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EU to upgrade carbon market and introduce carbon import tax

On 18 April, the European Parliament voted to approve a sweeping reform of European Union (EU) climate policies. It includes upgrading the bloc's carbon market, which is expected to increase the cost of polluting in Europe, as well as a tax on high-carbon goods imports. The measures will have significant effects on the EU emissions trading system (ETS) market, as the demand for carbon credits is driven up by the latest measures.

EU to upgrade carbon market and introduce carbon import tax_visual 1

The compliance carbon market requires power plants and factories to buy carbon permits when they pollute. This system has reduced emissions by 43% since 2005 but needs further reform to meet EU climate targets.

A deal agreed last year by negotiators from EU countries and Parliament aims to cut emissions by 62% from 2005 levels by 2030. The European Parliament voted by a large majority to approve the deal. As part of the upgrade, factories will lose the free carbon permits they currently receive by 2034, and shipping emissions will be added to the carbon market from 2024.

The EU also backed a world-first plan to phase in a levy on imports of high-carbon goods from 2026. This includes imports of steel, cement, aluminium, fertilisers, electricity, and hydrogen. The carbon border levy aims to prevent EU industries from being undercut by more-polluting foreign competitors, removing the temptation for EU firms to relocate to regions with lax environmental rules.

Read more: EU plans early auction of carbon credits to support emissions reductions

The laws still need final approval from the European Council (representing EU countries’ governments), which will assess them in the next few weeks. However, this approval is usually a formality that takes priority ahead of pre-agreed deals. Even so, the process was upended last month when Germany lodged a last-minute opposition to another policy to phase out fossil-fuel-powered cars.

Peter Liese, the Parliament's lead negotiator on the EU ETS reform, said the success of the carbon market would make or break Europe's carbon-cutting goals. For the climate, the ETS alone is more important than all the other [carbon measures] files together’, he told Reuters.

The price of EU carbon permits soared in recent years, boosted by reform anticipation. It hiked costs for polluters and raised billions of euros for EU governments to invest in climate measures. As of 18 April, EU carbon permits were trading at around €94 per tonne, having nearly quadrupled in value since the start of 2020. The price hit €100 for the first time in February.

Read more: EU carbon price hits all-time high

The lawmakers also backed plans to launch a new EU carbon market in 2027 covering emissions from fuels used in cars and buildings, plus an €‎86.7 billion ($103.7 billion) research programme aimed at developing green technologies.

Europe has set sail at full speed to reach its net-zero goals, influencing not only European markets but also global ones. With decarbonisation gaining more momentum, high-quality carbon credits from nature-based solutions, such as the projects developed by DGB, remain integral in achieving net zero. As the demand for carbon solutions continues to escalate, we are dedicated to supporting businesses and investors in gaining access to the flourishing global nature market.

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