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Our Take: 'Fit for 55' -- a Road Map for the Oil Sector

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The EU's “Fit for 55” raft of proposed legislation targets fossil fuel use within the transportation and heating sectors across the bloc. Designed to cut the EU's carbon emissions by 55% by 2030 from 1990 levels, the legislation will cause headaches for oil companies (PIW Jul.16'21). But for the European majors in particular, it at least provides a road map for how they should align their own energy transition strategies to keep step with the EU. Meanwhile, other measures will give the majors' low-carbon ventures a helping hand. • The European Commission says its emissions target cannot be achieved without “significant emissions reductions in buildings and road transport.” So, it proposes a new EU-wide emissions trading system to regulate fuel suppliers, rather than households and vehicle drivers. In addition, emissions trading will be applied to large ships, while measures designed to promote clean energy over fossil fuels will end tax exemptions for fossil-based aviation fuels and marine bunker fuels. • The new legislation is a clear statement of intent, and it addresses demand for renewables and fossil fuels. And it is exactly the type of initiative that the CEOs of the European majors have been demanding -- so it should serve as an aid to those oil companies that want to align their strategies with the direction that wider society is taking. • BP CEO Bernard Looney, whose company is aggressively pursuing the energy transition, has welcomed the legislation, noting “we want ambitious and effective climate policies to help us all get to net zero.” And although Royal Dutch Shell announced Tuesday that it would appeal a court ruling requiring a 45% cut to its emissions by 2030, CEO Ben van Beurden reiterated his view that “clear, ambitious policies” are needed to drive change across the whole energy system (IOD May26'21). • Although the emissions trading measures will increase costs for suppliers of fuel for heating, aviation, road transportation and shipping, there are items within the commission's proposals that will help facilitate the majors' transition plans. For example, an initiative obliging fuel suppliers to blend increasing levels of sustainable aviation fuels -- 2% in 2025 rising to 63% by 2050 -- fits with the plans not only of the big three European majors but of Eni and Repsol too (EIF Mar.10'21). Meanwhile, the EU has raised targets to boost charging capacity for electric and hydrogen fuel-cell vehicles, and for increased use of other renewable transport fuels, so providing a boon for European majors investing in these. • The commission did not mention policies to boost carbon capture and storage, while eyebrows were raised by plans to explicitly promote the use of green hydrogen over the use of blue hydrogen that is produced from natural gas. In response, leading European independent Wintershall Dea argued that “both renewable and climate-friendly gases must be able to participate” and that fragmentation would prevent the development of a strong European hydrogen market.

Topics:
Low-Carbon Policy, Corporate Strategy
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