Climate Change and EU Policies

Quo vadis, EU (Law)? 3rd edition: The Green Transition 1/4

The opening panel was chaired by Umberto Lattanzi (Bocconi University, and the speakers were Jukka Similä (University of Lapland) and Juoko Nuottila (University of Lapland).

Climate change and EU transport policies – Jukka Similä

Introduction

Professor Jukka Similä laid out a comprehensive overview on the European Union’s climate policy structure. He defined the three different approaches [MOU1] of its intervention and specifically how they dealt with the transportation sector, one of the most polluting in Europe. The Professor’s presentation focused on how these instruments are currently applied and how they will see improvements in the coming years, to better achieve a positive impact on the sector and hopefully start its transition towards sustainability. Finally, Prof. Similä highlighted the Union’s policies aimed at reducing any possible adverse effects brought on by its market interventions.

European climate policies 

Regarding climate policy, the EU has developed numerous instruments to address the challenges for the green transition. These instruments fall into three categories, each one characterized by a different approach and various means of achieving the same goal of emission reduction. These categories are known as Emission Trading, Effort Sharing and Forest and Land Use; all of these separate policies function through regulatory efforts and emission reduction quotas, set out differently according to the specificities of the sectors falling under their purview and with differing levels of direct intervention by the Union itself.

The first set of instruments, Emission Trading, sees a unified EU-level target and primarily impacts large industrial installations. Currently aviation, and from 2024 onwards, maritime transport will be falling under its scope. On the contrary, Effort Sharing measures set out individualized reduction targets to each member state. Currently, road transportation sector is classified under these kinds of measures.

The EU’s transport policies have undergone a shift and now generally falls under both the Emission Trading and Effort Sharing systems of Union instruments. Historically, these kinds of policies entirely fell under the Effort Sharing systems, which involves less impactful measures and a broader scope, including building, heating, housing and waste management policies. Recently, some transportation modes have moved to the more stringing standards of Emission Trading. 

The transportation sector faces significant challenges on greenhouse gas emissions due to its increasing size. On the other hand, this transformation itself this necessity for transformation might also hide within itself precious opportunities for growth and technological development, in an effort to modernise and create high-quality jobs that both fulfil the EU’s quest for sustainability and its struggle to remain at a leading position in global markets.

EU put forward several steps on the plan for achieving a sustainable transport sector and reducing the emission. The transport sector’s emissions have been in fact generally decreasing since their peak in 2005, but projections place this slow reduction as far below the threshold of any meaningful change, and some modes of transportation have actually experienced slight upturns in emissions. Cars in particular have seen the least significant decrease, barring of course the significant downtick experienced by all transportation fields during the COVID-19 pandemic, while representing 77% of cumulative greenhouse gas pollution in the EU.

The EU-level instruments for tackling the transportation problem

The Emission Trading System (“ETS”) has proven to be the most successful instrument of EU climate policy. It functions through a general unified cap, limiting total amount of greenhouse gases that can be emitted annually. This cap progressively reduces emissions to achieve a gradual decrease in total emissions. Under the cap, operators have the option to buy or receive emissions allowances, which are tradeable on a sort of secondary market. This practice encourages cost-effectiveness and free market-oriented development of innovative, low carbon technologies that reduce the operator’s need for buying allowances. 

The ETS was initiated in 2005 by targeting power generation and other heavy energy-intensive industries, which continue to be the most sizeable sectors affected. In 2012, the system expanded to include the aviation sector and starting from 2024 onwards maritime transport as a whole will also be moved from Effort Sharing to the ETS. The future plan involves incorporating the entire transportation sector into the Emission Trading System by 2027, while shifting road transport infrastructure and buildings away from Effort Sharing measures to the ETS area of competence, ensuring a consistent framework.

