Parliament’s biggest group rejects compromise on EU carbon border tax

Lawmakers are gearing up for a cliff-hanger vote on the EU’s proposed carbon border adjustment mechanism (CBAM) next week after the European Parliament’s main political groups failed to agree a common stance on when the new scheme should start to apply.

“There is no overall compromise on CBAM,” said Peter Liese, a German Christian Democrat who leads the reform of the EU carbon market in Parliament on behalf of the centre-right European People’s Party (EPP), the assembly’s biggest political group.

Liese briefed journalists on Thursday (2 June) about the decisive vote next week on the proposed overhaul of the Emissions Trading Scheme (ETS) – the EU’s carbon market and flagship climate policy tool.

The vote in the Parliament’s plenary chamber in Strasbourg will conclude months of haggling between the political groups on the ETS reform and the parallel introduction of a carbon border tax to protect EU industries against environmental dumping.

The European Commission tabled plans last year to tighten the ETS in order to meet the EU’s target of reducing carbon emissions by at least 55% this decade and put it on track to reach net-zero emissions by 2050.

This entails eliminating free pollution permits for industries like steel, cement and chemicals, which currently receive most of their CO2 allowances for free. CBAM would be introduced in parallel, as a way to protect EU industries against cheaper imports of polluting goods coming from abroad.

But lawmakers are divided over when to introduce CBAM in replacement for free CO2 pollution permits.

“We don’t want too hasty introduction of CBAM because it has not been proven to work,” Liese told journalists. Companies, he said, need time to invest in low-carbon technologies in order to remain competitive on global markets. “That’s why we think we need to be careful with completely phasing out free allowances too fast.”

While the European Commission proposed phasing out free allowances between 2026 and 2035, the Parliament’s environment committee voted for a 2030 end date – way too early for the EPP.

A middle way, supported by the Socialists and Democrats (S&D) and the centrist Renew Europe groups, suggests ending them in 2032.

But that is a no-go for the EPP. “We don’t support that compromise,” Liese said, pointing out that 2032 is already three years ahead of the Commission’s initial proposal to end free allowances in 2035.

Instead of 2026, the EPP supports gradually introducing CBAM as of 2027, and eliminating free allowances by 2034, in line with proposals voted on by the Parliament’s industry committee (ITRE).

“There will be a controversial vote and we will see who has a majority,” Liese said. Other political groups “were not ready to have a more careful start before 2026 and that’s why we don’t support that compromise,” he explained.

Avoiding a ‘price shock’

According to the EPP, EU industries need more time to adjust because of Russia’s war in Ukraine, which is pushing up energy prices for European consumers and businesses.

“In 2024, we will still be in a crisis and to replace Russian gas,” Liese remarked. While the EU is speeding up plans to deploy renewables, Europe will still be dependent on fossil fuels by then “and we will need to use coal” in replacement of Russian gas, he argued.

Liese’s point was made in relation to a proposed ‘rebasing’ of the ETS, which aims to gradually reduce the supply of carbon allowances until 2030, in line with the bloc’s higher climate ambitions.

“Making everything more expensive at this moment will create a price shock for citizens,” Liese warned. “This is why we fought very much against this rebasing.”

The EPP’s rebasing proposal was agreed with the centrist Renew group in Parliament. Pascal Canfin, a French Renew lawmaker who chairs the Parliament’s environment committee, confirmed this on Wednesday (1 June).

On the ETS reform, “we start with a bit less ambition because we have very high energy prices today,” Canfin told a press briefing. “We did what is called a rebasing so that we don’t have a price shock in the very short term,” he explained.

However, Canfin said this initial decrease in ambition will be compensated later on as Europe gets closer to its 2030 climate target. “There is more ambition before 2030 so that at the end, on all the period, 2020-2030, it’s the same level of emission reductions,” Canfin explained.

That compromise proposal is not supported by the S&D and the Greens, however, meaning it will be up to MEPs to decide during the plenary vote next week.

‘Green export rebates’ on the table

Another proposal, supported by Renew and the S&D, is to introduce a system of “green export rebates” for European manufacturers of environmentally-friendly products like low-carbon steel or aluminium.

“The problem with CBAM is that you do not cover exports,” Canfin explained, saying exporters will lose the protection they currently enjoy from the free CO2 allocation system under the ETS. “This is why we created a mechanism that will focus only on the green exports,” Canfin said.

Under the proposed system, free CO2 permits would be granted only to the 10% best-in-class manufacturers of low-carbon technologies, mirroring the existing system used to award free CO2 permits to industry under the ETS.

The permits will be granted only “for that part of the exports that are connected to decarbonisation,” the French lawmaker explained.

The move, which is opposed by the Greens, was aimed at placating the EPP, which has insisted on providing further protection to European industry.

But the EPP rejected the idea, saying it risks being challenged under World Trade Organisation rules prohibiting discriminatory practices against foreign manufacturers.

According to Liese, it would be difficult for the WTO to make a distinction between the ‘green’ share of EU exports and the rest. “As far as we know, the WTO wouldn’t make this difference,” Liese said. “That’s why we didn’t support that one”.

The EPP’s position, Liese explained, is to grant free allowances for exports and let the Commission do a thorough assessment before it enters into force. “And if the Commission thinks it’s not WTO compatible”, it should come with a proposal.

“The EPP amendment in my view is the most clever one,” Liese said. “We definitely need a solution for exports”.

CBAM ‘landing zone‘ in sight

Despite differences among political groups, the Parliament’s lead lawmaker on the CBAM proposal, the S&D’s Mohammed Chahim, said he was confident that positions were converging.

“We know what the landing zone will be in Parliament,” the Dutch MEP told the press briefing on Wednesday, saying this includes a phase-out of free allowances by 2032 and extending the scope of the scheme to chemicals, such as polymers and plastics.

The hope, Chahim said, is that other countries will follow suit and adopt similar carbon border taxation schemes so that all world nations pay a price for their carbon emissions, creating a level playing field.

“And the talks I’ve had over the last year with many people and interlocutors from different countries gives me the feeling that this will go exactly in that direction,” he said, adding that the US position has shifted radically on the issue.

“Even the Republicans now like it because they see that this creates a level playing field for their own producers as well.”

[Edited by Zoran Radosavljevic]


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