On Wednesday, June 22, the European Parliament adopted some key elements of the Fit for 55 Package, namely the EU Emission Trading System (ETS), the Carbon Border Adjustment Mechanism (CBAM) and the Social Climate Fund. One day before, the European Parliament and the Council also reached a provisional agreement on the Corporate Sustainability Reporting Directive.
The adoption of the European Parliament’s position on the different proposals marks an important step forward for the adoption of the Fit for 55 Package. The MEPs adopted more ambitious proposals compared to the Commission’s texts. The discussions leading towards full adoption of the Fit for 55 Package can now continue with the Council.
From dark Wednesday…
On the 8th of June, the European Parliament voted in plenary on the Fit for 55 Package. However, the plenary session took a particular turn of events. The reports proposed by the European Parliament were more ambitious than the Commission proposals (for instance, the EP ENVI Committee reports proposed the total phase-out of free allocations by 2030 under ETS of sectors covered by CBAM). The ambitions stated in these reports were rejected by the right wing of the Parliament which successfully passed amendments to water down the Parliament’s position. This motivated a majority of MEPs of mostly left wing, Greens and socialists, but also conservatives and part of the Christian-Democrats, to vote against the Fit for 55 Package as a whole. Therefore, the EU ETS, the Social and Climate Fund and the CBAM proposal were referred back to the ENVI Committee.
… To a bright one
Based on the last plenary session, the negotiators of the European People’s Party, of the group of Socialists and Democrats and of the Renew Europe group were able to find a compromise text proposal on ETS and CBAM on June 15, which has been adopted on June 22.
The adopted European Parliament position sets the phase-out of allocations under ETS by 2032 for sectors covered by CBAM under certain conditions. The phase-out would start in 2027 and should be reduced to 93% in 2027, 84% in 2028, 69% in 2029, 50% in 2030, 25% in 2031 and 0% in 2032. The text proposed as well to slightly raise the linear reduction factor of carbon credits from 4.5% to 4.6% in 2029. This would enable to increase the reduction rate of CO2 emissions for the covered sectors for 2030 by 63%.
With respect to CBAM, the compromise text proposes to extend the scope of CBAM to polymers, organic chemicals, plastics, ammonia and hydrogen. Furthermore, MEPs also wish to extend CBAM to include indirect emissions, meaning emissions deriving from the electricity used by manufacturers. These extensions of the scope of CBAM could obviously have a significant impact on business. The EP also decided to include in their position the request for export rebates, by introducing a derogation for products intended for export markets. The EP wants the Commission to propose and reflect on ‘green’ export rebates for the GHG efficient EU industries (or other types of measures heading this way). As such, the proposal of export rebates would require the Commission to verify the WTO compatibility of the claim.
Political developments on the CSRD
The Council and the European Parliament also reached a provisional political agreement on the Corporate Sustainability Reporting Directive on the 21th of June. This is a major step in the further implementation of this measure. The proposal establishes clear and standardised sustainability reporting rules, to ensure reliable and comparable sustainability information disclosure. The new rules introduce more detailed reporting requirements to oblige all large companies and all listed companies to report on sustainability matters. Moreover, the CSRD will introduce an assurance requirement and integration within the company’s annual report (the sustainability reporting will have to be published in a dedicated section of management reports). The reporting must be certified by the statutory auditor or possibly an accredited independent certifier, to ensure compliance of the sustainability information with the EU standards.
Under the proposal, the CSRD will apply to all large companies from 2024 onwards. It applies as well to non-EU companies operating in Europe, where companies generate more than EUR 150 million in the EU and have subsidiaries in the EU. SMEs will be subject to the CSRD from 2026 onwards (with an opt-out possibility for the transitional period, then start to report in 2028). Companies not yet subject to the Non-Financial Reporting Directive, will start reporting on their sustainability issues as from 2025 onwards.
What is next?
Regarding the Fit for 55 Package, dialogues amongst the different institutions will move forward. Since the European Parliament position is now final, the interinstitutional dialogues will be conducted between the EP and the Council. The aim of these discussions is to find a compromise on the legislative package. The European environment ministers will aim to reach a general approach on the Fit for 55 on June 28.
Concerning the CSRD, the Permanent Representatives Committee (COREPER) will need to approve the provisional political agreement. Once this is done, the CSRD will follow the formal adoption procedure, and Member States will have 18 months to transpose it into national law. The Commission will adopt secondary legislation containing the reporting standards by April 2023.
Takeaway message
Companies subject to the sectors covered by the EU ETS, as well as the CBAM will have less time than expected to prepare for the phase-out of free allocations. Meaning the time to act is now. Moreover, companies importing products such as polymers, organic chemicals, plastics, ammonia and hydrogen from outside of the EU now also have to prepare for the CBAM reporting requirements and the financial costs bound with the purchasing of CBAM allowances. Time to act and assess what these new measures will mean for the business, but also the tax function.
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- Corporate income tax
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- Risk & Compliance
- Tax Accounting
- Tax challenges arising from the digitalisation of the economy/Global anti-base erosion (GloBE)
- Tax controversy and dispute resolution (TCDR)
