The European Parliament elections across Europe from 6 to 9 June 2024 will usher in a new legislature and spell the end of the incumbent European Commission led by Ursula von der Leyen. Leading up to June, the Commission is focusing on implementing the European Green Deal and wrapping up interinstitutional negotiations on files that have been launched but are not yet completed.

Separately, from 1 January to 30 June 2024, Belgium will take over the 

Presidency of the Council of the European Union

 from Spain. The Presidency of the Council is rotating, meaning that every six months a new member state government takes the helm to steer the Council’s work on EU legislation. The two main tasks of the Presidency are to plan and chair the meetings of the member states in the Council (ministers) and the preparatory bodies (attachés and ambassadors) and to represent the Council in its relations with other EU institutions.

The current Spanish Presidency oversaw multiple Fit for 55 files and saw through the completion of some of them (see Table 1). These include e.g. the revised 

Corporate Sustainability Reporting Directive

Others, such as the Electricity Market Reform are now in trilogue (interinstitutional negotiations) and might be concluded during the environment and energy council meetings on 18-19 December, the last ones this year (see more on this below).

As for the upcoming 2040 climate target, the latest signals from Brussels indicate that the Commission intends to postpone the process compared to what was originally expected. The plan now seems to be to issue a ‘communication’ and an impact assessment in early 2024, then wait until 2025 – well after the EP election and the appointment of a new Commission – to present the concrete legislative proposal.

EU work programme 2024

The document mentions the launch of an “evaluation” of the governance regulation governing the obligations of Member States in terms of energy and climate in 2024. The idea would be to adapt it to the new regulatory framework resulting from the climate package, which sets the EU an objective of slashing GHG emissions by 55% by 2030. The 2024 programme does not feature initiatives concerning heat pumps and CCUS.

Plans to launch clean ‘transition dialogues’ with stakeholders from industry and agriculture are also featured in the document. The Commission seems to be considering a proposal to include the latter in the EU ETS at some point (post 2030). A recent study made for the Commission by a group of think-tanks led by Trinomics, discusses various policy options/design aspects that could be used to add agricultural emissions.

The programme also mentions an initiative on industrial carbon management setting out a strategy for environmentally sustainable carbon capture, utilisation, and storage deployment in the EU.

for its presidency of the EU Council in the first half of 2024, the penultimate of which is to advance socially equitable green transition by implementing the Fitfor55 legislative files in practice.

Belgium’s work programme aims to finalise around 10 pieces of legislation relating to energy policy. The leaked programme, obtained by Veyt, is dated July 2023, but already sets the dates of the ministers' meetings for the first half of 2024, when Belgium takes over the presidency of the Council of the EU.

The first occasion for Belgium to chair member states ministers’ discussion on climate and energy topics will be during an informal meeting of ministers, on 15 and 16 January. Whether the 2040 target will be on the agenda here remains to be seen but given the latest signals from the Commission – that a proposal is not due before early 2025 - the Belgian government might see it as premature. 

If Madrid does not succeed in closing the trilogues on the energy performance of buildings directive by the end of December Belgium will take over with the aim of completing it as soon as possible. The same goes for the gas package and the methane regulation.

In 2021, EU leaders agreed on a 2030 target of “at least 55% reduction”. This led to the Fitfor55 process to recalibrate a swath of climate policy files such as the EU ETS and renewable energy, two directives that were finally adopted in 2023.

In the big picture, the missing link now is the 2040 target that will help to connect the dots between 2030 and 2050. The preparatory process started with a 

 that ran from 3 April to 23 June 2023, allowing stakeholders to have their say.

On 15 June, the European Scientific Advisory Board on Climate Change (ESABCC) presented

 on what should be Europe’s 2040 climate target. It recommends a GHG emissions budget of 11-14 Gt CO2e for the EU in the period 2031 to 2050. To stay within the desired budget, ESABCC recommends a 90-95% reduction target for 2040, compared to the 1990 reference level. That means getting close to the net zero target for 2050 ten years ahead of time. The lobby groups that represent industrials and other emitters can be expected to call for a less ambitious 2040 target, more likely in the range of 70-80%.

