Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

May 19, 2022

Members of European Parliament provide more ambitious proposal for five elements of “Fit for 55” climate package, including EU Carbon Border Adjustment Mechanism

Executive summary

On 17 May 2022, the European Parliament’s Committee on Environment, Public Health and Food Safety (ENVI) voted and adopted five reports of the “Fit for 55” legislative package. The package aims to align the European Union (EU) climate, energy, land use, transport and taxation policies with the goal of reducing net greenhouse gas (GHG) emissions by at least 55% from 1990 levels by 2030 with the overarching goal to achieve climate neutrality in Europe by 2050.

The ENVI is the committee responsible for the Carbon Border Adjustment Mechanism (CBAM). Following their earlier recommendations (see EY Global Tax Alert, European Parliament provides recommendations on EU Carbon Border Adjustment Mechanism, dated 1 March 2022) and the ECOFIN’s agreement on CBAM (see EY Global Tax Alert, EU Finance Ministers reach agreement on EU Carbon Border Adjustment Mechanism, dated 16 March 2022., they have now voted for CBAM to have a broader scope, more ambitious targets and at an accelerated pace of implementation. In addition, free allowances under the EU Emissions Trading System (ETS) will be phased out sooner than originally planned, a new EU carbon sinks goal will increase EU 2030 reduction target to 57%, and the Effort Sharing Regulation, which governs GHG emissions in sectors not covered by the EU ETS, will be tightened.

With expanded scopes and tighter timelines, a greater number of businesses will be impacted. It will be critical for businesses to keep a close eye on developments as the legislative process for CBAM in particular unfolds at pace, with a vote in early June 2022 followed by negotiations by the EU Member States.

Detailed discussion

Revisions to the EU Emissions Trading System

The EU ETS is a cornerstone of the EU’s policy to combat climate change. Changes to the EU ETS include:

  • Free EU ETS allowances may be phased out from 2025 and eliminated entirely by 2030

  • Annual reduction of emission allowances to be extended by 0.1 percentage points annually compared to the previous year until 2030, starting from 4.2% in the year following the entry into force of the new regulations

  • New EU ETS II for commercial buildings and transport shall be established from 2025

  • Municipal waste incineration shall be included in the EU ETS from 2026

  • Extending EU ETS to maritime transport: 100% of emissions from intra-European routes as of 2024 and 50% of extra-European routes from and to the EU as of 2024 until end of 2026. From 2027, emissions from all trips should be covered 100% with eventual derogations for non-EU countries where coverage could be reduced to 50% subject to conditions. Methane nitrous oxides emissions shall be included in addition to CO2

  • Extending scope for aviation sector: In addition to free allowances being phased out earlier than originally proposed, the scope has extended and shall apply to all flights departing from an airport located in the European Economic Area

  • Revenues of the EU ETS shall be used exclusively for climate action in the EU

Carbon Border Adjustment Mechanism

With this vote, the ENVI is aiming for a more extensive and faster CBAM implementation. The CBAM is designed to reduce the risk of carbon leakage (i.e., the relocation of emission intensive business to non-EU countries without or with less carbon pricing) and help to meet global carbon ambition goals. Changes to the CBAM include:

  • Extended product scope: CBAM shall also cover additional products including ammonia, refinery products, organic chemicals, base organic chemicals, polymers/plastics, hydrogen in addition to the already proposed categories (cement, iron and steel, aluminum, fertilizers and electricity)

  • Mirror the EU ETS phase out from 2025 and elimination of EU ETS free allowances by 2030

  • Indirect emissions will also be covered in addition to direct emissions (i.e., emissions from electricity used by manufacturers)

  • Establishment of a centralized EU CBAM authority

  • CBAM revenue is intended to fund international climate and development projects

Effort Sharing Regulation

The ENVI also proposes to tighten the EU Effort Sharing Regulation legislation, which covers GHG emissions in sectors not included in the EU ETS (representing approximately 60% of EU emissions). EU Member States will have stricter targets for GHG reduction with targets ranging between 10-50%, instead of 40% as the maximum. There is also the ambition for increased transparency and less flexibility to borrow, bank and transfer emission allowances.

Regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF)

The ENVI agreed to increase the EU carbon sinks target for land use, land use change and forestry sector, which will de facto increase the EU’s 2030 GHG reduction target to 57%. A progress report is expected by the end of 2024 and the targets shall be met by new measures including:

  • Support for voluntary carbon farming to provide for 50 million additional tons CO2-equivalent of net carbon removal

  • Sub-targets for cropland, grassland and wetlands at EU and at the Member State level, GHG removal targets will be set by the end of 2024


The ambition of the EU energy policies is clear reflecting the urgent need to reduce emissions and meet overall climate goals. Changes may be expected to the five interlinked elements, as the legislative process continues to move forward.

While upcoming negotiations may weaken current positions, it is critical for businesses to continue monitoring the developments closely and start to analyze the impact. The impact is not limited to the EU, rather it will impact across global sourcing and distribution footprints of businesses. In summary, businesses should proactively embrace the changes and prepare to align their business model accordingly.


For additional information with respect to this Alert, please contact the following:

Carbon Border Adjustment Mechanism

Emission Trading System 

EMEIA Sustainability Tax Services


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2024, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or Please refer to the privacy notice/policy on these sites for more information.

Yes, I accept         Find out more