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Parliament Pushes for Higher Ambition in CBAM
The Carbon Border Adjustment Mechanism (CBAM) is one of the carbon pricing instruments aiming for a level playing field and avoidance of carbon leakage by imposing charges on the import of emissions-intensive goods from jurisdictions not covered by a fair carbon price if it is WTO-compatibility so. With appropriate ambition, a higher carbon tax rate or a tighter ETS cap leads to higher carbon prices and hence incentivizes more abatement and incentivizes those without a fair carbon pricing of their own, according to the NZAOA.
Key Changes to the CBAM Proposal:
Phasing in CBAM from 2027 and ending free allowances in EU ETS by 2032
The scope should be extended to include organic chemicals, plastics, hydrogen, and ammonia as well as indirect emissions
EU budget should support the least developed countries through amounts equivalent to sums collected through CBAM
Need for a centralized EU CBAM authority
By 31 December 2025, the Commission shall present a report with a detailed assessment of the effects of the EU ETS and CBAM on the EU production of products covered by CBAM and exported outside the EU, on the development of global emissions, and on the WTO-compatibility of the export derogation. Parliament further stresses that coherence between the CBAM and the EU ETS is essential to respect the principles of the World Trade Organisation and that CBAM must not be misused as a tool to enhance protectionism.
EU Emissions Trading System Reform
June 22, 2022, the European Parliament adopted its position on the revision of the EU Emissions Trading System (ETS) with 439 votes for, 157 against, and 32 abstentions. Parliament wants to incentivize industries to further reduce their emissions and invest in low-carbon technologies. The Emissions Trading System (ETS) should be reformed accordingly, to include:
New ETS II for buildings and road transport - citizens excluded until 2029. A separate new emissions trading system for fuel distribution for commercial road transport and buildings shall be established on 1 January 2024 - one year earlier than proposed by the Commission. Revenues from the auctioning of 150 million allowances under the ETS II shall be made available for the Social Climate Fund to address the challenges for low-income families.
The 2030 GHG emissions reduction target should be increased from 61% to 63%. Parliament wants to increase the Commission’s overall ambition to reduce emissions in the ETS sectors from 61% to 63% by 2030, compared to 2005. This is to be achieved through further one-off cuts to the EU-wide quantity of allowances in circulation, in combination with an increase in the annual reduction of allowances to 4.4% until the end of 2025, rising to 4.5% by 2026 and to 4.6% from 2029.
Free allowances are to be phased out from 2027 and end by 2032. The free allowances should be reduced to 93% in 2027, 84% in 2028, 69% in 2029, 50% in 2030, 25% in 2031 and 0% in 2032.
A bonus-malus system is to be introduced in 2025. Parliament wants to introduce a bonus-malus system in order to incentivize best-performers and innovation and reward the most efficient installations in a sector with additional free allowances. Those who do not implement the recommendations made in the energy audits, do not certify their energy systems, or do not establish a decarbonization plan for their installations, will lose some or even all of their free allowances.
Revenues to be used exclusively for climate action in EU and member states. Both the EU and member states must spend all of their ETS (I + II) revenues on climate action or on up-skilling and re-skilling of workers potentially affected by the green transition.
The ETS would now be extended to maritime transport. MEPs want to cover 100% of emissions from intra-European routes as of 2024 and 50% of emissions from extra-European routes from and to the EU from 2024 until the end of 2026. From 2027, emissions from all trips should be covered 100% with possible derogations for non-EU countries where coverage could be reduced to 50% subject to certain conditions. MEPs also want GHG emissions other than CO2 to be included, such as methane nitrous oxides. 75% of the revenues generated from auctioning maritime allowances shall be put into an Ocean Fund to support the transition to an energy-efficient and climate-resilient EU maritime sector. Parliament also wants to include municipal waste incineration in the ETS from 2026.
Parliament is now ready to start negotiations with member states. Please continue to track our latest updates on the matter.
Weighing all of the decarbonization trends roiling the energy-intensive industries, it is apparent that energy-intensive manufacturers must move quickly to revamp their operations and cut their carbon emissions if they are to remain competitive. The transition from a cost center to value-added requires long-term strategic planning instead of inaction. Time to assess the emission inventories of carbon-intensive products and seek transition planning to stay competitive.