Climate Change

EU to phase in CO2 border tax by end-2033, when it fully eliminates free carbon permits

EU phase in CO2 border tax CBAM end 2033 eliminates free carbon permits

Photo: European Union

Published

December 20, 2022

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Published:

December 20, 2022

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According to a deal between the European Council and the European Parliament, the EU’s free carbon allowances for the industry will be phased out by the end of 2033. The CBAM, a carbon border tax for importers, will be gradually rolled out in parallel, to avoid protectionism.

The European Parliament said its negotiators reached an agreement on a more ambitious Emissions Trading System (ETS). With the breakthrough in their talks with European Union member states, represented by the European Council, the 27-member bloc is about to formally expand the climate policy mechanism to “almost all sectors of the economy” including segments like maritime shipping.

The targeted cut in greenhouse gas emissions through 2030 within the scope of the emissions trading scheme was boosted to 62% from 43%.

A separate ETS is now set to be rolled out by 2027 for road transportation, buildings and heating fuels, but with prices limited until 2030 at a maximum of EUR 45 per ton of carbon dioxide equivalent. Furthermore, the impact on vulnerable households is envisaged to be cushioned with the upcoming Social Climate Fund, worth EUR 86.7 billion.

In case the energy prices are exceptionally high, the start of the new ETS would be delayed until 2028.

Sigh of relief for exporters of commodities, electricity to EU

Lawmakers and member countries also prepared a measure to soften the blow for the part of the heavy industry that is now receiving free carbon credits. Such aid will completely disappear at the end of 2033. Of note, the European Parliament voted in June to phase out the free allowances two years earlier.

The free carbon permit phaseout will last two years longer than what the European Parliament initially proposed, while the CBAM will match the process in speed and duration

The Carbon Border Adjustment Mechanism or CBAM, essentially an emissions tax on imported commodities, products and electricity, is scheduled to kick in fully also at the beginning of 2034. The EU decided last week to begin the transitional period for the system in October. Trading partners from the countries like the Western Balkans and Turkey would initially only calculate and report the emissions, without paying.

The agreement stipulates that the EU will start charging importers within the CBAM system in 2026, with gradual increases in tariffs at the same speed that the free allowances in the ETS will be phased out, until the end of 2033.

In the European Parliament’s original proposition, the CO2 border tax was supposed to kick in fully in 2030 while free carbon credits would be completely eliminated two years later. Such a solution would spell trouble for foreign companies that rely on the EU for exports. The two mechanisms were harmonized to fully respect the World Trade Organisation’s competition rules, the European Council pointed out.

Carbon-heavy industries in the EU will lose the extra protection from free carbon allowances, but they can still access massive grants for decarbonization

On the other hand, the industry will benefit from more money that the EU decided to channel through the Innovation Fund and Modernization Fund.

Third countries can avoid the CBAM altogether if they introduce their own emission trading systems mirroring the EU ETS, which means they can keep the proceeds, intended for decarbonization incentives.

Cautious preparations for including municipal waste incineration into ETS

The European Commission has the task to assess and report by the end of 2026 on the possibility of including the municipal waste incineration sector in the ETS with a view to including it from 2028 and assessing the need for a possibility of an opt out until 2030, according to the European Parliament, or until 2031, according to the European Council.

The CBAM covers cement, aluminum, fertilizers, electricity, hydrogen, iron and steel and some downstream products. Its main purpose is to prevent so-called carbon leakage – the relocation of industries to countries with looser climate rules.

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