Investment Institute
Macroeconomic Research

Fit for 55: A carbon pricing upheaval

  • 27 July 2021 (10 min read)

Key points

  • The European Commission (EC) has unveiled a suite of measures, known as ‘Fit for 55’, to help deliver the European Union (EU)’s Green Deal objective of at least a 55% reduction in greenhouse gas emissions from 1990 levels by 2030.
  • The core of the proposals relies on carbon pricing. In this report, we explore the underlying mechanisms of the EU Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM).
  • Phase 4 of the EU ETS revision (2021-2030) introduces more ambitious emissions reduction targets, extends the system to aviation and shipping and creates a new ETS scheme for fuels in road transport and buildings.
  • The EC also proposed phasing in a CBAM from 2023 to 2026. This would apply to sectors with a high risk of carbon leakage – iron and steel, cement, fertiliser, aluminium and electricity generation.
  • Carbon pricing also raises revenues. We discuss the different initiatives proposed by the EC to increase its financing capacity and smooth the financial impact on the most vulnerable households.
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