A fierce lobbying effort by Europe’s heavy industries that shifted the European Parliament’s position on a carbon border fee is putting the Commission in a tight spot as it could infuriate the U.S., China and other big trading partners.
A Parliament report on the issue — which was up for a final vote on Wednesday — isn’t binding, but it offers an indication of a bitter fight that will play out as the Commission prepares to present its proposal by the summer.
The European Parliament on Tuesday adopted a last-minute change to its report on the Carbon Border Adjustment Mechanism (CBAM) — a levy the EU wants to impose on some imports from jurisdictions with laxer climate policies that could undercut European producers forced to pay for their greenhouse gas emissions.
The change called for heavy polluters like the steel and cement sectors, currently getting free permits under the EU Emissions Trading System (ETS), to continue getting that benefit even once the CBAM goes into effect.
That’s likely to spark fierce international opposition as the World Trade Organization doesn’t allow for so-called double protection.
Parliament “sent a very bad signal as it voted against phasing out free allowances under EU ETS. We still strongly advise against this option which would lead to double compensation & which would definitely put CBAM under threat at” the WTO, tweeted the EU branch of the Jacques Delors Institute, whose president emeritus is former WTO director general Pascal Lamy.
The Parliament wants the CBAM to mirror the ETS, with certain products hit with a tax linked to the price paid by EU producers for their emissions. Carbon dioxide currently trades at about €40 per ton.
The goal is to avoid “carbon leakage,” the term for companies leaving the EU to avoid high carbon costs. This is currently dealt with by allowing EU polluters a number of free emissions allowances. The Commission feels that the CBAM does away with the need for free permits, as it still protects EU industry.
“We are assessing various scenarios to allow for smooth and predictable transition from … free allowances and [to the CBAM],” EU Economy Commissioner Paolo Gentiloni told MEPs on Monday.
The Commission is wary of leaving both systems in place, as that could result in legal action at the WTO by the EU’s trading partners.
The “design needs of course to respect WTO rules and trade agreements,” Gentiloni said, adding that such a levy would be in place by 2023 and be designed to extend its scope gradually.
Surprise amendment
The original Parliament report, authored by Green MEP Yannick Jadot, said a border fee would “go hand in hand with the parallel, gradual, rapid and eventual complete phasing out” of free allowances for the sectors covered “so as to avoid double protection.”
But industry groups are fearful of losing free allowances, arguing that it would make their exports uncompetitive and risk knock-on effects such as substituting materials that would be subject to a carbon border levy for others that would be exempt. Industry groups Eurofer, Cefic, Cembureau and Fertilizers Europe, representing the steel, chemicals and cement sectors, among others, lobbied in favor of keeping the allowances ahead of Tuesday’s online vote, according to a text seen by POLITICO.
The industry concerns fell on fertile ground, and conservative lawmakers managed to push through their amendment calling for free permits to remain.
“We have to be careful when we say [the carbon border adjustment mechanism] is an alternative to existing measures, It clearly doesn’t work in the same way,” Adam Jarubas, the European People’s Party shadow rapporteur on the file, said ahead of the vote. He wants the Commission to keep both measures in its proposal, “otherwise the transition will turn to a direct switch and our economy is not ready for such an experiment.”
Conservative MEPs cheered Tuesday’s outcome.
Angelika Niebler, the co-chair of the German Christian Democrat CDU/CSU group in the Parliament, said Wednesday that a CO2 border adjustment mechanism “was no silver bullet” and as long as other major trading blocs didn’t follow the EU’s climate course it was crucial to support industry. “Otherwise our economy would be doubly penalized,” she said.
NGOs lamented the outcome, calling it “a blow, but we expect logic, scientific evidence and coherence to prevail in the upcoming legislative proposals on the Emissions Trading System and the Carbon Border Adjustment Mechanism,” said Doreen Fedrigo, industrial transformation policy coordinator at Climate Action Network Europe.
Jadot said there will be “a fierce struggle” in the coming months. “It began with an alliance between the most conservative right and the extreme right of this Parliament, around certain industrial lobbies, to break the most ambitious parts of the report.”
“The battle has only just begun,” he said.
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