The EU is accelerating the green transition: REPowerEU and ETS/CBAM update

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Last week was an important week for the EU’s Green Deal ambitions. On Tuesday 17 May the European Parliament ENVI Committee adopted updated proposals on CBAM and the ETS reform. And the following day the European Commission presented its REPowerEU plan.

What is the REPowerEU Plan and why should you care?

The aim of the REPowerEU Plan is to simultaneously end the EU’s dependence on Russian fossil fuels and tackle the climate crisis by fostering the transition towards a green economy. REPowerEU builds on the EU Fit for 55 Package presented by the European Commission on 14 July last year. Although REPowerEU does not change the EU’s ambitions of achieving at least a 55% reduction in net greenhouse gas emissions by 2030 and reaching climate neutrality by 2050, it does call for a swift adoption of the proposals contained in the Fit for 55 Package. This puts additional pressure on the EU Member States to reach an agreement on the proposals, and as we know, some of these proposals such as the revision of the EU Emissions Trading System (ETS) and the introduction of a Carbon Border Adjustment Mechanism (CBAM) will have a significant tax impact…

The REPowerEU plan also focuses on grants and incentives by further expanding existing European incentive programmes and by offering Member States new opportunities to support companies. For example:

  • the expansion of the Recovery and Resilience Plans (RRPs);
  • the focussed expansion of the Connecting Europe Facility (CEF) and CEF for Energy (CEF-E), which will support European infrastructure investments focussed on providing energy infrastructure security and support large-scale projects in the field renewable energy;
  • the InvestEU program which promotes among other things the recovery and green growth initiatives in line with the current plans;
  • the Innovation Fund in connection with the ETS which supports schemes demonstrating the innovative use of low-carbon technologies; and
  • the opportunity for Member States to define tax measures and incentives within the boundaries of EU State aid rules.
Progress on the ETS reform and the introduction of the CBAM

The European Parliament ENVI Committee adopted proposals on the CBAM and the ETS reform on 17 May. The proposals are closely linked because the CBAM proposal provides for a gradual phasing out of ETS free allowances in the sectors covered by the CBAM (iron and steel, aluminium, fertilisers, cement and electricity), as discussed in our previous newsflash, The CBAM complements the ETS and creates a system to counter carbon leakage. The CBAM sets a price on carbon emissions of goods imported into the EU to ensure a level-playing field between European and international suppliers. 

The European Parliament ENVI Committee’s reports set a new, ambitious timeline for the CBAM and the ETS. With regard to the ETS, the Committee intends to phase out completely free allocations by 2030 instead of 2035. Furthermore, in order to incentivise innovation and best-performers, the Committee proposes to introduce a bonus-malus-system from 2025 onwards. Under such a system additional free allowances will be allocated to the most efficient installations in a sector, outdated installations risk receiving fewer free allowances or no free allowances at all. With regard to the CBAM, the Committee proposes to reduce the transition period for the CBAM by a year (to the end of 2024, instead of 2025). In addition, the Committee proposes to extend the scope of the CBAM to cover aluminium, hydrogen, polymers and organic chemicals. It goes without saying that this would be a game changer and would have a material impact on doing business.

The next step is to hold a vote on the proposals. This vote is scheduled to take place during the plenary session of 6-9 June. Once the European Parliament adopts its final position it can start the negotiations with the Commission and the EU governments.

The Energy Taxation Directive (ETD) as an instrument to reduce consumption of fossil fuels and dependence on Russian Energy

The ETD sets a minimum tariff for certain energy sources. Price signals can have a significant impact on moving consumers away from polluting fossil fuels and saving energy. The revised ETD seeks to increase taxes on such polluting fuels and favour the use of green energy sources such as renewable hydrogen, solar energy and wind energy. It is crystal clear that the ETD will play a central role in achieving the goals of the REPowerEU Plan, putting the topic high on the agenda.

Impact on business and next steps

The EU’s ambition to become climate neutral is certainly not new, but it is clear that the evolving geopolitical situation and the impact that this has on the global energy market is accelerating the need to take action. REPowerEU builds on the EU Fit for 55 proposals as well as the RRPs to accelerate the green transition. 

Taxation and subsidies are key instruments in directing businesses towards a green transition. If you have not yet assessed the impact of the introduction of the CBAM, the revised EU Emission Trading System and the Energy Taxation Directive on your value chain, now is the time to act. Many businesses are changing and taking decisions with sustainability in mind. Now is the time to ensure that tax has a seat at the table and that you play your part in reshaping your organisation. 

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