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A game changer

By LU XUEDU | China Daily Global | Updated: 2023-06-21 06:43
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WANG XIAOYING/CHINA DAILY

With the EU's CBAM soon to be applied, companies should gradually reduce carbon emissions embedded in their exported goods in order to adapt

The European Union will begin applying its Carbon Border Adjustment Mechanism on Oct 1. The CBAM will usher in a new chapter wherein carbon emissions reductions directly affect global industries and businesses. The carbon border tax will have far-reaching significance on promoting global carbon emissions reduction, and deserves high attention.

In the initial transitional phase, the CBAM applies to a specified list of goods imported into the EU within the following six carbon-intensive sectors: cement, electricity, fertilizers, iron and steel, aluminum and hydrogen. During the transitional phase, the former three industries have to include both direct and indirect emissions in their accounting, while the latter three only have to include direct emissions.

Inspired and encouraged by the EU passing and implementing the CBAM, developed countries such as the United States and Japan could possibly join hands to establish a binding system for carbon tariff standards that is centered on the world's major developed countries and based on their advanced low-carbon technologies and their corporate governance standards. This will create a new mechanism for global emissions reduction, shake the foundation of and undermine the major guiding principles established by and enshrined in the United Nations Framework Convention on Climate Change, the Kyoto Protocol and the Paris Agreement, and deal a heavy blow to developing countries' endeavors to participate in global emissions reduction efforts on an equal footing.

Many scholars, particularly those from developing countries, point out that developed countries, including the European countries and the US are promoting a carbon border tax under the pretext of reducing the risk of "carbon leakage", but this move will erode the cornerstone principle of international climate governance — the principle of "common but differentiated responsibilities" (CBDR).Therefore, developing countries have thus far been opposed to the EU's CBAM and other similar schemes.

In the initial phase of the CBAM's implementation, the most direct impact will fall on energy-intensive exports, mainly iron and steel products and aluminum products. From a long-term perspective, however, the mechanism has very profound and complicated implications.

In particular, if the developed economies jointly set up unified carbon tariff barriers and substantially broaden the scope of industries and products covered by the carbon tariff, it will pose a grave challenge to all developing nations including China.

In terms of industries affected by the CBAM, China's iron and steel industry will be the most affected industry in the initial phase of its implementation. The carbon dioxide emissions per unit of product in China's iron and steel industry is much higher than that of the EU's. According to our preliminary analysis, the CBAM could increase the cost of iron and steel products imported into the EU from China by roughly 25 percent.

As a climate response measure, the CBAM's implementation will have implications that go far beyond the field of climate response as it will have repercussions for the global economy, trade and diplomacy.

In face of the CBAM, China should adopt suitable strategies, policies and measures to effectively cope with its adverse impacts, so as to turn the challenge into an opportunity for achieving the country's carbon peaking and neutrality goals ahead of schedule.

To start with, China needs to maintain close communication and coordination with other developing nations to unswervingly defend the CBDR principle enshrined in the UNFCCC and its protocol and agreement.

Under the guidance of the CBDR principle, developing nations and developed economies should negotiate on how to solve the "carbon leakage" resulting from global trade. They should promote the formulation of an international cooperation agreement that all parties can accept to manage and control the risk of "carbon leakage", including relevant norms, accounting standards and the functional mechanisms.

In the meantime, it is vital to promote the coordination and integration of carbon tariff schemes with World Trade Organization rules, to jointly set up an emissions reduction control and management mechanism for cross-border trade that all parties can accept.

Second, China should improve the carbon emissions trading mechanism in its domestic carbon market. This requires the country to extend the scope of industries covered by its domestic carbon market by including industrial sectors into the national emissions trading system besides the power sector. The scope of trading entities should be broadened, with government-allotted carbon quotas and government-issued carbon credits better protected by laws, regulations and policies.

The establishment and improvement of the carbon market will channel more investment into low-carbon technologies accelerating China's low-carbon transition. This is the most essential tool for coping with the carbon border taxes.

Third, export-oriented enterprises that bear the brunt of carbon tariffs need to set up professional teams in response to the schemes. The teams should have a thorough understanding of the policies, guidelines, procedures and functional mechanisms of the CBAM and make preparations for information gathering.

From a medium and long-term perspective, they need to quicken the pace of technological transformation and upgrading to achieve low-carbon or even zero-carbon production as soon as possible.

In practice, companies should gradually reduce the carbon emissions embedded in their exported goods at a bearable cost to reduce the taxable base, through prudent assessments of the cost of emissions reduction and the adoption of appropriate emissions reduction measures — such as using green electricity, revamping the production techniques and production process, advancing technological progress, and investing in the construction of carbon capture and storage facilities.

The author is a member of the academic committee of the International Finance Forum and former deputy director general of China's National Climate Center. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn

 

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