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The evolution trend of international carbon barriers is intensifying, and high-carbon industries and clean industries are facing challenges
Carbon barriers are a new type of trade restriction in the name of environmental protection in international trade, which is mainly divided into high-carbon industry barriers and clean industry barriers, and there is a trend of spreading from high-carbon industries to clean industries.
1) High-carbon industry barriers are mainly aimed at steel, cement, chemical and other industries, and are mostly in the form of trade barriers, such as the EU CBAM, the US CCA, etc., which are gradually spreading in developed countries.
2) Barriers to the clean industry are mainly aimed at photovoltaics, batteries, electric vehicles, new energy metals and other industries, such as the EU's "New Battery Act", the United States' "Inflation Reduction Act", etc., and its policy means are more abundant, not only using traditional tariffs to increase import costs, but also weakening the competitiveness of foreign products by setting up carbon as a name to block imports.
The impact of international carbon barriers: a macroeconomic and industry perspective
1) High-carbon industries: short-term cost increases are limited, and the future is uncertain. We use the CBAM as an example to analyze the impact of international carbon barriers on the mainland. From the perspective of total trade, the impact of the CBAM is mainly concentrated in the four major industries of steel, aluminum, cement and fertilizer, among which the steel and aluminum industries have been greatly impacted, but the overall impact on China is limited due to the limited exports of the four industries to Europe. From the perspective of unit cost, according to the CBAM calculation rules, the change of unit tax on related products mainly depends on the difference in carbon emission intensity per unit product and the difference in carbon pricing between China and Europe. From a macroeconomic perspective, the direct impact of the CBAM on China's macro economy mainly comes from export trade, which may force domestic carbon prices to rise in the medium and long term, which may have a potential indirect impact on the macroeconomy. We use China's dynamic computable general equilibrium model to simulate the economic impact of the EU's implementation of carbon tariffs
2) Clean industry: The "new three" is facing new challenges, and the carbon threshold may become a key obstacle. The EU is the main target of the mainland's lithium batteries, solar cells, electric vehicles and other "new three" exports, and the European and American crackdowns on China's new three are mainly to set more targeted entry thresholds. Taking the EU's "New Battery Law" as an example, the entry threshold for five types of batteries is mainly related to the challenges of relevant enterprises in the mainland
In response to international carbon barriers, we will comprehensively use policy and financial means to promote the steady and long-term green transformation of the mainland
1) On the policy side: accelerate the construction of the domestic carbon market and promote the energy transition. There is still a big gap between the construction progress of the carbon market in the mainland and the supporting MRV system compared with the EU. We believe that in the context of intensifying international carbon barriers, the national carbon market needs to be expanded to include industries in a timely manner, and the carbon barriers should be covered under the domestic carbon pricing mechanism as soon as possible, so as to make room for domestic enterprises, and at the same time optimize the energy structure, steadily promote green transformation, and essentially deal with carbon barriers.
2) Finance: Strengthen the identification and prevention of carbon barrier risks, and innovate carbon financial tools. Pay full attention to the financial risks that may be caused by carbon barriers, urge financial institutions to strengthen the identification and management of carbon risks, and at the same time launch and improve financial products such as carbon futures, carbon forwards, and carbon swaps, so as to play a key role in improving the mainland carbon market and promoting the coupling of carbon prices at home and abroad.
3) Enterprise: Familiar with the rules of carbon barriers and establish carbon accounting capabilities. In the face of the challenge of international carbon barriers, relevant enterprises should familiarize themselves with the rules and important timelines of relevant laws and make preparations in advance. For example, the CBAM will gradually increase the reporting requirements in phases during the transition period, and exporters will need to cooperate with EU importers to do a good job of reporting. In the content of the CBAM report, carbon emission information may cause greater statistical pressure on enterprises, and enterprises should clarify the accounting products, processes and requirements in accordance with EU regulations, and improve their carbon accounting capabilities under the guidance of domestic regulators.
