Writer: Vivi CHEN, Jenica OU
Social Media Team: Irina LIN
Coverage
Carbon Border Adjustment Mechanism (CBAM), launched by the European Union, serves as an import tax on products designed to address the "carbon leakage" issue, preventing businesses from relocating production to other countries to evade the costs associated with climate policies. The regulation was enacted on 17 May 2023, covering six sectors at the highest risk of carbon leakage: electricity, aluminum, iron and steel, cement, fertilizers, and hydrogen. Notably, in the steel sector, it extends beyond the basic material to include further down the value chain, such as screws and bolts.
The relevant regulations of the European Union until November 2023 specify emission scope requirements for six industries, as shown in Table 1. During the transition phase, all enterprises in these industries, except for the electricity sector, must report both direct and indirect emissions. In the final phase, it is currently anticipated that only indirect emissions related to cement and fertilizer products will be considered, while the other three industries will require further consideration.
Table 1. CBAM Constrains Industries and Corresponding Scope
Current Phase of CBAM Regulation
First Stage – Transitional Phase
Before the CBAM becomes fully operational, there will be a transitional period[1]. This transitional period, which began on October 1, 2023, and concludes at the end of 2025, requires the reporting declarant (the importer or the customs representative) to submit quarterly reports on emissions embedded in CBAM goods imported during each quarter. No financial adjustment is required during this phase, allowing the final system to be implemented.
Second Stage - End Stage
The definitive period of CBAM will come into effect in January 2026, marking the commencement of importers paying the CBAM financial adjustment. Upon the commencement of this period, EU importers will purchase CBAM certificates equivalent to the carbon price that would have been paid if the goods were produced under the EU's carbon pricing rules. Conversely, suppose a non-EU producer has already paid a carbon price in a third country for the embedded emissions in producing the imported goods. In that case, the corresponding cost can be fully deducted from the CBAM obligation. This phase will persist until free allowances in CBAM sectors are entirely phased out in 2034.
The impact on Asian industries – Mainland China & Taiwan
Following the announcement of the CBAM transitional period, questions have arisen about its impact on trade between Europe and Asian industries, including China and Taiwan. As of now, the EU’s CBAM is most likely to impact Chinese exports to the EU in the steel sector. According to China Metallurgical Industry Planning and Research Institute, based on steelproducts exported from China to the EU in 2022 (389 million tons), the total value of steel products exported to the EU in 2022 (USD 6.44 billion), and the average carbon price in the EU carbon market in 2022 (EUR 81 per ton), the cost of China industry products exported to the EU is expected to increase by around 4% to 6%. This implies an annual payment ranging from USD 200 million to USD 400 million to the EU.[1]
Examining the impact on Taiwan, the Chung-hua Institution for Economic Research shows that over the recent five years, the average annual export of products from Taiwan to the EU was nearly 1.8 million tons, with an average yearly export value to the EU (USD 1.21 billion). This accounts for 5.2% of Taiwan's annual average export value to the EU. Steel represents the highest proportion, with an average annual export value (USD 11.96 billion), followed by aluminum (USD 1,362 million). Following the implementation of CBAM in 2026, the financial adjustment is projected to amount to 1.21 billion USD.[2]
Based on the statistics, the impact of CBAM has already been felt to a certain extent. CBAM has extended its control to downstream products of the steel industry, directly affecting the exports of steel and aluminum, which include items like screws, bolts, and nuts. CBAM might further expand its regulated industries in the future as well. Therefore, countries must understand the actions businesses should take to prepare for the future.
Further Action
The CBAM introduced by the European Union signifies a noteworthy advancement in the global initiative to mitigate greenhouse gas emissions. For companies or industries affected by the CBAM, feel free to contact Mt.Stonegate for comprehensive assistance in minimizing risks related to CBAM and other evolving carbon market regulations.
Ref.
[1] Bird&Bird. (2023, July 17). CBAM Reglation adopted. https://www.twobirds.com/en/insights/2023/global/cbam-regulation-adopted
[2] 車百智庫. (2023, September 20). 歐盟碳關稅即將落地，影響幾何？. https://baijiahao.baidu.com/s?id=1777513410632575255&wfr=spider&for=pc
[3] 中華經濟研究院. (2021, August 4) 國際碳邊境調整機制與國內碳定價風險因應https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjo-ZLN_bODAxUIslYBHTSXAU8QFnoECAoQAQ&url=https%3A%2F%2Fwww.moea.gov.tw%2FMNS%2FCORD%2Fcontent%2FwHandMenuFile.ashx%3Ffile_id%3D26799&usg=AOvVaw1QqF3WwRmH1vQpHrRh5_O4&opi=89978449