EU Council adopts new renewable energy rules and rules for promotion of sustainable aviation fuels under Fit for 55

• The European Union (EU) Council has adopted new rules for renewable energy and promotion for sustainable aviation fuel.

• The rules are key elements of the European Commission's Fit for 55 climate legislative package.

• Businesses should understand the potential implications of the latest policy developments and formulate plans accordingly.

Executive summary

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.

Detailed discussions

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).

Key points:

• The target is for industry to increase the use of renewable energy annually by 1.6%. Additionally, 42% of the hydrogen used in industry should come from renewable fuels of non-biological origin (RFNBO) by 2030 and 60% by 2035. RED III is intended to act as a main instrument to put pressure on the development of the renewable hydrogen sector in the EU.

• In the transport sector, EU Member States can choose between a binding target of 14.5% reduction of greenhouse gas intensity from the use of renewables by 2030 or a binding share of at least 29% of renewables within the final consumption of energy in the transport sector by 2030.

• In the case of buildings, there is an indicative target of at least 49% renewable energy share in buildings in 2030.

• Member States will design renewables acceleration areas whereby renewable energy projects will benefit from simplified and accelerated permit-granting processes.

• Renewable energy deployment will also be presumed to be of "overriding public interest,"

• which will serve to limit the grounds of legal objections to new installations.

• Sustainability criteria for the use of biomass for energy will be strengthened to reduce the risk of unsustainable bioenergy production.

Refuel EU: 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.

Key points:

• The regulation requires fuel suppliers to blend increasingly higher levels of sustainable aviation fuels and, from 2030, synthetic fuels with existing jet fuel supplied at EU airports. They must incorporate 2% of SAF in 2025, 6% in 2030 and 70% in 2050. The blending mandate for synthetic fuels will rise from 1.2% in 2030 to 35% in 2050.

• The scope of eligible sustainable aviation fuels and synthetic aviation fuels includes certified biofuels, RNFBO (including renewable hydrogen) and recycled carbon aviation fuels complying with the RED III sustainability and emissions saving criteria, up to a maximum of 70% except for biofuels from food and feed crops, as well as low-carbon aviation fuels (including low-carbon hydrogen).

• To avoid additional emissions from extra weight due to tankering, the regulation introduces the obligation for aircraft operators to ensure that the yearly quantity of aviation fuel uplifted at an EU airport is at least 90% of the yearly aviation fuel required.

• The regulation imposes data collection and reporting obligations for fuel suppliers and aircraft operators to enable monitoring of the effects on the competitiveness of EU operators and platforms.

• Based on the regulation, a Union labelling scheme will be created on environmental performance for aircraft operators using SAF, which will help consumers make informed choices.

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:

• EU Carbon Border Adjustment Mechanism — imposes a levy on certain emission-intensive imports into the EU; transitional phase commenced on 1 October 2023 with first reporting obligations due January 2024 (Watch this EY webcast focused on CBAM.)

• EU Emission Trading System — provides free allowances phase out from 2026, extended application to aviation and maritime (2024), new EU Emissions Trading System (ETS) II for building and road transport (2027)

• Energy Efficiency Directive — legally binding target of 11.7% reduction in final energy consumption by 2030 compared to 2020, with EU Member States required to contribute and embed energy-efficiency considerations throughout decision making

• Social Climate Fund — provides funding to EU Member States to support measures and investments in increased energy efficiency of buildings, decarbonization of heating and cooling of buildings, and improving access to zero/low-emission mobility and transport

• Regulation on Land Use, Forestry and Agriculture — sets an overall 2030 target for carbon removals by natural sinks equivalent to 310 million tons of CO2 emissions

• CO2 emissions standards for cars and vans — sets targets of 55% CO2 emissions reductions targets for new cards and 50% for new vans from 2030—2034 compared to 2021 levels, and 100% CO2 emissions reductions for both new cars and vans from 2035

• EU Forest Strategy — aims to improve the quality, quantity and resilience of EU forests by planting at least three billion trees by 2030.

• Alternative Fuels Infrastructure Directive — aims to expand charging capacity that can cater for the demand in zero-emissions vehicles

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.)

Business implications

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

• Alenka Turnsek

Ernst & Young Belastingadviseurs LLP, Amsterdam

• Ana Fallas Conejo

Ernst & Young Law Zakrzewska i Wspólnicy sp. k. Warsaw

• Kasia Klaczynska Lewis

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.