ECONOMY

Europe’s carbon border tax is more evolution than revolution

Good morning and welcome to Europe Express.

Brussels’ policymaking machine has gone full throttle ahead of the summer break — and the FT has got its hands on one of the critical drafts before next week’s “Fit for 55” package of green measures.

We will unpack what the Carbon Border Adjustment Mechanism will mean for Europe’s industry and imports and why climate activists are likely to stir up a fuss about the generous timelines.

Meanwhile, Hungary’s recovery plan is nowhere near receiving the European Commission’s approval. Ursula von der Leyen is expected to address MEPs today and call for a tough line with Budapest.

We will also hear from Spain, where the Socialist government has thrown in the towel on raising the minimum wage, a win for the business-friendly wing in the cabinet of Pedro Sánchez.

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CBAM, more of a whimper

One of the most anticipated measures in next week’s “Fit for 55” package is the EU’s Carbon Border Adjustment Mechanism, which is designed to tax imports and help raise money to fund the bloc’s recovery fund debt, writes Mehreen Khan in Brussels.

The legal draft seen by the FT lays out the scale of the CBAM’s ambition, which Brussels officials have been keen to stress will not start with a bam but more of a whimper. The range of imports initially targeted will be limited to a select few, led by steel, iron and aluminium, and will raise less than €10bn a year once it gets going.

European industry has been waiting for details that spell out how the CBAM will work in conjunction with the bloc’s carbon pricing mechanism.

Brussels has promised to phase out free allowances for carbon credits given to European industries such as steelmakers and aviation, and in return impose the CBAM on foreign importers to protect the bloc’s businesses from foreign competition.

The leaked text does not provide an explicit timeline for the phaseout of free credits, but there are plenty of hints that the introduction will be over the course of many years. The commission text said there would be at least a three-year transition period from the introduction of the CBAM to allow foreign companies to get used to the administrative burden.

In another hint that free allowances will be around for a while, the text also weighed up different timelines and concluded that one of the best options would be a seven-year tail where allowances were cut 50 per cent in 2023, eventually reaching zero only in 2030.

EU officials stressed the final decision would only be made when the text was decided by the college of commissioners next week.

But environmental groups are likely to balk at the long transition, arguing that the EU’s ambitious emissions targets require immediate incentives for business to reduce their carbon footprint. The European parliament is also likely to push for a shorter time span, allowing the CBAM to kick into gear before 2030.

The spat is already gearing up to be an early litmus test of Europe’s ambitions to get serious about decarbonisation.

Chart du jour: Opec drama

From the rock bottom prices of 2020, oil has climbed to its highest price in three years after the Opec+ group, which includes Russia, failed to agree on how much to increase global supply. The conflict centres around demands by the United Arab Emirates to review how production targets are calculated. The FT’s explainer has more details.

Dealing with Orban

When Ursula von der Leyen stands to address the European parliament today, the fraught state of relations between the EU and Hungary will be at the front and centre of MEPs’ attention, writes Sam Fleming in Brussels.

Among the most important questions is the outlook for Hungary’s recovery and resilience plan, which seeks to tap more than €7bn of EU funding. Budapest submitted its proposals in the first half of May, but with a two-month target date looming on July 12 they have yet to receive the commission’s endorsement.

MEPs have been pressing the commission to strike a tough line on Budapest’s plan, which must also be endorsed by member states. The centrist Renew Europe group wrote to von der Leyen last month urging her to withhold approval of Hungary’s plan until she had received rule-of-law-related commitments.

Budapest is resisting calls for demanding quid-pro-quos. But diplomats said the dramatic showdown between Viktor Orban and fellow EU leaders over Hungary’s controversial anti-LGBTI+ law has intensified the political heat and scrutiny of Budapest’s bid for its slice of the €800bn Next Generation EU package.

What are the options at the commission’s disposal when it comes to addressing the lengthening list of Orban’s alleged rule of law violations?

  1. The course of action when it comes to the anti-LGBTI+ legislation, which prohibits references to homosexuality or transgender issues in school material and media aimed at under-18s, is likely to be an infringement action by the commission. MEPs last night debated a resolution, due to be voted on tomorrow, to condemn the bill as a “clear breach of EU values” by Hungary, which is already subject to inconclusive Article 7 disciplinary proceedings.

  2. Budapest’s recovery plan may be handled along a different track. The commission’s recent “country-specific recommendations” for Hungary in 2019 and 2020, which are supposed to be at least partially addressed in the recovery plan, demanded the country reinforce its anti-corruption framework and improve prosecutorial efforts and judicial independence. The question is what rule of law commitments will end up in the approved Hungarian plan as “milestones” that have to be met for future recovery payments.

  3. Then there is the question of when and how the commission will deploy its new rule of law conditionality mechanism, which allows it to withhold EU funding in the event of rule of law violations that endanger the union’s budget. As the FT wrote this morning, a report from three professors commissioned by MEPs argues for prompt action. The commission said it was still gathering evidence, however, and was reluctant to move before autumn.

If the commission wants to take a harder line with Orban’s rule of law violations, it has a broad array of tools at its disposal. The question, however, is how tough von der Leyen is prepared to be.

Minimum wage truce

Spain appears to have put off one of the most contentious issues on its economic agenda — a minimum-wage increase — until the end of the year, in a victory for the government’s more pro-market wing, writes Daniel Dombey in Madrid.

Spain’s minimum wage works out at just over €1,100 a month, relatively low for countries in western Europe. The rates in Germany, France and Belgium are all above €1,500.

Nadia Calviño, the country’s chief economy minister, said yesterday that because of uncertainty in the labour market, “our priority has to be to drive forward economic growth and job creation”, including getting more than 400,000 people still on Spain’s furlough schemes back to work.

In an indication that a minimum wage rise may only come in 2022, she added: “We are going to see how the job market evolves during the second half of the year.” But she expressed hope that “we can return to increasing the minimum wage as soon as possible,” restating the government’s goal of raising it to 60 per cent of the average salary by the 2023 end of the parliament’s mandate.

The minimum wage has been the source of heated debate within Prime Minister Pedro Sánchez’s Socialist-radical left coalition for months.

Yolanda Díaz, labour minister, failed to secure an increase to the minimum wage at the end of last year and has argued that the working poor were being put under pressure by price rises of almost 3 per cent.

“It is hardly fair that we leave those who need it most, not with frozen [income] but with a fall in purchasing power,” Díaz said last month.

The battle is particularly contentious because back in 2018, Sánchez approved a 22 per cent increase in the minimum wage that critics said damaged the labour market as a whole.

In a study last month, the Bank of Spain estimated that the move may have reduced employment opportunities for 6-11 per cent of those directly affected by the increase due to job destruction and lower job creation.

The Spanish press estimated those figures translated into 92,000 to 174,000 foregone jobs.

What to watch today

  1. EU economics commissioner Paolo Gentiloni presents the commission’s summer economic forecast

  2. The European parliament debates the rule of law and fundamental rights in Hungary and Poland

Notable, Quotable

  • Delta, delta: Research by the FT suggests that Spain, one of Europe’s most popular tourism destinations, has the highest rate of coronavirus infections in mainland Europe. The Delta variant is driving the increase and is set to be dominant by mid-July.

  • Back to pensions: President Emmanuel Macron is considering reviving a controversial overhaul of France’s costly pension system. He met labour union and business leaders yesterday to discuss options, including a suggestion by finance minister Bruno Le Maire to raise the retirement age from 62.

  • Courtroom drama: Austria’s former vice-chancellor Heinz-Christian Strache appeared in a Vienna court yesterday facing corruption charges stemming from the “Ibizagate” scandal in 2019 that brought down the coalition government. If found guilty, Strache could be sentenced to five years in prison. (BBC)

  • Spying for China: A German academic that ran several high-profile think-tanks with links to the CSU, the sister party of Angela Merkel’s CDU, has been charged with passing information to Chinese intelligence. In a twist out of a spy novel, German media reported the man had also been working for Germany’s intelligence service. (DW)

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Today’s Europe Express team: [email protected], [email protected], [email protected], [email protected], [email protected]. Follow us on Twitter: MehreenKhn, @Sam1Fleming, @danieldombey, @valentinapop.


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