It’s a deal: CBAM, ETS Reform & SCF
But also — Taxation, IRA, Qatar, Apple, Twitter
Hi! This is Monday, 19 December 2022. Here’s the news you need to start your week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
The Briefing
The Council and the Parliament reached a deal on three major pieces of the ‘Fit for 55’ legislative package, which aims at reducing the EU’s greenhouse gas (GHG) emissions by 55% by 2030 and at achieving climate neutrality in 2050.
On 13 December, the two institutions agreed on the details of the brand-new Carbon Border Adjustment Mechanism (CBAM). Five days later, on 18 December, negotiators found a common ground on the European Trading Scheme (ETS) and struck a deal on the Social Climate Fund (SCF).
CBAM • “This morning’s agreement is a decisive step towards the launch of the world’s first carbon border adjustment mechanism”, said Economy Commissioner Paolo Gentiloni, after trilogues ended at 5AM on 13 December. CBAM will impose a levy on high emitting imported goods to make sure EU producers — which bear the cost of emissions through the ETS — do not face unfair competition from foreign companies.
Sectors covered by CBAM will include iron and steel, cement, fertilizers, aluminium, electricity. The Parliament also managed to include hydrogen and several downstream products in the scope, but failed to convince the Council to cover organic chemistry and polymers — nonetheless, the deal allows for a reconsideration of these.
Although the mechanism will only start working in 2026, importers will have to report GHG emissions embedded in their goods from October 2023 onwards. After 2026, CBAM will progressively apply to relevant goods and sectors.
UNFAIR? • Since it was first announced, several NGOs have asked to exempt companies from Least Developed Countries (LDCs) from CBAM. The final version of the deal does not include such a measure. “Europeans are responsible for double the carbon emissions as the poorest half of the world. Yet, the EU just agreed to pass the buck to those least responsible by forcing them to pay a tariff despite being hardest hit by the climate crisis”, explained EU Tax expert Chiara Putaturo in a press release.
Some NGOs also regret that revenues from the scheme will not be redirected to developing countries as climate finance. CBAM also faces criticism from several countries including China, the US and South Africa — they all fear the effects of CBAM on their manufacturers.
WTO • For CBAM to be WTO-compatible, a reform of the ETS was also necessary. Until now, companies in sectors vulnerable to unfair competition and carbon leakage were allocated free emission permits through the ETS. Since CBAM will put local goods and imports on an equal footing, it needs to coincide with the phasing-out of free permits.
Negotiators have agreed to end free allowances over a nine year period, from 2026 to 2034. As free permits end progressively, CBAM will gradually phase-in. This will ensure CBAM is compatible with WTO rules.
However, the final version of the text does not include rebates to protect EU products exported to other markets — negotiators argued these could have clashed with WTO rules. EU countries will instead have the opportunity to allocate revenues from the scheme to individually support companies at risk.
ETS • The end of free permits is far from being the only element of the ETS reform: “We just found an agreement on the biggest climate law ever negotiated in Europe," tweeted German MEP Peter Liese on 18 December.
The Parliament and Council have agreed to increase the overall goal of emission reductions by 2030 in sectors covered by the EU ETS to 62%. Among other measures, they also agreed to gradually increase the annual reduction rate of the cap on emission permits. Negotiators also confirmed that the ETS will progressively tackle emissions in the shipping sector, with most large vessels being included in the scope of the ETS from the start.
SCF • The two co-legislators have also agreed to create a new, separate ETS for fossil fuels used in cars and heating from 2027 — a highly divisive issue given potential negative effect on consumers and the current energy crisis. This “ETS II” will apply progressively, and will be accompanied by a 86.7 billion euros Social Climate Fund — more than the 59 billion fund initially proposed by the Council. This fund — which will be financed through ETS, and then ETS II allowances — will finance national “Social Climate Plans” aimed at supporting vulnerable households and helping them transition to decarbonized transports & infrastructures.
WHAT NEXT? • Agreement on these three legislations is provisional. They will have to be formally endorsed before being published in the EU’s Official Journal and entering into force.
One of the aims of CBAM is to incentivize other countries to develop their own carbon market — as importers that are subject to a carbon market similar to the EU ETS will be exempted from the CBAM levy. According to Sam Lowe, it will also be interesting to look for possible domino effects that could incentivize foreign governments to create their own version of CBAM.