As of now, the Commission is reportedly aiming to publish a ‘communication’ and an impact assessment in late January 2024, to pave the ground for a legislative proposal to amend the Climate Law to insert a 2040 target with a concrete number. This was originally expected for May 2024, with the idea of starting the co-decision negotiations in the second half of 2024, under the new Parliament. Now, it seems that the current Commission prefers to leave it to its successor to also put forth the legislative proposal.

It will be up to the member states and the next European Parliament to negotiate and agree on the target, which will eventually set the course of the climate policy framework post-2030. It will surely inform the next RES target (for 2040) and the parameters for the EU ETS in the next trading period (2030-2040). 

We might see some member states react to the Commission's communication already this winter, but most likely the Belgian Council presidency (Jan to June 2024) will judge it premature to start real negotiations before the actual proposal is ready and the new European Parliament is constituted.  

Electricity Market Reform solidifies the role of CfDs

The Spanish Presidency managed to finalise and present the Council’s negotiating position on the file for interinstitutional negotiations with trilogues in progress. Originally, both the Parliament and the Council wanted to adopt the EMR before the year’s end; yet some contentious issues such as the creation of a single legal entity to centralise market coupling operations might preclude this from happening.

Another difficult question is what the role of contracts for Differences (CfDs) should be. The Commission’s original proposal stipulates that this instrument should be mandatory, however, the Council instead wants them to be optional for existing infrastructure, and mandatory for investments where public funding is involved in “

new power-generating facilities based on wind, solar, geothermal, hydro without reservoir and nuclear energy

The Council agreed that Member States would promote power purchasing agreements (PPAs) by removing unnecessary barriers and including measures that facilitate their uptake, in line with the Commission’s initial proposal.

The trilogue started in mid-October. One month later, Parliament and the Council are reportedly moving towards a deal, but the financing for nuclear and coal remains disputed and needs to be sorted out. The Spanish presidency acknowledges how sensitive this is for France and Poland, respectively, whereas on the EP side, the Greens and other negotiators are deeply critical of accepting a form of subsidy that they fear will undermine the level playing field among Europe’s power generators.

Due Diligence Directive means mandatory decarbonisation plans

 would make it mandatory for large companies (>500 employees and revenue >150 MEUR) to adopt decarbonisation plans and ensure that their business models and strategies are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 degrees C in line with the Paris Agreement. This would supplement the Corporate Sustainability Directive where no such mandatory obligation exists.

The most recent trilogue took place on 22 November 2023, with the Council pushing to exempt the financial sector from due diligence obligations. The Spanish Presidency supported the Parliament’s position to link directors’ remuneration to a company’s decarbonisation performance and add more content to the transition plans. The fifth round of interinstitutional negotiations is scheduled for December, as co-legislators will debate the weight the rules give to decarbonisation plans, inter alia.

For the European carbon market, the ongoing policy files will likely have a limited price impact next year. Some of the above initiatives, such as the electricity market reform and the due diligence directive have only tangential relevance for the EU ETS. The 2040 target 

 be of crucial importance to the EU ETS, as it will guide the recalibration for the years 2031-2040. Market participants will surely follow closely the 'communication' and the impact assessment in January, to try to gauge roughly what outcome to expect, even if the real negotiations will not start before 2025. 

As for the carbon removal framework, this might at some point in the future become integrated with the EU ETS, but that option is not part of the current negotiations. Hence,  we do not expect the conclusion of the removals trilogue to affect the EUA price.

Instead, depending on the European election results and the policy priorities of the new Commission that will be appointed around July, we might see some more general indirect impact on market sentiment if climate and energy are perceived to slide down from the top of the policy agenda.

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The work programmes of the European Commission and the upcoming Belgian presidency of the Council show that ahead of the European elections in June 2024, the main energy and climate priority is to wrap up outstanding files from the Fitfor55 package and the initiatives launched in reaction to the energy crisis in 2022.

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Leak: EU legislative priorities for first half of 2024

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