Executive summary
On 17 May 2022, the European Parliament’s Committee on Environment, Public Health and Food Safety (ENVI) voted and adopted five reports of the “Fit for 55” legislative package. The package aims to align the European Union (EU) climate, energy, land use, transport and taxation policies with the goal of reducing net greenhouse gas (GHG) emissions by at least 55% from 1990 levels by 2030 with the overarching goal to achieve climate neutrality in Europe by 2050.
The ENVI is the committee responsible for the Carbon Border Adjustment Mechanism (CBAM). Following their earlier recommendations (see EY Global Tax Alert, European Parliament provides recommendations on EU Carbon Border Adjustment Mechanism, dated 1 March 2022) and the ECOFIN’s agreement on CBAM (see EY Global Tax Alert, EU Finance Ministers reach agreement on EU Carbon Border Adjustment Mechanism, dated 16 March 2022), they have now voted for CBAM to have a broader scope, more ambitious targets and at an accelerated pace of implementation. In addition, free allowances under the EU Emissions Trading System (ETS) will be phased out sooner than originally planned, a new EU carbon sinks goal will increase EU 2030 reduction target to 57%, and the Effort Sharing Regulation, which governs GHG emissions in sectors not covered by the EU ETS, will be tightened.
With expanded scopes and tighter timelines, a greater number of businesses will be impacted. It will be critical for businesses to keep a close eye on developments as the legislative process for CBAM in particular unfolds at pace, with a vote in early June 2022 followed by negotiations by the EU Member States.
Detailed discussion
Revisions to the EU Emissions Trading System
The EU ETS is a cornerstone of the EU’s policy to combat climate change. Changes to the EU ETS include:
Free EU ETS allowances may be phased out from 2025 and eliminated entirely by 2030
Annual reduction of emission allowances to be extended by 0.1 percentage points annually compared to the previous year until 2030, starting from 4.2% in the year following the entry into force of the new regulations
New EU ETS II for commercial buildings and transport shall be established from 2025
Municipal waste incineration shall be included in the EU ETS from 2026
Extending EU ETS to maritime transport: 100% of emissions from intra-European routes as of 2024 and 50% of extra-European routes from and to the EU as of 2024 until end of 2026. From 2027, emissions from all trips should be covered 100% with eventual derogations for non-EU countries where coverage could be reduced to 50% subject to conditions. Methane nitrous oxides emissions shall be included in addition to CO2
Extending scope for aviation sector: In addition to free allowances being phased out earlier than originally proposed, the scope has extended and shall apply to all flights departing from an airport located in the European Economic Area
Revenues of the EU ETS shall be used exclusively for climate action in the EU
Carbon Border Adjustment Mechanism
With this vote, the ENVI is aiming for a more extensive and faster CBAM implementation. The CBAM is designed to reduce the risk of carbon leakage (i.e., the relocation of emission intensive business to non-EU countries without or with less carbon pricing) and help to meet global carbon ambition goals. Changes to the CBAM include:
Extended product scope: CBAM shall also cover additional products including ammonia, refinery products, organic chemicals, base organic chemicals, polymers/plastics, hydrogen in addition to the already proposed categories (cement, iron and steel, aluminum, fertilizers and electricity)
Mirror the EU ETS phase out from 2025 and elimination of EU ETS free allowances by 2030
Indirect emissions will also be covered in addition to direct emissions (i.e., emissions from electricity used by manufacturers)
Establishment of a centralized EU CBAM authority
CBAM revenue is intended to fund international climate and development projects
Effort Sharing Regulation
The ENVI also proposes to tighten the EU Effort Sharing Regulation legislation, which covers GHG emissions in sectors not included in the EU ETS (representing approximately 60% of EU emissions). EU Member States will have stricter targets for GHG reduction with targets ranging between 10-50%, instead of 40% as the maximum. There is also the ambition for increased transparency and less flexibility to borrow, bank and transfer emission allowances.
Regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF)
The ENVI agreed to increase the EU carbon sinks target for land use, land use change and forestry sector, which will de facto increase the EU’s 2030 GHG reduction target to 57%. A progress report is expected by the end of 2024 and the targets shall be met by new measures including:
Support for voluntary carbon farming to provide for 50 million additional tons CO2-equivalent of net carbon removal
Sub-targets for cropland, grassland and wetlands at EU and at the Member State level, GHG removal targets will be set by the end of 2024
Implications
The ambition of the EU energy policies is clear reflecting the urgent need to reduce emissions and meet overall climate goals. Changes may be expected to the five interlinked elements, as the legislative process continues to move forward.
While upcoming negotiations may weaken current positions, it is critical for businesses to continue monitoring the developments closely and start to analyze the impact. The impact is not limited to the EU, rather it will impact across global sourcing and distribution footprints of businesses. In summary, businesses should proactively embrace the changes and prepare to align their business model accordingly.
For additional information with respect to this Alert, please contact the following:
Carbon Border Adjustment Mechanism
Richard J. Albert, Leipzig
Derek Leith, Aberdeen
Kasia Klaczynska-Lewis, Warsaw
Slawomir Czajka, Warsaw
Ashish Sinha, Zurich
Aron Nagy, Budapest
Franky de Pril, Diegem
Gert van Telgen, Amsterdam
Milen Raikov, Sofia
Alessandra di Salvo, Rome
Pedro Gonzalez-gaggero Prieto-carreño, Madrid
Marguerite Trzaska, Paris
Emission Trading System
Kasia Klaczynska-Lewis, Warsaw
Dariusz Kryczka, Warsaw
Boris Scholtka, Berlin
Sebastian Helmes, Berlin
Eric-Holger Glattfeld, Berlin
EMEIA Sustainability Tax Services
- Alenka Turnsek, London
- Ana Fallas Conejo, Amsterdam
- Maike Moore, Berlin
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
