November 1, 2023
EU Council adopts new renewable energy rules and rules for promotion of sustainable aviation fuels under Fit for 55
New rules for renewable energy and promotion of sustainable aviation fuel form key elements of the European Commission's Fit for 55 climate package.
In July 2021, the European Commission introduced a climate legislation package of new proposals and changes to existing regulations, designed to align EU legislation with its increased climate ambitions as stated in the European Green Deal (EGD). Notably the "Fit for 55" moniker references the need to reduce greenhouse gas ambitions by 55% from 1990 levels. Since its introduction in 2021, progress has been made against close to all elements.
In October 2023, the EU Council adopted rules on renewable energy and sustainable aviation fuels (RefuelEU) introducing new targets and reporting obligations. This signifies near completion of the package and an opportunity for businesses to review the progress made and what new rules may mean for their operations, supply chains, and wider sustainability transformation plans.
Renewable Energy Directive
Revision of the Renewable Energy Directive (RED III) increases the share of renewable energy in the EU's overall energy consumption to 42.5% by 2030 with an additional 2.5% indicative top-up to reach 45%. Each EU Member State is required to contribute to this common target. The focus on renewable energy deployment is mirrored in the EU's Green Deal Industrial Plan, which references facilitating funding for renewable energy projects (see EY Global Tax Alert, European Commission publishes proposal for a "Green Deal Industrial Plan for the Net-Zero Age," dated 7 February 2023).
RefuelEU: promotion of sustainable aviation fuels
The main objective of the RefuelEU aviation initiative is to increase both demand for and supply of sustainable aviation fuels (SAF) and is a core component of how the EU is transforming the aviation industry to achieve its climate targets for 2030 and beyond.
Recap on the Fit for 55 package
Developments on RED and RefuelEU signify the near completion and adoption of the Fit for 55 climate legislative package that the European Commission announced in July 2021:
The European Commission has continued to build on the original package with initiatives in soil health, deforestation, waste management (see EY Global Tax Alert, European Commission proposes new set of measures to address deforestation, waste management and soil health, dated 14 January 2022) and undertake other initiatives to significantly accelerate business transformation in gas, agriculture and transportation sectors (see EY Global Tax Alert, European Commission builds on "Fit for 55" energy and climate package with new measures, dated 14 January 2022).
Reform of the Energy Taxation Directive remains under discussion. As part of the proposal, the Commission looks to align the taxation of energy products with EU energy and climate policies: taxation of fuels and electricity would be based on how much pollution they generate rather than volume, updated minimum rates, which have been unchanged for almost 20 years, and removal of exemptions and reductions offered by national governments that currently encourage the use of fossil fuels. (For more information, see the EU Commission's Revision of the Energy Taxation Directive (ETD): Questions and Answers.)
The adoption of RED III and RefuelEU should serve as a catalyst for not only industry but also businesses to consider their operations and transition to more-sustainable processes. With RED III, EU Member States will strive to meet new targets, which will affect businesses operating in the EU. For businesses, a worthwhile first exercise will likely be to review and switch to using renewable energy. For renewable energy producers, the revisions to RED III will improve the regulatory and financial environment for renewable energy production at the national level.
With regard to RefuelEU aviation, blending mandates should be part of a wider strategy across the aviation sector and its fuel supply chain. Financial support for the private sector will be critical to boosting production and supplying sustainable aviation fuels.
The Fit for 55 package is one element of the wider European Green Deal, a comprehensive plan to address climate change that has a far-reaching impact on all industries. The impact varies depending on the industry. Notable developments include new regulation in the textiles and batteries space — as part of the EU Circular Economy Action Plan — which will significantly affect value chains (see EY Global Tax Alert, EU Commission and Council take steps as part of the circular economy action plan — new rules on textiles and batteries, dated 21 July 2023). Another notable example is the EU Deforestation Regulation, which will require careful due diligence, reporting and, in some cases, significant changes to supply chains and source strategies.
On the flipside, to encourage investment in key green areas and enable sustainable transformation, there is a significant focus on increasing funding at the national, EU and private level. Businesses should endeavor to understand and consider the potential impact of the policy changes on their current operations and sustainability transformation plans.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, London
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young Law Zakrzewska i Wspólnicy sp. k. Warsaw
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor