It was a raucous day in Strasbourg, France, on 8 June when three EU climate proposals – establishing an EU carbon border tax, revising the EU Emissions Trading System (ETS) and creating a social climate fund – were all defeated by Green and centre-left members of the European Parliament.

The surprise development came after an afternoon in which centre-right MEPs successfully added a series of amendments to the proposals that would have phased out ETS allowances to European industry from 2028 to 2034, even as they started to benefit from the carbon border tax on their competitors. This was significantly later than the 2026-2032 phase out proposed by the European Commission and the 2025-2030 phase-out adopted by the parliament’s environment committee.

European Commission Vice-President Frans Timmermans was unable to convince centre-right MEPs to maintain the ambition of the EU executive’s proposals on emissions trading and carbon border charges. (Photo by European Parliament)

The carbon border adjustment mechanism (CBAM) was proposed by Commission President Ursula von der Leyen in 2021 as a way of protecting European industry from unfair competition from companies in countries with less stringent climate legislation. It was intended to prevent “carbon leakage”, or the shift of production outside of the EU to avoid domestic climate legislation. A levy would apply to all imported goods with a higher carbon footprint than the equivalent good produced in the EU.

The CBAM proposal is closely connected to the ETS reform proposal because that is where an accompanying phase-out of free allowances is foreseen. The social climate fund, meanwhile, was designed to shield consumers from the costs of an increasing carbon price from the ETS and CBAM, both of which could be passed on to already-struggling households.

Until now, the main method of protecting European companies from dirty competitors has been to give free allowances in the EU ETS to those industries most at risk of carbon leakage. Under the Commission’s CBAM proposal, those free allowances were supposed to be phased out as CBAM took effect.

However, industry has been lobbying for a longer transition period. That lobbying had a sympathetic ear from centre-right MEPs, who added amendments to the legislation extending free allowances until 2034. As a consequence, Green and centre-left MEPs refused to support the legislation in the final plenary vote, saying it gave industry double compensation.

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The amended legislation would also have had a less ambitious emissions reduction trajectory than that voted on by the Parliament’s environment committee in May: a 63% cut by 2030 compared with the committee's 67%. The gradual cutback of free allowances would have been slowed; for instance, by removing 70 million allowances from the market in 2024 and 50 million in 2026 instead of the timeline proposed by the Commission of 117 million in 2024.

Once the centre-left Socialists and Democrats group, the Parliament's second-largest political group, saw what the legislation had become, it called for an urgent break in the plenary's proceedings and took the shock decision to instruct its members to vote against it, sending the ETS proposal back to committee and delaying votes on all three proposals until an unspecified future date.

A US carbon border tax?

The delay is good news for lawmakers in Washington, who have been urging the EU to slow down its carbon border tax and wait until the measure can be coordinated among the G7 (and the US can adopt its own version). However, EU lawmakers are sceptical that a carbon border tax will ever come to pass in the US, and they have been burned before by delaying EU climate action to give the US time to act.

However, the reality is that the disagreement over how much protection European industry should get from global competition means we are now looking at a very delayed passage of a CBAM.

Given that these proposals are just three parts of the much larger 'Fit for 55' package, and the Commission has said it wants all components adopted at the same time, this could slow down EU climate legislation considerably and endanger not only the union’s target to reduce emissions by 55% by 2030 but also the REPowerEU plan to wean the EU off Russian fossil fuels.

In the meantime, European industry deemed to be at risk of carbon leakage will continue getting free EU ETS allowances.

A blow to 'Fit for 55'

Climate campaigners cheered the legislation’s rejection, while industry decried it. European steel industry association Eurofer said it was very disappointing. “The rejection of the report is neither good for the climate nor for industry’s green transition,” it said in a statement. “The majority of members of the Parliament had adopted amendments which supported the [low-carbon] transition of the steel industry. [...] Thirty thousand jobs at risk could have been saved by keeping European steel competitive while decarbonising.”

NGO CAN Europe said rejecting the legislation was the right thing to do, however. “Today the European Parliament almost sold out climate protection for the demands of big polluters,” said Klaus Röhrig, CAN Europe’s EU climate and energy policy coordinator. “This is a wake-up call. MEPs need to re-examine their loyalty to the Paris Agreement and decide whether to listen to industry lobbyists or act on the climate emergency. Time is running out.”

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Time is indeed running out, and in hindsight EU lawmakers may look back on this vote as the moment when 'Fit for 55' lost its momentum and became hostage to objections from domestic industry and foreign governments.

The pressure from Washington to delay CBAM has been intense. This week’s rejection means a delay of at least a few months, which will give the US more time to convince national EU governments to hold off approving the legislation in the EU Council while they wait for a US equivalent. That could mean the CBAM is stripped out of the 'Fit for 55' package and put on ice for years.

“The unnecessary delay on this agreement effectively weakens the European Parliament compared to the Council in the quest for higher climate targets and implementing the EU Green Deal,” noted Sam Van den plas, policy director at the NGO Carbon Market Watch. The Council can see that Parliament is divided, which will strengthen its hand in negotiations once both institutions have adopted their versions of the legislation. Since the Council usually wants less ambitious legislation, this suggests the proposals may be heavily watered down.

Given their track record in weakening EU climate legislation, the fact that the hand of national governments has now been strengthened is not good news for climate action – particularly CBAM. MEPs will have to get their house in order quickly to avoid seeing this legislation fade into the long grass.