fit for 55' package, which will extend carbon pricing to over two thirds of EU emissions by 2030, is a critical step to realise Europe's vision for a Green Deal, and to build an industry 5.0 in Europe, which is able to win the global competitive sustainability race and create green jobs."

Sector Estimated share of EU GHG emissions in 2030 (%)* Estimated share of EU GHG emission subject to carbon pricing in 2030 (%)
Current ETS stationary sectors (power, energy-intensive industry) 34 26.7**

Intra-EU aviation

2.2 2.2***

Intra-EU maritime

2.2 2.2****

Road transport

28 28

Buildings

8.5 8.5
Total   67.6 

The estimated revenues from the extension of carbon pricing are based on an assumed ETS price range of 50-100 Euros/tonne by 2030, yielding revenues of €71-142bn per year by that time.

The estimated revenues to be collected at the border from the CBAM are based on the European Commission's Impact Assessment for the proposed CBAM regulation.

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* Estimates (not including international aviation or maritime) calculated based on projected emissions in the European Commission Staff Working Document Impact Assessment on Stepping-up Europe’s 2030 Climate Ambition in the MIX scenario (that reflects the key aspects of the Fit for 55 package), and assume an equal split between intra-EU aviation and maritime emissions.

** Assuming around 50% of current free allowances are phased out by 2030, based on the proposal for CBAM sectors.

*** Based on the proposed end to free allocation in the aviation sector.

**** In addition, half of extra-EU maritime emissions should face a carbon price, based on the Explanatory Memorandum in the ETS Directive revision proposal.