Welcome to a new edition of Dr2 Consultants’ weekly policy updates on the Fit for 55 legislative package. In the coming weeks, Dr2 Consultants will provide you with the latest insights on this package of climate and energy legislations, which was presented by the European Commission on 14 July, including updates on the decision-making process and the latest political developments in the EU institutions. This update will be the last one before a short summer break. Regular updates will pick up at the end of August. This week, we will focus on the revision of the Renewable Energy Directive.
Highlights of the week
PARLIAMENT’S INDUSTRY CHAIR REACTS TO FIT FOR 55: The Chair of the Industry, Research and Energy Committee (ITRE) of the European Parliament, MEP Cristian Buşoi (EPP, Romania), reacted to the package of proposals presented by the European Commission. He stated that many of the proposals fall under the remit of the ITRE Committee, which will work on the proposals with the mindset that it is the EU industry that will enable the green transition. Therefore, the Committee will promote market-based measures. Buşoi also called for unwavering commitment to small and medium-sized enterprises to support them in the considerable efforts required by the proposals. Finally, the ITRE Chair highlighted that in order to ensure that the transition leaves no one behind, careers of workers in energy-intensive industries will have to be supported, particularly in terms of re-skilling and up-skilling. The ITRE Committee is expected to be in the lead on the revision of the Renewable Energy Directive.
EU TRADING PARTNERS DENOUNCE CBAM PROPOSAL: The main trading partners of the EU reacted with worry over the Commission’s proposal for a Carbon Border Adjustment Mechanism (CBAM). China warned that it considers the measure, which will introduce a tariff on polluting goods entering the EU, to go against World Trade Organization rules and would seriously undermine mutual trust in the global community and prospects for economic growth. Russia, which could be impacted the most by the measure considering the volume of electricity, aluminum and fertilizer it trades with the EU, said that the prospect of an additional financial burden for Russia’s economy and companies was extremely unpleasant. Australia denounced the proposal, arguing it would hit jobs and was a form of protectionism. However, the Commission’s proposal also triggered some partners to consider their own carbon border tariffs. For example, Democrat lawmakers in the US are proposing to impose a tax on imports from countries without ambitious climate laws.
EU INDUSTRY EXPRESSES WORRY OVER CBAM PROPOSAL: European industries covered by the EU’s future CBAM have expressed doubts about the proposal. The mechanism is planned to apply to six categories of imports: electricity, iron and steel, aluminum, fertilizers, and cement. Industry is worried that the gradual introduction of the CBAM will coincide with a phase-out of the free emissions allowances they receive under the EU’s Emissions Trading System (ETS), with the risk of making European industry less competitive compared to third-countries not decarbonizing. In order to ensure the competitiveness of EU exports, European industries are asking for export rebates to be introduced in the EU’s climate and trade policy, for products produced in the EU and exported to countries which do not have carbon limitation or pricing policies. European manufacturers additionally warned that with the end of free ETS allowances, industry will have less money available to invest in low-carbon technologies.
EU ENVIRONMENT MINISTERS CRITICIZE PLAN TO EXTEND EU ETS TO BUILDINGS AND TRANSPORT: Environment Ministers of the EU Member States, who met in late July in the Environment configuration of the Council of the EU, expressed reservations and skepticism over the Commission’s proposal to create an EU Emissions Trading System for transport and heating fuels for buildings. Although it was not made public which Member States expressed criticism, some Ministers had expressed their concerns prior to the meeting. The Polish Climate and Environment Undersecretary of State warned that extending the EU ETS to buildings and transport was a political mistake that made the Commission appear as choosing to tax poorer households. Luxembourg’s Energy Minister said that the Commission proposal was counterproductive and would create unnecessary social hardship. France expressed similar concerns. The proposal for the EU ETS is considered to be one of the most politically sensitive files of the Fit for 55 package.
DR2 CONSULTANTS INTERVIEWED ORANGEGAS ON THE FIT FOR 55 PACKAGE: In order to outline the exact impact of the Fit for 55 package, Dr2 Consultants asked Marcel Borger, founder and CEO of OrangeGas, what the new package means for his business. As a clean fuels and energy supplier, OrangeGas finds itself right in the midst of the proposed policy measures. Here you can read more about how OrangeGas has prepared for the publication of the Fit for 55 package, how it views the proposed legislations and how the package will likely impact OrangeGas.
Deep dive – Revision of the Renewable Energy Directive
The European Commission presented on 14 July the proposal for the revision of the Renewable Energy Directive (RED II) as part of the Fit for 55 legislative package. After the revision, the Directive will be abbreviated as “RED III”. The Renewable Energy Directive is the legal framework for the development of renewable energy across all sectors of the EU economy. The existing RED II includes renewable energy targets for Member States as well as targets for the share of renewable fuels in transport. In addition, RED II contains rules for the use of biomass, waste as a raw material for fuels, and forms the basis for the incentive framework for biofuels.
Why revise the Renewable Energy Directive?
Energy production and use accounts for 75% of all EU emissions. Therefore, the European Commission is proposing to revise the Renewable Energy Directive in order to accelerate the uptake of renewable energies and the transition to a greener energy system necessary to achieve the EU’s climate and energy objectives. A revision is also needed to reduce the share of renewable energy coming from biomass, in alignment with the recent EU Biodiversity and Forestry strategies. Currently, 60% of the EU’s renewable energy comes from biomass.
What does the revision include?
RED III mainly increases the RED II 32% renewable energy by 2030 target to 40%. Additional specific targets are proposed for renewable energy use in transport (13% greenhouse gas intensity reduction), heating and cooling (+1.1% annually), buildings (at least 49% of renewable energy), and industry (+1.1% annually). The increased targets aim at increasing the share of renewable energy in highly-polluting areas, to reduce their environmental impact.
Additionally, RED III further promotes the use of biofuels and strengthens sustainability criteria for the use of bioenergy by applying the existing land criteria (such as no-go areas) for agricultural biomass also to forest biomass. In line with the EU Hydrogen Strategy, RED III sets sub-targets for renewable hydrogen and hydrogen-based synthetic fuels for transport (2.6% for renewable fuels of non-biological origin) and industry (50% renewable share in hydrogen consumption).
The proposal also includes measures to make it easier for projects of electricity production from wind and sun to receive permits and get connected to electricity distribution grids.
Furthermore, the revision also revises the definition of renewable energy from non-biological origin to cover all liquid and gaseous fuels deriving from renewable sources other than biomass, and includes higher target for the integration of these fuels in the EU’s energy mix, especially in sectors where electrification is not possible.
What will be the impact of the revision?
The European Commission expects that the revision will reduce the EU’s reliance on fossil fuel imports, reducing energy costs for consumers and businesses, and will lead to job creation in the renewable energy sector. The revision will specifically benefit SMEs, as most of the value chain of renewable energy deployment is operated by SMEs.
However, the proposal received mixed reviews from industry. The proposal was positively welcomed by the wind energy sector, as well as the solar power sector. However, for the bioenergy sector, the revision and the specifically the review of sustainability criteria for biomass could increase red tape for biofuel producers and impair the EU’s renewable energy ambitions.
Moreover, for environmental groups and associations, the revision is not ambitious enough to contribute sufficiently to the EU’s -55% by 2030 target. A 50% renewable energy target would have been better. Additionally, certain NGOs, such as Greenpeace, consider that the proposal is not in line with the EU Forestry Strategy, as biomass from wood continues to count towards renewable energy targets.
Following the publication of the proposal, the European Commission has opened a feedback consultation period between 16 July and 21 September 2021.
The proposal will now be forwarded to the European Parliament and Council of the EU for adoption. In the Council, it is expected that the file will be dealt with by the Energy Council Configuration. In the European Parliament, it is not yet decided which Committee(s) will be responsible, but most likely the Industry, Research and Energy Committee. Key MEPs, such as rapporteurs and shadow rapporteurs, also still need to be appointed.
Slovenia has made it clear that they are not committed to reaching a general approach on RED III within the Council of the EU during its time holding the rotating Presidency. They are leaving this task to France, which will hold the Presidency in the first half of 2022.
What are MEPs saying?
Onlangs presenteerde de Europese Commissie deze stapel wetsvoorstellen die ervoor moeten zorgen dat de EU in 2030 55% minder CO2 uitstoot. Waarover gaan al die voorstellen? En wat merk je ervan in de praktijk? Daarover bericht ik deze zomer #GreenDealVoorstellen #Fitfor55 pic.twitter.com/7MYmREdXza
— Esther de Lange (@Esther_de_Lange) July 28, 2021
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Highlights of the week
TIMMERMANS DEFENDS CLIMATE PACKAGE IN EUROPEAN PARLIAMENT: Following the publication of the Fit for 55 package on 14 July, EU Climate Chief, Frans Timmermans, joined the meeting of the European Parliament’s Environment, Public Health and Food Safety Committee (ENVI) for an exchange of views on the proposed climate and energy measures. In general, MEPs congratulated the Commission for the work and efforts it took to finalize the package. Nonetheless, Greens and left-wing MEPs considered that the proposals could go ever further, for example by setting binding targets for Member States and including the agricultural sector in the proposals. Moreover, many MEPs voiced their concerns about the social implications of the package, fearing that too many repercussions would be felt by poorer households and stressing that compensation mechanisms needed to be ensured. Timmermans will visit multiple European capitals to defend the package, as well as the upcoming G20 summit in Naples.
POLITICAL GROUPS REACT TO FIT FOR 55 PUBLICATION: In the aftermath of the Fit for 55 publication, political groups within the European Parliament issued press releases in response to the publication.
The Europeans People’s Party (EPP) underlined the need for a credible social instrument in order to make sure “low-income families, middle class home owners or car owners in rural areas without public transport” don’t have to pay the highest bill.
The Socialists & Democrats (S&D) group welcomed the “ambitious and bold” commitments of the Commission, and is committed to working in the next months to ensure the measures are socially just and environmentally efficient.
Greens MEPs deplored that some proposals lack the ambition to create the right incentives for the ecological-transitions, seeing too many gaps and exemptions.
Renew Europe called the package “the most important legislative initiative of the decade”, and will work to ensure that all measures can transform the society without breaking it socially. The group’s press release also calls for Member States to take active responsibility on the implementation of the package.
European Reformists and Conservatives (ECR) are “highly concerned” with the Commission’s approach for reaching climate neutrality by 2050, fearing that it will endanger jobs in industry and lead to social movements similar to the yellow jackets in France.
MEPs from the left (GUE/NGL) also welcomed the package, but stressed that the shift in the economy must be accompanied with robust social support so that the green transition does not punish those in a precarious situation, workers and low-income households.
MEMBER STATES SKEPTICAL ON EU ETS REVISION: Following the publication, Member States’ governments started reacting on the package. Reactions mainly concerned the revision of the EU ETS. Spain’s Minister for Ecological Transition, Teresa Ribera, raised concern on the inclusion of road transport and building emissions under a new EU ETS scheme, and expressed worry over increased prices on the EU’s carbon market, calling for price control. The Ecological Transition Ministry in France also issued a statement warning of the country’s reservation about the relevance of extending the EU ETS to road and building emissions, fearing social consequences.
REPORTS OF TENSION WITHIN THE COLLEGE: Reports of tensions within the College of Commissioners over the finalization of the Fit for 55 package are coming from the Brussels bubble. Reports say that some Commissioners expressed concerns about the initiative and the way it was pushed forward by the Commission President, Ursula von der Leyen. Main criticisms concerned the failure to tie the measures of the package to own-resources legislation, that would be needed to finance the changes introduced by the new legislations, and the impact of the package on vulnerable households, industries and SMEs. Complaints also concerned the time-pressure that Commission staff was put under to deliver the package, noting that consultation periods should have started earlier.
Deep dive – The EU Emissions Trading System
Introduced in 2005, the EU Emissions Trading System (EU ETS) is the EU’s internal carbon market, working on a cap-and-trade principle. This means that a cap is set on the amount of greenhouse gases emissions of sectors covered by the system. Over time, the cap is destined to be reduced in order to decrease emissions. Within the cap, installations receive a certain amount of free allowances, and may buy additional ones or trade them with one another. Currently, the sectors covered by the existing EU ETS include power and heat generation, energy-intensive industrial sectors and aviation within Europe. As part of the Fit for 55 package, the European Commission announced a revision of the EU ETS Directive.
What does the proposal for a revision include?
With the revision of the EU ETS Directive, the Commission is proposing to upgrade the overall emissions reduction target by 2030 from -43% to -61%. To reach this target, the Commission proposes to increase annual emissions reduction to 4.2%, instead of the current 2.2% per year. This will be achieved through a reduction of emissions allowances within the cap.
It is additionally proposing to include emissions from the maritime sector in the scope of the scheme, submitting them to the same targets. Shipowners will have to buy emissions permits for ships sailing within the EU. The proposal also plans for 50% of emissions from international voyages starting and ending in the EU to be covered as well. Shipping should be added to the EU ETS gradually from 2023 and phased in over a 3-year period.
It is also proposing to phase out free allowances for aviation, which is already covered by the EU ETS.
Finally, the Commission is proposing to create a new, separate emissions trading system for emissions from fuels used in road transport and buildings (heating fuels). This separate scheme should be operational by 2025. Potential increased costs for consumers would be compensated by the Social Climate Fund.
Allocation of free emissions allowances will continue for industrial sectors at risk of carbon leakage (i.e. businesses transferring production to third countries with lesser emissions constraints), notably manufacturing industries, to safeguard their competitiveness. However, with the reduction of the overall emissions cap, the number of free allowances will also be reduced, but only from 2025.
Why revise the EU ETS?
With this proposal for a revision, the European Commission aims at strengthening the contribution of the EU ETS to the fight against climate change and ensuring that the 55% emissions reduction by 2030 is reached.
By including emissions from the maritime sector, as well as road transport and buildings, the Commission hopes to incentivize the transition towards more sustainable fuels in these energy-intensive sectors. Indeed, emissions from these sectors have not decreased since 1990 and are even expected to continue increasing if no measures are taken. Investments needed for the low-carbon transition will be supported by funding from the Innovation Fund and Modernization Fund.
What will be the impacts of the revision?
The revision will impact all sectors covered by the EU ETS, which will inevitably have to limit their emissions to fit within the reduced cap or face hefty fines. The revision will however most strongly impact the aviation and maritime sectors, as well as road and building sectors.
On maritime, there is a worry that the inclusion of international voyages towards and from EU ports in the scope will upset the EU’s trading partners, and negatively impacting the competitiveness of the EU at global level. Moreover, shipping companies failing to comply with the EU ETS could face a ban from entering and docking at EU ports, at the request of a Member State.
On aviation, the phasing out of free allowances will increase costs for EU airlines, negatively impacting their competitiveness compared to third-country carriers not subjected to the same costs.
On the creation of a separate ETS for emissions from road transport and heating fuels for buildings, concerns have already been raised on the cost repercussion this could have on private consumers and households. Indeed, setting a cap on such emissions will inevitably lead to cost increases for vehicles manufacturers and fuel producers, which many worry will fall back on consumers.
The European Commission has opened a feedback period on the revision. Stakeholders can provide feedback on the overall revision of the EU ETS and on the updated rules for aviation until 14 September 2021.
The file will also now move on to the Council of the EU and the European Parliament for negotiation and adoption. The file will be discussed in the Environment Council and is expected to be assigned to the Environment (ENVI) and Transport (TRAN) Committees within the European Parliament.
What are MEPs saying?
Highlights of the week
VDL MEETS EUROPEAN PRESS: European Commission President Ursula von der Leyen granted a joint interview to five European media outlets (Le Monde, Süddeustsche Zeitung, La Stampa, La Vanguardia, The Guardian) on 13 July, a day ahead of the official presentation of the Fit for 55 package. In the interview, von der Leyen notably defends the approach behind the package and justifies the decision of creating an additional EU carbon market for road transport and buildings, a decision that raised concerns over potentially increased prices for consumers. Von der Leyen announced that this will be counterbalanced by the creation of a Social Climate Fund.
DELIVERING THE EUROPEAN GREEN DEAL: After weeks of anticipation, the European Commission presented on 14 July its Fit for 55 legislative package. Following a final meeting of the College of Commissioners, Commission President Ursula von der Leyen lead a press conference to present the package, joined by Commission Executive Vice President Frans Timmermans (in charge of the European Green Deal) and Commissioners Paolo Gentiloni (Economy), Adina Valean (Transport), Janusz Wojciechowski (Agriculture), Kadri Simon (Energy) and Virginijus Sinkevicius (Environment, Oceans and Fisheries), who all participated in the preparations of the legislations included in the package. A dedicated website was also launched where both the legislative proposals and factsheets are accessible.
PAVING THE WAY FOR -55%: During the press conference, Commission President Ursula von der Leyen underlined that this package will set the EU towards a better, healthier and more prosperous future, securing the wellbeing of future generations. She was joined in this statement by Commission Executive Vice President Frans Timmermans, who also stressed that “we are currently in the make-or-break” decade in the fight against climate change, and that we have to ‘put a price on carbon and put a premium on decarbonizing’.
STAKEHOLDER REACTIONS TO THE FIT FOR 55 PACKAGE: The presentation of the Fit for 55 package received mixed reviews from industry stakeholders, with many welcoming the ambition of the Commission but at the same time worrying about the implementation and the too high cost put on consumers. The question of the availability of sufficient low-carbon energy to meet the EU’s need was also raised. On the other hand, actors of the energy transition, such as the electric vehicle charging industry or the wind energy industry, positively received the package.
COUNCIL OF THE EU APPROVES NATIONAL RECOVERY PLANS: This week, the Council of the EU finalized the approval of 12 National Recovery Plans (Austria, Belgium, Denmark, France, Germany, Greece, Italy, Latvia, Luxembourg, Portugal, Slovakia and Spain), which will allow the Member States to access funding from the Recovery and Resilience Facility. Recovery Plans notably have to include investments and reforms in key areas of the Fit for 55 package, such as clean technologies and renewables, energy efficiency of buildings and sustainable transport.
Deep dive – The Fit for 55 legislative package
The Fit for 55 package is a set of legislative proposals put forward by the Commission to make the EU’s climate, energy, land use, transport and taxation policies fit for reaching the European Green Deal’s objective of reducing net greenhouse gas emissions by at least 55% by 2030.
What measures are included in the Fit for 55 package?
Thirteen proposals were presented by the European Commission as part of the Fit for 55 package, making it the most comprehensive and extensive legislative package ever put forward by the Commission. The aim of these combined policies is to enable the necessary boost of greenhouse gas emission reductions needed in the next decade to reach the 55% reduction target.
The legislations presented include, inter alia, an extension of the EU’s carbon market to road transport and buildings, a tax rate on fossil fuels in aviation and shipping, a ban on the production of combustion engines by 2035 and updated targets on renewable energy and energy efficiency.
Watch this space in the coming weeks, as each proposal will be analyzed in detail.
How will the increased costs generated by these proposals be compensated?
The European Commission additionally proposed a mechanism to compensate the pressure put in the short run by increased environmental standards on individuals and SMEs. The ‘Social Climate Fund’ is proposed to provide funding to EU Member States to help citizens finance investments in energy efficiency, new heating and cooling systems and cleaner mobility. The EU will provide €72.2 billion from its budget to this fund, and the Commission will propose that Member States to match this funding to reach €144.4 billion. The new fund is welcomed by political groups, although some doubt whether the mechanism can truly compensate the burden for EU citizens and households.
