EU Parliament Divided Over Emissions Trading, Pushes for Combustion Car Ban

In its plenary session on 8 June 2022, the EU Parliament failed to reach a consensus on the reform of the EU Emissions Trading Scheme (EU ETS) and also referred the legislative proposals on the Climate Social Fund and the Carbon Border Adjustment Mechanism (CBAM) back to the lead committees. On the one hand, this delays the legislative process on the "Fit for 55" climate package; on the other hand, it also offers the opportunity to correct any incipient wrong decisions. However, the ban on internal combustion engines in new passenger cars and vans from 2035, which was advocated by the EU Parliament, can now only be stopped by the member states in the Council.

Dispute Over Emissions Trading, Climate Social Fund and CBAM

At the end of the voting marathon in the parliamentary plenary on individual issues of the reform of the EU ETS (see cepPolicyBrief 5/2022), the Greens and Social Democrats pulled the ripcord and refused to approve the reform as a whole. In their view, the majority of MEPs had crossed one of their red lines by lowering the CO2 reduction target for 2030 compared to 2005 from 67% to 63% as proposed by the Environment Committee, although this majority decision went beyond the 61% originally proposed by the EU Commission. In addition, a majority of conservatives, liberals and EU sceptics had voted to spread the one-off reduction of the cap on EU ETS allowances and thus the maximum permissible CO2 emissions ("cap") out over two steps. Finally, conservatives and EU sceptics followed the proposals of the Industry Committee to allow the free allocation of EU ETS certificates ("free allowances") to energy-intensive companies that are threatened by relocation of production and emissions to third countries due to high climate protection costs ("carbon leakage") to expire only in 2035 and not - as proposed by the Environment Committee - already in 2030. Since with this also a compromise proposal of the Social Democrats for a phasing-out of the free allowances in 2032 had failed, they, as well as the Greens, saw an unacceptable "watering down" of the "Fit for 55" climate package by the majority decisions.

Thus, for the time being, the introduction of a separate EU emissions trading scheme for road transport and buildings (EU-EHS 2; see cepPolicyBrief 6/2022; Europe.Table: Opinion) proposed by the EU Commission has also failed in the EU Parliament. As the Climate Social Fund and the CBAM are closely linked to the EU ETS reform, these two dossiers were also referred back to the committees. The aim now is to forge a consensus among the pro-European parliamentary groups for all three legislative projects. As a result of the delays, the Council may adopt its positions on the dossiers earlier, which could cause the EU Parliament to lose influence on their final design.

Yes to the Ban on Internal Combustion Vehicles from 2035

In another vote, the majority of the EU Parliament agreed on a further tightening of the CO2 fleet standards for passenger cars and vans. As proposed by the EU Commission, only CO2-free vehicles can be newly registered in the EU internal market from 2035. Alternative motions to this de facto ban on internal combustion engines, which would have prescribed only a 90% reduction in CO2 emissions for these vehicles, did not find a majority. This means that from 2035, the possibility of newly registering vehicles with alternative fuels will also be eliminated.

cep Assessment

The cep takes a very critical view of the developments in the EU Parliament, not only because of the delay of central legislative procedures of future EU climate policy.

  • Effective Overall CO2 reduction Through Emissions Trading is Decisive

The Commission had coordinated the individual dossiers of its "Fit for 55" climate package in such a way that they are compatible with the overall EU target of a 55% reduction of CO2 by 2030 compared to 1990. An additional increase in the CO2 reduction target for the EU ETS sectors beyond that proposed by the EU Commission would thus be unnecessary if the EU Parliament's proposed restriction of the scope of the EU ETS 2 for road transport and buildings to commercial users did not de facto weaken the reduction targets there at the same time. The assumption of many MEPs that a delayed phasing-out of free allowances would also mean a dilution of climate protection efforts is simply wrong. The steadily decreasing cap will effectively achieve the reduction targets (see cepPolicyBrief 5/2022;). It is irrelevant whether allowances have to be auctioned or are freely allocated. The incentive effect is the same: those companies with abatement costs below the allowance price decarbonise, the others will prefer to use certificates. If too many allowances are in demand, the CO2 price rises, so that in turn more companies have economic incentives to reduce their CO2 emissions. For effective climate protection, the effective cap reduction of the EU ETS is decisive. Therefore, the EU Parliament should not get bogged down in the minutiae of ultimately irrelevant details but should quickly agree on an EU ETS reform including the introduction of the EU ETS 2 for road transport and buildings.

  • Climate Protection Requires Protection of the EU Export Industry

The planned phase-out of free allowances, which have so far protected the European economy from carbon leakage, will only increase the burden on energy-intensive companies in the EU which cannot pass on these costs to their customers due to the international competitive situation. In this respect, the planned CBAM is not an adequate substitute, as neither the EU Commission's proposal nor the EU Parliament's plans provide for relief for exporters from climate protection costs. Therefore, this fixation on a rapid abolition of free allowances is, on the one hand, dangerous for European industry and endangers jobs. If production, including the associated CO2 emissions, migrates to countries outside the EU with lower climate protection requirements, this will also be harmful for the global climate (see cepStudy July 2021). It remains to be hoped that in the upcoming renegotiations in the Environment Committee, MEPs will come to the understanding that only with effective carbon leakage protection the ambition level in the EU ETS can be increased with no harm to the economy and climate protection.

  • Technology openness instead of combustion engine ban

The phase-out of the internal combustion engine also threatens to lead to an industrial devastation (cepPolicyBrief 6/2022;). Since there will still be demand for vehicles with combustion engines in emerging and developing countries long after 2035, they will continue to be built outside the EU, but jobs in the European automotive industry - especially in development departments and with suppliers - will be lost. Here, too, the only hope is that the Council will prevent this and at least keep the door to technological openness ajar.

Dr. Martin Menner

cep-Expert EU-Climate- und Transport Policy