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The evolution trend of international carbon barriers is intensifying
As a new type of trade restriction in the name of environmental protection in international trade, carbon barriers have risen rapidly around the world after the new crown epidemic, geopolitics and energy crisis. According to the differences in the restrictions of relevant policies for different industries, the main carbon barriers can be divided into high-carbon industry barriers and clean industry barriers.
► Barriers to high-carbon industries: mainly for steel, cement, chemical and other industries. At present, most of the policies for high-carbon industries are trade barriers, that is, increasing the import costs or import thresholds of foreign companies to reduce external demand.
► Clean industry barriers: mainly for photovoltaics, batteries, electric vehicles, new energy metals and other industries. Policies for the clean industry are more abundant, not only using traditional tariffs to increase import costs, but also setting up technical barriers in the name of carbon, special protection and source control of local industries, to block imports and thus weaken the competitiveness of foreign goods.
Figure 1: The current major carbon barrier policies in Europe and the United States
Source: European Commission, U.S. Congress, CICC Research Institute, CICC Research
High-carbon sectors: The carbon border adjustment mechanism has been introduced, and the climate club is beginning to take shape
The EU's carbon border adjustment mechanism was introduced. The Carbon Border Adjustment Mechanism (CBAM) is a complex policy tool that essentially serves as a complementary mechanism to the EU ETS to prevent intra-EU carbon leakage (essentially industrial and capital drainage), protect EU industry, and achieve the EU's climate ambitions. On May 16, 2023, the final text of the EU Carbon Border Adjustment Mechanism (CBAM) regulation was officially published in the Official Journal of the European Union[1], marking the completion of the three-year legislative process of the CBAM and the official entry into EU law.
The transition period for the CBAM is from 1 October 2023 to 31 December 2025, during which the authorisation of filers is only required to fulfill reporting obligations for the purpose of collecting data. After the transition period, in order to ensure the compatibility of the CBAM with international trade rules, the official collection of carbon tariffs will be in line with the gradual reduction of free allowances in the EU carbon market to complete abolition. Currently, the CBAM covers steel, cement, aluminum, fertilizers, electricity, hydrogen, and some downstream products (such as iron drums, steel pipes, screws, aluminum drums, and similar steel or aluminum products). However, there is a possibility that the list of products subject to levy will be further expanded, and the EU expects that before the end of the transition period, the remaining products covered by the carbon market will also be gradually included in the scope of CBAM collection[2], and the emission calculation will be changed from direct emissions to indirect emissions. [3]
Chart 2: CBAM coverage is likely to expand over time
Source: EU official website, CICC Research Institute, CICC Research Department
Carbon tariffs are gradually spreading to other developed countries, and the climate club is beginning to take shape. In recent years, the United States has also been actively preparing for a "carbon tariff". In June 2022, Senators such as Chris and Sheldon Whitehouse proposed the Clean Competition Act (CCA), which would impose a carbon emission fee on goods, which is considered to be the prototype of the U.S. carbon tariff. In order to prevent "free-riding" in the climate negotiation process, Nordhaus proposed that countries that take action to reduce emissions should form a coalition and impose sanctions on countries that do not act [4]. For example, the United States and Europe have proposed the "Global Arrangement on Sustainable Steel and Aluminum"[5], which is equivalent to the establishment of a "green steel and aluminum trade alliance" composed of countries that produce low-carbon steel and aluminum with internal equality and external discrimination. Free trade between alliance member countries, and the imposition of additional tariffs on steel and aluminum products from outside the alliance force countries to achieve green and low-carbon production of steel and aluminum. In our view, although the Sustainable Steel and Aluminum Alliance has not yet reached an agreement[6], it reveals the path to the realization of the Climate Club, which may still evolve into new green trade barriers in the future.
