On December 22, 2021, the European Commission published its proposal for the next generation of EU own resources. Next to the proposal that 15 percent of the revenue generated under Pillar One of the OECD BEPS 2.0 proposals would be contributed by Member States to the EU budget, there are from a Tax Sustainability perspective two proposed new resources of revenue in relation to the EU budget: 1) revenues from the EU emissions trading system (EU ETS) and 2) revenues generated by the EU Carbon Border Adjustment Mechanism (CBAM).
Moreover, since January 1, 2021, Europe has already introduced a new own resource: the EU plastic ‘tax’. This plastic contribution is part of the European recovery package, due to Covid. The EU will collect from Member States a contribution on non-recycled plastic, calculated by the weight of non-recycled plastic packaging waste at a rate of 0.80 eurocent per kilogram. Estimates indicate that this new plastic contribution can provide Europe approximately 6 till 8 billion euros of additional revenue each year. For example, for the Netherlands the contribution is estimated on approximately 200 million.
EU emissions trading system (EU ETS)
Under the current EU ETS, most revenues from the auctioning of emission allowances are transferred to national budgets. On December 22, 2021, the Commission proposes that in future, 25% of the revenue from EU emissions trading flows into the EU budget. At cruising speed, revenues for the EU budget are estimated at around EUR 12 billion per year on average over 2026-2030.
The EU ETS is an European carbon market for emission rights, based on a cap and trade system. First introduced in 2005. A cap is set on the total amount of certain greenhouse gases that can be emitted by the installations covered by the system. The cap is reduced over time so that total emissions will fall. Within the cap, installations buy or receive emissions allowances, which they can trade with one another as needed. At this moment ETS covers installations in the power sector and manufacturing industry in more 30 countries. ETS is operating in all EU countries plus Iceland, Liechtenstein and Norway. So as part of ETS, for every tonne of carbon emissions you need a emission right / allowance. The EU ETS is also inspiring the development of emissions trading in other countries and regions. The number of emissions trading systems around the world is increasing. Besides the EU ETS, national or sub-national systems are already operating or under development in for example Canada, China, Japan and the US.
Under the European Green Deal, the Commission presented in September 2020 a plan to increase the EU’s net greenhouse gas emissions reductions target to at least 55% by 2030. In July 2021, the Commission has presented legislative proposals (Fit for 55) to implement the new target, including revising and expanding the scope of the EU ETS. There are three major implications for ETS going forward:
- The cap of the total annual emissions will decrease, so less carbon emissions are allowed. The lower cap will force greater investment in decarbonization activities.
- Several ETS participants receive free emission rights. The proposed reforms seek to reduce these free allowances, in the end phasing them out.
- Expand the scope of the ETS, introducing a new ETS for the road transport and buildings sectors and including maritime transport in the existing ETS.
EU Carbon Border Adjustment Mechanism (CBAM)
The Commission proposes to allocate to the EU budget 75% of the revenues generated by this Carbon Border Adjustment Mechanism. Revenues for the EU budget are estimated at around EUR 1 billion per year on average over 2026-2030. CBAM is not expected to generate revenue in the transitional period from 2023 to 2025.
Increasing ambitions for emissions reduction raise concerns about potential “carbon leakage”. This is the concern that consumers in a high ambition emission reduction country will be encouraged to purchase imports produced in low ambition jurisdictions where the cost of production is lower. Also, producers in a high ambition jurisdiction may consider they have to move their production to new locations. The consequence is that carbon leakage reduces the impact of carbon reduction measures in a high ambition jurisdiction. In order to address risks of carbon leakage, the European Commission introduces the CBAM, in fact a European carbon border levy. The CBAM relates to the importation of certain goods to Europe, at this moment limited to cement, electricity, fertilizer, iron and steel and aluminum. It concerns greenhouse gas emissions embedded in these goods, upon their importation into the European Union. The introduction of CBAM establishes in fact a ‘shadow ETS’ for certain goods being imported into the EU to avoid further carbon leakage. The CBAM should come into force in 2023 and is part of the EU Green Deal / Fit for 55 package.
In order to incorporate these new own resources in the EU budget, the EU needs to amend legislation. The Own Resources Decision needs to be approved unanimously in Council after consulting the European Parliament. The decision can enter into force once it is approved by all EU countries in line with their constitutional requirements.
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