Fit for 55

Last Updated:
February 14, 2024
Fit for 55 explained
The transition to a low carbon economy is on every CEO's agenda nowadays. The impacts of climate change and responses to it will transform every business sector in the coming decades. Although Climate change will affect a majority of companies, all will be expected to contribute to its solution.
Nevertheless, it is challenging for most companies to devise and implement a credible decarbonisation strategy. The transition requires new ways of doing business, including new ways of displaying capabilities and resources and new ways of thinking. But despite the challenges, companies around the world are scaling up their decarbonisation commitments.
We can see this trend with the number of companies committing to reducing emissions. More than 2000 companies have confirmed emissions reduction targets under the Science Based Target initiative (SBTi). Additionally, more than 370 have committed to The Climate Pledge, pledging to achieve net zero emissions by mid-century or sooner.
For most companies and investors, carbon credits play a crucial role in their Net-Zero strategy. They allow companies to make earlier and more ambitious commitments. Credits allow companies to reduce their current emissions through offsets, while taking cost-effective steps to reduce future emissions through asset rotation and business model development. In the long term, credits can play an essential role in offsetting difficult-to-avoid emissions from products for which no low- or zero-emission options exist.
The growing interest in recent years is also reflected in the Voluntary Carbon Market (VCM), which organises the pledging and trading of carbon credits. In 2022, the demand for carbon credits is at its peak. Prices have increased by more than 140% since 2021 and forecasts assume that demand for credits will increase 15-fold by 2030, to $50 billion per year.
But the voluntary carbon market has a problem. It cannot cope with demand. Access, which plays a crucial role in the global effort to combat climate change, is often limited to large organisations and is characterised by opaque pricing and market inefficiencies. Furthermore, due to a lack of transparency and credibility, it has faced a number of problems in recent years.
This report examines the key role for on-chain carbon credits as part of net zero strategies and the VCM. It was prepared by senken to help business decision makers identify and understand the best use of credits for their business.

What is Fit for 55?

The Fit for 55 package is a comprehensive set of legislative proposals aimed at aligning the European Union with its ambitious climate targets. It encompasses various policies and regulations designed to reduce greenhouse gas emissions and accelerate the transition to a sustainable, low-carbon economy.

European Climate Law Fit for 55 graph

What is the Fit for 55 timeline?

  1. Present: The Fit for 55 package was introduced in July 2021, signalling a significant step forward in the EU's climate ambitions. It includes numerous legislative proposals and initiatives, some of which are already in the process of being implemented.
  2. Near Future: Implementation of the Fit for 55 package will occur gradually over the next decade. The package outlines specific targets and milestones, including an overall goal of achieving at least a 55% reduction in greenhouse gas emissions by 2030 compared to 1990 levels. Many of the measures will come into effect in the coming years, impacting various sectors.
  3. 2030 and Beyond: The Fit for 55 package sets the stage for the EU's long-term objective of achieving climate neutrality by 2050. This means that emissions in the EU should be balanced by removals of greenhouse gases or offset through measures such as carbon capture and storage.

Sectors Covered by Fit for 55:

The Fit for 55 package covers a wide range of sectors and industries, aiming to ensure that emissions reduction efforts are comprehensive. Key sectors included are:

  1. Energy: Measures to accelerate the shift to renewable energy sources, enhance energy efficiency, and phase out high-emission technologies.
  2. Transport: Promoting electric vehicles, improving public transportation, and setting stricter emissions standards for cars and trucks.
  3. Industry: Implementing measures to reduce emissions from energy-intensive industries through carbon pricing and innovation.
  4. Agriculture: Promoting sustainable farming practices, reducing methane emissions, and encouraging afforestation.
  5. Buildings: Enhancing energy efficiency in buildings and promoting the use of sustainable construction materials.

Carbon Policy Tools

  1. Carbon Pricing: Expanding the EU Emissions Trading System (ETS) to include additional sectors, such as aviation and shipping, and increasing the price of carbon allowances.
  2. Carbon Border Adjustment Mechanism (CBAM): Introducing a mechanism to address carbon leakage by imposing tariffs on imports from countries with weaker climate regulations.

How Fit for 55 Affects Your Company:

For a company just beginning its decarbonisation journey, the Fit for 55 package is significant because it sets the regulatory landscape for emissions reduction in the EU.

Here are key considerations:

  1. Compliance: Understanding and complying with the new regulations will be essential. Companies need to assess how their operations and emissions align with the targets and requirements set by the Fit for 55 package.
  2. Innovation and Investment: The package encourages innovation and investment in low-GHG impact technologies and practices. Companies can explore opportunities to transition to cleaner energy sources, improve energy efficiency, and adopt sustainable practices.
  3. Risk Management: Being aware of the potential financial risks associated with non-compliance or carbon pricing is crucial. Companies should develop strategies to manage and mitigate these risks.
  4. Market Opportunities: The transition to a low-carbon economy also presents market opportunities, such as the demand for sustainable products and services. Companies can position themselves to benefit from these trends.