MEP Drafts Complete Overhaul of EU Carbon Boarder Levy

The Member of the European Parliament (MEP) in charge of negotiating the proposed EU Carbon Border Adjustment Mechanism (“CBAM”) on behalf of the European Parliament has recommended far-reaching changes to the draft law which had been put forward by the European Commission last summer. The amendments include a wider product scope, a quicker roll-out and the creation of a new EU agency. While the response of the European public opinion is mixed, it is certain that the changes being sought will increase the ambitions of the future legislation.

As Hong Kong traders will recall, the European Commission’s proposal for the CBAM, published in July 2021, provides for the introduction of a levy on the greenhouse gas emissions embedded in certain industrial goods imported into the EU. The proposal is designed to curb the relocation of European industries to regions where the price of carbon is lower than in the EU and to reduce the carbon intensity of goods that enter the European market (please see Controversy Abounds Over EU Carbon Border Levy Proposal for more background).

The proposal has now entered the stage where the European Parliament and the 27 EU Member States sitting in Council must agree on the text before the CBAM passes into law. In this context, the lawmaker in charge of negotiating the proposal on behalf of the Parliament, Dutch MEP Mohammed Chahim from the left-wing Socialists and Democrats (S&D) group, has put forward a draft report bringing significant changes to the Commission’s proposed CBAM. Most notably for Hong Kong sellers, Chahim’s report proposes expanding the scope of the levy. Under the Commission’s proposal, the CBAM would cover iron and steel, cement, fertiliser, aluminium, and electricity generation. Chahim’s expanded list would also include organic chemicals, hydrogen, and polymers.

Secondly, the draft report seeks to include indirect emissions, that is, emissions generated by the production of the electricity used in industrial processes, in the calculation of the carbon intensity of imported products. That is something the European Commission only wanted to consider in future revisions of the legislation. Chahim has indicated that including indirect emissions immediately after the pilot phase of the CBAM is necessary “to heighten the climate ambition of this proposal”. Alongside this, the draft report pushes for the trial period to be shortened by a year and the levy to be fully implemented by the beginning of 2025 instead of 2026.

Thirdly, the draft report proposes the creation of an EU-level authority that would enforce the levy. Under the Commission’s proposal, each EU country would be responsible for dealing with the charge on imports. According to Pierre Leturcq, policy analyst of the Institute for European Environmental Policy, Chahim’s proposal would tackle "the risk of circumvention" arising from a decentralised system of national authorities. The idea has been welcomed by BusinessEurope, a major lobby group.

The most controversial aspect of the report is the proposal to bring forward the deadline to phase out free emission allowances to 2028 – eight years earlier than provided for by the Commission’s proposal. Under the cap-and-trade Emission Trading System, free pollution permits are currently granted to carbon-intensive industries in the EU. Under Chahim’s amendments, 100% of free allocations would be in place during the trial period. This would drop to 90% in 2025, 70% in 2026, 40% in 2027 and reach 0% by the end of 2028. Accelerating the phase-out of free allowances by end of 2028 instead of 2035 has been welcomed by NGOs, such as German Watch, which sees it as "[a] clear improvement and important step for industry transformation".

However, the swifter transition away from free allocations is likely to incur significant opposition from the industries that have benefited from the system. According to Alexandre Affre, deputy director general at BusinessEurope, the phase-out is “unbalanced when it comes to the timing and feasibility for European business to switch from a tried and tested mode of carbon leakage protection, to a wholly unpredictable one”. He adds that, taken together with the shortened introductory period and the inclusion of indirect emissions, the proposed timeline “would be rushed and lacks any form of assessment in their effects on European companies”.

The report will now be debated by lawmakers to find a common position before Chahim leads the European Parliament’s delegation in final talks with EU Member States and the European Commission.