Columbia Threadneedle: EU’s ‘Fit for 55’ strengthens sustainable outcomes focus

22 juli 2021

The European Commission has unveiled its Fit for 55 roadmap setting out the transformation to deliver the European Union's target of reducing net greenhouse gas emissions by at least 55% by 2030. Columbia Threadneedle’s Andrea Carzana and Natalia Luna comment:

'The European Union’s 2030 target is a vital step to ensure the EU is on the way to becoming climate-neutral by 2050. The package brings granularity and detail as to how these reductions might be met. It will be debated and voted on by the European parliament and member states before adoption, so not all the proposals may ultimately become law – nevertheless, it is a solid starting point.

It is also interesting to look at what has been announced and, in this case, show how the proposed framework will benefit the sustainable themes targeted by the Sustainable Outcomes Equity Strategy.

Carbon border tax
The carbon border adjustment mechanism (CBAM) will initially apply to cement, fertilisers, iron and steel, aluminium and electricity generation, as well as to Scope 1 direct emissions. Importers will be taxed on the carbon emission embedded in their goods based on the EU  arbon price. This will be implemented over three years from 2023 and could be extended to other sectors after 2026. Free allowances will be phased out for these subsequent sectors by 2035, declining 10% per annum, at which point it will reach zero. This is a positive factor for the construction industry, and a holding in the strategy such as building materials business CRH2 , as the carbonfree allowance might have been removed as soon as 2023. But the proposed date means the industry will only have to bear the full incremental carbon cost by 2035, allowing more time to accelerate emissions reductions plans and adjust pricing to a higher level.

The most positive and impactful aspect of the CBAM is that it is a starting point, heralding much more stringent carbon regulations globally. The delayed implementation could see the CBAM become a powerful tool to push the acceleration of decarbonisation plans by other countries, stimulating increased debate around global decarbonisation and climate ambitions.

 
Aviation and maritime
The EC is proposing that over the next few years sustainable aviation fuel (SAF) be blended into jet fuel on flights from any EU airport in order to drive emission reductions – a topic we covered in a recent viewpoint. The proposal now is for a 2% SAF blend by 2025, 5% by 2030 and 25% by 2035, up from a current level of around 0.1%.

The aviation sector has also been added to the EU emissions trading scheme (ETS). Sectors covered by the revised EU ETS – which will see further tightening of the market in support of higher carbon prices – will need to reduce their greenhouse gas (GHG) emissions by 61% by 2030 versus 2005 levels. This will see the sector’s free credit allocation, based on 2010 flying levels, wind down by 4.2% per year.

These proposals will impose additional costs on the aviation industry, so there will be winners and losers. Airlines will have to factor in SAF adoption and buying carbon certificates, and their success will depend on their ability to pass on costs to customers. For a company such as Neste – the world’s largest producer of renewable diesel and sustainable aviation fuel refined from waste and residues, and which we hold within the strategy – this is very supportive as Neste grows SAF production from around 0.1 Mtpa today to close to 1.5 Mtpa by 2024.⁽¹⁾

The maritime sector has also been added to the EU ETS, and this will affect intra-EU voyages, 50% of emissions from extra-EU voyages and emissions occurring at berth in an EU port. The industry will need to reduce its GHG intensity (versus a reference value yet to be set) by 2% by 2025, 6% by 2030, 13% by 2035, 26% by 2040, 59% by 2045 and 75% by 2050. Neither the kerosene used in the aviation industry nor heavy oil used in shipping will be fully exempt from energy taxation for intra-EU voyages. Over 10 years the minimum tax rates for
these fuels will increase, while sustainable fuels will benefit from a zero rate which will boost its acceptance and uptake.

 
Electric vehicles
EU car manufacturing is to be fully electric by 2035. Fit for 55 proposes a 55% reduction in emissions of new cars by 2030 and 100% by 2035. This implies a phase-out of internal combustion engine vehicles by 2035 – a faster emissions reduction than anticipated – which will
require faster growth of electric vehicles (EVs). However, these targets could pose a challenge for automakers and will also require acceleration in the rollout of EV infrastructure, including an increase in the number of charging points to a million by 2025 and 3 million by 2030.

This is very positive for semiconductor firms, which are key to this rollout. Infineon, which we hold is the market leader in the power semiconductor segment, a market that should see tremendous growth as these proposals mean the number of EVs on the road simply has to go
up. Electrical equipment companies like Schneider will also benefit, as they are critical to the implementation of the charging network.

 
Building renovations
The roadmap has increased the energy efficiency savings target to 36% by 2030, up from 32.5%. There is also a new binding target of a 1.1% annual increase in renewables used in heating and cooling, with renewables to account for 49% of energy use in buildings by 2030.
We previously covered this topic in a viewpoint at the end of 2020, but the proposals now go further. Previously the requirement was purely for government buildings to be upgraded, but now the public sector will be required to renovate 3% of its buildings each year, to include schools and hospitals. However, to achieve these efficiency targets further supportive policies will be needed in terms of funding, incentives and other regulations.

While carbon regulation is still a near-term headwind for the construction industry, in the long term the new EU rules are a positive factor and could benefit the decarbonisation leaders with greater access to capital and potentially a lower relative cost base. For firms such as Belimo, SIKA and Schneider that we hold in the strategy this should result in a sustained high level of organic growth with strong pricing power. Electrical companies will also benefit as commercial and residential buildings will be instrumental to energy transformation across the grid.'

^{4 https://www.neste.com/about-neste/who-we-are/business#9507dabd}