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ARTICLE19 July 2021

Swedish Enterprise: ‘Fit for 55’ – increase in ambition but a lack of focus on cost-effectiveness

‘Fit for 55’ is a crucial element in the journey towards an EU free of greenhouse gas emissions, and there are considerable opportunities for Swedish companies as part of the transition. However, we believe that it is important to safeguard the fundamental principles of cost-effectiveness and competitiveness, says Jesper Gyberg, Director Climate Policies.

EU-kommissionens ordförande Ursula von der Leyen. Photo: AP Photo/Valeria Mongelli

This week, the European Commission presented its most comprehensive climate change package to date: ‘Fit for 55’. Earlier this year, the EU had agreed on a tighter emissions target for 2030, cutting emissions by 55% by 2030 compared to 1990 levels. This is a sharp increase on the existing target of 40% and as a result, virtually all energy and climate policies are now being revised.

The Confederation of Swedish Enterprise supports both the Swedish climate targets and the goal of the EU of reaching net zero by 2050. ‘Fit for 55’ is a crucial element in the journey towards an EU free of greenhouse gas emissions, and the Confederation sees considerable opportunities for Swedish companies as part of the transition. At the same time, however, it believes that it is important to safeguard the fundamental principles of cost-effectiveness and competitiveness. Below is an initial analysis of the highly comprehensive proposal presented by the European Commission.

The ambition of European climate policy must be to demonstrate that it is possible to reduce emissions while stimulating growth in the business sector. To achieve this, policy instruments must deliver as much emission reduction as possible at as low a cost as possible. Therefore, it is a cause for concern that the European Commission is proposing that the majority of emissions reductions should be borne by industry, despite the fact that it already bears the biggest burden today. The ETS-sector is expected to cut emissions by 61% by 2030 compared to 2005 levels, while the non-trading sector is expected to cut emissions by 40% compared to 2005 levels. There is a risk that this distribution will result in an inefficient climate policy. An increased focus on the non-commercial sector would have been preferable, as there are significant emission reductions to be achieved in large parts of the Union at a lower cost. The Confederation of Swedish Enterprise has shown this in its calculations presented in this report.

Significant changes for transport

Among the major changes proposed in the initiative is the introduction of a separate emissions trading scheme for transport and heating of buildings. The scheme aims to reduce emissions by a total of 43% in the sectors concerned. For Sweden, this could have a major impact, as we already tax these emissions with the highest CO2 charges in the world. The introduction of a European system, on top of the existing Swedish CO2 tax, risks becoming disproportionately burdensome for both Sweden and Swedish businesses.

Tighter emissions trading

As a result of the dramatic increase in ambition within the EU Emissions Trading Scheme (ETS), emissions trading is being tightened. The rate of reduction will increase to 4.2% per year and free allocation will be tightened. From the second half of the decade, free allocation will begin being phased out over a ten-year period, while Carbon Border Adjustment Mechanism will be introduced. Those installations that do not comply with recommendations made in energy audits will have their free allocation reduced by 25%. This free allocation is a vital element in ensuring the continuing competitiveness of European companies in the global market.

A Carbon Border Adjustment Mechanism is proposed

The Commission is proposing to introduce a Carbon Border Adjustment Mechanism (CBAM). The aim of the CBAM is to avoid carbon leakage. As the costs of various climate-damaging activities increase, the EU does not want to allow non-European competitors - who may not have to bear the same costs at home - to gain an advantage as a result. The CBAM is intended to replace free allocation as the main tool for avoiding carbon leakage.

This proposal is popularly known as a ‘climate levy’, but it is not a tariff in the standard sense. Instead, it is a system whereby importers have to buy allowances at the same price as if the product had been produced in the EU; in other words, it is a copy of the ETS, but without a quantitative limit. Importers are allowed to deduct the cost of any climate action in the exporting country, in order to ensure that there is no double payment for the same emissions. The free allocation of allowances, as long as they are available, are provided to importers to the same level as to European manufacturers. Taken together, this basic model means that the proposal should be WTO compatible, reducing the risk of trade conflicts with third countries.

