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EU CBAM: Impacts on Foreign Producers including China

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On March 15, 2022, the Council of the EU reached an agreement (general approach) on the Carbon Border Adjustment Mechanism (CBAM) regulation, which is one of the key elements of the European Union’s ‘Fit for 55’ package.

The European Parliament adopted in March 2021 a resolution advocating for the introduction of a WTO-compatible carbon border adjustment mechanism. The European Commission has proposed replacing free allowances (similar to Carbon Emission Allowances in China) by a new Carbon Border Adjustment Mechanism under which importers would have to buy carbon certificates corresponding to the price paid by European manufacturers. Foreign producers would be exempted from the levy only if they can show they paid a similar carbon price at home. And importers would then pay the difference.

The long awaited Proposal for an EU Carbon Border Adjustment Mechanisms (CBAMs) was published by the European Commission on July 14 2021, alongside 12 other legislative proposals in the "Fit for 55" package. The CBAMs will commence in 2023 and apply to the importation of electricity and certain goods into the EU Customs Union. The goods covered are aluminium, cement, fertilisers, iron and steel. The CBAM is expecting to be fully implemented in 2026.

The industry specific proposal on the new Batteries Regulation demonstrated the specific objectives of reducing environmental, climate and social impacts throughout all stages of the battery life cycle, which requires economic operators placing industrial or electric vehicle batteries (including incorporated in vehicles) larger than 2 kWh on the EU market to establish supply chain due diligence policies. It focusses on those raw materials of which a significant amount of the global production goes into battery manufacturing and that may pose social or environmental adverse impacts. The economic operators must submit compliance documentation for third-party verification by notified bodies and are subject to checks by the national market surveillance authorities.

Chinese industry as one of the key trading partners and foreign producers has expressed concerns about the EU Commission’s plans on four issues in particular:

1. What are the potential implication of trading in the European market when CBAM rolls out?

1.1 The timeline of CBAM: In the initial three-year period of the scheme, the transitional period from 2023 to 2025, the importer will have a requirement to disclose the embedded emissions in the goods but, there will be no payment required to be made in respect of the CBAM.

1.2 Under the Commission’s proposal, CBAM will be fully phased in as of 2026 for a period of ten years, by which time EU industries covered by the scheme will stop receiving ETS free allowances on the EU carbon market, a move aimed at ensuring the system is compatible with World Trade Organisation rules. However, the timeline of ETS free allowances phase-out for domestic (EU) producers remain debatable. For example, the European Parliament’s environment committee, said in late 2021 that the CBAM should be introduced more quickly than originally proposed and should cover a wider range of products and ETS free allowances should be phased out by 2028 rather than 2035.

1.3 Once started, it is anticipated that rising cost from border charge will depend on embedded emissions of the trading products and the weekly average closing carbon price under the EU Emissions Trading Scheme that referred by the CBAM certificates.

1.4 Once fully implemented the scheme is based on actual embedded emissions within the goods to be imported, where such emissions have been calculated and verified by a duly authorised verifier. In the absence of sufficient information and verification default emissions for each type of good can be used, based on the worst 10% of emitters in the EU who produce similar goods.

Case Study: The implications of CBAM among steel makers in China

Steel Product

Emission intensity embedded in trading products is the key to determine the cost of CBAM in the future besides carbon prices movement. Figure 2 adapted from the EU Commission Stuff Working Document: Towards Competitive and Clean European Steel 2021 shows CO2 emissions per tonne of steel made in China, the EU, the US, and Mexico by different route process, namely Blast furnace route and EAF route. '[1] The average CO2 emissions per tonne of steel imported from China is ~2.3 for blast furnace route, and ~1.6 for EAF (Electric Arc Furnace) route.

In 2019, Baosteel produced 1.94 tCO2e per ton of raw steel calculated based on the “Accounting Methods and Reporting Guidelines for Greenhouse Gas Emissions of Chinese Steel Producers (on trial)” audited by SGS. [2] The company is targeting its total carbon emissions of its four production bases to reach a peak level in 2023, while the company will achieve the technical ability to reduce carbon emissions by 2025 and will cut them by 30 percent by 2035. