The EU started to impose "carbon tariffs" transition period, impact on global trade, the impact on China?

The European Commission has published the rules for the transition period of the EU's Carbon Border Adjustment Mechanism (CBAM). The rules will take effect on October 1 this year and last until the end of 2025, with the levy officially starting in 2026 and fully implemented by 2034.

At this point, the world's first carbon import tax is about to be landed, and CBAM has become the world's first mechanism to respond to global climate change in the form of carbon tariffs.

"Carbon tariff" specific requirements

The transitional implementation rules announced by the European Commission are based on the "Establishment of a carbon border adjustment mechanism" published by the European Union in May this year, detailing the obligations of importers of EU carbon border adjustment mechanism products and calculating the amount of greenhouse gases released during the production process of these imported products.

The fine print states that during the initial transition phase, importers will only have to submit reports of carbon emissions information related to their goods without having to make any financial payments or adjustments.

After the transition period, which comes into full effect on January 1, 2026, importers will be required to declare annually the quantity of goods imported into the EU in the previous year and the greenhouse gases they contain, and surrender the corresponding quantity of CBAM certificates.

The price of the certificate will be calculated based on the average weekly auction price of the EU Emissions Trading System (ETS) allowances, expressed in euros per tonne of CO2 emissions.

Over the period 2026-2034, the phasing out of free allowances under the EU ETS will go hand in hand with the phasing out of CBAM, culminating in the total elimination of free allowances in 2034.

Under the new law, all EU industries protected under the ETS will be granted free quotas, but the proportion of free quotas will gradually decrease from 93% to 25% from 2027 to 2031. In 2032, the proportion of free quotas will be reduced to zero, three years earlier than the withdrawal date of the original draft.

The scope of the "carbon tariff"

CBAM will initially apply mainly to industries such as cement, steel, aluminium, fertiliser, power and hydrogen, as the production of these commodities is carbon intensive and has the greatest risk of carbon leakage. As the scope of application expands, CBAM will eventually (when fully phased in) capture more than 50% of emissions from sectors covered by ETS.

Although the "carbon border adjustment mechanism" proposal emphasizes that the mechanism must not be abused for trade protectionism, the EU has acknowledged that the main purpose of introducing the "carbon tariff" policy is to avoid European enterprises being at a disadvantage in market competition.

A carbon border tax would raise the cost of tariffs on exports to Europe, hitting the relevant high-carbon industries of countries with large or high exports to Europe, such as China, India, Turkey, Russia and other developing countries.

For external companies exporting to the EU, carbon tariffs will directly affect competition and, to an even greater extent, change trade patterns, according to experts at the Boston Consulting Group.

If these firms are unable to adapt quickly to the New Deal by reducing their carbon footprint, they could lose market share and be replaced by other EU firms or more carbon-efficient firms in other countries.

What is clear is that, on the one hand, developed countries can protect domestic industries through carbon taxes and generate carbon trading income, on the other hand, they can rely on their own technological advantages, export energy-saving equipment, transfer low-carbon technology, and obtain low-carbon economic development dividends.

Developing countries will suffer a net loss from the implementation of carbon border taxes, while the economies of developing countries that rely heavily on exports of high-carbon products will be greatly impacted.

What is the impact on China's foreign trade

In 2022, the total number of industries covered by CBAM in mainland China's exports to the EU is about 20 billion euros, accounting for only 3.2% of the total exports to the EU, and the scale is in a controllable range.

But how much will China be affected by long-term carbon tariffs? According to the calculations of Tencent Research Institute, China is a net exporter of "carbon emissions" in international trade.

Because most of China's export manufacturing products are in the middle and low end of the international industrial chain, with high energy consumption and low added value, in 2018 China's export products implied carbon dioxide emissions of 1.53 billion tons, and imported goods implied carbon dioxide emissions of 542 million tons.

The first industries covered by the EU CBAM are cement, fertilizer, steel, aluminum, power and hydrogen industries. Since China does not export electricity, hydrogen under the EU CBAM involves only one tariff code.

In 2022, the EU imported only 3,134 euros worth of hydrogen from China, a negligible amount. Therefore, the EU CBAM has a substantial impact on China's industries are cement, fertilizer, steel and aluminum.

According to the Huasheng Green Industry Development Institute estimates that after the implementation of the EU carbon tariff, it will increase the cost of relevant Chinese enterprises exporting to the EU by 6%-8%.

"In the future, there is a high possibility that the EU will further expand the carbon tariff coverage industry, and the impact on the Chinese industry is more difficult to predict." Therefore, it is necessary for China to accelerate its low-carbon energy and industrial transition and prepare for possible carbon tariff barriers in the future." Shenzhen Advanced Financial Research Institute associate professor Zhao Junhua said.

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