EU carbon tariffs to be levied soon, to be expanded to plastics, organic chemicals

        On June 22, the European Parliament passed the text of the regulation on establishing the world's first carbon border adjustment mechanism (CBAM, i.e. carbon tariff) with 450 votes in favor, 115 votes against and 55 abstentions. This means that the European Commission (proposal passed on July 15, 2021), the European Council (passed on March 15, 2022) and the European Parliament (passed on June 22, 2022) all have their own versions and positions.

        The European Parliament voted this time to make a series of adjustments in the scope of CBAM collection, the scope of product carbon emissions accounting, and the time of collection:

        1. Expand the scope of CBAM

        In addition to the products steel, aluminum, electricity, and fertilizers proposed by the European Commission, the European Parliament also hopes that CBAM will cover organic chemicals, plastics, hydrogen and ammonia. To ensure smooth implementation, organic chemicals and polymers should be subject to the European Commission's assessment of their technical characteristics.

        2. Expand the scope of emissions accounting

        In addition to the European Commission's proposal to include product scope 1 (direct emissions), the European Parliament also hopes to expand CBAM to include scope 2 indirect emissions, that is, emissions generated by electricity used by manufacturers, to better reflect the cost of carbon dioxide for European industry.

        3. Postponement of the official implementation time

         The CBAM adopted by the European Parliament is set as a transition period from 2023 to 2026 and will be officially implemented in 2027. It is one year later than the 2026 implementation of the European Commission's draft. The Parliament believes that it must be fully implemented in the above-mentioned sectors of the EU Emission Trading System (ETS) before 2032 - three years earlier than the European Commission's proposal.

        4. Gradually adopt CBAM and terminate free quotas in ETS

        The latest bill of the European Parliament points out that the free quota will be 100% during the transition period of 2023-2026, that is, products exported to the EU will not be subject to carbon tariffs during this period. The free quota will be 93% starting in 2027, 84% in 2028, 69% in 2029, 50% in 2030, 25% in 2031, and completely abolished in 2032. The free quota will be withdrawn 3 years earlier than the original draft. In order to ensure fairness, the free quota of the EU internal carbon trading market (ETS) will also be cancelled simultaneously.

        This means that the promotion of EU carbon tariffs is a gradual process. In addition to the three-year transition period, the collection amount will be gradually increased, rather than all at once.

        5. Increase the export adjustment mechanism

        Parliament requires that the most effective EU facility should have an export adjustment mechanism, targeting non-EU countries and countries without a carbon trading system, and providing free allocation of relevant emissions for their exported products regulated by CBAM.

        By 31 December 2025, the European Commission shall submit a report with a detailed assessment of the impact of the EU Emissions Trading Scheme and the CBAM on products covered by the CBAM produced in the EU and exported outside the EU, on the development of global emissions and on the compatibility of exports with the World Trade Organization (WTO). Parliament stressed that consistency between the CBAM and the EU Emissions Trading Scheme is essential to respect the principles of the World Trade Organization (WTO) and that the CBAM cannot be abused as a tool to strengthen protectionism.

        6. CBAM revenues go to the EU budget

        Parliament wants CBAM revenues to go to the EU budget. MEPs added that the EU must provide financial support of at least the same value as the revenues generated by the sale of CBAM certificates to support the least developed countries in their efforts to decarbonize their manufacturing industries. Such support will help achieve the EU's climate goals and international commitments, such as the Paris Agreement.

        Next, it only needs to reach an agreement through three-party negotiations to get the final legal text of the EU carbon tariff. Mohammed Chahim, a member of the European Parliament, said: "The EU finally has a tool to incentivize the decarbonization of the manufacturing industry of global trading partners, because no matter where the pollution is, if you want to export to the European market, you have to pay for it. Therefore, CBAM will make a significant contribution to achieving EU and global climate goals."