Clean: Challenges posed by traditional tariff barriers and new technical barriers
Green trade surveys are frequent, tariffs have been strengthened, and new technical barriers such as carbon footprints and carbon labels have emerged. In March 2020, the European Commission published a new version of the Circular Economy Action Plan (CEAP), which sets market access rules for processed products (e.g. photovoltaics, textiles, electronics, etc.). On December 10, 2020, the European Commission published the first proposal of CEAP, the New Battery Law. The regulation, which came into effect on August 17, 2023, sets nine "entry tickets" for five categories of batteries entering the EU market, including carbon footprint, proportion of recycled materials, electrochemical properties and durability, health and longevity information, supply chain due diligence, extended producer responsibility, collection rate of used batteries, battery recycling efficiency, battery passports, and the bill requires new electric vehicle (EV) batteries purchased from 2027, Light vehicle (LMT) batteries and industrial batteries with a capacity of more than 2kWh must be exported to Europe with a "battery passport" that meets the requirements, recording the manufacturer, material composition, carbon footprint, supply chain and other information of the battery, and batteries that exceed the carbon footprint limit are prohibited from entering Europe, and batteries must use a certain proportion of recycled materials from 2030.
Local-content requirements (LCRs) may accelerate the fragmentation of global markets and fragment the origin of raw materials. LCRs are trade protection tools used by governments to protect their fragile or pillar industries, requiring companies to use a certain proportion of local raw materials or intermediate goods in the production process [7]. Although this is clearly stipulated in the WTO Agreement on Subsidies and Countervailing Measures (ASCM), which prohibits subsidies based on local content requirements [8]. However, due to the difficulty of effectively complying with these regulations, LCRs are more common and are growing in various countries [9]. On August 16, 2022, the United States officially signed the Inflation Reduction Act, in which some subsidies are conditional on content produced in the United States and/or North America, which has attracted widespread attention. Europe and the United States are also trying to strengthen the control of the sources of key raw materials and components in the green industry. For example, the "mineral diplomacy" of the United States and the "Critical Raw Materials Act" and the "Net Zero Industry Act" proposed by the European Union.
The impact of international carbon barriers: a macroeconomic and industry perspective
High-carbon industries: Short-term cost increases are limited, and the future is uncertain
Taking the CBAM as an example, combined with the actual situation of China-EU trade, the impact of the CBAM on the mainland's export industries is mainly concentrated in the four major industries of steel, aluminum, cement and fertilizer, among which the steel and aluminum industries are the most affected. From the perspective of the countries involved, the mainland is one of the main affected countries, but from the specific export trade data of related industries, the overall impact is limited. According to relevant statistics, the mainland's steel, aluminum, cement, and fertilizer industries themselves have limited exports, and the proportion of steel and aluminum exports is relatively high, but they are only 4.7% and 11.4% of the total output, and the proportion of trade volume exported to the EU has further decreased, accounting for only 6.66% and 9.75% of their total export trade respectively, and accounting for 0.31% and 0.79% of the national output. Therefore, even if the export of related products to the EU is blocked due to carbon tariffs, the impact on the industry as a whole is very limited.
Chart 3: Major import regions and trade value of CBAM-covered products such as steel, aluminum, cement and fertilizers in the EU (2021)
Source: Eurostat, CICC Research Institute
Figure 4: CBAM industry's total exports from China and share of exports to the EU in 2022
Source: General Administration of Customs of the People's Republic of China, CICC Research Institute
Of course, in addition to considering the volume of trade with Europe, the impact of the CBAM on related products or enterprises is also reflected in the fact that according to the CBAM calculation rules, the change in the unit tax of related products mainly depends on two aspects: one is the difference in carbon emission intensity per unit of product, and the other is the difference in carbon pricing between China and the EU.
From the perspective of the difference in carbon emission intensity per unit of product: on the one hand, look at the actual carbon emission intensity of related products in the mainland. At present, the mainland has not yet established a complete carbon emission monitoring report verification (MRV) system and standard system, so the accounting method is mainly used for carbon emission statistics [10], while the measurement method is recognized in most cases in Europe [11].
