The European Parliament adopts the EU ETS and CBAM

On 22 June 2022, the European Parliament adopted revised proposals for the EU Emissions Trading System (EU ETS), the Carbon Border Adjustment Mechanism (CBAM) and the Social Climate Fund. These three revised proposals are intertwined and, after a plenary set back, had to be renegotiated within the Parliament’s Committee on Environment, Public Health and Food Safety (ENVI). The main sticking point was the phase out trajectory of free emission rights in sectors covered by the CBAM. The phase out should now start in 2027 with 93% and reach 0% of free emission rights in 2032.

The next step for these three Fit for 55 Package -proposals (as well as the other five Fit for 55 Package proposals that were adopted on 8 June 2022) is negotiation with the Council of the EU. An important part of the measures is intended to come into force by 1 January 2023.

As the EU is the biggest market for Swiss companies, the developments in this area need to be carefully monitored.

What does this mean for your organisation?

Negotiations with the Council may result in these Fit for 55 Package proposals being further adjusted. Nonetheless, it is certain that the final version of the package will have a significant impact on companies and individuals since they will need to meet the agreed targets of the European Climate Law: a binding EU 2030 climate target of a domestic reduction of net greenhouse gas emissions (emissions after deduction of removed emissions) by at least 55% compared to 1990 levels by 2030.

It will have a significant impact on companies that are in carbon-intensive industries such as iron, steel, aluminium, chemicals and energy. The logistics and transportation sector (including shipping, road transport and aviation), construction sector, and companies that own real estate and/or production sites in the EU and/or use certain materials from outside the EU will also be impacted.

So now is the time for companies to get a clear view of the carbon footprints (direct and indirect) that their supply and value chains cause. They should then investigate the options that are available to reduce their carbon footprints. Doing this now will give them time to implement the required processes and procedures for obtaining the required insights.

Later on, they can perform technical, economic and financial analyses to assess what abatement options are most suitable. Starting on time will also allow them to optimise their supply chains, amend their procurement contracts and enter into discussions and negotiations with their stakeholders. Doing this in a timely manner should allow them to mitigate the additional taxes and levies that will inevitably follow from the measures included in the Fit for 55 Package.

There is a wide range of EU and domestic incentives available to companies to support their business cases for investments to reduce their carbon footprints. A sustainable business case assessment should ideally consider both the additional tax measures and the available incentives.

Details of the proposed revisions to the EU ETS

The proposed revisions to the EU ETS include:

Phasing out free allowances in sectors covered by the CBAM between 2027 and 2032 following a CBAM factor trajectory of 93% in 2027, 84% in 2028, 69% in 2029, 50% in 2030, and 25% in 2031 ̶ reaching 0% in 2032. This would be three years earlier than originally proposed by the European Commission.
Slight increasing the reduction factor of carbon credits annually to 4.4% by the end of 2025, 4.5% from 2026 to 4.6% from 2029, arriving at an overall reduction of GHG emissions in ETS of 63% by 2030.
Implementing EU ETS II for fuel distribution for commercial buildings and transport, as of 1 January 2024. This would be a year earlier than anticipated by the European Commission. Additional safeguards aimed at preventing citizens from bearing excessive additional energy costs are also envisaged. Private buildings and private transport should be excluded prior to 2029 and a safeguard is proposed that will release 10 million allowances if the average ETS II allowance price exceeds 50 euros before 2030.
Introducing a bonus-malus-system from 2025, which will provide for additional free allowances (bonuses) for the most efficient installations in a sector. Maluses are proposed under which installations that do not establish a decarbonisation plan, or do not sufficiently act on recommendations, can lose all or part of their free allowances.
Including maritime transport from 2024 to cover 100% of the emissions from intra-European routes and 50% of emissions from international routes to and from the EU. Starting in 2027, 100% of emissions from all trips should be included, with the possibility of lowering this to 50% in relation to non-EU countries.
Part of the EU ETS auctioning revenue becoming an own (general) resource for the European Commission. Both the European Commission and member states will be required to spend all of their revenues from EU ETS (I + II) on climate action or on upskilling and reskilling workers who are affected by the green transition.
Increasing the Innovation Fund (to be renamed the Climate Investment Fund) which supports innovation in technologies that contribute significantly to the decarbonisation of the ETS sectors.

Details of the proposed revisions to the CBAM

The proposed revision to the CBAM include:

The CBAM should apply as from 1 January 2023, beginning with a transition period until 2026 during which exporters will receive 100% free emission rights to ensure a level playing field for companies that export EU-produced goods. After 2026, these free emission rights will reduce at the same pace as the phase out of free emission rights under the EU ETS. The period between 1 January 2023 and 1 January 2027 will be used for data collection and analysis of the impact of the CBAM on the industries concerned. Declarants will have to report on a quarterly basis the actual embedded emissions in goods imported during the administrative transitional period, detailing direct and indirect emissions as well as any carbon prices paid abroad.
Broadening the CBAM’s scope to include polymers, organic chemicals and hydrogen, in addition to the originally proposed products (cement, iron and steel, aluminium, refineries, organic basic chemicals, fertilisers and electricity production). Inclusion of organic chemicals and polymers will be subject to an assessment by the European Commission of the technical specificities (embedded emissions calculation, value chains identification, and the measure’s efficiency). The timeline to include other ETS sectors that are at risk of carbon leakage in the CBAM will follow the same reduction path / slope as for the first sectors covered by the CBAM.
Also broadening the CBAM’s scope to cover indirect emissions ̶ i.e. emissions deriving from electricity used by manufacturers.
Introduction of a single, centralised EU CBAM authority, instead of 27 competent authorities.
Refund of an allowance (equivalent to the charge on import) upon export of products that are within the CBAM’s scope.
Revenues generated by the sale of CBAM certificates will be EU internal revenues, primarily to cover the costs of the operation and maintenance of the CBAM scheme and to support EU industry through the establishment of sectoral funds for the purpose of tackling competitive disadvantages triggered by the CBAM.
The European Commission is asked to implement a review mechanism that monitors any unforeseen gaps in the carbon-leakage protection and avoids any double protection.

Legislative process and next steps

The European Parliament has now adopted a total of eight proposals for the Fit for 55 Package (including the proposals that it adopted on 8 June 2022). These are revision of the EU ETS, the CBAM, an EU ETS for aviation, CORSIA, an Effort Sharing Regulation, LULUCF, CO2 emissions standards for cars and vans, and the Social Climate Fund. The next step is for these proposals to be negotiated with the Council of the EU.

Note that the different legislative proposals for the Fit for 55 Package each have different timelines. However, it is widely expected that a large part of the Fit for 55 Package will be enacted by 1 January 2023. Monetary impact in terms of additional taxes could materialise quite soon following the enactment. It’s therefore important for you to start working sooner rather than later to identify what carbon footprint (direct and indirect) your operation currently has and to identify (in a sustainable business case) what abatement options are available.

Background of the Fit for 55 Package

The aim of the Fit for 55 Package is to reduce the EU’s net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, and to reach climate neutrality by 2050. In addition to the environmental targets, the package also addresses certain societal aspects of the energy transition. For example, the Climate Social Fund’s objective is to mitigate the societal impact of the extended emissions trading scheme.

{{contentList.dataService.numberHits}} {{contentList.dataService.numberHits == 1 ? 'result' : 'results'}}

The European Parliament adopts the EU ETS and CBAM

Background of the Fit for 55 Package

{{filterContent.facetedTitle}}

{{item.title}}

Contact us