On June 22, local time, the European Parliament passed three important EU draft laws linked to climate change. This is called the "largest carbon market reform in history" in Europe, including the reform of the carbon emissions trading system (ETS), the amendment of the relevant rules of the carbon border adjustment mechanism (CBAM), and the establishment of a social climate fund to eliminate energy and liquidity poverty.

The above three draft laws are part of the EU's "Fitfor55" package, which aims to combat climate change and protect jobs and citizens by reducing greenhouse gas emissions by at least 55% by 2030. The EU's "Fitfor55" plan will reduce pollution by at least 55% from 1990 levels by 2030 and achieve net zero greenhouse gas emissions (climate neutrality) by 2050.

According to the official website of the European Parliament, the Parliament is now ready to start negotiations with EU governments on the final form of these draft laws.

It is worth noting that in the face of the "gas outage" crisis under the Russian-Ukrainian conflict, European countries such as Germany, Italy, Austria and the Netherlands have recently stated that they will increase coal-fired power generation. Returning to coal, the EU's commitment to reduce carbon emissions may be challenged.

Reform of the Carbon Emission Trading System

ETS is the main policy tool for EU emission reduction. It requires power plants and industrial enterprises to purchase carbon dioxide emission permits when they pollute, and sets a cap on the amount of greenhouse gases that factories, power plants, aviation and maritime shipping (new) can emit to achieve overall emission targets.

The European Parliament believes that ETS is the core of Europe's climate policy. Pricing greenhouse gas emissions may incentivize economic actors to reduce emissions and invest in low-carbon technologies.

In early June, the European Parliament was divided on whether to strengthen or weaken the ETS. At that time, it was proposed that by 2030, the total emissions of industries covered by the carbon emission trading system would be reduced by 61% compared with 2005. The draft proposes to increase this reduction to 63%.

The new draft proposes that the market's CO2 emissions cap will fall by 4.4% from 2024, 4.5% from 2026 and 4.6% from 2029, with 70 million emission permits cancelled in 2024 and 50 million in 2026.

The draft will also support the gradual elimination of free carbon emission quotas from 2027 and a complete end in 2034.

In addition, the ETS will be extended to maritime transport. From 2024 to the end of 2026, 100% of emissions on intra-European routes will be covered, and 50% of emissions on routes outside Europe from 2024 to the end of 2026. From 2027, emissions from all travel should be 100% covered. MEPs also want to include greenhouse gas emissions other than CO2, such as methane and nitrous oxide.

Carbon border adjustment mechanism

Important progress has been made in EU carbon tariff legislation.

In addition to steel, refineries, cement, organic basic chemicals and fertilizers, MEPs proposed to further expand the scope of CBAM to include organic chemicals, plastics, hydrogen and ammonia. The bill also proposes to include "indirect emissions", that is, emissions from electricity used by manufacturers, in the scope of CBAM to better reflect the carbon dioxide costs of European industry.

CBAM will apply from January 1, 2023, with a transition period until the end of 2026, and carbon tariffs will be levied from 2027, a year later than the draft legislation of the European Commission. Importers need to pay for the direct carbon emissions of their imported products, and the price is linked to the EU carbon market.

Members of the European Parliament said that the free quotas obtained by EU industries under the EU Carbon Emissions Trading System (EU-ETS) will be phased out by 2032, three years earlier than the European Commission's proposal.

In addition, the plan also proposes to establish a unified carbon tariff enforcement agency at the EU level, rather than delegating it to each member state. MEPs proposed that the revenue generated by the sale of CBAM certificates go into the EU budget, and part of the revenue from carbon tariffs be used to support the least developed countries.

Social Climate Fund

The European Parliament also agreed to set up a social climate fund with the aim of helping the poorest people most affected by energy and transport to cope with the increased costs of energy transformation. The fund will benefit poor households, micro-enterprises and transport users.

The social climate fund will provide financial resource support in two aspects, including temporary direct subsidy measures such as reducing energy-related taxes and fees to cope with rising prices of road transport and heating fuels, and long-term structural investments such as building renovation, investment in renewable energy, and guiding people to turn to public transportation.

The European Parliament expects that the total financial amount of the fund will reach 16.39 billion euros by 2027. Based on the next EU budget negotiations and the future inclusion of private buildings and road transport in the ETS, the total amount may reach 72 billion euros by 2032.

It is reported that the European Parliament has previously passed legislative proposals on carbon dioxide emission standards for cars and vans, land use, land use change and forestry (LULUCF), greenhouse gas emissions from other sectors (effort sharing), reducing aviation sector emissions, market stabilization reserves, etc. involving greenhouse gas emission reduction.

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