Taking the steel and aluminum industries, which have relatively large exports to Europe, as an example, we have calculated the changes in the unit carbon tax collection of their mainstream products. According to the current EU quota free allocation standards of 1.3 tons and 1.5 tons [12] and the Sino-EU carbon prices of US$9/ton and US$87/ton, since the implementation of the CBAM in 2026, the export of steel and aluminum products from the mainland to the EU will increase by 405 yuan/ton and 150 yuan/ respectively. The carbon cost per ton will further increase to 1,102 yuan/ton and 944 yuan/ton by 2034 after the EU fully withdraws from the free quota allocation, corresponding to the average selling price of related products.
Figure 5: Changes in the unit carbon cost of mainland steel and aluminum products with the withdrawal of free allowances from the EU
Source: CICC Research Institute, CICC Research Department
From the perspective of carbon pricing differences, there is a large price difference between the mainland and the EU. However, from the perspective of future development trends, with the expansion of the scope of products covered by the mainland carbon market and the improvement of the trading mechanism, the rise in carbon prices is the general trend, and the carbon price gap with the EU will gradually narrow. In our view, this will help mitigate the impact of the CBAM on the rising cost of related products in mainland China.
Figure 6: There are differences in the price of carbon markets and carbon tax coverage in different countries and regions
Note: Data as of 2023-3
Source: World Bank, IMF, CICC Research Institute, CICC Research
From a macro perspective, the direct impact of the CBAM on China's macro economy mainly comes from the export trade, which is obvious in the short term. In the medium to long term, the transmission effect of CBAM on the domestic carbon market will also have a potential indirect impact on the macroeconomy. We believe that overseas carbon tariffs may force the domestic carbon market to rise in price to curb the welfare losses caused by foreign carbon tariffs, and the effect of this transmission effect is more obvious in the medium and long term.
Figure 7: The path of the macroeconomic impact of carbon tariffs
Source: CICC Research Institute, CICC Research Department
Based on the above analysis, we further try to quantify the economic impact of the EU's carbon tariffs by using China's dynamic computable general equilibrium model. Under the baseline scenario, we simulate the short-term scenario with only the direct impact of carbon tariffs, and the medium- and long-term scenarios with the direct and indirect effects of carbon tariffs [13]. Here are the results:
► In the short-term scenario, the negative impact on the overall macro economy is not significant due to the limited volume of trade in the sectors involved in China's exports to the EU. Under the official imposition of carbon tariffs by the EU in 2026, the mainland's average annual GDP will lose 0.08%, and exports and imports will fall by 0.2% respectively.
► In the medium to long-term scenario, it is assumed that the EU carbon tariff forces the development of China's carbon market to accelerate [14], which is reflected in the increase in the market auction share and the increase in carbon prices at a faster rate. The simulation results show that compared with the baseline scenario, the medium- and long-term impact of the implementation of carbon tariffs is an average annual GDP loss of 0.28%, and exports and imports are reduced by 0.59% and 0.65%, respectively, and the indirect effects in the medium and long term lead to greater losses to the overall macroeconomy. Specifically, compared with the baseline scenario, as carbon prices rise due to carbon tariffs, especially after 2030, the average growth rate of carbon prices increases by 0.8 percentage points, and the effect of indirect effects is becoming increasingly apparent, resulting in an increase in GDP losses, with an average annual increase of about 0.1%.
Overall, the impact of EU carbon tariffs on the overall macro economy is limited, and the indirect impact will be greater than the direct impact. Therefore, it is necessary to be vigilant against the negative economic impact caused by the blind and rapid increase of domestic carbon prices due to foreign carbon tariffs.
Figure 8: Carbon market prices and GDP losses under medium- to long-term scenarios
Source: CICC Research Institute, CICC Research Department
Clean industry: The "new three" is facing new challenges, and the carbon threshold will become a key obstacle
Since 2021, lithium batteries, solar cells, electric vehicles and other "new three" trade products have become a new bright spot in China's economic growth, and the EU is the main trade object of the mainland's exports. In 2022, the new three exports will already account for 3.5% of the total domestic exports, becoming a new driving force for the mainland economy. In 2022, the export value of PV modules from the mainland to Europe reached US$24.2 billion, accounting for 0.67% of the mainland's total exports [15]. In 2018, the total export value of lithium batteries and electric vehicles to Europe was only 2 billion US dollars (0.45% of exports to Europe), while in 2022 it jumped to 27.5 billion US dollars (4.19% of exports to Europe). The increase in exports to Europe is inseparable from the mainland's advantages in economies of scale. According to SNE Research data, China's installed power battery capacity in Europe has continued to increase in the past four years, with 11.8%, 16.8%, 22.6% and 34% respectively from 2019 to 2022. The EU's eagerness to wean itself off China led to the creation of the New Battery Law.
