The European Commission recently adopted a package of proposals to make the EU’s climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55 percent by 2030, compared to 1990 levels. The package includes a Carbon Border Adjustment Mechanism to put a carbon price on imports and a proposed revision of the Energy Taxation Directive.

Carbon Border Adjustment Mechanism (CBAM)

The CBAM will equalise the price of carbon between domestic products and imports and ensure that the EU’s climate objectives are not undermined by production relocating to countries with less ambitious policies. It also aims to encourage industry outside the EU to take steps in the same direction.

Under the CBAM system EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer. The CBAM will be phased in gradually, initially apply only to a selected number of goods at high risk of carbon leakage: iron and steel, cement, fertiliser, aluminium and electricity generation. A simplified CBAM system, where importers will have to report emissions embedded in their goods without paying a financial adjustment will apply as from 2023 for selected products with the objective of facilitating a smooth roll out and to facilitate dialogue with third countries. The definitive system is expected to become fully operational in 2026.

Revision of the Energy Taxation Directive

The proposal to revise the Energy Taxation Directive aims to align the taxation of energy products with EU energy and climate policies, promote clean technologies and remove outdated exemptions and reduced rates that currently encourage the use of fossil fuels.

The main changes in the revised Directive are:

• Fuels will start being taxed according to their energy content and environmental performance rather than their volume.
• The way in which energy products are categorised for taxation purposes will be simplified to ensure that fuels most harmful to the environment are taxed the most. Products covered by the Directive are grouped and ranked according to their environmental performance. Fuels that have the most negative impact on the environment will be subject to higher minimum rates.
• Exemptions for certain products and home heating will be phased out, so that fossil fuels can no longer be taxed below minimum rates. Member States will be able to support vulnerable households and protect against energy poverty.
• Fossil fuels used as fuel for intra-EU air transport, maritime transport and fishing should no longer be fully exempt from energy taxation in the EU.