Ouyang Yan, Chen Jiaer, Wang Jianming, Sun Haiping
From October 1, 2023, the EU Carbon Border Adjustment Mechanism (commonly known as carbon tariff) will enter the trial operation stage and will be officially imposed from January 1, 2026. Once the EU carbon tariff is officially levied, it will lead to a significant increase in the cost of export products from the mainland's relevant industries to Europe, and the international competitiveness of the mainland's related industries may be greatly affected.
The EU carbon tariff has entered the trial operation stage
On October 1, 2023, the EU's Carbon Border Adjustment Mechanism (CBAM) began trial operation. According to the relevant regulations, the EU will impose additional carbon tariffs on specific products imported from abroad, covering six major industries: electricity, steel, aluminum, cement, fertilizer, and hydrogen. The amount of tax payable on EU carbon tariffs is determined by the embodied carbon emissions of taxable products and the unit carbon price. That is, the tax payable = (carbon emissions contained in the unit of taxable products - carbon content covered by the free quota of similar products in the EU) × total amount of imported products × EU unit carbon price - the total carbon price actually paid in the exporting country. Among them, the embodied carbon emissions of taxable products include direct emissions from the use of fuel combustion and process fugitives in the production process, as well as indirect emissions from the use of electricity. The amount of free allowances will be gradually reduced, in line with the EU ETS, starting in 2026 and abolishing them all by 2034.
The transition period from October 1, 2023 to December 31, 2025 is the CBAM. In the meantime, importers are required to submit quarterly carbon emission information reports related to their commodities within one month after the end of each quarter. This includes the quantity of imported products, the actual carbon emissions per tonne of products (or the default carbon emissions if not available), and the carbon cost paid by the imported products in the exporting country. The EU does not impose any fees during this period. From January 1, 2026, the CBAM transition period will end, and the carbon tariff will be officially levied, and importers will need to fulfill their reporting obligations through the CBAM registry and pay the corresponding number of CBAM certificates before May 31 of each year.
At present, the CBAM intends to include both direct and indirect emissions from cement, electricity and fertilizers, and aluminum, hydrogen and most steel products may only be levied in the short term. The precursor raw materials of the above-mentioned six types of taxable products and downstream products of the value chain, such as steel precursor raw materials such as sinter, cement precursor raw materials such as kaolin, steel downstream products such as screws and bolts, and aluminum downstream products such as cables are all included in the scope of collection. In addition, the European Commission will assess the range of products to be covered by the CBAM before the end of the transition period, i.e. by 1 January 2026. These include embodied indirect emissions from steel, aluminium and hydrogen, embodied emissions from products that are currently included in the transport of goods, other precursors that are currently included in products, and other goods that are at risk of carbon leakage, in particular organic chemicals and polymers.
A number of future operating rules will be affected
The CBAM is the world's first new mechanism to bundle climate change with international trade, and will form green trade barriers in the name of addressing climate change. In the future, the operating rules of global international trade, industrial competition, capital flows, and energy markets will all be affected by this mechanism.
Carbon tariffs will shift responsibility for tackling climate change. The CBAM violates the "principle of common but differentiated responsibilities" between developed and developing countries under the United Nations Framework Convention on Climate Change. Developed countries transfer the production of high-carbon products to developing countries, and developing countries export high-carbon products to developed countries, not only need to bear the environmental costs, but also need to pay additional carbon tariffs. Through this mechanism, the EU will use the CBAM as an important source of financing to support its energy transition, with the intention of passing on the cost of greenhouse gas emission reduction to other countries, and politically it will increase its bargaining chips on climate change and increase the pressure on developing countries to reduce emissions.
The export cost of China's steel and aluminum products will increase significantly. From 2026, China's exports to Europe will be subject to carbon tariffs on some products from industries such as steel, cement, fertilizers and aluminum. In 2022, China's exports to Europe involved a total of about 20 billion euros in industries covered by the CBAM, accounting for 3.2% of the total exports to the EU. In 2022, the EU imported 15.1 billion euros of Chinese steel products and 4.5 billion euros of aluminium products in terms of trade value. The first batch of included steel and aluminum industries will pay 250 million ~ 360 million euros per year for this "carbon tariff" in the future, with an additional cost of 83~88 euros per ton of steel and 550~629 euros per ton of aluminum. The EU carbon tariff will increase the cost of the mainland's exporters of related products, reduce the profit margins of enterprises, put pressure on exporters, affect the mainland's trade competitiveness, and may lead to changes in the global trade pattern. At the same time, the cost pressure caused by the EU carbon tariff on mainland enterprises will also force the mainland carbon market and its related institutions to accelerate the construction.
