The Commission adopted the European Green Deal on 11 December 2019. The Green Deal is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where economic growth is decoupled from resource use.
Following the European Council conclusions of December 2020, the European Commission adopted a package of proposals (“Fit for 55”) in July 2021 in order to make the EU's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Achieving these emission reductions in the next decade is crucial to Europe becoming the world's first climate-neutral continent by 2050 and making the European Green Deal a reality.
Among the proposed measures are the revision of the Energy Tax Directive (ETD) and the creation of a Carbon Border Adjustment Mechanism (CBAM). DG TAXUD leads on these proposed measures and hence contributes significantly to the implementation of the European Green Deal.
Carbon Border Adjustment Mechanism (CBAM)
The Carbon Border Adjustment Mechanism (CBAM) is a climate measure that aims at preventing the risk of carbon leakage while ensuring WTO compatibility.
In the EU, the carbon price for energy-intensive industry sectors is currently determined by the market through the EU Emission Trading Scheme (EU ETS). The EU ETS works on the 'cap and trade' principle. A cap is set on the total amount of certain greenhouse gases (GHG) that can be emitted by installations covered by the system. Within the cap, companies receive for free or buy emission allowances which they can trade with one another as needed. Free emission allowances are a temporary derogation to the rules of the ETS aimed at addressing the risk of carbon leakage. They have an impact on the price signal delivered by the EU ETS.
As the EU raises its own climate ambition, less stringent environmental and climate policies prevail in many non-EU countries. Therefore, there is a strong risk of so-called ‘carbon leakage' – i.e. companies based in the EU could move carbon-intensive production abroad to take advantage of less ambitious policies, or EU products could be replaced by more carbon-intensive imports.
In this context, carbon leakage is likely to lead to an overall increase in global emissions and create an uneven playing field for European industry. To prevent this from happening, the CBAM will ensure that the price of imports reflects more accurately their carbon content. To this end, it will equalize the price of carbon between domestic products and imports and ensure the EU’s climate objectives are not undermined.
CBAM now represents a viable alternative to this system which, over time, will replace the free allocation of emission allowances. In its initial phase, CBAM will cover a number of sectors which are under the scope of the EU ETS, and where there is greater risk of carbon leakage: iron & steel, aluminum, cement, fertilizers and electricity. At the end of this transitional phase in 2025, a first review will look carefully into the possibility of extending the scope of the CBAM to other sectors.
Under CBAM, EU importers will be required to buy certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU ETS. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.
By putting a carbon price on imports, CBAM will ensure that European emission reductions contribute to a global emissions decline, instead of pushing carbon-intensive production outside Europe. It also encourages non-EU industry to curb their emissions and third countries to adopt green policy frameworks.
What’s next for CBAM?
The proposals are being discussed in the European Parliament and Council. More details on the procedure in European Parliament is available on the Parliament’s legislative observatory. On 22 March the Council reached a general approach on CBAM.
Energy Taxation Directive
The Energy Taxation Directive (ETD) lays down EU rules for the taxation of energy products and of electricity used as motor fuel or heating fuel. Adopted in 2003, the Directive has been in place in its current form for almost two decades. In 2011, the Commission proposed a revision of the Directive. However, Member States in the European Council could not agree on the revision. Meanwhile, energy markets and technologies have experienced significant developments and the EU’s international commitments, notably the Paris Agreement in 2015, have evolved considerably. In 2019, the Commission started the process of revising the Directive again.
As a first step in the legislative process, in September 2019, the Commission published the evaluation of the Energy Taxation directive (full report, summary). Its conclusion is clear: the EU Energy Taxation Directive is no longer in line with the EU internal market and climate objectives. Furthermore, the evaluation concluded that:
- The ETD does not promote emission reductions, energy efficiency, or alternative low carbon / sustainable fuels. A wide range of sectorial exemptions and reductions applied by Member States de facto incentivizes the use of fossil fuels;
- The ETD does not provide sufficient incentives for investments in clean technologies;
- The ETD is not in line with other climate EU policies (EU Emission Trading System, Renewables Directive, Energy Efficiency Directive).
In July 2021, as an integral part of the “FitFor55” package, the Commission put forward a proposal to revise the Directive. The proposal aims at ensuring more coherence with other EU policies as well as at contributing to achieving the EU’s mid- and long- term energy and climate objectives, amongst them the Green Deal. The proposal does so by reflecting more accurately the climate impact of the various sources of energy and to encourage consumers and businesses to change their behaviour.
In line with the above the proposal follows three main objectives:
- aligning taxation of energy products and electricity with EU energy and climate policies with a view to contributing to the EU 2030 targets and climate neutrality by 2050;
- preserving the EU internal market by updating the scope and the structure of rates as well as by rationalising the use of optional tax exemptions and reductions and
- preserving the Member States’ revenues raising capability.
The proposal and its Annexes, were accompanied by an Impact Assessment (Summary), that explored the impacts of various policy options and based on its conclusions selected the best policy option, that was ultimately put forward by the Commission. The proposal was also accompanied by an Open Public Consultation, which received over 200 contributions ranging from large manufacturing companies, through airlines to individual citizens. All contributions are accessible on the Have Your Say web portal.
The proposal is currently being discussed by Member States in a dedicated ad- hoc Working Group of the Council.
A European Green Deal - Striving to be the first climate-neutral continent