The transportation sector under ETS and Effort Sharing

Firstly, aviation sector under the Emission Trading System is regulated as an implementation of the international Carbon Offset and Reduction Scheme. This scheme now operates under a route-based approach, to ensure equal treatment of airlines operating flights to and from the same places. Until the end of 2026, the routes covered by the ETS aviation system are restricted to flights between airports located in the European Economic Area and also departing flights from Switzerland and the United Kingdom. Starting from 2027 a new assessment will be conducted on the routes to have a more effective system, while suspending the free ETS allowances completely, marking the final step in the integration of aviation in the system.

Secondly, maritime transport will also be gradually included in the Emission Trading System. Starting from 2024 shipping companies will be required to purchase ETS emission allowances, calculated by the EU on a CO2 per Ton basis, for all cargo vessels and passenger ships having a gross tonnage above five thousand. It is planned for the system to cover all internal routes in the European Economic Area and 50% of emissions for voyages starting or ending outside the EU; every company will initially have to buy allowances for 40% of its emissions, with the requirement rising to 70% in 2026 and to 100% in 2027, allowing for a full gradual integration of the navigation and shipping sector.

Lastly, the road transport sector, however, presents wholly different challenges owing to its massive size and share of total EU transport emissions. For its planned shift out of Effort Sharing it will thus not be included in the aforementioned Emission Trading System where energy-intensive industry, aviation and maritime transport already operate. A wholly separate ETS will be instead put in place, covering all fuel stations and placing a separate reduction cap of 43% (compared to 2005 emission levels) by 2030. This policy, aimed at increasing the price of fossil fuels in comparison to renewable sources, poses some risks in terms of cost shifting on the final consumers and price volatility during the transition period; as such, the 2027 start date may be postponed to 2028 in case the price of oil or gas becomes exceptionally high, and a price stability mechanism will be put in place to avoid the risk of social injustices stemming from the instrument.[MOU2] 

Product Regulation measures for the transportation sector

A second set of EU-level instruments for creating a sustainable transportation sector may be found in product regulation policies, which affect the transport sector by targeting both vehicles and fuels.   Tightening requirement of emissions for cars and vans will be coming into effect by 2035, as well as a parallel regulatory framework for road vehicles on one hand and off-road vehicles and engines on the other, respectively. Separate regulation will also be introduced specifically for fuels, with sweeping measures aimed at both curbing current polluting fuel usage as well as strengthening the current alternative fuel infrastructure.

On the vehicle regulations side of the European Union’s regulatory effort, the main effort concentrates around a ban which will be put in place on the sale of new carbon-emitting cars by 2035, with an exception made for combustion engines running on so-called E-fuels, produced from renewable or decarbonised electricity. E-fuels are to be kept well distinct from biofuels, which have organic biomass as their main component and are thus potentially more liable to environmentally damaging side-effects [MOU3] (for example when the biomass is composed of palm oil).

On the fuel regulations side, the aim is to lay out a new set of measures for the alternative fuel infrastructure, mainly by setting targets for the maximum distance (set as 60 km for standard vehicles within the Trans-European transport network) between recharging stations. Additionally, measure aims to facilitate payment and comprehensive information on the location of the stalls [MOU4] for the final consumer. As a result, these measures will increase user friendliness and availability and reducing prices and waiting times. Regulations will extend also to affect aviation and maritime transport, with electricity supply for planes and large vessels becoming mandatory in airports and port facilities. 

Lastly on railway plans, a single European Railway Area will be set up in accordance with the 2020 Sustainable and Smart Mobility Strategy, which will double the high-speed railway network in the EU by 2030. This goal will supplement the existing EU “railway packages”, which have already been implemented with the aim of opening the market to competition and increasing cooperation between national railway systems.

A Just Transition 

All of these Union initiatives not only aim to cut emissions and achieving the goal of a green transition, but also introduces a secondary but imperative objective: ensuring a just transition towards a climate-neutral economy. This guiding principle seeks to prevent the EU measures from affecting those with lower income levels and whose economic activity might not have the necessary liquidity and stability to face radical fluctuations in the market, such as micro businesses.