Figure 9: The export volume of the "new three" has grown rapidly, and the proportion has been increasing
资料来源:UN Comtrade,中金研究院
Exhibit 10: The EU is the mainland's new top three exporters (2022)
Note: The percentages in the table are the share of exports to Europe in total exports
资料来源:UN Comtrade,中金研究院
On the whole, at present, Europe and the United States are mainly attacking China with more targeted entry thresholds. Taking the EU's "New Battery Law" as an example, compared with tariff barriers such as CBAM to impose costs on imports, the "New Battery Law" is more like setting a "one-size-fits-all" threshold for entering the market. If you don't meet the entry rules, you'll be shut out of the European market. As the world's first legal instrument to regulate the entire battery life cycle, from production to reuse and recycling, the EU seeks to become a global benchmark for battery sustainability, safety and end-of-life management. For the battery industry, the introduction of the "New Battery Law" means that exports to the EU may face three major challenges in the future, involving carbon footprint declarations, recycling requirements, information disclosure requirements, and higher compliance costs and transformation costs.
Strategies to deal with international carbon barriers
Although the short-term impact of carbon barriers on the mainland's macroeconomy is limited, the potential impact of the medium and long-term can not be ignored, and the key is to focus on the core path of the potential impact of the carbon barrier policy, that is, to start from the two aspects of volume and price, externally strive for the greatest space for domestic enterprises, and internally implement carbon emission reduction actions in accordance with the rhythm of their own development characteristics, make good use of policies and financial means, and promote the steady and far-reaching green development of the mainland economy in a market-oriented manner.
On the policy side, accelerate the construction of the domestic carbon market and promote the energy transition
As the most important carbon pricing mechanism in the mainland, the national carbon market is not only an effective way to achieve carbon reduction, but also an important channel to keep carbon tax revenue in China. In order to create favorable conditions for dialogue with relevant countries in Europe and the United States, and minimize the pressure on export enterprises to cope with carbon barrier policies, the national carbon market needs to be expanded to include industries in a timely manner, and the carbon barriers should be covered under the domestic carbon pricing mechanism as soon as possible. We believe that in terms of trading size, the mainland may replace the EU as the world's largest carbon trading market, so the market-based emission reduction mechanism is also in the interests of the mainland in the long run. At the same time, it should also be noted that carbon tax, as another major policy tool for carbon pricing, is cheaper than the implementation cost of the carbon market [16], so it is necessary to consider introducing carbon tax in a timely manner in combination with the industrialization process of the mainland, so as to give full play to the double dividend effect of carbon tax and realize the organic unity of economic, social and ecological benefits [17].
In the context of the accelerated emergence of carbon barriers, there is still great room for improvement in the construction of market rules and accounting systems in the mainland. With 30 countries participating in the EU ETS, which covers the greenhouse gas emissions of around 10,000 energy sector and manufacturing facilities, it took nearly two decades from Phase 1 to Phase 4 to make the ETS system continue to evolve in the operation of the market. In particular, its carbon monitoring, reporting and verification (MRV) system has become an important reference benchmark for the construction of carbon markets in other countries and regions, whether in terms of laws and regulations, operation and coordination mechanisms, as well as in terms of regulatory penalties and capacity building.
Although the mainland ETS already covers more CO2 than the EU, the process is still lagging due to the short construction time. From the establishment of a carbon market in 2011, to the pilot implementation of seven carbon markets in Beijing in 2013, and then to the launch of the national carbon market in 2021, the construction and development of China's carbon market has only been more than ten years. There are still some problems in the mainland carbon market, such as the lack of sound relevant laws and regulations, information disclosure and transparency, and the need to improve the MRV system.
