CBAM (Carbon Border Adjustment Mechanism)

 

1. Understanding Carbon Leakage

Carbon leakage is a critical concept to grasp when discussing the Carbon Border Adjustment Mechanism (CBAM).

CBAM was primarily introduced to combat the issue of carbon leakage. Carbon leakage occurs when companies operating in regions where climate regulations are stricter, such as carbon taxes or carbon fees that increase production costs, decide to move their production to countries with laxer carbon emission controls. Alternatively, they might import similar but cheaper products from regions with less stringent regulations. This results in continued environmental pollution, undermining the global goal of achieving zero carbon emissions by 2050. Additionally, companies in regions with stricter regulations face unfair competition.

The European Union (EU), a prominent advocate for global climate action, is particularly concerned about carbon leakage. To achieve carbon neutrality, many countries have introduced measures like purchasing carbon credits and paying carbon taxes. Since 2005, the EU has operated a carbon trading system, obligating major carbon emitters to pay a high price for emitting carbon, thereby encouraging companies to intensify their carbon reduction efforts.

The Carbon Border Adjustment Mechanism (CBAM) was devised as a solution to address carbon leakage.

 

 

2. The EU Emissions Trading System (EU ETS)

The EU has employed various mechanisms, with the most prominent being the carbon trading market's free quota system, known as the EU Emissions Trading System (EU ETS). Established in 2005, the EU ETS stands as the world's largest carbon trading market, requiring regulated companies to purchase carbon rights certificates corresponding to their emissions. The EU ETS operates on a "cap and trade" model, where companies receive a portion of free quotas within the set total emissions. Companies that successfully reduce carbon emissions can sell their surplus quotas to other firms lacking sufficient certificates in the EU ETS. The carbon price within the EU is determined by the supply and demand for carbon rights certificates, adhering to the "polluter pays" principle, which encourages companies to reduce carbon emissions.

To maintain the competitiveness of EU enterprises during their green transformation, especially for industries at high risk of carbon leakage, the EU has offered free quotas. However, these free quotas will gradually be phased out to align with the EU's climate objectives and encourage active carbon reduction efforts.

As free quotas phase out, the new mechanism to combat carbon leakage is the Carbon Border Adjustment Mechanism (CBAM), often referred to as a "carbon tariff." It ensures that products imported into the EU customs area bear costs equivalent to the carbon expenses imposed on domestic producers.

3. Carbon Border Adjustment Mechanism (CBAM)

Under CBAM, importers must purchase carbon permits equivalent to the embedded carbon emissions in imported goods. These permits can be procured by the exporting country or importing companies in the domestic carbon market. This approach discourages carbon-intensive production practices.

The CBAM policy is seen as an extension of EU carbon trading, similar in concept to carbon tariffs. It sets the carbon price based on the average carbon trading price in the EU Emissions Trading System. Imported products are required to pay the same carbon price as domestically produced goods, offsetting the carbon emissions through CBAM certificates.

A CBAM certificate represents the right to emit one ton of carbon dioxide and its price is influenced by the EU ETS carbon trading market. However, since EU ETS carbon rights certificates are auctioned daily, their prices fluctuate frequently, so the CBAM certificate price is determined based on the "weekly average price."

Starting in October 2023, the EU will begin a trial implementation of the Carbon Border Adjustment Mechanism (CBAM). Controlled high-carbon-emitting industrial products must obtain CBAM certificates before entering the EU.

This mechanism calculates the carbon content of products from exporting countries. If this content exceeds the EU's specifications, importers are required to purchase CBAM Certificates (CBAM Certificates). Consequently, CBAM is often referred to as a type of "carbon tariff."

4. What should non EU exporters do in response to CBAM?

Non-EU manufacturers can offset the cost of EU CBAM certificates if they provide evidence that the product has been priced according to the carbon cost in their home country. However, if the carbon pricing in a non-EU country is lower than the EU carbon price standard (carbon tax, carbon fee, or a recognized carbon trading system), they may still need to purchase CBAM certificates to bridge the gap.

The primary goal of CBAM is to reduce carbon leakage, encouraging companies to actively reduce carbon emissions in products manufactured outside the EU, ultimately decreasing global carbon emissions. This approach also offsets the cost disadvantages faced by EU companies in global competition. In the past, due to the EU's stringent carbon emission regulations, EU products bore high carbon reduction costs, putting them at a pricing disadvantage. With the introduction of CBAM, goods imported into the EU must also reflect the true carbon emission costs.

5. CBAM Implementation Timeline:

  • 2023/10: Trial launch with importers only required to submit carbon data, no fees yet.
  • 2026: Full implementation of CBAM with the initial coverage of five major industries. (aluminum, cement, electricity, fertilizer, hydrogen, and iron/steel.)
  • 2027: Comprehensive assessment of CBAM implementation, especially its impact on Less Developed Countries (LDCs).
  • 2034: Full-scale implementation of CBAM, extending to other industries.

Once CBAM is fully implemented in 2026, importers will be obliged to purchase CBAM certificates to compensate for the difference between the carbon price paid in the producing country and the carbon quota price in the EU ETS for imported products.

6. How do we respond to CBAM:

Importers will be required to gather fourth-quarter data starting from October 1, 2023. The Carbon Border Adjustment Mechanism (CBAM) is scheduled for implementation in 2027. The United States is set to commence carbon tax collection and the rollout of the Clean Competition Act (CCA) policy as early as 2024. In alignment with global environmental initiatives, We will conduct systematic greenhouse gas emissions inventory in line with the ISO 14064-1:2018 standard and the Greenhouse Gas Protocol (GHG Protocol) requirements to assess our greenhouse gas emissions. This initiative not only enhances resource efficiency but also fulfills our responsibility to combat global warming.