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Regulatory Briefing: EU parliament’s compromise on ETS and CBAM

By Victor Smart

The European Parliament has agreed to a compromise package of green measures, including some tightening of the EU’s high-profile carbon trading system and a new scheme to penalise imports of commodities like cement from countries with lax emission rules. This opens the way for approval of the measures by EU member states.

The package reviews the EU Emission Trading System and the new Carbon Border Adjustment Mechanism and Social Climate Fund proposals. 

Clear aims. Consultancy EY said in a briefing note that the prompt new agreement reflects a strong commitment to implement the European Green Deal measures. EY noted that the carbon package aims to transform the EU economy to zero emissions by 2050 and that some EU member states have greater national goals. 

While the upcoming negotiations between parliament and European Council “may result in some change in detail … there is now a greater level of clarity and certainty about the EU’s future climate and emission policy.”

ETS: progress. Parliament’s agreement on the ETS, a cornerstone of the bloc’s policy to combat climate change, was a relief as the terms of a pre-agreed deal were thrown out at a plenary session earlier this month. With the ETS overhaul, the parliament aims to incentivise EU industry to further reduce emissions and at a faster pace and invest in low-carbon technologies. 

Parliament members agreed the greenhouse gas emissions reduction target should rise from 61 per cent to 63 per cent by 2030; this is lower than some MEPs had demanded but higher than proposed by the EU commission. Other details include: phasing out free allowances of certificates from 2027, to be fully eliminated by 2032; a bonus system to reward efficient installations; and plans to penalise manufacturers that do not implement their energy audit recommendations.  

Significantly, the carbon tax would be extended to the maritime transport and municipal waste incineration over the next three to four years. 

CBAM: level playing field. More novel is the creation of the Carbon Border Adjustment Mechanism. This is designed to ensure that EU firms obeying tough carbon rules are not put at a disadvantage vis a vis competitors from countries with less stringent regulations.  Reporting by importers begins next year, with full implementation of the measures due to be phased in by 2032 The original scope has been widened from categories such as iron, steel and cement to also include plastic polymers and organic chemicals. CBAM will also now consider indirect emissions from the use of electricity as part of the manufacturing process. And a centralised EU CBAM authority will be established.

As ever, the proposals reflect the EU’s big ambitions for its climate policies. Once up and running, CBAM will impact global sourcing and supply chains; it could heavily influence investment strategies and, it is hoped, motivate other jurisdictions around the world to implement measures similar to the EU’s.

Social Climate Fund: short and long term. The fund will be created to support households and entrepreneurs most vulnerable to the impact of the transition to a green economy. It includes temporary measures to support member states as they deal with rising transport and heating fuel prices, such as possible reductions in energy taxes. And structural investments in building renovation, renewable energy projects and public transport though fiscal incentives and subsidies.

Good, but good enough? One the positive side, approval of the full carbon package keeps alive the EU’s hopes of driving forward sustainability standards globally. It also shows that the bloc’s often cumbersome technocratic proposals can successfully navigate their way through the democratic cut-and-thrust within parliament. But it has entailed significant compromises that fall short of what environmentalists say is needed. 

And another tough challenge is already rearing its head. Two influential committees of the European parliament this month rejected a proposal from the EU commission that natural gas and nuclear should be labelled as green in the bloc’s sustainability taxonomy. A plenary session of MEPs must vote on the matter shortly.

A service from the Financial Times