In Case You Missed It
TAXATION • On 12 December, the EU Council agreed to put a European signature on the second pillar of the OECD agreement to reform the taxation of multinationals. To combat the erosion of fiscal bases, the agreement aims to implement a minimum tax rate of 15% for multinationals with an annual turnover of more than €750 million. From 2024 onwards, these multinationals will be liable to pay 15% corporate tax on their profits generated within the EU. The first pillar, which deals with profit shifting within multinationals and should result in profits being taxed where they are made, is still in the works.
While the OECD agreement is an international treaty, the EU's implementation of the second pillar requires a directive. Since this directive relates to the taxation of EU Member States, it must be adopted unanimously by the Council under Article 115 TFEU. This is why the directive was blocked by Ireland, Hungary and Poland, which used their vetoes for political purposes — whether to protect their tax advantages, to engage in an arm wrestle with Brussels over the rule of law, or to deny macro-financial assistance to Ukraine.
The entry into force of this directive in 2024 is a relief for Margrethe Vestager. The Competition Commissioner has been fighting against tax agreements between large multinationals and certain Member States. Vestager's crusade under state aid law has frequently come up against the shield of the EUcourts, which have overturned such decisions — whether it be Apple/Ireland, Starbucks/Netherlands or FIAT/Luxembourg.
IRA • When it comes to the IRA, the EU is still fuming. The Inflation Reduction Act — with its $369 billion in subsidies and tax exemptions — was on the agenda of the European Council on 15 December. At the end of the meeting, Charles Michel said he wanted to negotiate exemptions for European companies and had asked the Commission to work on measures to support the competitiveness of European companies.
The generous tax exemptions granted to "made in the USA" products — particularly in the field of green vehicles — are causing great concern among European leaders. Manufacturers, which are already handicapped by exorbitant energy prices relative to the United States are also under strong pressure to postpone their investment projects in the United States because of the IRA.
In a speech to the European Parliament on the eve of the Council, Ursula von der Leyen announced that she was ready to relax the rules on state aid from the beginning of 2023. She said: "The inflation reduction law risks leading to unfair competition. Three aspects are of particular concern: firstly, the 'buy American' logic, which underpins much of the law. Second, the tax breaks, which could lead to discrimination. Thirdly, production subsidies, which could disadvantage European companies. We have to solve these problems. We have to come up with our own answer, our European version of the 'Inflation Reduction Act'.”
The same is true of DG Competition. In a blog post dated 15 December, Margrethe Vestager pleads for a simplification of state aid law and supports the creation of a European sovereign wealth fund promoted by the Commission to support the ecological and digital transition. Member States remain very divided on the effects of a relaxation of the state aid regime. In the background, there is the fear of "small" countries that the "big" ones will take advantage of their budgetary leeway to strongly support their national industries to their detriment.
QATAR • The corruption scandal at the European Parliament is without a doubt the most serious to have hit the institution so far. One and a half million euros in cash were seized in Belgium and Italy, in a case that led to the arrest of Eva Kaili, Vice-President of the European Parliament.
As Simon Van Dorpe, Peter Teffer and Salsabil Fayed point out in an article for Follow The Money, diplomats — unlike interest representatives — do not need to be declared in any register to meet MEPs, which has allowed Qatari or Moroccan officials to approach politicians without being recorded anywhere.
APPLE • The DMA has already struck. Apple has already announced that it is preparing to allow app stores other than its own on its devices by 2024, to comply with the DMA. Until now, Apple has taken the view that Section 6(4) of the DMA, which requires gatekeepers to allow the installation of "or" third-party app stores, gave it the choice of offering one or the other — not one and the other.
The commissions charged on the App Store — between 15% and 30% — and the impossibility of using alternative means of payment to those of Apple are the subject of a major dispute in the Netherlands, where the American firm was forced to back down in the face of the Dutch authorities. In the US, EPIC Games, the developer of the video game Fortnite, is leading a fierce legal battle against Apple's commercial policies on its App Store.
TWITTER • The antics of Twitter's new owner are making waves around the world. The sacking of the company's entire staff in Brussels has also helped to dim Elon Musk's star, even as Twitter prepares for the Digital Services Act provisions to take effect. The suspension of the accounts of several American journalists from the social network is causing great concern on this side of the Atlantic.
What We’re Reading
European capitals are not rejecting the American Inflation Reduction Act out of hand, it is the underlying protectionism that is difficult to accept, explains Georgina Wright of Institut Montaigne. As a result, a European industrial policy is the talk of the town in Brussels.
In an article for the investigative media Follow The Money, Simon Van Dorpe, Peter Teffer and Salsabil Fayed go into detail about the corruption scandal in the European Parliament.
This week’s newsletter is brought to you by Maxence de La Rochère and Augustin Bourleaud. See you next Monday!