Author: institute for international trade and economic cooperation, ministry of commerce
In july 2021, the european commission submitted a draft carbon border regulation mechanism (cbam), which opened the process of reforming key eu carbon market legislation. In june 2022, the two other eu legislative decision-making bodies, the european parliament and the council of the european union, respectively, formed their respective positions on cbam; in december 2022, the european parliament and the council agreed on the establishment of cbam at the eu level. On 8 february 2023, the council of the european parliament on the environment, public health and food security adopted an inter-institutionally agreed final cbam programme, which is expected to enter into force in the first half of the year. Overall, the final formula is the product of a compromise between stakeholders, reflecting both the eu's ambition to become the first global “climate-neutral continent” and the need to ease the burden of green transformation in the eu's high-carbon industry as a result of the ukrainian crisis, as well as to ensure that socially vulnerable groups are more well adapted to the green transition。
I. A final solution that combines emission reduction ambition and industrial competitiveness considerations
The carbon border regulation mechanism (cbm) is one of the key measures of the eu's “adaptation to emissions reduction 55 by 2030” package and an important initiative for the development of the eu carbon market to phase iv. It aims to address the “carbon leakage risks” posed by asymmetrical climate governance policies in non-eu countries by imposing carbon tariffs on imports that do not meet eu carbon emissions requirements. Over the past year, the draft cbam has been thoroughly discussed at the eu level around seven aspects: implementation time, coverage of products, emission categories, governance institutions, free emission quotas, export carbon costs and international liability. According to the final cbam programme currently agreed upon, it will be a bill that takes into account eu carbon emission reduction ambition and industrial competitiveness (see table 1). This is reflected in:
First, the expansion of product coverage and emission categories reflects the eu carbon reduction ambition. The five main areas of imports initially covered by the draft ec are cement, aluminium, fertilizer, electricity and steel, with emissions categories limited to direct emissions (greenhouse gas releases from product production). In june 2022, an amendment adopted by the european parliament called for an increase in the range of imports covered by carbon tariffs, from five to nine, adding four major areas of organic chemicals, plastics, hydrogen and ammonia; and incorporating indirect emissions (carbon emissions from electricity consumption used in product production) together with direct emissions into carbon costing. The agreed cbam final programme covered six broad areas, including steel, aluminium, hydrogen, fertilizers, cement and electricity; it was also agreed that the inclusion of organic chemicals and plastics would be further assessed before the end of the transition period, so that the scope of cbam covered products by 2030 would be consistent with those covered by the european union's emissions trading system (ets); the emission categories included both direct and indirect emissions, although only cement and fertilizers would apply to indirect emissions. In addition, cbam was fully implemented as early as 2034, one year earlier than originally planned for 2035。
Second, the arrangements for free emission quotas and carbon cost subsidies for exports reflect the eu's consideration of preserving the competitiveness of its own industry. In terms of arrangements for free emission quotas, the final programme, with the aim of phasing out free quotas, was a compromise between the european parliament's radical programme (which was completely eliminated within six years) and the european commission programme (which was completely eliminated within ten years), reflecting the eu's combined consideration of promoting the upgrading of its industries; at the same time, and out of concern about the erosion of export competitiveness of eu products due to their higher carbon emission costs, the interim agreement required the european commission to conduct a carbon leakage risk assessment of eu exports to third countries before the end of the transition period, and to provide risk-response proposals consistent with world trade organization rules (such as carbon cost subsidies for exports)。
The eu carbon border mechanism will have a significant impact on european exports
The carbon border regulation mechanism (cbm) is one of the european union's combined tools for achieving climate neutrality in 2050, and together with the emissions trading system (ets) constitutes both the positive and the negative side of a coin. The draft carbon border regulation mechanism proposed by the european commission in july 2021, as it relates only to the four categories of steel, aluminium, fertilizers and cement that i exported to the eu (which together accounted for 3. 2 per cent of my total exports to europe in 2022), does not have a direct impact on me. But in the light of the final formula agreed among eu agencies, the negative impact of the cbam on me is threatening to increase further, especially with regard to the energy transition and the entry of my products into the eu market。
First, my exports to the eu of products facing additional carbon costs are likely to eventually expand from four to seven, covering steel, aluminium, fertilizers, cement, hydrogen, organic chemicals and plastics. With the possible inclusion of organic chemicals and plastics at the end of the transition period, my exports to the eu totalled 132 products (customs hs four-digit code), and in 2022 my exports to the eu totalled $54. 3 billion, or 9. 7 per cent of my total exports to the eu in that year; of this amount, my exports to the eu of organic chemicals and plastics amounted to $20. 75 billion and $15. 42 billion, respectively, and my exports to the eu amounted to 3. 8 million tons and 4. 26 million tons, respectively, with additional tariffs on european exports of organic chemicals and plastics at an average eu carbon price of 80 euros per ton in 2022。
The second is that, in the future, my foreign exports of steel and aluminum may be subject to a combination of european and american restrictions. Unlike the major exporting developing economies of products such as cement and fertilizers, my exports of steel and aluminium are mainly from developed economies such as the european union, the united states and japan, which together accounted for 18. 5 per cent and 26. 8 per cent of my total exports of steel and aluminium, respectively, in 2022. Within the framework of the trade and technology council, the united states and europe have begun to enhance coordination on sustainable trade rules for steel aluminium products, with carbon tariffs being one of the possible tools. Future relevant rules may be adopted by more developed economies, putting pressure on my exports of steel and aluminium products and on industrial development。
Thirdly, there is increased pressure for the transformation of my energy structure, especially in terms of increasing the share of renewable energy generation. The proposed amendments to the european parliament's carbon border regulation mechanism to include indirect emissions in the calculation of carbon emissions, i. E. Electricity used in manufacturing, heating and cooling of manufactures, would pose a threat to my existing energy structure. At present, my renewable energy generation accounts for about 30 per cent of total electricity consumption in society, but renewable energy accounts for only 15 per cent of total energy consumption in society; the eu's share of renewable energy generation is about 40 per cent in 2020, and renewable energy is 22 per cent of total energy consumption, with a gap between me and the eu in terms of renewable energy development. The eu is my largest trading partner, and if indirect emissions are eventually incorporated into carbon border regulation mechanisms, my exports to the eu will face the urgency of increasing the use of green electricity in product production, thereby challenging my established share of the total amount of electricity consumed by renewable energy throughout society, which needs to be planned and addressed by the relevant government departments and enterprises as soon as possible。
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