The export costs of the two major industries of steel and aluminum may increase sharply, China clearly opposes the EU’s carbon boundary adjustment mechanism

“The carbon border adjustment mechanism is essentially a unilateral measure. It unprincipledly expands the climate issue to the trade field. It violates WTO rules, impacts the free and open multilateral trading system, and seriously undermines the mutual trust of the international community and the prospects for economic growth. Comply with the principles and requirements of the United Nations Framework Convention on Climate Change and its Paris Agreement, especially the principles of common but differentiated responsibilities, and the institutional arrangements for the “bottom-up” national independent decision-making contribution, which encourages unilateralism, The wind of protectionism will greatly harm the enthusiasm and ability of all parties to deal with climate change.”

At the regular press conference of the Ministry of Ecology and Environment in July, the spokesperson of the Ministry of Ecology and Environment Liu Youbin made a statement on the Carbon Border Adjustment Mechanism (CBAM) announced by the EU in mid-July, which is an important part of its climate policy reform plan.


The carbon boundary adjustment mechanism is planned to be implemented online in 2023. Starting from 2026, manufacturers of aluminum, cement, steel, fertilizer, and electricity that export to the European market will need to pay for carbon emissions during the production of their products in accordance with EU laws. The equivalent price paid by European producers. According to the current proposal of the European Commission, the free quotas under this mechanism will be all reduced in 2035. The relevant draft rules were announced in the “Fit for 55 package” issued by the European Commission on July 14.

This mechanism was formally proposed by the European Commission at the end of 2019. Once it was raised, WTO members such as China, the United States, Russia, Australia, Brazil, South Africa, and India expressed serious concerns. Many experts told reporters from 21st Century Business Herald that the carbon boundary adjustment mechanism will not have a major impact on Sino-European trade in the short term, but the future impact will depend on the specific content officially announced.

Green international trade barrier risk

According to a report issued by the United Nations Conference on Trade and Development, if the carbon price of the EU’s carbon border adjustment mechanism is US$44 per ton, the income of developed countries will increase by US$2.5 billion, while the income of developing countries will be reduced by US$5.9 billion.

In fact, according to the proposal of the European Commission, the carbon boundary adjustment mechanism will be gradually introduced in three stages. 2023-2025 is the first pilot phase. During this period, EU importers only need to report embedded carbon dioxide emissions in their imported products, but no fees are charged.


The second stage is from 2026 to 2034, at this stage importers will have to pay for their embedded carbon dioxide emissions, which is the carbon price under the EU emissions trading mechanism. But this only pays for the share of carbon emissions not covered by EU producers’ free quotas.

The European Commission recommends that the free quota be reduced by 10% every year. Domien Vangenechten, a policy consultant for E3G industrial transformation and industrial decarbonization, told the 21st Century Business Herald that this means that the amount of emissions that importers must pay under the mechanism to obtain will increase year by year. Until 2035, the free quota will be completely abolished. At that time, the carbon boundary adjustment mechanism will apply to 100% of the embedded emissions of imported goods. This is also the third stage of the carbon boundary adjustment mechanism.

Pierre Leturcq, European policy analyst at the Jacques Delors Institute, a European climate think tank, told the 21st Century Business Herald that the carbon boundary adjustment mechanism and the existing European carbon market (EU ETS) are indispensable to each other, and CBAM cannot be implemented if it wants to be implemented. Some free quotas are added to the amount of free quotas. Because according to WTO rules, CBAM will be regarded as “double relief” and “illegal subsidy.”


Therefore, the import and export costs that may be incurred under the carbon boundary adjustment mechanism are also different from the concept of “carbon tariffs”.

Liu Zhe, Director of the Research, Data and Innovation Department (RDI) of the Beijing Representative Office of the World Resources Institute, said in an interview with the 21st Century Business Herald that the current CBAM mechanism does not involve taxes or tariffs, because CBAM pays attention to the entire policy process. Does not violate WTO rules, especially Articles 1, 3 and 20, that is, the principle of universal most-favored-nation treatment without discriminatory trade measures, the principle of national treatment, and the general principle of providing “exemption” channels for the economic security of member states The principle of exception.

Liu Zhe believes that CBAM is currently designed in the form of quota trading, which is an environmental regulation method within the jurisdiction of the European Union, and subsequent gradual tightening may have policy implications beyond the jurisdiction of the European Union. At present, the relationship between CBAM and EU ETS has not been clarified at the policy level, so the interactive relationship between them, such as whether the quotas under the two mechanisms can form some offsets or joint performance, etc., is not yet at this stage. Knowable. The EU’s proposal on July 14 is only the starting point of its legislative process, and the process of CBAM remains to be further observed.

