European Commission Seeks Comments on Green Deal Proposals from Global Stakeholders

Overview

On July 23, the European Commission (EC) launched public consultations on two initiatives to further the EU’s climate goals through tax policy: (1) revision of the Energy Tax Directive (ETD) and (2) creation of a Carbon Border Adjustment Mechanism (CBAM). 

Given the potential economic and trade impacts and systemic implications of these proposals, entities that do business in and export to the EU should review them carefully and consider submitting comments. On account of the widespread adoption by other countries of many EU regulations, the development and implementation of EU policy in these and related areas will be likely to substantially impact global practice in the use of tax and trade policy to advance environmental objectives and have a major impact on global supply chains. It is critical, therefore, that parties with exposure to these developments weigh in on both proposals at these early stages of development to provide relevant data and insights to EC decisionmakers. 

Deadlines for Submitting Comments: The EC will accept feedback on the revision of the ETD through October 14, 2020, and feedback on the introduction of a CBAM through October 28, 2020. We have provided short summaries of the two proposed measures below. Please contact any members of the Steptoe team listed as authors if you would like to discuss further. 

Timing: The EC has stepped up its work on the ETD and CBAM initiatives in the context of the COVID-19 pandemic. New taxes should contribute to the financing of the recovery plan agreed by EU leaders in July. On this occasion, the European Council announced that "the Commission will put forward in the first semester of 2021 [a proposal] on a carbon border adjustment mechanism…with a view to [its] introduction at the latest by January 1, 2023. In the same spirit, the Commission will put forward a proposal on a revised [Emissions Trading System] scheme, possibly extending it to aviation and maritime." Other tax-related initiatives are expected at EU level in the months to come. 

Revision of the Energy Tax Directive (ETD) 

The stated objective of revising the ETD is "to re-shape energy taxation in a way that encourages consumers and businesses to behave in a more environmentally way," and "includes revising minimum rates for fuels and re-thinking current tax exemptions, to reduce the implicit subsidies for fossil fuels and certain economic sectors." In the consultation, the EC notes that taxes play an important role in incentivizing sustainable practices for producers, users, and consumers, and that the 2003 Energy Taxation Directive, which set the EU rules for "taxation of energy products used as motor fuel or heating fuel and of electricity," has become outdated. 

Since 2003 there have been significant developments in technology and energy markets, as well as in the EU's international commitments – namely the Paris Agreement – and its regulatory framework in the areas of energy and climate change. Specifically, a September 2019 EC evaluation found that, with regard to the 2003 Energy Taxation Directive, (1) "The wide range of exemptions and reductions de facto, favours the consumption of fossil fuel," (2) "The Directive does not adequately promote greenhouse gas emission reductions, energy efficiency, or alternative fuels (hydrogen, synthetic fuels, e-fuels, advanced biofuels, electricity, etc.)," and (3) "The ETD does not achieve anymore its primary objective in relation to the proper functioning of the internal market."

In the Inception Impact Assessment for the proposed revision of the ETD, the EC delineated several building blocks upon which it will develop a number of policy options for reform of the ETD, noting that "Dedicated options might be proposed for the aviation and maritime sectors," which "are currently fully exempt from energy taxation," despite land transportation bearing "an important burden of energy taxation." Those building blocks are: 

1. Minimum excise rates: The EC will consider adjustments to minimum tax rates based on a number of factors.
2. Sectoral tax differentiation: The EC will explore revising the opportunities available to member states to apply differentiated tax rates, exemptions, and reductions.
3. Product coverage: Although the EC notes that it "will also analyse how best to reconcile the energy and climate objectives with the objective of generating tax revenue," it laments that "The use of a number of new energy products is currently discouraged since they can be taxed in the same way as the traditional ones," suggesting, perhaps, that the EC may consider exempting certain sustainable energy products from tax coverage to encourage their use. 

Creation of a Carbon Border Adjustment Mechanism (CBAM) 

The stated objective of introducing a CBAM is to minimize carbon leakage, in furtherance of the EC's objective of reducing greenhouse gas emissions in Europe and globally. Carbon leakage refers to a situation in which – in response to rigorous and financially costly environmental regulations implemented by a jurisdiction – carbon-intensive production processes are outsourced to jurisdictions with more lenient environmental standards, negating the positive impact the rigorous environmental regulations may have had on global climate, and hampering domestic industry, in effect, with a tax which its foreign competitors need not pay. 

The Inception Impact Assessment (the Assessment) for the proposed CBAM indicates that "[v]arious options could include: 

1. A carbon tax on selected products – both on imported and domestic products 
2. A new carbon customs duty or tax on imports, or 
3. The extension of the EU Emissions Trading System (ETS) to imports."

The Assessment indicates that the methodology for evaluating the carbon content and carbon pricing of imported products could be based on existing practice under the ETS, with certain exceptions, to the extent that the sector under consideration is covered by the ETS. It also notes, however, that the EC will explore alternative methodological approaches, such as "defining carbon content of products, taking into account their interaction with existing and future climate policies." In addition, the Assessment anticipates that in order to effectively evaluate the carbon content and carbon pricing of imported products, "[a]ncillary verifications, controls and audits of installations in third countries may be needed," but that "[t]he design of the measure will take into account the need to minimize administrative burden." 

The EC notes in the consultation that the CBAM "will be designed to comply with World Trade Organization rules and other international obligations of the EU" and is targeted for completion by the second quarter of 2021. The EC also plans to review related measures in other jurisdictions, including the Cap-and-Trade systems in California and Quebec.