May 19, 2022
Members of European Parliament provide more ambitious proposal for five elements of “Fit for 55” climate package, including EU Carbon Border Adjustment Mechanism
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.
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:
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:
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:
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
Emission Trading System
EMEIA Sustainability Tax Services