The final text of the European Union's Carbon Border Adjustment Mechanism (CBAM), also known as the "carbon border tax" bill, was released on May 16th, and CBAM came into effect on the second day after the announcement.

The European Union's Carbon Border Adjustment Mechanism (CBAM) is the world's first "carbon import tax," which means that non-EU producers will have to pay for their carbon emissions if they want to sell goods in the EU. The plan is set to be implemented in stages between 2023 and 2034, with a trial run starting in October 2023. This makes the EU the first economy to introduce a carbon border tax.

According to the CBAM legislation, it will come into effect on October 1, 2023, but there will be a transitional period until the end of 2025. During this period, Chinese companies exporting products to the EU will need to report their carbon emissions information but will not be required to pay fees. After the transitional period, starting from January 1, 2026, carbon border taxes will need to be paid, and the prices will be linked to the European carbon market.

The industries covered by CBAM include steel, cement, aluminum, fertilizers, electricity, hydrogen, and certain indirect emissions under specific conditions. Importers of these products will have to pay the difference between the carbon price paid by the producing country and the carbon quota price in the EU carbon market. Currently, the CBAM legislation covers six industries, but the EU carbon market encompasses 28 industries. As a complement to the EU carbon market, the CBAM mechanism may expand its coverage in the future.

The potential impacts on related industries

After the implementation of the European Union's Carbon Border Adjustment Mechanism (CBAM), it can be predicted that domestic high-carbon industries such as steel, aluminum, and electricity will face increased export costs to Europe, forming a green trade barrier, which may usher in a new era of global climate trade rules. In the short term, the total value of China's exports to the European Union in CBAM-covered industries in 2022 is estimated to be around 20 billion euros, accounting for only 3.2% of total exports to the European Union. The scale is manageable, and there is still a certain transition period before the formal implementation. However, attention should be paid to the potential extension of CBAM to downstream industries, which could cause significant losses in exports.

The industries in China that will be most affected after the implementation of CBAM include raw materials and processing industries, including the steel industry. However, since the calculation method for the actual payment of carbon emissions prices for these products has not been clarified, it is currently impossible to accurately estimate the carbon border tax that needs to be paid to the European Union each year. Taking steel as an example, based on the existing CBAM regulations and considering factors such as the annual volume of steel products exported to the European Union from China (e.g., 3.89 million tons in 2022), the total value of steel products exported to the European Union (e.g., $6.44 billion in 2022), and the carbon price in the European Union carbon market, a preliminary estimate indicates that the export costs of China's steel industry will increase by about 4%-6%, requiring an annual payment of carbon border tax to the European Union of approximately $200 million to $400 million.

Long-term development trends in the Chinese market

1. After the European Union (EU) imposes carbon border taxes on imported products, Chinese exporting companies may face additional cost pressures, which could reduce the competitiveness of Chinese products. Exporting industries, particularly those with high carbon intensity, may face significant challenges.
2. Carbon border taxes can incentive businesses to reduce carbon emissions and improve energy efficiency. To avoid the costs of carbon border taxes, Chinese companies may increase investments in clean technologies and low-carbon innovations to enhance the environmental sustainability of their production processes. This could contribute to driving China's sustainable development and green transformation.
3. Although industries covered by carbon border taxes will face various challenges, the Chinese market is vast and holds potential. The implementation of carbon border taxes may prompt domestic companies to increase the supply of low-carbon products and services. This could lead to growth in the clean technology and renewable energy industries in the domestic market, creating more employment opportunities.
4. The implementation of carbon border taxes may strengthen awareness of environmental protection and emissions reduction. It could also drive the government to adopt more environmental policy measures, including enhanced regulations, stricter emission standards, and incentives for the development of renewable energy and energy efficiency. These policies can contribute to transitioning China towards a more sustainable and low-carbon economic model.

Other countries' relevant cases

Apart from the EU, other countries and regions are also actively exploring and implementing carbon border tax policies. Canada announced the implementation of the "Carbon Levy" plan in 2019, which imposes taxes on high-carbon products while providing incentives for low-carbon products to stimulate economic growth and employment. The policy is gradually being rolled out and is planned to expand to other industries and sectors.

Japan is also pushing forward with carbon border tax policies. The Japanese government announced the "Carbon Neutrality Promotion Plan" in 2021, which includes specific plans for implementing carbon border taxes. The plan aims to impose carbon taxes on imported goods by 2026 and encourages companies to adopt low-carbon technologies and measures through preferential policies.

These carbon border tax policies in various countries indicate the increasing global attention to greenhouse gas emissions. Countries and regions are taking measures to encourage carbon emission reductions and accelerate the transition to a low-carbon economy. The implementation of these policies may have profound impacts on the markets and industrial structures of the respective countries and regions, while also providing new opportunities and challenges for global emission reduction and climate change mitigation effort.