To temper some of the effects that the ETS and regulatory measures might have on these vulnerable categories of people and businesses, a Social Climate Fund will be put in place. Its purpose is to support the Member States as they implement policies and invest in improving energy efficiency for buildings, as well as the decarbonisation of their heating and cooling. A relevant objective for the Fund is to grant better access to low- or zero-emission mobility options.

This Fund aims to support also citizens with transport poverty. For this, a definition of the terö transport poverty was laid out: whenever a citizen’s ability to satisfy his everyday needs is limited by either poor transit availability, unsuitability of transit options due to physical conditions, insufficient connections between significant activities (such as work, education and health services), relevant incidence of transit costs on the household budget, excessive travel time or unsafe travel conditions, the citizen shall be considered “transport poor” and be prioritised for the purposes of the Fund.

The Fund’s scope is not so broad as to be a universal solution to all the issues that the green transition will pose, especially in relation to price shifts the private transportation market will experience as a result of its relocation to the Emissions Trading System. But by improving public alternatives and removing other costs related to energy inefficiency, the Union aims to balance out the transition’s downsides by creating new, sustainable savings in other fields (such as household energy efficiency or public transit) that will undoubtedly be most felt and appreciated by less privileged European citizens.

Industry Impact Scenarios of the Ecodesign for Sustainable Products Regulation - Juoko Nuottila

Introduction

In the rapidly evolving landscape of environmental consciousness, the forthcoming Ecodesign for Sustainable Products Regulation is supposed to initiate a profound shift in global business practices. In fact, it goes beyond a mere compliance framework, offering an opportunity for industries to recalibrate their entire approach. At its core, this transformation has three pivotal aspects: business model evolution, heightened open innovation, and a reinvigorated focus on Intellectual Property Rights (IPRs) and their management.

Current Market Challenges and Past EU Actions

The modern consumer market faces with a numerous unsustainable practices that collectively contribute to a upcoming environmental crisis. From the utilization of non-renewable resources and non-sustainable materials to the intentional obsolescence of products, the market's current direction is environmentally damaging. There is an evident lack of sustainability perspective in product development: even when Europe claims to be a leader in climate and sustainability, firstly, most rechargeable batteries in consumer electronics and e-bikes or scooters are either non-replaceable or non-repairable and secondly, the fashion industry has the inclination towards short product lifespans and the lack of software updates in consumers' electronics. This obliges consumers to purchase new ones precisely due to software failure, further compound these challenges.

In response to these concerns, the Ecodesign Regulation should introduce a visionary shift towards a circular economy model in the internal market. This model should be underpinned by a commitment to minimize systematic leakage, reduce waste, and curtail emissions. Its core tenets encompass resource sharing, proactive maintenance, item reuse, strategic refurbishment, and systematic recycling of both products and resources. Basically, the main goal should allow consumers to maintain the chattels for longer than what is currently possible. If a product breaks, the consumers should be able to replace the damaged part or to repair it. And when it is not possible to fix it anymore, it should be repurposed again to fabricate new goods.

To review the EU actions so far, firstly the roots of these regulatory initiatives can be traced back to the EU's Ecodesign Directive of 2009 (“Directive”), which established the initial framework for minimum ecodesign requirements. Though initially directive-based, it laid out specific requirements for over 30 product groups, including televisions, household appliances, computers, and more. Its target was the end of the products’ life. These requirements are valid for the products sold in European Union and also applicable to the non-EU companies selling their products within the internal market.