Figure 11: The history of the EU and China's carbon markets
资料来源：European Commission，中金研究院
Although adjusting the energy structure is a "slow variable", it is an essential means to deal with international carbon barriers, and it is also the core grasp to promote the dual control of energy consumption to dual control of carbon emissions. This process needs to maintain strategic focus, scientifically and orderly promote the clean substitution of the production side and the substitution of electric energy on the consumption side, that is, to encourage the substitution of clean energy for fossil energy in the energy production process, and to use more green electricity in the consumption link, which pays special attention to the safe and stable operation of the new power system. At the operational level, for enterprises with high technical level and little room for energy efficiency improvement, it is recommended to reduce direct and indirect carbon emission intensity by optimizing the energy consumption structure, especially increasing the proportion of green electricity in the electricity consumption structure.
Finance: Strengthen the identification and prevention of carbon barrier risks, and innovate carbon financial tools
International carbon barriers will increase the economic cost of real enterprises, which may lead to the deterioration of the cash flow and solvency of related enterprises, affect the asset quality of commercial banks, and then turn into financial risks. At present, there is still a large carbon price gap between the mature carbon markets of the mainland and the EU, which magnifies the risks caused by international carbon barriers to the mainland to a certain extent. Financial institutions can play a key role in the process of building and improving the mainland carbon market and promoting the coupling of carbon prices at home and abroad, and at the same time, financial institutions also bear the important responsibility of preventing the risk of carbon barriers from escalating into financial risks. In addition, financial institutions can also help high-carbon enterprises adapt to the new requirements of dual carbon emission assessment and reduce transition risks. Based on the above macro background, financial institutions should mainly start from the two aspects of risk management and market activation, and help the mainland deal with carbon barriers by innovating the carbon financial product system.
For real enterprises, overseas carbon barriers are essentially a category of carbon risk, and the implementation of carbon tariffs and other policies will lead to the aggravation of the overall carbon risk of export enterprises. We believe that if the impact of international carbon barriers on the real economy is further escalated in the future, risks may be further transmitted to financial markets. At present, the industries that are greatly affected by international carbon barriers are mainly concentrated in the energy and power, chemical industry, manufacturing and other industries, which are highly overlapping with the key financial support industries in the mainland.
A large number of empirical studies at home and abroad show that carbon risk may increase the debt cost of enterprises. Therefore, when the carbon risks of entities in multiple industries and sectors are superimposed, financial risks may be triggered through the bond market, which deserves the attention and prevention of regulatory authorities and industry organizations. Financial institutions should strengthen the identification and management of carbon risks to prevent the spread and escalation of international carbon barriers. At the risk control level, financial institutions should carry out stress tests on carbon financial risks, integrate carbon risks into the risk control system, and incorporate carbon pricing, carbon performance and other factors into the credit management process as soon as possible to prevent credit risks caused by carbon financial risks.
Figure 12: International carbon barrier risk transmission pathway
Source: CICC Research Department, CICC Research Institute
Although the carbon emissions covered by the mainland carbon market are the largest in the world, there is still a big gap between the transaction amount and trading activity and the EU carbon market. In 2021, the cumulative trading volume of the national carbon market in mainland China was 179 million tons, with a turnover of 7.661 billion yuan, and the turnover rate of carbon allowances was less than 2%, while the turnover of the EU carbon market was 12.2 billion tons, 683 billion euros, and the turnover rate of carbon allowances was as high as 758% [18].
Financial institutions can effectively improve the energy level of the carbon market, assist the carbon market to achieve price discovery, guide domestic emission reduction activities with more scientific price signals, and help the mainland improve its pricing power in the international carbon market. The carbon price is formed in the transactions between buyers and sellers in the carbon market, and guides the flow of funds into emission reduction enterprises through price signals, so that "carbon emissions have costs and carbon reductions have benefits". According to international experience, a reasonable carbon pricing mechanism often requires the participation of financial institutions and the assistance of carbon futures, carbon options and other carbon financial trading tools. Futures trading has the characteristics of high transparency and good continuity, and the development of carbon futures will help guide market expectations, and at the same time, because overseas carbon trading is dominated by futures trading, carbon futures tools will also help to enhance the mainland's bargaining power in the international carbon market.
