The European Parliament must adopt Tuesday several key texts of the EU climate plan, including the vast reform of its carbon market and the “carbon tax” at the borders to green its imports, after the agreement reached in mid-December with the member states. MEPs will also vote on Wednesday on a regulation banning the import of products from deforestation.
Reform of the carbon market
This reform should make it possible to achieve the ambitious greenhouse gas reduction objectives of the EU-27 climate plan. To cover their CO2 emissions, electricity producers and energy-intensive industries (steel, cement, etc.) in the EU must now buy “pollution permits” on the European Union Emissions Trading Scheme (ETS), which was created in 2005 and applies to 40% of the continent’s emissions. The total amount of allowances created by the states decreases over time to encourage industry to emit less.
The reform provides for an acceleration of the rate of reduction of the proposed allowances, with a reduction of 62% by 2030 compared to 2005 (compared to a previous target of 43%): overall, the industries concerned will automatically have to reduce their emissions by the same amount. The carbon market will gradually be extended to the maritime sector, to emissions from intra-European flights, and from 2028 to waste incineration sites, subject to a favourable study by Brussels.
A second carbon market (ETS2) is planned for building heating and road fuels. Households will pay a carbon price on fuel and heating from 2027, but this price will be capped at 45 euros/ton at least until 2030, and if the current surge in energy prices continues, the implementation will be postponed to 2028. MEPs are also expected to approve the extension of the carbon market to maritime transport and the phasing out of free allowances for airlines from 2026. The rapporteur, German MEP Peter Liese (EPP, right), was pleased on Monday to see the Parliament “on the verge of adopting the greatest climate protection law of all time”.
“Carbon tax” at the borders
This “border carbon adjustment mechanism” (CBAM) is not strictly speaking a tax, but an unprecedented mechanism that consists of applying the criteria of the European carbon market to imports from the 27 Member States, where EU manufacturers are required to buy quotas to cover their polluting emissions.
In practice, the importer will have to declare the emissions linked to the production process, and if these exceed the European standard, acquire an “emission certificate” at the EU CO2 price. If a carbon market exists in the exporting country, it will only pay the difference. It will target the sectors considered the most polluting (steel, aluminum, cement, fertilizer, electricity). The MEPs have obtained to add hydrogen, some by-products (bolts…), and Brussels will have to study the possible extension to organic chemistry and polymers (plastics).
The expected revenues, which could exceed 14 billion euros annually, will be fed into the general EU budget. A test period will begin in October 2023, during which importing companies will simply have to report their obligations. As this “carbon tax” at the borders is ramped up — between 2026 and 2034 — the EU will gradually phase out the free emission allowances that have been allocated to European manufacturers to enable them to compete with non-European companies.
Social Fund
86.7 billion, a Social Climate Fund (SCF) designed to help micro-enterprises and vulnerable households in this energy transition, is to be set up in 2026. Revenues from the new carbon market (ETS2) will provide the bulk of this fund. It is intended to finance temporary direct income support measures to address rising road transport and heating prices, but also long-term investments such as building retrofits, integration of renewable energy, purchase and infrastructure for zero and low emission vehicles, and use of public transport and shared mobility services.
French MEP Manon Aubry (GUE/NGL, radical left), denounced the extension of the carbon market to private individuals as a measure that “will impact on transport and housing prices”. “Nothing has been learned from the yellow vests,” she tweeted. These comments were criticised by the elected representative Marie-Pierre Vedrenne (Renew Europe, centrists and liberals) for being “demagogic”, and for putting forward the establishment of this social fund for the climate.
