EU’s Fit-for-55 to Spur Energy Transition in Multiple Sectors

Tue 03 Aug, 2021 - 8:43 AM ET

The EU has released a wide-ranging set of inter-related regulatory proposals to reduce greenhouse gas (GHG) emissions by 55% (compared to 1990 levels) by 2030. The package, ‘Fit-for-55’, will increase regulatory pressure, as well as costs, related to emissions from domestic production and imports into the EU. These will affect companies across a wide spectrum of industries. Fitch Ratings considers regulatory shifts a crucial factor that can influence credit risks and ratings. Predictable regulatory changes communicated well in advance typically lessen the potential impact as issuers have time to prepare to comply.We expect the implementation lead time for the EU’s ‘Fit-for-55’ proposals, and the reasonable clarity around longer-term tightening of emission standards, to reduce the risk it may present for issuers.Compliance Costs, Investments to RiseEven so, pressure on issuers’ profitability in most affected sectors will increase, particularly where new costs cannot be passed on further down the value chain and distributed more widely due to competitive or pricing dynamics. The investments needed to decarbonise and to comply with the new requirements will also increase, negatively affecting issuers’ cash flows.One of the most wide-ranging sets of proposals expands the EU’s European Emissions Trading Scheme (ETS) to include new sectors, such as shipping. It also includes the set-up of a brand new ETS scheme for road transport and building fuels to be complied with by fuel providers. Furthermore, the proposals anticipate the reduction of the overall number of permits available and taper down free allowances from 2026 onwards. The proposal to introduce the Carbon Border Adjustment Mechanism (CBAM) will mirror the carbon costs of domestic producers for importers into the EU in hard-to-abate polluting sectors – steel, cement, aluminium, electricity and fertilisers. If proposals pass in their current or near-current form, which at this point is far from certain, we expect European carbon prices to increase.

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