The introduction of carbon trading into banks, securities companies and other financial institutions can improve the liquidity of the carbon market and expand the scale of participation in the carbon market. According to overseas experience, the introduction of the market maker mechanism has a significant effect on improving the activity of carbon trading. The Korea Emissions Trading System (KETS) has established a relatively complete market maker mechanism, which can provide liquidity to the KAU market through the Korea Carbon Allowance (KAU) credits lent by the Ministry of Environment. In May 2021, the Ministry of Environment approved three securities companies to become market makers, and then in October 2021, South Korea approved 20 financial institutions to participate in the trading activities of South Korea's carbon allowances (KAU), further expanding the scope of financial institutions' participation in the carbon market. Up to now, eight securities companies in mainland China have obtained no-objection letters from the China Securities Regulatory Commission (CSRC) to participate in carbon emission trading, while the participation of financial institutions in national carbon trading is still subject to further confirmation by the competent authorities of the carbon market. Therefore, it is necessary to speed up the pace of financial institutions to participate in the national carbon market, so that financial institutions can help entities reduce the transaction costs of the carbon market and improve the activity of carbon trading through market maker mechanisms and matching transactions.
Financial institutions should vigorously innovate carbon financial products, respond to regulatory requirements, and launch specialized tools to deal with carbon barriers. The Guiding Opinions on Further Strengthening Financial Support for Green and Low-Carbon Development proposes to study and enrich financial products and trading methods linked to carbon emission rights, and gradually expand the scope of trading entities suitable for the development of the mainland carbon market [19]. Carbon financial trading tools are the main way to deal with international carbon barriers, and their main categories include carbon futures, carbon options, carbon swaps, etc. Carbon futures have a risk hedging function, which can help enterprises avoid the risks caused by the fluctuation of carbon emission prices. The cost of carbon barriers borne by enterprises is affected by the fluctuation of overseas carbon prices, and enterprises can use the risk hedging function of carbon futures to reduce the impact of overseas carbon price uncertainty on the financial status of enterprises by buying or selling carbon futures contracts. At present, financial products have appeared in China in response to the EU's carbon border adjustment mechanism. For example, a financial institution launched a cross-border carbon income swap (TRS) product for EU carbon emission futures contracts, which allows domestic institutional customers to directly participate in EU carbon market transactions without leaving the country, avoiding the risk of carbon price fluctuations and reducing compliance costs.
Chart 13: Product structure of cross-border carbon swaps (TRS) for EU carbon futures contracts
Source: Shenzhen Green Finance Association, CICC Research Department, CICC Research Institute
Enterprise: Familiar with the rules of carbon barriers and establish carbon accounting capabilities
In the face of the challenge of international carbon barriers, relevant enterprises should familiarize themselves with the rules and important timelines of relevant laws and make preparations in advance. At present, the CBAM, the EU battery and waste battery regulations have officially come into effect, and enterprises need to digest their rules in advance, and the EU Net Zero Industry Act has not yet been formally passed, but a political agreement has been reached in the EU, and relevant overseas enterprises need to pay attention to its trends. Taking the CBAM that is currently in force as an example, there is a transition period to gradually increase the reporting requirements before the bill enters the substantive implementation stage. Although the CBAM is subject to reporting obligations on EU companies or authorized filers, exporters are required to prepare and provide relevant information. [20] Therefore, relevant exporters should pay attention to the timeline and relevant requirements of CBAM information declaration, and cooperate with EU importers to complete their reporting obligations.
