Overhaul of the EU Emissions Trading System (ETS), the Energy Taxation Directive (ETD), and the introduction of a Carbon Border Adjustment (CBAM)

The European Commission has adopted a package of measures intended to put the EU firmly on the road to climate neutrality by 2050 with the intermediate step of a minimum 55% reduction in net greenhouse gas emissions by 2030. An overhaul of the EU Emissions Trading System (ETS) and of the Energy Taxation Directive (ETD), and the introduction of a Carbon Border Adjustment (CBAM) form part of the package:

A.- ETS overhaul: it would bring maritime transport within the scope of the ETS and accelerate the reduction of the number of emissions allowances that can be issued each year. A separate proposed directive would lead to the gradual reduction of free emissions allowances available to the airline industry. It also envisages the establishment of a separate emissions trading system for road transport and heating fuels which would apply from 2026 at the fuel supplier level. Its introduction would be accompanied by the establishment of a Social Climate Fund.
B.- ETD overhaul: the ETD does not reflect the current mix of energy products and criticized that it does not link the minimum tax rates to energy content and CO2 emissions.
Minimum tax rates would be based on the real energy content and environmental performance of each product, with most polluting fuels taxed at the highest level. The tax base would also be expanded – including through the removal of existing exemptions. An eye-catching change in this respect is that fuels for the aviation and maritime industries would lose existing exemptions.
The burden of higher minimum levels of energy taxation may be felt disproportionately by consumers and poorer households. The mitigation of this risk does, however, appear to be left mostly to each Member State’s tax system and the commission encourages Member States to consider using energy tax revenues to support vulnerable households.
C. CBAM introduction: the overarching aim is to prevent carbon leakage. The CBAM has been designed as a system of certificates to complement the ETS rather than, for instance, an import tax. Importers will be required to purchase certificates at a price to be set by the Commission on a weekly basis to mirror average ETS prices (which are established on a daily basis) in respect of relevant goods (being, at least initially, only iron and steel, cement, fertiliser, aluminium and electricity generation as per Annex I to the proposed CBAM regulation) imported into the EU customs territory from third countries. Imports from countries that participate in the ETS or have an emissions trading system linked to it are exempt from CBAM.

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