Which sectors will be impacted by the Fit for 55?
Considering that the extensiveness of the package, no sector will be left unimpacted by the Fit for 55 legislations. Evenly distributing the impact and cost of the EU’s climate ambitions among sectors is actually one of the Commission’s goal.
The package will specifically impact the transport sectors (road, aviation and maritime), forestry and land use, building, all energy intensive industries, cars and vans manufacturer, importers of steel, aluminum, and cement. All will have to compose with way more stringent environmental rules, potentially leading to increased operational costs or creating the need for heavy investments to be compliant.
The Fit for 55 package, by setting increased targets for the uptake of alternatively-powered vehicles, for the inclusion of renewable energies in the EU’s energy mix, and for the uptake of alternative fuels for aviation and maritime, can however also create opportunities for frontrunning industries in clean and renewable energies to meet the demand.
Two files of the package remain to be presented by the European Commission, the EU Forestry Strategy and the proposal for a revision of the Energy Taxation Directive. Press conferences will take place on 15 July.
The European Commission will then have to defend its proposals in negotiations between the European Parliament and the Council of the EU. Considering the impact and the sensitivity of the files, the negotiations could take years. Many MEPs notably already denounced the social impact of these proposals, which risk leaving households footing the bill for the higher carbon price on cars, vans or heating. Within Member States, the worry is that the proposals will fuel social movements similar to the ‘Yellow Jackets’ in France.
What are MEPs saying?
7/Reopening of the Energy Taxation Directive after 18 years of standstill. It opens the door to kerosene taxation, which was until today not possible.
— Pascal Canfin (@pcanfin) July 14, 2021
Highlights of the week
ABOUT THE PROPOSALS: Although the presentation of the Fit for 55 package is scheduled for 14 July, there are some indications of the planned proposals that the Commission will put forward. Dr2 Consultants has some insights on what the EU Emissions Trading System (EU ETS), ReFuelEU Maritime and Aviation, the Energy Tax Directive (ETD), the Renewable Energy Directive (RED2) and the CO2 performance standards for cars initiatives will look like. Get in touch to learn more about the planned proposals or stay tuned for analyses of these initiatives in this series of policy updates.
COORDINATION AMONG MEMBER STATES: All initiatives in the Fit for 55 package are closely interlinked, and as such, the assignment of the initiatives to the respective Council configurations will be complex. At Council level, the Environment Council will be in charge of the EU ETS, the Effort Sharing Regulation (ESR) and the CO2 performance standards for cars and vans. The Transport Council will discuss the Alternative Fuels Infrastructure Directive (AFID), as well as the ReFuelEU initiatives for maritime and aviation. The Energy Council will address the RED2 and the Energy Efficiency Directive (EED). Finally, the Economic and Financial Affairs Council will work on the ETD and the proposal for a Carbon Border Adjustment Mechanism (CBAM).
PARLIAMENT WORK ALLOCATION STILL AWAITS: Whereas the role division at Council level seems to be clear, the European Parliament’s Conference of Presidents and the Conference of Committee Chairs are expected to decide which parliamentary committee will formulate its opinion on the different legislations. It is expected that MEPs from different committees will be co-rapporteurs of a legislation or alternatively, parliamentary committees will have exclusive competences over certain provisions of a proposal. For example: the Environment, Public Health and Food Safety (ENVI) Committee will be assigned to formulate its position on EU ETS, but the Transport and Tourism (TRAN) Committee will have exclusive compentences on the articles related to transport. Due to this complexity, the negotiations are anticipated to progress slowly.