The products covered are steel and iron, aluminium, cement, fertilisers and electricity. Exactly how the level of emissions in third countries will be calculated is not yet entirely clear, but for a transitional period, flat rates will be adopted. The proposal is likely to hit Turkey, Russia, China and the UK hardest, as they are the largest exporters of the goods in question. Norway, Switzerland, Iceland and Lichtenstein are not covered by the scheme.

The CBAM will be introduced on 1 January 2023, but initially only as a reporting requirement. Only as of 1 January 2026 will companies be expected to start paying the tariff for the goods they import.

Raising ambition in burden sharing

The design of the Effort Sharing Regulation (ESR), based on a country’s GDP, is maintained, but it now introduces features for increased flexibility to enhance cost-effectiveness. Sweden has been given a more stringent target to reduce emissions in the non-commercial sector by 50% by 2030, while there is no longer any country that does not need to reduce its emissions, which is a positive change. However, we would have liked to see a greater focus on cost-effectiveness when the targets were allocated. One effect of this lack of focus on cost-effectiveness in the ESR is that the impact of the Swedish climate targets is reduced, because there is still room for other Member States to continue to with their emissions.

Future ban on new sales of fossil cars

The European Commission is also proposing tougher requirements on how much CO2 new passenger cars will be allowed to emit. By 2030, the current level is to be reduced by 55%, and by 2035 all new cars sold must be zero-emission.

Doubling the annual energy savings target

To achieve climate neutrality, all energy consumed needs to be used as smartly and efficiently as possible. However, in order to enable businesses to decide on these most cost-effective solutions clear and well-defined legislation will be needed.

The proposal is to continue to formulate the EU’s energy efficiency targets as a cap on the amount of energy that can be used. However, this risk hampering the opportunities for economic growth. The revised energy efficiency target for 2030 is being raised to 36%. It is proposed to raise annual energy savings targets from the 0.8% to 1.5% for all Member States, a near doubling of the existing level.

A European Social Climate Fund

To support the poorest households in their transition to becoming fossil free, the European Commission is proposing to create a European Social Climate Fund. This will mobilise over €70 billion over seven years, starting in 2025. This will be financed by channelling and redistributing 25% of the revenues from the parallel emissions trading scheme for road transport and buildings through the fund. These funds will be allocated according to criteria developed by the European Commission. It is estimated that Poland will be the Member State receiving the greatest share of the fund, at 17.6%, followed by France, Spain and Italy. Sweden’s share will be 0.6%.

Renewable energy target raised

The common EU target for renewable energy use is being raised from 32% to 40%. Indicative targets for Member States will be set on the basis of this common target. The share of renewable energy use in certain industries (for example mining, manufacturing, electricity, water production and construction) will be promoted through a new Article I Directive, with the share increasing by 1.1% annually. It also introduces a binding sub-target, whereby 50% of the hydrogen used by industry should be produced from renewable electricity of non-biological origins (which should reduce greenhouse gas emissions by at least 70%).

A benchmark of 49% renewable energy use in buildings by 2030 is proposed. Member States are expected to introduce measures to increase the share of renewable electricity in heating. They will also introduce measures to increase the share of self-generated electricity, local energy associations and local storage solutions.

Sweden is already well placed to create climate benefits

The importance of an effective climate policy that can also stimulate business development cannot be overestimated. Thanks to clean energy, efficient processes and low-emission products, Swedish exports already displace the equivalent of 26 million tonnes of emissions per year in competitor countries. Given the right conditions, EU industry will be able to contribute substantial global climate benefits.

This initial analysis raises concerns over, among other issues, the cost-effectiveness of the proposals put forward. Work is now underway to examine the evidence from the European Commission in greater detail.

Written byJesper Gyberg
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