Last month, the ‘Fit-For-55’ package of the European Commission (EC) was presented. It is a unique package of measures. It has implications for the entire economy, so for producers and consumers.

The package consists of a series of ambitious and far-reaching plans that should result in the European Union achieving 55% CO2 reduction by 2030. The individual plans together account for some 12.000 pages. I would be lying if I said I have read everything, but I did read several sub-reports that apply specifically to my expertise. For the rest, the summary was well sufficient. What strikes me so far is that the package mainly focuses on two policies.

The first is raising the EU targets in reducing emissions. In order to achieve the 55% reduction in CO2 by 2030 – the interim target towards 2050 – we need more ambitious targets, such as:

1. An increase in energy efficiency in 2030 from 32.5% to 39-41%
2. An increase in the percentage of sustainable energy from 32% to 40%
3. Reduce car emissions by 55% (compared to 37.5% now).
4. An adjustment in the EU Emissions Trading Scheme (ETS) . Not only will the number of available emission allowances be reduced faster each year (from -2.2% to -4.2%), but the provision of free emission allowances will also come to an end. (See here for more information on the changes to the EU ETS).
5. An extension of the EU ETS to the maritime sector.
6. A separate ETS for the building environment and road transport sector
7. The remaining sectors will continue to fall under the ‘Effort Sharing Regulation’ (ESR), and there too, stricter requirements are set for CO2 reduction (from 30 to 40% reduction for the EU as a whole).

The ‘what’ is thus reasonably clear. It becomes more difficult when we start looking at the ‘how’.

“It may be clear that CO2 emissions will cost more money as time goes on”

As a second policy measure, the EC uses carbon emission pricing in its plans. The measures to tighten the EU ETS with respect to the new targets will create a greater scarcity of emission allowances if companies take fail to reduce substantially their emissions. As a result, the price will increase.

The maritime, built environment and road transport sectors are now also faced with an ETS system that puts a price on their carbon emissions. It is likely that this will also result in a higher price of carbon emissions. Furthermore, the energy tax is being transformed into a tax that is linked to the energy content of a product. Also, this will result in a higher cost for energy-intensive companies.

At the same time, companies are requested to invest in making their business more sustainable.  They need to increase the percentage of renewable energy and to make industrial processes more carbon friendly. But they also need to invest in infrastructure. The infrastructure needs to be adapted to larger flows of electricity or, for example, newer forms of energy carriers, such as hydrogen. Furthermore, they need to invest in innovation and technological development to increase energy efficiency.

We as consumers also must invest in reducing our carbon footprint. Think for example of insulating your house and/or buying a zero-emission vehicle. It may be clear that CO2 emissions will cost more as time goes on.

“Especially the competition with countries outside the EU is a tricky issue”

However, the ‘Fit-for-55’ plans miss details about the change and stimulation of the transition at the level of the end users. Companies are eager to invest in the future. But at the same time they are in competition with their competitors. Competition with companies that are based outside the EU is a particularly a tricky issue. Companies will unlikely make investments that are not profitable and or are not expected to be paid back in the relatively short term (because of lack of demand).

The enormous investments that have to be made in the infrastructure often require government guarantees. This is because if companies don’t have any assurance  that their product will actually be purchased, they are very reluctant to invest huge sums. So they need some kinds of reassurances from the governments.

And with the Fit-for-55 plans, the EC has not announced concrete plans to remove the unprofitable top and further stimulate innovation / technological development. Probably the EC will leave that to the national governments. Yet that is a crucial part of the transition to a carbon-neutral economy to be successful.

Of course, you can wait until the market comes up with a solution that is embraced by end users. And given the enormous commercial potential for companies that come up with this solution, there will certainly be products that are more efficient in terms of energy consumption, generate fewer to no emissions or have some other reason why the end user buys it. But the question is whether that will come in time.

“No ‘Fit-for-55’ without ‘Support-the-remaining-45”

There is a sense of urgency to make this transition to a carbon-neutral economy. But the financing of this transition needs to be carried by many shoulders. Carbon pricing is only half, or in this case maybe 55%, of the solution.

Without stimulating new technologies and support demand for the carbon neutral alternatives, pricing mainly leads to making the existing energy mix more expensive. Fit-for-55′ is therefore a first step, but it is difficult to realise this without a way to induce commercial companies to invest in alternatives that are still unprofitable. No ‘Fit-for-55’ without ‘Support-the-remaining-45’.