The CBAM report mainly contains three key information: cargo information, carbon emission information, and carbon price information. Among them, carbon emission information may cause greater statistical pressure on enterprises. In the face of the cost and statistical pressure brought about by the CBAM, relevant enterprises should accelerate the establishment of carbon accounting capabilities. CBAM's carbon emission accounting is based on the production process, which requires enterprises to build a data collection mechanism according to the production process, including activity level data and emission factor data, as well as verification and quality control methods for relevant data. At present, the carbon emission accounting of mainland regions or sub-industries is relatively perfect, and the carbon emission accounting system based on the micro enterprise level of the whole industry has not yet been fully established. In recent years, the regulatory authorities have vigorously promoted the construction of carbon accounting statistics system and carbon footprint management system, and we believe that we will provide rules, standards and database support for enterprise carbon accounting, and promote the mutual recognition of carbon footprint standards and international convergence.
Exhibit 14: CBAM implementation timeline
Source: World Resources Institute, CICC Research
[1]https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R0956
[2] Before the end of the transition period, the European Commission will submit a report to the EU Parliament and Council on the possibility of extending CBAM to other commodities, including other goods with a high risk of carbon leakage, in particular organic chemicals and polymers. The EU ETS includes 28 stationary source emission activities such as combustion, oil refining, steel, coke, metal ores, other metals, cement and lime, other non-metallic minerals, pulp and paper, chemicals, aviation, mainly power plants and energy-intensive basic raw materials industries.
[3] The CBAM bill mentions that the calculation of emissions from the cement, fertilizer, and power industries includes both direct and indirect emissions, and the rest of the products that only include direct emissions will be further considered for indirect emissions.
[4] Nordhaus, Green Economics, CITIC Press, 2022
[5] The EU and the United States did not reach an agreement on the matter by the stipulated October 31, 2023
[6]http://world.people.com.cn/n1/2023/1031/c1002-40106567.html
[7] See OECD website: https://www.oecd.org/trade/topics/local-content-requirements/,2015
[8] See WTO website: https://www.wto.org/english/tratop_e/scm_e/subs_e.htm,1994
[9]彼得森研究所针对全球LCRs政策做了一次早期调查，所调查的100多个案例横跨医疗保健，可再生能源，汽车，石油和天然气等行业。 G. Hufbauer等人：“Local Content Requirements: Report on a Global Problem”, Peterson Inst.Intl. Econ.,Washington DC，2013
[10] The existing greenhouse gas emission accounting methods can be summarized into three main types: emission factor method, mass balance method, and measurement method, and the China National Development and Reform Commission has published greenhouse gas emission accounting methods and reporting guidelines for 24 industries in three batches, mainly using the emission factor method and the mass balance method.
[11] For example, the United States requires reporting by the measured method instead of the accounting method, and the European Union has even refined the uncertainty of the measured method.
[12] The European Commission's Delegated Regulation (EU) 2019/331 sets out a benchmark value for the free allocation of quotas for different products.
[13] It should be noted that the Chinese model used in this paper does not take into account the impact of the EU's imposition of carbon tariffs on the international competition landscape of the export of related products, i.e., it does not take into account the squeeze or pull effect of changes in relative competitiveness on domestic exports.
[14] In this scenario, we assume that the exit of free allowances in the domestic carbon market will accelerate by 10% compared to the baseline scenario due to the implementation of the EU CBAM.
[15]https://www.sohu.com/a/690471269_121123883
[16] Aldy J , Ley E , Parry I: “What is the role of carbon taxes in climate change mitigation?”, World Bank Other Operational Studies, 2008.
[17] Hu Yuan, Yang Yuetao, "The Legitimacy, Necessity and Institutional Choice of Carbon Tax in the Mainland", Taxation Research, 2023(1):5.
[18]https://news.bjx.com.cn/html/20230106/1281347.shtml
[19]http://camlmac.pbc.gov.cn/goutongjiaoliu/113456/113469/5325946/index.html
[20]https://wri.org.cn/insights/CBAM-01
Article source:
This article is excerpted from: "The Impact and Response of International Carbon Barriers: Macroeconomic and Industry Perspectives", which has been published on April 18, 2024
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