ETS, CBAM and Social Climate Fund

EU Parliamentary re-vote results in a landmark outcome.

During the 6-9 June 2022 European Union (EU) Parliamentary plenary session, a heated disagreement on the proposed revised Emissions Trading System (ETS) report prepared by the EU Committee on Environment, Public Health and Food Safety (ENVI) resulted in a 53% majority vote rejection of the report. The reformed ETS was, however, not rejected in its entirety - MEPs voted to refer the text back to the ENVI for revision. The reports on the Social Climate Fund (SCF) and Carbon Border Adjustment Mechanism (CBAM) proposals were also sent back to ENVI, as MEPs agreed that the three files were too interlinked to be voted upon separately.

On 22 June 2022, the proposals with revised amendments were once again brought before the entire EU Parliament. In what may be considered a landmark decision, all three Committee Reports were adopted and will now be taken to the EU Member States for further negotiation.

Parliament’s position

To accelerate EU climate change actions, the EU Parliament will be putting forward the following amendments to the current reform proposals for negotiation with Council representing Member States and the EU Commission:

Regulation	Topic	Adopted EU Parliamentary position
Revised EU ETS	Overall emissions reduction ambition	The increased ambition of reducing emissions by 63% in the ETS sector by 2030, compared to 2005, is to be achieved through: one-off cuts to the EU-wide quantity of allowances in circulation, and; an increase in the annual reduction of allowances (4.4% until the end of 2025, 4.5% from 2026 and 4.6% from 2029).
	Removal period of EU ETS free allowances (linked to CBAM)	Free allowances in the ETS sectors covered by the CBAM to be phased out from 2027 and disappear by 2032.
	ETS II for commercial buildings and transport	A separate, new ETS (“ETS II”) for commercial buildings and road transport to be established on 1 January 2024. Residential buildings and private transport will be exempt until 2029 (and only subject to a thorough assessment and new legislative proposal).
	Maritime transport	The current ETS to be extended to include maritime transport: 100% of emissions from intra-European routes to be covered as 2024; 50% of emissions from extra-European routes to and from the EU as of 2024 until the end of 2026; From 2027, 100% of emissions from all trips should be covered with possible exemptions (up to 50%) for non-EU countries subject to certain conditions. Seventy five percent of the revenues generated from auctioning maritime allowances to be put into an Ocean Fund to support the transition.
	Introduction of incentivization	A bonus-malus system to be introduced from 2025: The most efficient installations in a sector will get additional free allowances. Those who do not implement the recommendations of the energy audits or certified energy systems, or do not establish a decarbonization plan for their installations, will lose some or even all of their free allowances.
	Municipal waste	Inclusion of municipal waste incineration in the ETS from 2026.
CBAM	Covered products	Cement, iron and steel, aluminium, fertilizer, electricity, organic chemicals, polymers (plastics), hydrogen and ammonia. (Organic chemicals and polymers will be subject to a Commission assessment of their technical specificities.)
	Emissions	Inclusion of indirect emissions (i.e. emissions arising from electricity used by manufacturers).
	Transitional period (linked to the EU ETS)	Phased introduction of CBAM from 1 January 2023: Only reporting obligations required until the end of 2026. From 1 January 2027, CBAM should be fully operational and CBAM certificates will have to be surrendered. ETS free allowances for exporters in CBAM sectors to be phased out from 2027 (100% free allocations between 2023 and 2026); reaching up to 50% in 2030; with CBAM fully phased in by 2032.
	Centralized authority	One centralized EU CBAM authority, rather than 27 competent authorities, should bring about more efficiency, transparency and cost effectiveness, and also combat forum shopping by importers.

The proposal for a regulation establishing a SCF is intended to address social impacts that arise from the extending emissions trading to include the building and road transportation sectors. Those most affected by energy and mobility poverty will be assisted to cope with the increased costs of the energy transition through support measures such as temporary direct income support (i.e. a reduction in energy taxes and fees), fiscal incentives, vouchers, subsidies or zero-interest loans.

Next steps

Although the EU Parliament has adopted the amended proposed reports, the texts are not final EU legislation, and may be subject to further amendments based on the outcome of the trialogue between Parliament, the Council and the Commission.

However, with the intended CBAM implementation date of 1 January 2023 looming, and as global climate actions continue to intensify, companies should begin assessing the carbon footprint of their operations and value chains in preparation for the significant changes that are being seen.