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There are many challenges for the EU to push forward carbon market reform

May 4, 2023
The European Parliament has passed key climate legislation
The European Parliament in Strasbourg, France, recently passed three major climate bills by a majority vote: the reform of the Emissions Trading System (ETS), the Carbon Boundary Adjustment Mechanism (CBAM), and the Social Climate Fund Law (SCF) worth 86.7 billion euros, Dpa reported. The European Council has voted in favour of CBAM, marking the end of the legislative process. The three bills, which aim to slash the bloc's greenhouse gas emissions, have been described as the "biggest carbon market reform in European history".
There is a great desire, but there is great pressure
In terms of content, the package of climate bills passed by the European Parliament makes the EU's policy on climate change more concrete.
Under the ETS, EU emissions will be cut by 62% from 2005 levels by 2030, a significant increase from the previous target of 43%. It also plans to phase out free carbon emission allowances for companies within the EU by 2034.
According to CBAM Law, in the import and export link of goods trade, the EU will levy corresponding fees or quotas on imported products with high carbon emission level, so this law is also called "carbon tariff". The bill, which currently covers cement, steel, aluminium, fertiliser, electricity and hydrogen, takes effect on October 1 this year, but sets up a transition period that will not be phased in until 2026. Before the transition period ends, the EU will also assess whether to extend the levy to other sectors at risk of "carbon leakage".
The SCF, planned for 2026, aims to ensure that the climate transition is equitable and socially inclusive. It will help small businesses and households cope with higher fuel costs as a result of the new measures, especially vulnerable households, micro-enterprises and transport users affected by the scarcity of energy and transport resources.
The bills have received positive reviews from the EU and some member states. European Commission President Ursula von der Leyen called the bill's passage a "milestone" and urged member states to ratify it as soon as possible. "This is a good day for climate protection in Europe," said the FDP's climate policy spokesman. Early on, the Czech environment minister said it was a "victory for European climate policy" and that the EU remained "at the forefront of the global fight against climate change".
"The EU has always taken a leading position in the world on the path of low-carbon transition. The centralized introduction of a number of important climate bills to strengthen the pace of transition in legal form shows that the EU has an urgent desire to low-carbon transition, but also faces great pressure." Liu Mingli, deputy director of the Institute of European Studies at the China Institutes of Contemporary International Relations, pointed out in an interview with our reporter that the first is the pressure of climate change. Globally, progress in tackling climate change has fallen short of expectations in recent years, and the EU also believes that its energy transition is behind schedule. At the same time, as extreme weather such as high temperature and heavy rain has increased in European countries in the past two years, the pressure on the EU to address climate change has been increasing. The second is geopolitical pressure. After the escalation of Ukraine crisis, the EU mainly focused on security issues and paid less attention to climate change issues. In addition, the EU followed the US in imposing sanctions on Russia in the energy sector, leading to the outbreak of energy crisis. Some European countries increased the use of coal and other traditional fossil fuels, which hindered the EU in achieving emission reduction targets. This forces the EU to adjust and get back on a low-carbon path.
Climate issues are increasingly politicized
The three climate bills are at the heart of the EU's "Fit for 55" (" 55% carbon reduction ") climate change package, Dpa reported. The plan, proposed by the European Commission in the summer of 2021, aims to help the EU achieve a 55% reduction in carbon dioxide emissions by 2030 compared with 1990 levels and become carbon neutral by 2050.
A member of the European Parliament negotiating the ETS said the success of the carbon market was "make-or-break" for Europe to meet its emissions reduction targets.
"Meeting the 55 per cent target is the main aim of the EU's climate legislation." Liu pointed out that the EU had pledged in the Paris Agreement to cut emissions by at least 40 percent by 2030. The EU's current climate targets are already a big step up from previous commitments.
The CBAM bill is getting a lot of attention. Some analysts point out that goods exported to the EU have to pay a "carbon tariff" certificate, which will not only help fight climate change, but also help protect the market competitiveness of EU products.
At present, the global green industry competition intensifies, countries to "carbon tariff" voice increasingly fierce competition. In June 2022, US senators introduced the Clean Competition Act in Congress as the US version of the "carbon tariff" scheme. On January 1, 2023, the Inflation Reduction Act of the United States came into effect, and its "green subsidy" clause is undoubtedly a great threat to the international competitiveness of European industries.
Outside attention, in addition to the three climate bills passed by the European Parliament, the EU has recently intensively proposed a number of green and low-carbon bills. The Green Deal Industrial Programme was approved by the European Council at an extraordinary meeting with heads of State; The Key Raw Materials Act was officially published on the EU website. The Renewable Energy Directive Enabling Bill was approved.
Yan Shaohua, associate researcher at the Center for China-Europe Relations at Fudan University, analyzed to this reporter that the relevant EU climate bill and the goal of achieving carbon neutrality by 2050 are of great significance to the EU's energy transformation, industrial competition and the promotion of the voice of global climate governance. First, energy transformation is the key to achieving carbon neutrality in the EU. Under the framework of "Green Deal Industry Plan", the EU has accelerated the pace of transition to sustainable energy. Second, the EU intends to adopt a series of measures to enhance the competitiveness of the EU zero-carbon industry; Third, the EU takes an "inside out" approach to climate governance. The climate act and relevant standards implemented by the EU internally will greatly enhance the EU's voice in the field of global climate governance.
"Addressing climate change is an increasingly urgent global challenge; Climate issues have become increasingly politicized and become a new frontier of competition and game between major powers. "Green transformation is the current policy direction of the EU. It will also be one of the key processes that will determine the future and destiny of the EU in the coming decades." Yan Shaohua said.
Facing challenges, the future is in doubt
Paolo Gentiloni, the EU's economics commissioner, has been stressing that a "carbon tariff" is "an environmental policy tool, not a tariff". However, the legislation has caused some controversy within Europe and in the international community.
For some, CBAM is the start of environmentally friendly trade, while others fear the new measures could drive up the prices of thousands of products, German newspaper Die Welt reported recently. Cyril Meunier, head of the aluminium union, said: "A 'carbon tariff' would raise the price of metal consumption in Europe." He predicts that if aluminum prices rise, so could car prices. According to the Wall Street Journal, CBAM has raised concerns in some countries, as exporters worry that it will mean a cumbersome export process. S&p Global's analysis shows that low - and middle-income countries that export steel, such as South Africa, Brazil and Turkey, would face the highest cost increases under the carbon boundary adjustment mechanism.
Liu Mingli believes that as the first economy to impose a carbon tariff, the EU policy may be interpreted differently. As a developed economy, the EU has been at the forefront of tackling climate change, and the relevant technologies are relatively mature. As the birthplace of the Industrial Revolution, Europe should also shoulder the historical responsibility of reducing emissions. However, if the same standard is applied to other countries, especially developing countries with relatively backward productivity and technology, it will cause controversy. At the same time, the EU is not free from the suspicion of protectionism by means of tariffs.
Europe also faces multiple internal and external challenges on the road to green transformation. The implementation of relevant climate laws is still in doubt. Officials involved in the relevant negotiations told European media that the whole industry of the EU is facing the impact of geopolitical factors, and it is very challenging to solve the current energy dilemma while promoting the goal of green low-carbon transformation of the EU. As the European newspaper Politico pointed out in a recent report, the EU has for years relied too much on carbon pricing as its main tool for reducing carbon emissions, but has not invested much in a real energy transition.
"Judging from the content of the bill, the ambition of the EU is not small. At the same time, the uncertainty cannot be ignored." Liu Mingli pointed out that from the internal perspective, on the one hand, the EU needs to massively increase the use of renewable energy and reduce the use of fossil energy to achieve energy transformation, but it is still a question mark whether the EU can bear the risk of energy shortage under the disturbance of geopolitical conflicts, energy crisis and other factors. On the other hand, there are different understandings of the definition of clean energy within the EU. For example, there are disputes among EU countries over whether nuclear energy and hydrogen energy are renewable energy. From the external perspective, the protectionist policy of the United States in green industry and the intensified competition in the global scope will also pose challenges to the development of green industry in the European Union.
According to Yan Shaohua, there are at least three challenges to the implementation of the relevant EU climate act. First, the energy crisis in Europe caused by the Ukraine crisis has not been completely eliminated, and energy shortage may force the EU to make some compromises in terms of climate goals in the short term; Second, zero-sum thinking may undermine global climate cooperation. In particular, with the introduction of green subsidies by various countries, the green industry faces the risk of rising protectionism, which may intensify competition among different countries and thus undermine the atmosphere of global climate cooperation. Third, the challenges within the EU: some of the climate targets and policies put forward by the EU do not take full account of the uncertainties that may arise in the future, which may trigger an internal backlash.
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