Reduced carbon supply, higher EU renewable target unveiled

LONDON (ICIS)–A steeper cut in carbon emission allowance supply and a confirmed target of 40% renewable share in energy consumption by the end of the decade were among the proposals published by the European Commission on Wednesday as part of the so-called “Fit for 55 Package”.

The EU body has released the long-awaited roadmap that will be instrumental for hitting a 55% carbon emission reduction compared with 1990 levels by 2030, as formally agreed by EU authorities last June. The package amends existing legislation and introduces brand new measures.

In response, the EU benchmark December ’21 product was very volatile, surging by roughly €2.00/tCO2e in the early afternoon in conjunction with the start of the press conference.

But the contract later fell back, most likely because most of the measures announced proved to be largely in line with expectations, with most traders across Europe having already factored them in over the past few weeks.

RENEWABLE ENERGY DIRECTIVE

The revised renewable energy directive called governments on raising renewable penetration targets to 40% by 2030, up from a previous target of 32%.

A leaked draft had revealed a similar figure back in May.

According to a new impact assessment by the commission, the target would translate into a 64% share of renewables in electricity consumption in 2030. “Our previous research suggested that this could lead to around 155GW of additional renewables on top of the government plans that have previously been laid out,” said ICIS analyst Matthew Jones.

The text added that support for power production from biomass will be phased-out from 2026. The directive stressed the importance of innovative technologies, like offshore wind, and gave EU countries up to three years to create a cross-border renewable pilot project.

Additionally, the measure called for certification schemes for renewables and low-carbon fuels.

Finally, the Europe-wide bloc’s target will be complemented by country-specific targets for renewable energy in transport, heating and cooling, buildings and industry, EU officials said during the press conference.

REVISION OF THE EU ETS

The amendment of the EU ETS confirmed an extension to the aviation and maritime sectors on top of heat and power generation and energy-intensive industries within the European Economic Area, that were already part of the current scheme.

A separate carbon pricing system for road transport and buildings will be set up.

The linear reduction factor (LRF) – the pace at which the overall number of allowances in circulation drops on a yearly basis – will be changed to 4.2% from the year following the entry into force of the directive.

Finally, the document indicated that a one-off emission cap reduction is also set to take place one year after the entry into effect of the amendment, which means the measure will be dependent on the uncertain timeline of the legislative process.

“Generally, almost everything turned out perfectly in line with expectations,” commented ICIS carbon analyst Sebastian Rilling on Wednesday.

Only the expansion of the aviation scope is a potentially bullish factor, Rilling noticed, but limited due to large exemptions.

Another key element of the directive consisted in the scrapping of free allocation for the manufacturing sector on the back of the introduction of a carbon tax on imports.

The text indicated that free allocation will be gradually phased out, with 25% auctioning in 2024, 50% auctioning in 2025, 75% auctioning in 2026 and full auctioning as of 2027.

OUTLOOK

The commission’s proposals included in the package are set to be intensely negotiated by the EU co-legislators – the Parliament and the Council of the European Union.

Once an agreement is reached, a final stage of negotiations will involve all three institutions.

Each file will be subject to separate discussions, although experts warn that the process will hardly take less than two years, even if everything runs smoothly – which, due to fierce lobbying, is unlikely to happen.

All agreements have to be struck before Parliamentary elections in 2024.