EUROPEAN COMMISSION STAFF CRUSHED UNDER FIT FOR 55 WORKLOAD: European Commission staff is heavily overloaded due the workload brought by the preparations of the Fit for 55 package on 14 July, according to Politico. Staff in the Directorate-General for Environment (DG ENV) have already been working around the clock on proposals as part of the European Green Deal (e.g. Circular Economy Action Plan, Biodiversity Strategy, Action Plan on Zero Pollution for Water, Air and Soil), and continue to do so to finalize the proposals part of the Fit for 55 package in time for 14 July. The presentation of the package already had to be postponed once from June. Officials from DG ENV warned that the pressure on staff could endanger the Commission’s ability to deliver on all of its objectives and targets under the European Green Deal by 2024, as planned in the strategy. The situation will not be improved by a reduction of human resources finances for the Commission in the EU’s 2021-2027 budget.
START OF THE SLOVENIAN COUNCIL PRESIDENCY: Slovenia took over the rotating Presidency of the Council of the EU on 1 July, succeeding Portugal, and will hold the Presidency for six months. Slovenia will therefore lead the negotiations among Member States on the legislative proposals that are part of the Fit for 55 package, which is listed as a priority in the Slovenian Presidency program. You can read our recap of the Transport priorities of the Slovenian Presidency.
Deep dive – The Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM) imposes a CO2 charge to be applied on products entering the EU from third countries. The goal of the European Commission is to ensure that the EU’s environmental targets are met while still protecting EU industries by ensuring a level playing field between EU and foreign manufacturers. EU manufacturers having to submit to the EU’s more stringent environmental rules can result in an increase in costs of production and may impact the competitiveness of EU companies compared to their foreign competitors.
With the CBAM, the European Commission specifically wishes to avoid ‘carbon leakage’, which refers to EU industries relocating production abroad in countries with weaker environmental policies, resulting in lower production costs.
How will the Carbon Border Adjustment Mechanism work?
Third country companies importing into the EU products that are targeted by the CBAM will need to report yearly the amount of CO2 emissions “embedded” in the products they export, meaning the amount of CO2 emitted in production. To compensate their CO2 emissions, industries will have to surrender a number of CBAM certificates, purchased to a new authority, corresponding to the total embedded emissions of the products imported into the EU.
Which sectors and countries will the Carbon Border Adjustment Mechanism apply to?
The CBAM will first apply only to goods of certain sectors considered energy-intensive or at high risk of carbon leakage: steel, iron, cement, fertilizers, aluminum, and electricity. However, the proposal plans for the Commission to have the power to extend the mechanism to other sectors, such as paper, glass, oil refinery or chemicals, which was requested by the European Parliament.
The CBAM has the potential to apply to all non-EU countries, but the European Commission will have the competence to adopt delegated acts excluding certain countries from the CBAM, notably those that are integrated in the EU Emissions Trading System (e.g. Iceland, Lichtenstein, Norway), or those having agreement to link their own emissions trading system with the EU ETS (e.g. Switzerland).
What will be the impact of the CBAM?
As it stands now, the CBAM will primarily financially impact non-EU companies importing steel, iron, cement, fertilizers, aluminum, and electricity into the EU, as both costs and administrative procedures to import in the EU will increase. EU companies that are reliant on those imports for their supply chain will also be impacted as they will likely see the impact of these increased costs on the prices charged. However, for EU companies producing these goods, the levelling of the playing field will increase their competitiveness on the EU market.
The introduction of this mechanism might also have effects on international carbon pricing. The latest G7 Summit, held between 11-13 June in Cornwall, UK, notably recognized the potential of carbon markets and carbon pricing to reduce emissions, which could lead to a widespread adoption of such mechanism, or at least to an international agreement on carbon pricing, which could lead to an increase in operational costs for energy-intensive industries.
What are MEPs saying?
#CBAM running into relevant opposition even before the concept has been publicized. Major challenge for EU! #India and other developing nations will oppose plans by the European Union and the U.S. to penalize imports of carbon-intensive goods https://t.co/Rspe4qFyhY via @business
— Reinhard Bütikofer (@bueti) June 30, 2021