MEPs vote to reform the EU’s emissions trading system and impose a carbon tax

The European Parliament has voted in favour of three key climate laws, barely two weeks after the same legislative files caused scenes of chaos in the hemicycle.

That incident, in which MEPs booed and jeered at each other, prompted a flurry of behind-the-scenes negotiations to achieve a new compromise between the main political groups.

The concentrated push paid off on Wednesday, when a majority of lawmakers approved the three draft laws with a comfortable majority: a revision of the EU’s Emissions Trading System (ETS), a novel carbon border tax and a Social Climate Fund.

The three pieces of legislation were unveiled by the European Commission last July as a part of a broader package to slash the bloc’s greenhouse gas emissions by 55% before the end of the decade.

In a plenary session on Wednesday, a comfortable majority voted in favour of the draft laws. The parliament will now defend this position in the upcoming negotiations with member states, which are expected to be intense.

The Parliament and Council will have to agree on a final version for the laws enter into force.

“Today’s plenary decision is good for the climate and good for jobs,” said German MEP Peter Liese, the rapporteur on the ETS file. “I am very relieved and glad that a large majority is now living up to its responsibility.”

Speaking on behalf of the socialist group, Mohammed Chahim welcomed the deal “after the troublesome vote in the previous plenary” and said it was based on the principle “the polluter must pay, no matter where they pollute!”

The liberals from Renew Europe called the agreement a “huge step” forward while the Greens said it would enable the 55% carbon reduction but fall short of the Paris Agreement’s goal to to limit global warming to 1.5 degrees Celsius.

European Commission President Ursula von der Leyen also celebrated the news, saying that “together Europe paves the way for a climate neutral future.”

What are the three climate laws?

The first draft law is a revision of the Emissions Trading System (ETS), one of the EU’s flagship climate tools.

The ETS is the world’s largest carbon market and covers a variety of highly polluting sectors, such as electricity generation, commercial aviation, oil refineries and steel production.

All companies that operate in these fields are obliged to buy ETS allowances to pay for the amount of carbon dioxide and other greenhouse gasses they release into the atmosphere. Companies can purchase these permits and then trade them with each other to fulfil their annual needs. Some allowances are free of charge to help the industry maintain its international competitiveness. 

The reform, which passed with 439 votes in favour, extends the ETS to the emissions released by the maritime sector, which until now has been excluded, and establishes a separate system for buildings and road transport.

For the time being, the new ETS will apply only to commercial usage, exempting residential buildings and private transport until, at least, 2029.

The revenues obtained from this separate ETS will be channelled into a Social Climate Fund, the second file voted on Wednesday. The fund will serve to finance income support for vulnerable households, invest in building renovation and stimulate a shift from private vehicles to public transport.

Reacting to the parliament’s vote, WWF Europe struck a critical note, saying MEPs have missed a second chance to increase the system’s targets. “The agreed [ETS] proposal is no more than old wine in new bottles as it fails to reintroduce the critical elements that had been lost in the first vote following intensive industry lobbying,” the organisation said in a statement. 

The third draft law, officially known as Carbon Border Adjustment Mechanism (CBAM), is a levy on imports coming from countries where climate policies are weaker than in the EU.

The tax is meant to address the problem of carbon leakage: when a European company moves production outside the bloc to benefit from laxer climate regulation and a have greater liberty to emit CO2.

The world-first measure will apply from January 2023, with a transitional period until December 2026.

Under the parliament’s position, approved with 450 votes, the carbon tax will cover iron and steel, refineries, cement and fertilisers, together with organic chemicals, plastics, hydrogen and ammonia.

The free ETS permits that are in place for these sectors will be phased-out by 2032, in order to ensure a level playing field between EU companies and their international competitors.