On 18 April, The European Parliament approved sweeping reforms to make EU climate change policies more ambitious, approving the first ‘carbon tax’ for imported goods, whereby tariffs are imposed based on the amount of greenhouse gas emissions generated.
The legislation is part of the EU’s broader ‘Fit for 55 in 2023” plan, which aims to reduce the greenhouse gas emissions within the EU by at least 55% of their 1990 levels by 2030 (adopted earlier in March).
Currently, EU carbon permits are standard practice – trading at around €94 per tonne on the day the legislation was passed, nearly quadrupling in value since the start of 2020. However, these permits do not hold countries that do not put a price on carbon to account.
This push in carbon legislation is all part of the EU’s wider climate goals, and commitment to the Paris Agreement. The new legislation is at the core of a broader EU package, ‘Carbon Border Adjustment Mechanism’ (CBAM), which seeks to incentivise non-EU nations to increase their climate ambitions and push economies around the world to put a price on carbon dioxide emissions, while shielding the EU’s manufacturers from countries that aren’t regulating emissions as strictly, or at all.
The tax gives credit to countries that put a price on carbon, allowing importers of goods from those countries to deduct payments made for overseas emissions from the amount owed at the EU’s borders. ‘CBAM certificates’ will therefore be a required purchase for companies that import products into the EU, to make up the difference between the carbon price paid in the country of origin and the price of carbon allowances in the EU.
Under the upgrade, factories will lose the free CO2 permits they currently receive by 2034, and shipping emissions will be added to the CO2 market from 2024. Similarly, as part of the same package, the Parliament also voted on plans to launch a new EU carbon market covering emissions from fuels used in cars and buildings in 2027, plus an €86.7bn fund to support households affected by the costs. However, in doing so, there is expected to be an additional 10-euro cent increase to the price of petrol and diesel, which has sparked further fears in relation to the soaring increases in inflation.
The new laws still require final approval from other EU countries, that will be assessed over the coming weeks. This is normally just a formality, however, could be subject to alterations. Peter Liese, Parliament’s lead negotiator on the ETS reform, said the success of the carbon market would make or break Europe’s CO2 cutting goals and stated that this law would be essential to finalising ‘Fit for 55’ to place the “EU firmly on track to a greener future”.
The Wall Street Journal has already reported concerns among U.S companies, in anticipation of the legislation, writing that the increase in “bureaucratic hurdles may cause large-scale disruptions” to trade and the exportation of goods to Europe – likewise disrupting other major export markets. That said, overall, this legislation is an extremely positive development in the EU’s carbon reduction measures; similarly, it sets a precedent for other nations to follow, an essential step towards wider climate goals and reducing anthropogenic impact.
Georgina Murrin is a ESG Analyst in Itriom’s London Office.
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