This Tuesday the European Parliament completed the formal approval of three additional components of the Fit for 55 package, the legislative framework aimed at cutting polluting emissions. The package seeks to achieve carbon neutrality targets by 2030 (a 55 percent reduction from 1990 levels) and by 2050, while reforming the emissions trading system to cover maritime and aviation activities, introducing a carbon cap adjustment mechanism, and establishing a new social climate fund to help the most vulnerable consumers. The legislation obliges electricity producers and major polluters to cut their emissions by 62 percent by 2030 compared with 2005, and it introduces the first carbon tax cap.
The interim political agreement between European Parliament negotiators and the Council was reached at the end of December. After two years of intensive talks and plenary approval, the final step remains the Council’s formal blessing in the coming weeks. The emissions trading plan remains the EU’s principal tool to curb CO2 releases, operating on a system of emission ceilings and tradable rights across sectors with high energy consumption. To date, it covers around 40 percent of total EU CO2 emissions, and emissions have fallen by 41 percent since the scheme began in 2005.
The newly approved regulation, passed by 413 votes in favor, 167 against, and 57 abstentions, broadens ambition by expanding its scope to additional sectors, notably aviation and maritime transport. The objective includes phasing out free emission allowances for the aviation industry by 2026 at the latest and promoting the use of sustainable fuels. It also requires electricity producers and other major polluters to reduce pollution by 62 percent by 2030. The regulation establishes a two-year global maximum emission limit of 90 and 27 million tons, respectively, and tightens the annual reduction trajectory to 4.3 percent from 2024 to 2027 and 4.4 percent from 2028 to 2030. The market rules are designed to push for deeper decarbonization while keeping a stable transition path for industries.)
Area facilities currently receiving free allocations will be subject to conditionality measures, including energy audits and, for certain facilities, climate neutrality plans. The agreement also foresees a mid-2026 assessment and report on the potential inclusion of Brussels municipal waste incineration into the regime from 2028. In addition, under certain conditions and in some member states, temporary continued free allowances may be granted to district heating projects to spur investments in decarbonization. This approach remains controversial, due to fears that it could disproportionately affect vulnerable households.
Support for vulnerable sectors and digits
To prevent adverse effects on households, a new Social Climate Fund will be introduced, available from 2026 and financed through revenue from emission rights auctions up to a cap of 65 billion. The fund was adopted by a wide majority and will operate through 2026-2032, with member states contributing at least 25 percent of co-financing from national budgets. The current allocation sits at 87 billion. The package is completed with the creation of the world’s first carbon cap tax, and the Carbon Limit Adjustment Mechanism, a scheme designed to shield European companies from negative impacts while encouraging other regions to raise their climate ambitions. The mechanism was approved with broad support and will apply to products such as iron, steel, cement, aluminum, fertilizer, electricity, and hydrogen, and in certain cases to indirect emissions. Importers of these products will be liable for the difference between the carbon price paid in the country of manufacture and the price of allowances in the EU emissions trading system. The tax is scheduled to roll out gradually from 2026 to 2034, aligning with the phase-out of free allowances in the EU.