European Parliament rejects carbon legislation package, including more ambitious rules for EU Emission Trading System and new EU Carbon Border Adjustment Mechanism

Executive summary

On 8 June 2022, the European Parliament (EP) voted to reject the package of carbon legislation, including revision of the European Union (EU) Emission Trading System (EU ETS), the new Carbon Border Adjustment Mechanism (CBAM) and the Climate Social Fund. One key item of dispute was the phase-out plan for free allowances for CO2 emissions which are granted to certain industries in the EU as part of the revised EU ETS regulations.

During the vote, the Socialists and Democrats faction and the Greens/European Free Alliance (EFA) faction put forward claims that the regulation did not sufficiently achieve their climate ambitions as set in the context of the European Commission’s “Fit for 55” package. It was asserted that key aspects had been significantly diluted during the intra-ENVI Parliament processing (European Parliament Committee on Environment, Public Health and Food Safety (ENVI)).

Detailed discussion

Next steps for EU ETS and CBAM

It is worth noting the current rejection of the legislative package does not mean that the “Fit for 55” package has been withdrawn, or that implementation timelines are slowed significantly. The legislative package has returned to the EP committees to revise the draft package, with the goal of achieving consensus by the majority of EP members. In short, more ambitious regulation needs to be agreed and aligned between the committees responsible for EU ETS and CBAM. Some media reports indicate a new draft could be available for voting in the EP by the end of summer 2022.

Once there is a successful vote in the EP, another round of negotiation with the representatives of the EU Member States is required in accordance with the legislative process. It also cannot be excluded that certain industry-friendly positions could be shared again by (some) EU Member States, which could cause some delay.

Uncertainty over timelines

Overall, given the EP’s vote, there is now significant uncertainty in terms of timing for implementation of planned measures. While it is not certain, the 1 January 2023 start of the CBAM transitional phase for reporting of emissions embedded in imported products does not seem likely. However, if the EP and the EU Member States reach consensus and rapidly move the agenda forward, there may only be a few months of delay and CBAM reporting requirements may still start in 2023. In case of continued disagreement in the EP and in the EU Member States’ negotiation phase, there may be a longer delay by a couple of years.

The re-drafted carbon legislation package and the resulting political debate will provide a clearer indication about when EU carbon measures may be realized and accordingly, businesses’ timeframe to prepare accordingly. Notably, the instrumental technicalities of EU ETS and CBAM have not been questioned in the recent debate and the EP’s decision. Recent EY client projects indicate that effective preparation for CBAM for a complex organization, such as impact assessments, can require multiple months up to years for material changes to e.g., supply chains and IT system capabilities. Accordingly, early preparation should be considered.

Implications

The goals of the EU energy and emission policies are clear, reflecting the urgent need to reduce emissions and meet overall climate goals. Despite the lack of clarity on some points including timelines for implementation, it is critical for businesses to continue monitoring the developments closely and to start analyzing the impact.

The impact is not limited to the EU, rather it will impact across global sourcing and distribution footprints of businesses. The impact is also not limited to new data and reporting requirements. There potentially will be additional costs for businesses in terms of emissions occurring during product manufacture, which can heavily impact on product competitiveness, sourcing, supply chain and investment strategy, and corporate value, among others. In summary, businesses should proactively address the changes and prepare to align their business model accordingly.

Additional resources

For additional resources on the “Fit for 55” package and CBAM specifically, see EY Global Tax Alerts, European Parliament provides recommendations on EU Carbon Border Adjustment Mechanism, dated 1 March 2022, EU Finance Ministers reach agreement on EU Carbon Border Adjustment Mechanism, dated 16 March 2022, and Members of European Parliament provide more ambitious proposal for five elements of “Fit for 55” climate package, including EU Carbon Border Adjustment Mechanism, dated 19 May 2022. Previous developments have also been outlined in several CBAM-focused webcasts here.

For additional information with respect to this Alert, please contact the following:

Carbon Border Adjustment Mechanism

• Richard J. Albert, Leipzig

• Derek Leith, Aberdeen

• Kasia Klaczynska-Lewis, Warsaw

• Slawomir Czajka, Warsaw

• Ashish Sinha, Zurich

• Aron Nagy, Budapest

• Franky de Pril, Diegem

• Gert van Telgen, Amsterdam

• Milen Raikov, Sofia

• Alessandra di Salvo, Rome

• Pedro Gonzalez-gaggero Prieto-carreño, Madrid

• Marguerite Trzaska, Paris

• Zoran Dimoski, Stockholm

Emission Trading System 

• Kasia Klaczynska-Lewis, Warsaw

• Dariusz Kryczka, Warsaw

• Boris Scholtka, Berlin

• Sebastian Helmes, Berlin

• Eric-Holger Glattfeld, Berlin

EMEIA Sustainability Tax Services

• Alenka Turnsek, London

• Ana Fallas Conejo, Amsterdam
   

• Maike Moore, Berlin

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.