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EU carbon border adjustment mechanism: implementation still faces many challenges

   For a long time, the EU has been striving to play a leading role in the response to climate change. Despite being hit by waves of new crown epidemics, the European Union has not stopped its pace of accelerating the promotion of relevant legislation in the field of climate. On July 14, 2021, the European Commission launched a package of measures to address climate change, in which the much-anticipated Carbon Boundary Adjustment Mechanism (CBAM) finally revealed its full picture. The European Commission not only released the official CBAM text and related annexes, but also published the final impact assessment report, which fully explained the purpose of establishing CBAM, decision-making process, policy design, implementation methods and its potential impact. Whether this means that the so-called EU "carbon tariffs" are truly bootstrapped, how effective they can be in terms of reducing emissions, and what impact they will have on the EU's related industries and foreign trade relations, is becoming the focus of widespread debate inside and outside the EU.

The establishment of a carbon boundary adjustment mechanism is intended to solve "carbon leakage"


  According to the European Union's vision, CBAM is a policy tool set up to solve "Carbon Leakage" (Carbon Leakage). The so-called "carbon leakage" refers to the fact that in order to avoid the high economic costs caused by strict emission reduction policies, companies in the EU move their industries to third countries outside the EU that have relatively loose emission reduction restrictions, or import similar substitute products from third countries. The phenomenon. "Carbon leakage" weakens the effectiveness of the EU's emission reduction efforts. To this end, the European Union seeks to impose "carbon tariffs" on imported goods through CBAM to make carbon prices comparable to similar goods in the European Union, so as to solve the problem of carbon leakage and protect the competitiveness of similar industries in the European Union. Unlike the carbon trading market which mainly controls total industrial emissions and quota trading in the EU, CBAM targets imported goods and does not set a maximum limit, and will gradually replace the current free quotas in the carbon trading market.

  Taking into account the technical difficulty in determining the emissions of imported commodities such as oil refining and organic chemicals covered by the carbon trading market, the EU has narrowed the scope of CBAM to five major industrial sectors: cement, electricity, fertilizers, steel and aluminum. 2023~2025 is the transition period of CBAM. During this period, importers of the above five major industries need to calculate and declare the total carbon emissions of imported goods and pay corresponding fees in accordance with EU regulations, but they do not need to pay for the time being. The payment will not start until the formal implementation in 2026. During the transition period, EU companies that produce similar products covered by CBAM will still enjoy free quotas, but from 2026 to 2035, the EU will reduce the free quotas by 10% year by year until it reaches zero. After the end of the transition period, the EU will also consider whether to extend the scope of application of CBAM based on the assessment results.

Controversy over the carbon border adjustment mechanism continues in the EU


  In the EU’s view, the introduction of CBAM is a two-pronged strategy to combat climate change while maintaining economic competitiveness. However, relevant European industries did not applaud the imposition of "carbon tariffs" because CBAM applies to similar imported goods. , And free quotas will also be gradually cancelled, which makes relevant industries worry that the EU's carbon prices will continue to rise in the future, resulting in additional costs. At present, the EU has the world's earliest and largest carbon trading market, and its carbon price has climbed to a historical high of 58 euros per ton, and the gap in emission reduction costs between countries that have not implemented carbon pricing has been widening. Although the collection of CBAM will enable similar industries within and outside the EU to compete on the same starting line, European companies do not appreciate this and hope that the EU will formulate an export tax rebate plan to enhance their competitiveness. According to the calculations of the impact assessment report published by the European Commission, after the introduction of CBAM and other emission reduction measures, the GDP of the 27 EU countries will shrink by 0.22% to 0.23% by 2030, and the imports of the 27 EU countries will also decrease, and at the same time, it will be given to the member states. And the company brings certain compliance costs.

  Think tanks such as the European Brugel Institute (Brugel) and the European Reform Center also question the necessity and effectiveness of implementing CBAM. They pointed out that before the EU launched this mechanism, no country or supranational entity extended its internal carbon pricing mechanism to overseas, because the effective tradable carbon price is generally low among the various existing carbon pricing mechanisms. Even in the EU, the most mature carbon trading market, due to the existence of free allowances, the effective carbon price paid by steel, chemical, cement and other companies is basically zero, so the CBAM is totally unnecessary. More importantly, for those countries that have not implemented carbon pricing, the levy of CBAM may be regarded as discrimination against similar products. If the levied price is higher than the tariff ceiling agreed by the EU and a third country, it may violate WTO rules.

Or intensify the unfairness of international trade and intensify trade frictions


  In 2012, the European Union tried to impose carbon tariffs on the aviation industry and drew opposition from various countries. Today, after the official appearance of CBAM, major economies and international organizations in the world still criticize the EU's move.

  First of all, the actual effect of CBAM in mitigating climate change is limited, but it will magnify the unfairness in international trade. On the same day that the EU launched CBAM, a report issued by the United Nations Trade and Development Organization pointed out that CBAM can only reduce global carbon emissions by 0.1%, but it may change the existing international trade model and be more conducive to adopting lower carbon emission production methods. Developed countries. The report estimates that if CBAM is levied at a carbon price of US$44 per ton, the EU’s carbon leakage will drop from 13.3% to 5.2%, but the export of high-emission industries in developing countries will be reduced by 1.4% and their revenue will be reduced by US$5.9 billion. , While the income of developed countries will increase by 2.5 billion US dollars.

  Second, the EU has not clarified how CBAM will embody "common but differentiated responsibilities." The "Paris Agreement" expressly stipulates that its implementation "should reflect the principles of fairness and common but differentiated responsibilities and respective capabilities." While developing countries take the lead in reducing emissions, they should provide support to developing countries. Although the European Parliament has emphasized in the CBAM resolution that the least developed countries and small island developing States should be given special treatment, the European Commission has not made a clear commitment in the formal provisions of CBAM, but only mentioned in the preamble. And "The EU stands ready to cooperate with low-income and middle-income countries to achieve the decarbonization of their manufacturing. In addition, the EU should provide necessary technical assistance to less-developed countries."

  Third, CBAM may intensify friction between the EU and its major trading partners. Although the European Commission has repeatedly stated that CBAM is an environmental policy tool rather than tariffs, the outside world generally regards it as a trade protection measure, and the EU’s main trading partners will be affected to varying degrees. According to a report by the European Reform Center, Russia, Turkey, China, the United Kingdom and Ukraine will be the five most affected countries. A few days ago, Russian officials have publicly criticized CBAM as "extremely unpleasant" and calculated that it may lose 7.6 billion U.S. dollars due to this. Australian Trade Minister Dan Tehan also criticized this as a "new form of protectionism" that undermined global free trade and affected the country's exports and employment. Following the example of the European Union, the US Democrats have introduced a similar "polluter import fee" in the Senate. They plan to impose carbon tariffs from 2024 and are trying to use the "budget coordination process" to force them through. The Biden administration has not abolished the Trump administration’s additional steel and aluminum tariffs on the EU, and the “carbon tariffs” will require the two parties to make more complex profit calculations when resolving trade disputes. In addition, the just-concluded G20 Environment Ministers' Meeting failed to reach a consensus on the elimination of coal subsidies. It is foreseeable that the EU's CBAM will find it difficult to get more support in the G20 in the near future.

  Although the EU has made elaborate policy design for the implementation of CBAM, limited to a few industries and reserved a transition period so that the EU can adapt to its complicated expropriation methods inside and outside the EU, it has not reduced the criticisms and doubts caused by this. Whether CBAM can avoid repeating the mistakes of 2012 is still awaiting the hard game between the European Commission, member states and external trading partners.


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