The EU Commission’s proposals to reduce greenhouse gas emissions by 55% by 2030, ‘Fit-for-55’, will increase regulatory pressure and costs related to emissions from domestic production and imports into the EU, affecting companies across a wide spectrum of industries, Fitch Ratings says.
We consider regulatory shifts a crucial factor that can influence credit risks and ratings. Predictable regulatory changes communicated well in advance typically lessen impact as issuers have time to prepare to comply. We expect the implementation lead time for the EU’s ‘Fit-for-55’ proposals, and the reasonable clarity around longer term tightening of emission standards, to reduce the risk it may present for issuers.
Even so, pressure on issuers’ profitability in the most affected sectors will increase, particularly where new costs cannot be passed on further down the value chain and distributed more widely due to competitive or pricing dynamics. The investments needed to comply with low-carbon policies will also increase, negatively affecting issuers’ cash flows. European aviation, shipping and automotive, where decarbonisation costs are very high, as well as extractive industries and utilities, will be among the most affected in the long term, if proposals are enacted.
An expansion of the EU’s European Emissions Trading Scheme (ETS) to new sectors, a new ETS scheme for road transport and building fuels, a reduction of the overall number of permits and free allowances, and the introduction of the Carbon Border Adjustment Mechanism to mirror the domestic producers’ carbon costs for importers into the EU in hard-to-abate polluting sectors are the key elements of the package.
If proposals pass in their current or near-current form, which at this point is far from certain, we expect European carbon prices to increase.
Source: Fitch Ratings