MEPs agree carbon border tax - heavy industries protected

In their report, EU lawmakers stressed that this mechanism "should support the EU's green objectives, in particular, to better address greenhouse gas emissions embedded in EU industry and international trade".

However, they failed to scrap free allowances heavy industry receives under the bloc's internal carbon market, for those sectors where a future carbon border tax could be applied, following lobbying from Europe's steel, chemicals, cement, and fertiliser groups.

Should such industries continue to get receive these allowances even after a carbon border levy is in place, this would be equivalent to a double subsidy for those sectors, green groups warned.

"We need to apply the 'polluters pay' principles and move away from the free allocation of allowances, which so far free have tended to slow decarbonisation," Camille Maury from WWF Europe told EUobserver on Thursday (11 March).

"The European Commission must correct this in its upcoming proposal, so that industry does not get compensated for 'risk of carbon leakage' twice, but acts on the climate crisis," she added.

Doreen Fedrigo from NGO Climate Action Network, for her part, warned that this double protection would mean "the EU could continue to use taxpayers' money to finance industries' polluting practices".

The EU's carbon internal market - the Emission Trading System (ETS) - is one of the two main mechanisms of the bloc's climate policy to reduce greenhouse gas emissions.

Under this scheme, in principle, a price is put on carbon emissions, and emission allowances are auctioned.

Given that carbon costs vary significantly between countries, free permits help industry, aviation and, in some member states, the electricity sector, remain competitive against rivals based in third countries.

€24bn windfall from free allowances

These free allowances - which currently represent about 40 percent of the total number issued - are expected to be gradually phased out by 2030.

However, according to Maury, "the principle of giving out free allowances has shown its limits already, and proved to be inefficient to drive EU heavy industry decarbonisation".

Last year, a report of the European Court of Auditors also shed doubts about the efficiency of free allowances to reduce greenhouse gas emission, calling on the commission to better target these permits based on exposure risks to carbon leakages.

For example, the report found that power sectors in some member states, which received free allowances to invest in modernisation, end up using such investments to improve existing lignite and hard coal power stations.

According to Brussels-based NGO Climate Action Network, energy-intensive companies made more than €24bn windfall profits between 2008 and 2014 thanks to free allowances.

Carbon tax in 2023

The chair of the parliament's committee on environment, MEP Pascal Canfin, said this week that the carbon border mechanism and the free allowance subsidies cannot cover the same ton of carbon emitted, since this would be a "double compensation" that is not compatible with the World Trade Organization rules.

The report, endorsed by MEPs on Wednesday evening, will inform the European Commission of where MEPs stand before a legislative proposal on the carbon border levy is presented in June.

Afterwards, the legal text will have to be agreed by parliament with EU member states.

The aim is to have at least a pilot scheme up and running in 2023.