In addition to WTO rules, CBAM should consider the effects of climate change at the policy-making level. Sam Van den plas, policy director of Carbon Market Watch, a carbon market research organization, believes that the current EU proposal allows the CBAM mechanism to overlap with free allowances before 2035, instead of using it as an alternative to free emission allowances, it will be 2030 Free emission allowances for key industries will open the door after the year. “We believe that such an exemption will make the polluting industrial sector completely out of its predicament and send a very negative signal internationally.”

Since the current excess of free allowances has already had a certain negative impact on the promotion of emission reductions, the carbon market mechanism has actually failed to achieve the effect of incentivizing European producers to invest in low-carbon emission reduction technologies. As an introduction mechanism to combat carbon leakage in the context of rising carbon prices in the EU, CBAM can only be introduced when the free quotas for the covered sectors are reduced.

Dimitri de Boer, chief representative of the European Environmental Protection Association’s Beijing office and the head of the Chinese project, further explained: “This is because only when the free quota continues to decrease, will EU producers be at a higher level than other producers. Disadvantages require higher carbon costs, and thus the risk of “carbon leakage”. So in simple terms, to introduce the CBAM mechanism, the reduction of free allowances in the carbon market will be on the agenda. Otherwise, it will be with the WTO. The regulations are contradictory.”

“The European Commission’s proposal seems to be cautious and consensus-based, focusing on avoiding discrimination, so it is strong in terms of WTO legitimacy. However, the EU still needs to address some issues related to income, treatment of underdeveloped countries, and recognition of other countries. Regarding the last point, we call for the establishment of a multilateral forum for comparability of emission reduction policies, which can be hosted by the WTO’s Trade and Environment Committee.” Pierre explained.


China’s steel and aluminum industries bear the brunt

Pierre told the 21st Century Business Herald that the two main industries affected by CBAM in China are steel and aluminum.

According to the “Carbon Border Regulation Mechanism: Progress and Prospects” research analysis report jointly issued by the Energy Foundation, Sandbag and E3G, assuming that the EU’s carbon border regulation mechanism is fully effective, based on the scenario that the EU completely abolishes the free quota and levies 60 euros per ton of carbon dioxide in 2035, Taking the China-EU trade data in 2019 as an example, the trade volume of China’s steel products exported to the EU is about 4.7 billion euros and will be subject to a carbon border adjustment tax of about 265 million euros. The carbon border adjustment mechanism will increase the cost of steel exports from China to the EU by about 25%, and the cost of aluminum by about 9%.

From the perspective of CBAM’s impact on international trade flows, Pierre believes that China will not be the country most affected by the CBAM proposal. The most affected countries are Turkey, the United Kingdom and Ukraine. But before 2035, both steel and aluminum industries will continue to receive free quotas in Europe. Therefore, the adjustment range in the first few years was relatively small. It may even continue to be marginal after 2030, for two main reasons.

First of all, because steel and aluminum are also covered by China’s carbon market in the future. Chinese producers will pay for the carbon emissions in their production process, even if there is a big gap between China’s carbon price and the EU’s carbon price. At present, China’s carbon price is about 50 yuan/ton, while the EU carbon price is 50 euros/ton.

Second, China is currently the world’s largest producer of steel and aluminum. State-owned enterprises dominate the steel and aluminum markets and have begun considerable decarbonization investments. For example, Chinese aluminum producers also have considerable capacity in producing decarbonized aluminum from hydropower; China Baosteel, the world’s largest steel manufacturer, has also announced its carbon peak in 2023 and carbon neutrality by 2050.


Liu Zhe believes that my country’s steel, aluminum and other products exported to the EU are currently subject to the environmental protection standards of EU imported products. They should do a good job in environmental compliance. The carbon content per unit product should be at a relatively low level in China, and may even reach Exceeding the EU level, in that case, it is possible to profit under the CBAM mechanism.

It is worth noting that the current round of EU climate policy reform proposals has aroused intense discussions within the EU. Liu Zhe said that the EU needs to balance the protection of its corporate competitiveness and the protection of its consumer rights, so the price meaning of EU CBAM should be neutral, and more international cooperation may be considered in the next stage. A lot of policy and system innovation is needed to change the global governance pattern.

“At present, all countries have promised that the combined target can control the temperature rise by about 2.3-2.4 degrees, and all countries need to discuss how to make up the gap between controlling the global temperature rise of 2 degrees and 1.5 degrees. In this process, Chinese companies You can use your own advantages to demonstrate and lead, and strive for a multi-win situation.” Liu Zhe said.

Post time: Aug-05-2021