The inclusion of indirect emissions will further affect the export of steel and aluminium. Currently, indirect emissions from steel and aluminium on the mainland account for about 20% and 75% of total emissions. Since the EU's emissions intensity at the power generation end is lower than that of China, the inclusion of indirect emissions in the CBAM will significantly increase the cost of carbon taxes on steel and aluminum on the mainland. For aluminium products, the EU indirectly emits about 7 tonnes of CO2 per tonne of aluminium produced, compared to about 20 tonnes on the mainland. For steel products, 94% of the carbon emissions of long-process steel come from fuel combustion, and the carbon emissions per ton of steel of long-process steel in mainland China are basically the same as those in the EU. However, the main energy consumption of short-process steel (i.e., electric furnace steel) is electricity, and the average carbon emission per ton of electric furnace steel in the mainland is about 0.9 tons, while that in the European Union it is 0.6 tons. Therefore, from the perspective of indirect emission intensity (tCO2/t steel or aluminum), the continental short-process steel and aluminum have a great disadvantage compared with the EU. At present, the proportion of long-process steel production in the mainland is close to 90%, but according to the "Action Plan for Continuous Improvement of Air Quality" and other relevant documents issued by the state, the proportion of short-process steel production in the mainland will increase from 10.7% in 2021 to more than 15% in 2025, and will continue to grow at a rapid rate thereafter, and is expected to reach 30% by 2035. At present, the CBAM only calculates direct emissions of steel and aluminum, and if indirect emissions are included in the later stage, it will further affect the export competitiveness of mainland steel and aluminum products.
In view of the above situation, if the CBAM recognizes the carbon emission reduction brought by the mainland green power trading in the future, the cost of carbon emission reduction through the purchase of green electricity is 51 yuan/tCO2~86 yuan/tCO2, which is about 9%~14.5% of the current carbon price of the European Union. In view of the environmental premium cost advantage of green power in the mainland, the purchase of green electricity by enterprises may become an important way to avoid paying the high carbon price of the EU and reduce export costs. However, due to policy coordination and technical guarantees, the linkage mechanism between domestic green power and the national carbon emission trading mechanism and the voluntary greenhouse gas emission reduction mechanism has not yet been perfected. The lack of internationally recognized policy mechanisms will lead to the inability of relevant mainland exporters to reduce the additional costs of CBAM through the use of green electricity, and the competitiveness of the mainland's export trade to Europe will face the risk of further reduction.
The CBAM will promote the low-carbon transformation and development of the mainland. The impact of the EU CBAM on the mainland also needs to be viewed dialectically. The implementation of the EU's carbon tariff may promote the green and low-carbon international trade to a certain extent. Through the implementation of carbon tariffs, the EU will, to a certain extent, promote the low-carbon transition on a global scale and promote the development of global trade in a green and low-carbon direction. Since China has taken action to mitigate climate change and has certain advantages in low-carbon technologies and supply chains, the mainland can promote sustainable economic development by exporting low-carbon products and services. The EU CBAM may promote the construction of relevant institutional systems in the mainland, and accelerate the introduction of supporting measures such as green taxation and green credit.
Take multiple measures to deal with the EU's carbon tariffs
Improve the carbon market mechanism in China. Since the WTO explicitly prohibits double taxation, the mainland can effectively deal with the impact of carbon tariffs by improving the carbon market mechanism. The first is to expand the scope of industries covered by the carbon emission trading market, and give priority to the inclusion of steel, cement, electrolytic aluminum and other industries in the national carbon market. The second is to accelerate the improvement of the policy of enterprises using green electricity to offset carbon emissions, and update and publish the average electricity emission factors within the national, regional, provincial and other boundaries and the electricity emission factors that deduct the green power part, and the amount of electricity participating in green electricity trading will be calculated as zero when calculating carbon emissions.
R&D and application of energy-saving and carbon-reduction technologies. Promoting energy conservation and carbon reduction is an important means to enhance the low-carbon competitiveness of mainland exports. Continuously strengthen the main position of enterprises in innovation, and accelerate the improvement of the enterprise-oriented, industry-university-research combination, market-oriented green technology innovation system. On the one hand, guide and support the construction of energy-saving enterprise technology research and development capabilities, encourage enterprises to establish research and development institutions, participate in and undertake national scientific research tasks, and give greater support to qualified enterprise research and development institutions. On the other hand, we will increase the support for the upstream and downstream key links of the energy-saving industry chain, and effectively help enterprises solve the problems of large R&D investment, long payback period and difficult promotion of energy-saving technology, so as to give full play to the role of energy-saving technology in emission reduction and carbon reduction.
Strengthen trade negotiations on the details of CBAM rules. Resolving disputes through trade negotiations is an important means of dealing with carbon tariffs. The first is to further deepen communication and exchanges, accelerate the harmonization and mutual recognition of carbon emission standards for import and export products between China and the EU, reasonably determine the emission level of imported products, and ensure the effectiveness and fairness of the CBAM. The second is to promote international negotiations under the WTO framework, based on the rules of the United Nations Framework Convention on Climate Change and the Paris Agreement, and strengthen negotiation and communication with the EU based on the principle of coordination between carbon tariffs and the country's degree of development.
Author Affilications:CNOOC Energy Economics Research Institute
Contact: 010-64523406 Submission email: [email protected]
Editor: Zhang Rui
Proofreading: Jiang Yiyan
Review: Chang Fei Lu Xiangqian
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