Secondly, to comprehend the Product Group Regulation 2021 (“Regulation”), we may consider household washing machines as an example. Several key provisions have been established to promote sustainability, consumer choice, and responsible manufacturing practices. Producers are now mandated to ensure spare parts availability for professional repairers for a substantial period – specifically, a decade after the product's release. This extends not only to components requiring professional intervention but also to those accessible to consumers who prefer a do-it-yourself approach. A significant move towards user-friendliness is the insistence that no special tools should be necessary for repairs. This not only simplifies the repair process but also encourages consumers to take an active role in maintaining and prolonging the life of their appliances. However, recognizing the presence of advanced technologies in household washing machines, producers are now obligated to offer professional repair services as well. Moreover, a noteworthy addition is the stipulation for spare part delivery within 15 working days, ensuring timely repairs, and minimizing inconvenience for users.[MOU5] 

The repeated emphasis on a ten-year spare parts availability period raises a critical question: is it practical to maintain such a prolonged lifecycle for all products, considering potential environmental impacts?Regulation raises the need for a benefit-cost analysis, acknowledging that there are merits to both extending the lifespan of products and embracing new, potentially more eco-friendly alternatives. A suitable solution might consist in preferring a modular product design, which allows the easy replacement of parts with more sustainable and newer alternatives. This not only aligns with environmental goals but also encourages manufacturers to adopt forward-thinking approaches in product development. On the other hand, it is essential to note that companies are positioned to respond to consumer demands, suggesting that market forces play a pivotal role.

New Ecodesign Regulation and Industry Impact Scenarios

 Building upon the foundation laid by the 2009 Directive, the proposed Ecodesign Regulation for the future, anticipated in 2022, goes beyond compliance. It aims to foster a circular economy through an expanded set of requirements. Key additions include the introduction of a Digital Product Passport, the prohibition of destroying unsold goods, incentives for green public procurement, and financial encouragement for sustainable practices, in particular through investment companies. While green public procurement won’t be mandatory, the aim is to encourage its adoption by emphasizing sustainable criteria.

This Regulation will bring significant changes on information transparency, industrial collobration, protection of IPRs, technological innovation and consumer empowerment concerning sustainable practices.

Firstly, the introduction of a Digital Product Passport would mark a significant change in information transparency. Companies would be compelled to reevaluate their approach to information sharing about their products. This move towards transparency may necessitate changes in manufacturing processes, supply chain strategies, and potentially lead to standardized components for greater efficiency.

As sustainability and compliance take center stage, industries are likely to witness a surge in collaborative efforts. The increased emphasis on sustainability may drive companies to form alliances on digital platforms, incrising industry collaboration, and there's even the possibility of shared manufacturing capacities to streamline the production of sustainable products.

With this push for collaboration, the importance of Intellectual Property Rights (IPR) becomes significant. Collaborative ventures and shared platforms necessitate clear regulations to ensure fair and equitable distribution of rights. This area may also involve navigating antitrust measures to prevent monopolistic practices.

This Regulatory change naturally involves technological innovation. For instance, Digital Product Passport’s introduction could open avenues for advanced technologies. Blockchain, already implemented in certain marketplaces, can potentially trace the origin of products, ensuring transparency and authenticity. Artificial intelligence (AI) may play a pivotal role in collecting and analyzing product data, aiding in decision-making processes for sustainable practices.

Moreover, consumer empowerment would become a focal point with the advent of the Digital Product Passport. By providing comprehensive information for making sustainable choices, it has the potential to influence purchasing decisions. Nonetheless, the challenge of equity and accessibility arises, questioning the affordability of products aligned with stringent sustainability standards for all consumers. 

In the end, globalization dynamics add another layer of complexity: as the EU strives to lead in sustainable transition, there's a delicate balance to maintain. The push towards global standards, as opposed to region-specific ones, mirrors the global interconnectedness of industries. There’se a risk of markets splitting into two distinct segments– one complying with EU standards and another with the rest of the world.

In conclusion, The Ecodesign for Sustainable Products Regulation represents more than just mere set of guidelines; but an industry transformation towards a circular economy. While challenges abound, the opportunities for innovation, collaboration, and technological advancement are equally significant. Striking a delicate balance between sustainability goals, market dynamics, and societal needs will be crucial for a successful and comprehensive transition towards a more eco-friendly and circular future.