Yannick Jadot (Greens/EFA, France), Parliament’s rapporteur on this issue, said on Thursday 22 October that it was no longer a matter of considering the possibility of a carbon border adjustment mechanism at the EU’s borders, but it was now about looking at the modalities of such a mechanism, which will gradually be put in place from 2023 onwards.
The French Green MEP’s draft report, which will be discussed by the European Parliament Environment Committee (ENVI) on Wednesday 28 October, stresses that the future mechanism must both contribute to European climate policy and encourage the EU’s international partners to raise their level of climate ambition, protect European producers against unfair competition, stimulate reshoring of economic activities in the EU and strengthen the EU budget’s own resources.
The first objective of the scheme must be, “before the revenue” it will generate, to “stimulate the decarbonisation of European industry that emits the most greenhouse gases (GHG) without causing deindustrialisation in the EU”, said Mr Jadot.
He mentioned four options on the table. Firstly, the creation of a ‘mirror’ mechanism to the EU GHG ETS emissions trading scheme. To export to the EU, companies from third countries with lower environmental standards than those in the EU would be required to pay the same carbon price as European companies. Benchmarks would make it possible to measure the performance of these third-country companies, which would also be able to prove that they meet standards as high as those in Europe.
This option would have several advantages, according to the MEP: - to move from a climate policy that takes into account GHG emissions to a policy that includes the EU’s ‘carbon footprint’ by also taking into account imported emissions; - the European Parliament and the EU Council would be co-legislators with a decision by qualified majority of Member States.
The effectiveness of the mechanism will depend on the reform of the ETS system
The effectiveness of a ‘mirror’ mechanism to the ETS system - which the Green MEP believes would be favoured by a majority in the European Parliament - as well as the level of revenue generated will depend on the future reform of the ETS system itself. Intended to include new sectors of activity (air and maritime transport), this reform should set a floor price for carbon and put an end to the free allocation of allowances, Mr Jadot said. He added that this effectiveness will also depend on the development of the climate policies of the EU’s trading partners.
Second option: the introduction of customs duties. The creation of an ‘airlock’ at EU entry is “the most easy to understand system for citizens”, but the challenge will be to make it compatible with international trade rules, Mr Jadot said. The draft report does stress the need for any mechanism to treat intra-EU production in the same way as imports into the EU in order to be compatible with the rules of the World Trade Organization. In addition, any decision in the EU Council would require unanimity of the Member States.
Thirdly, a consumption tax on production in the EU and on imported products could be introduced. But national debates on a new carbon tax are particularly “delicate”, Mr Jadot said, referring to the ‘yellow vests’ movement in France. “I don’t see a political future for this option”, he said.
Finally, the fourth option would be to introduce discounts for European exports. The rapporteur is not in favour of this, because it would not encourage the EU’s trading partners to be virtuous. In his report, he therefore asks the Commission not to include this option in its legislative proposal scheduled for June 2021.
Whichever formula is chosen, the increase of the carbon border adjustment mechanism will be gradual. At the start, the most polluting sectors - cement, steel, chemicals and fertilisers - would thus be the first to be affected.
As for the revenue generated, Mr Jadot mentioned a range “between €5 and €10 billion annually”, depending on the reform of the ETS system. According to him, these revenues will have to be channelled into the EU budget to support the climate transition in Europe and the least developed third countries.
Discussions in both the European Parliament and the EU Council promise to be tough. Each political group in the European Parliament and each Member State must see advantages in the future mechanism that outweigh the disadvantages, according to Mr Jadot. “Germany is not against” his principle, he said, as the internal differences in the German debate are more about the implementation modalities based on the interests of each sector.
“My fear is that the carbon adjustment will fall into the same hole as the financial transaction tax”, he added.
The deadline for tabling amendments to the draft report is 10 November. The vote in the ENVI committee, leading on this dossier would take place in mid-January, with a view to a plenary vote in March. By that date, it will be possible to amend the final text on the basis of the impact assessments that the Commission has commissioned and which should be available by the end of 2020, Mr Jadot said.
See the draft report: https://bit.ly/3oa5Wa5 (Original version in French by Mathieu Bion)