Out-Law News 3 min. read

EU parliament votes against expansion of EU emissions trading

MEPs have voted against an extension of the European Emission Trading System (EU ETS) to the road transport and buildings sectors.

Two other votes also scheduled for 8 June on issues related to this project were cancelled.

The European parliament was to vote on several building blocks of the EU's so-called ‘Fit for 55’ climate package. The agenda included an extension of the EU ETS, the new carbon border adjustment mechanism and the planned climate social fund.

But a majority of MEPs voted against the extension of the EU ETS to the areas of road transport and buildings. The corresponding proposal of the European Commission was referred back to the environment committee. The political groups in the parliament blamed each other for the failure of the previous proposal. Greens and socialist MEPs said they rejected it because it had been watered down by amendments from the conservative groups. The environment committee will now work out a new compromise that can be backed by a majority in the parliament.

Christian Lütkehaus, ESG expert at Pinsent Masons, said he understands all involved in the legislative process have to be cautious, but is concerned about the delay of the legislation: "Although it should be accepted that parliamentarians do not simply allow themselves to be overrun, given the scope of the proposals put to the vote yesterday, it is not a good sign for climate protection if fronts harden. Moreover, further delays in the implementation of long-prepared legislative projects raise the suspicion that current economic developments could shift priorities that have already been achieved on behalf of the climate."

The EU ETS is considered the central policy instrument for reducing greenhouse gases in the European Union. So far, the scheme only covers large companies from the energy, manufacturing and aviation sectors. EU companies from these sectors have to pay for emissions exceeding their allocation of free emission allowances once they reach a certain emission threshold. The allocation of the free emission allowances serves to give the affected companies a transitional period in which they can make their production more climate-friendly. It is also intended to prevent the industries concerned from migrating to third countries outside the EU with less ambitious climate targets to avoid increased production costs (so-called "carbon leakage").

From 2026, the European Commission wants road transport and the building sector to be covered by the EU ETS. According to the Commission's proposal, the burden on private households caused by the coverage of these sectors was to be mitigated via the climate social fund. However, its establishment was not voted on after the rejection of the expansion of the EU ETS.

Peter Liese, member of the European parliament and responsible for negotiating the dossier, expressed his disappointment. He said that the compromise, which was largely rejected on Wednesday, would have tightened up the Commission's proposal in many places and could have ultimately led to more climate protection. For example, it had aimed at stricter reduction targets in the EU ETS sectors for the year 2030: 63% instead of 61%. The compromise had also included waste incineration and included shipping earlier than envisaged by the Commission. However,  Liese said this did not go far enough for the Greens and Social Democrats.

The proposal for a Carbon Border Adjustment Mechanism (CBAM), under which a "climate tariff" is to be introduced for imports from countries with inadequate climate protection rules by means of the obligation to surrender CBAM certificates, also went back to the environment committee. According to the Commission's justification, this system is intended to promote global climate protection and ensure a level playing field within and outside the EU. According to the proposal, the border adjustment mechanism should come into force in 2026 and initially only apply to the import of cement, iron, steel, aluminium, fertilisers and electricity into the EU.

The European Commission's "Fit for 55" package consists of a total of twelve legislative proposals that aim to reduce greenhouse gas emissions in the EU by 55 percent by 2030 compared to the emissions of the year 1990. By 2050, the EU wants to be climate neutral.

For the new climate protection rules to come into force, the approval of the parliament and the member states is required. The votes scheduled for yesterday were about the position with which the parliament wants to enter into negotiations with the member states.

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