European Parliament rapporteur Mohammed Chahim (S&D, Netherlands) submitted, on Wednesday 5 January, his draft report on the Carbon Border Adjustment Mechanism (CBAM) to the shadow rapporteurs. His report calls for a more ambitious mechanism than the European Commission’s proposal (see EUROPE 12762/5), including an expansion of the sectors covered, an earlier entry into force date and a quicker exit from free ETS allowances.
Scope
The rapporteur wishes to extend the sectors covered by CBAM to organic compounds, hydrogen and polymers (a class of materials made up of macromolecules). They would be added to the cement, electricity, steel and iron, aluminium and fertiliser sectors.
The Commission had decided not to include organic compounds due to “technical limitations” in determining the integrated emissions of imported goods. According to Mohammed Chahim, however, “these products have the characteristics to be covered by CBAM, and technical complexities can be overcome”.
In addition, the report calls for the so-called integrated emissions of products to include indirect emissions from electricity consumed in the production of goods, heating or cooling.
End of free allowances
A thorny issue in the text is the free allocation of allowances to European companies under the Emissions Trading System (ETS), which the rapporteur believes should be phased out more quickly than planned. He proposes to apply a “CBAM factor” that will gradually reduce these allocations until 2028 (90% of allowances maintained in 2025, 70% in 2026, 40% in 2027, and 0% in 2028). The European Commission had been working on a 10-year phase-out until 2036.
The cement sector should not even benefit from free allowances at all from 2025 onwards, according to the rapporteur. “Cement is the sector with the lowest trade intensity among goods covered by the CBAM. The risk of carbon leakage is low and a speedier implementation is warranted”, he writes.
Entry into force
Here too, the rapporteur advocates a shorter timeframe for the implementation of the regulation. He wants to bring forward the full application of the regulation to 2025 instead of 2026, which would leave two transitional years - instead of three from 2023 - during which companies would only have to declare their imports.
Operation
Instead of competent authorities in each Member State to manage CBAM certificates, Mohammed Chahim calls for a central authority to be set up by the European Commission.
This “CBAM authority” would be responsible for controlling import authorisations and the purchase of CBAM certificates. It would be able to take all kinds of decisions to implement the regulation.
The report also introduces the possibility for companies to appeal against a decision of this authority.
It also tightens the rules on fines for non-compliance. The European Commission had studied several scenarios and had settled on two levels of fines. Fraudsters had to pay a penalty equivalent to 100% of the price of a certificate or 200% of its price for each certificate not purchased. Mr Chahim’s report toughens the tone by proposing a single type of fine, equivalent to three times the price of the CBAM certificate.
Resources
As in the Commission’s proposal, the revenue from CBAM should always cover the operating costs of the CBAM authority and then go to the EU budget, according to the rapporteur.
However, the report adds an amendment specifying that “financial support shall be provided to support least developed countries’ efforts towards the decarbonisation of their manufacturing industries” through the various existing programmes. “The additional financial support shall be at least equivalent in financial value to the revenues generated by the sale of CBAM certificates”, it says.
On the other hand, 50% of the revenues generated by the faster phase-out of free allowances should support innovation in the EU, according to the rapporteur. The remainder will go into the EU budget.
The report does not provide any guidance on the exemption of least developed countries from CBAM.
In the coming months, the European Parliament’s Committee on the Environment, Public Health and Food Safety (ENVI) will have to adopt its position for a plenary vote around the month of June.
See the draft report: https://bit.ly/3eQ31zU (Original version in French by Léa Marchal)