Remarks by Executive Vice-President Timmermans and Commissioner Gentiloni at the press conference on the Carbon Border Adjustment Mechanism and Energy Taxation

Remarks by Executive Vice-President Timmermans

Thank you very much and happy to be here again.

Commissioner Gentiloni will present our proposals on energy taxation and the, so called, CBAM, which is now a new word for Carbon Border Adjustment Mechanism.

If we want to put our society on a sustainable path, we need also to look at these two issues. They are of extreme importance to make sure that the changes are fair and the changes are in balance.

We can do a lot through European regulation, through European plans, such as the ETS. But also taxations, tax on all levels and that's why we will be looking at the revision of a rather ancient directive that urgently needs to be revised.

Without further ado, I would like to pass the floor to Commissioner Gentiloni.

Remarks by Commissioner Gentiloni

Good morning. With every passing year the terrible reality of climate change becomes more apparent and with it, the need for a bold and determined response. And the two proposals we are presenting here this morning are crucial parts of that response, crucial elements of the overall package we adopted yesterday.

It was high time that we overhauled the two-decades old Energy Taxation Directive. The minimum rates it lays down are at the same level as they were in 2003. They have never been adjusted for inflation. They do not reflect the actual energy content or environmental performance of the energy sources covered. They lead to pollutant fuels being taxed less than their cleaner alternatives, which of course makes no sense. In short, the current rules are completely out of synch with our green ambitions.

First, the proposal stops harmful energy tax competition, with a new structure of minimum tax rates based on the energy content and environmental performance of the fuels and electricity.

Compared to the current system where the minimum rates apply by volume, this will provide clearer price signals to businesses and consumers alike. It will help them to make cleaner, more climate-friendly choices and investments, encouraging a switch to renewable energy and cleaner alternative fuels.

It will also help reflect the ‘polluter pays' principle in our tax rules. While the Energy Taxation Directive sets out only minimum rates for various categories of products, Member States will need to ensure their ranking is reflected by taxing the most environmentally harmful fuels most.

Second, we are broadening the taxable base by including more products and uses that have entered the energy mix since 2003.

At the same time, a number of possibilities for exemptions and rate reductions allowed under the current rules will be removed, with margin for Member States to set rates below the minima only for specific “green” products such as electricity made from renewable energy.

Finally, we are de facto bringing kerosene used as fuel in the aviation industry and oil used in waterborne transport into the scope of the Directive. It was fully exempted before. We are making them taxable for the first time, by removing their mandatory exemptions. This is a crucial measure - and it sends a crucial message - given the role of these sectors in energy consumption and pollution.

To support the use of more environmentally friendly products in these sectors, the consumption of sustainable and advanced products will not come under the scope of the rules for these sectors for ten years. So, the alternatives to kerosene and oil in air and maritime will not be taxed for ten years.

There is growing awareness among our population that we need adopt greener habits. But consumers may be justifiably worried that new energy tax rules mean higher fuel prices. Let me be clear. The switch to greener energy can only happen as part of a broader, socially fair, transition to a more sustainable economy. We need to balance fairness and ambition.

For example, Member States should adopt compensatory measures for the vulnerable and those affected by energy poverty, including through revenue redistribution.

So our proposal also contains in-built possibilities for Member States to relieve lower-income households from any additional tax burden while they adjust to greener energy over the coming years.

Let me now turn to our proposal for a Carbon Border Adjustment Mechanism or CBAM. I think this is another demonstration of the potential leading role of the EU at global level. The rationale is to address the risk of carbon leakage which can undermine our efforts when production is moved elsewhere to avoid EU carbon pricing.

Many EU businesses are already subject to the EU's extremely successful flagship Emissions Trading System. But as long as industrial installations outside the EU are not subject to similarly ambitious measures, these efforts can lose their effect.

That's why we need the new CBAM: an environmental policy tool that will equalise the price of carbon between domestic products and imported goods for certain sectors.

The CBAM has been designed to mirror the already existing Emissions Trading System, to ensure a fair and equal treatment for products made in the EU and imports from elsewhere, and to allow for a careful, predictable and proportionate transition for businesses and authorities.

Like the Emissions Trading System, the CBAM will be based on certificates whose prices correspond to the embedded emissions in imported goods.

If it can be shown that a carbon price has been paid for the embedded emissions in those imported goods, that amount will be removed from the importer's bill.

By addressing carbon leakage in this way, companies elsewhere will be incentivised to ‘green' their production processes. And the CBAM will also encourage foreign governments to introduce greener policies for industry.

For the transitional period, which will last from 2023-2025, CBAM will apply to the iron and steel, cement, fertiliser, aluminium and electricity sectors. In this phase, importers will only have to report emissions embedded in their goods, without paying a financial adjustment. This will give time to prepare for the final system to be put in place.

It will enter into force in 2026, coinciding with the entry into force of the reinforced Emissions Trading System. Importers will need to buy certificates that can be offset against embedded emissions. The cost of certificates will be based on weekly Emissions Trading System prices.

Finally, a lot has been said and written over the last few months about the design of the CBAM.

Let me say again that the CBAM is an environmental policy tool, not a tariff tool. It is in line and compliant with international trading rules. It will apply to products, not countries, based on their actual carbon content, independently of their country of origin.

And it has been fully calibrated with the Emissions Trading System so that as free allowances are phased out under the ETS, CBAM is phased in for the sectors it covers.

Of course there is a lot of attention, curiosity and concern about this decision at global level.

Last weekend I was happy to update my counterparts at the G20 in Venice. I can report back that these plans are received overall positively there. There is great interest in how we can cooperate on carbon pricing measures globally. You know that this is under discussion in several countries, from Canada to the US. And we stand ready to discuss the CBAM in the context of the WTO and at the COP26.

Cooperation at global level and European ambition can and will go hand in hand. We are completely open to global cooperation and this is why we have introduced a transition period in introducing the CBAM. But at the same time we can't wait for a quite difficult global carbon pricing system to take place tomorrow because we know knowing our partners that these discussions will take years and years. And as it happens for other measures of the EU, I think that if we give an example of a mechanism, and if it works, and of course without any discriminatory impact, this will be helpful to reach full agreement.

The design we have chosen will gradually bring the CBAM into effect and this will allow the industrial sectors involved to have time to adapt and to provide maximum certainty for business.