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Carbon tax sectors may lose free allowances by 2036 – draft


07 Jul 2021 13:16




07 Jul 2021 13:16

(Montel) Sectors covered by the EU’s carbon border adjustment mechanism (CBAM) could see their free ETS allowances phased out over 10 years from 2026, according to an unofficial European Commission draft proposal leaked to media.

The free allowance allocation would be cut by 10 percentage points each year, starting in 2026 at the earliest, proposed the draft seen by Montel on Wednesday.

The EU wants to phase in the CBAM from 2023, starting with a simplified system for the first three years focused on imported products from selected ETS sectors – including electricity, aluminium, and fertilisers – deemed at risk of carbon leakage. This happens when EU production moves to regions with less-strict carbon constraints.

This carbon leakage risk is currently managed by giving such sectors free allowances, which were foreseen to be phased out by 2030. Allowances not allocated for free are auctioned.

“The principle is that where CBAM comes in, free allowances go,” said a person with knowledge of the EC’s proposal earlier this week. “We will take a while to phase in the one and phase out the other.”

The exact dates will be in the EC’s formal CBAM proposal. This is due on 14 July as part of its Fit for 55 package to align EU energy and climate legislation with the bloc’s new 2030 target to cut its CO2 emissions by at least 55% from 1990 levels, up from 40%.

ETS prices are expected to rise until 2030 and beyond, given the EU’s goal to have net-zero emissions by 2050, the EC said in a separate, unofficial draft impact assessment of the CBAM.

This could increase the risk of carbon leakage, and the CBAM is intended to ensure imported product prices include a carbon element similar to that paid by EU producers in the ETS.

Companies importing products would have to surrender CBAM certificates equivalent to the embedded carbon in the products, bought at prices linked to the ETS.

“Relatively small” change
The draft proposes that during the 10-year transitional period the CBAM would apply to the difference between actual emissions embedded in the imported product and the emissions covered by free allowances for EU producers.

EC modelling found that such a measure would boost carbon prices from EUR 35.2/t in 2025 to EUR 47.2/t in 2030, a “relatively small” change, said the draft impact assessment.

Prices for the benchmark Dec 21 EUA reached an all-time high of EUR 58.64/t on 1 July on the back of gas price gains and expectations of bullish EC proposals to reform the ETS on 14 July.

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