The resolution underlines that the EU’s increased ambition on climate change must not lead to “carbon leakage” as global climate efforts will not benefit if EU production is just moved to non-EU countries that have less ambitious emissions rules. Carbon leakage refers to the situation where the reduction of greenhouse gas emissions in developed countries leads to an increase in emissions in developing countries.

According to Qin Yan, Lead Analyst at Refinitiv and Guest Researcher at the Oxford Institute for Energy Studies, the European Parliament's approval means a consensus among political parties to impose carbon tariffs on countries that are not ambitious enough about climate change. However, the negotiations between the Green Party and right-wing forces over the reduction of free allowances also indicate future discussions will be more contentious. Currently, free allowances will probably be further reduced due to the implementation of carbon tariffs, which will support carbon prices in the future. The carbon research team at Refinitiv predicts that European carbon prices will spiral upwards after 2025 due to growing demand for allowances and rising costs of emission reduction, reaching 89 euros per tonne by 2030.

“Phase-out of free allocation of allowances” not in CBAM

The resolution primarily includes three main points:

• Firstly, all goods covered by the EU Emissions Trading System (ETS) should be subject to carbon tariffs;

• Secondly, the revenues generated from carbon tariffs should be used to boost support for EU climate and energy industry policies;

• Thirdly, the mechanism should not be misused as a tool to enhance protectionism.

European Parliament believes that the scope of carbon tariffs should be gradually expanded to carbon-intensive industries such as electricity, steel, and cement. The revenues from tax tariffs can be incorporated into the EU's fiscal income and then redirected towards investments in green economic sectors.

European Parliament stresses that CBAM will be WTO-compatible and won’t trigger protectionism. Bruegel, a think tank in Europe, believes that the ideal approach is to allow countries to discuss the carbon border tariffs within the WTO framework.

There were differing opinions within the European Parliament regarding the inclusion of the “phase-out of free allocation of allowances” during the negotiation. The European People's Party, the largest party in the European Parliament, opposed the inclusion of this provision, while Green Party expressed support. Ultimately, this provision was not included in the resolution, but the provision to "avoid double protection of European industry" was retained.

Yannick Jadot (Greens/EFA, FR) said right-wing parliament members and certain industrial groups disrupted the most ambitious parts of the resolution.

Auction and free allocation have been the two ways through which the EU provides carbon allowances to businesses. The free allocation of allowances is to shield internationally competing industries from carbon leakage.

However, free allowance to the manufacturing industry has been decreasing year by year, from 80% in 2013 to 30% in 2020. Aviation and power sectors have been lobbying the government to avoid reducing free allowance.

Qin Yan believes that once carbon tariffs are implemented, it means that double subsidies to European industrial enterprises will no longer be possible. The EU would need to reduce the free allowance to industries involved in the European carbon market. However, the inclusion of "avoid double protection for European industry" indicates that further evaluation of the actual carbon cost on European industries is still to be discussed in subsequent negotiations.

Specific Programmes Expected by European Commission in Q2

After the European Parliament approval, the European Commission will formally present specific programs on the carbon border tariff in the second quarter of 2021. The carbon border tariff proposal will be part of the EU's 2030 Climate Target Plan.

Qin Yan believes that the European Parliament’s approval indicates its affirmation and support for the carbon border tariff. "The positions of the Members of Parliament and the various parties are consistent, supporting the carbon border tariff on less climate ambitious countries and ensuring compliance with WTO rules," she said.

"However, it is important to note that although the resolution has been passed, parties within the European Parliament are still greatly divided," Qin Yan said. "The reduction of free allowance received strong opposition from Business Europe as well as support from the People's Party, indicating further efforts needed to bridge the differences within the EU regarding carbon border tariffs."

Qin Yan predicts that the next stage of discussions within the EU will be more intense and contentious, and it is not ruled out that the European Commission may make certain concessions to the industries, such as retaining some subsidies. "However, these are just detailed discussions. The EU's resolution to imposing carbon border tariffs remains unwavering. The highest EU institutions have previously stated that the revenues from carbon tariffs will be one of the financing sources for EU's Recovery and Resilience Facility (RRF). Therefore, efforts will be made to promote the development and implementation of CBAM policy, which will also help consolidate the EU's position as an active leader in climate policies," she said.

The European Parliament states that if this resolution becomes legislation, it will create an incentive for both EU and non-EU industries to decarbonize in line with the Paris Agreement objectives. It may also give impetus to zero-carbon innovation of the pollution-intensive sectors, and facilitate trading between the EU and its partners.

Sources: Caijing New Media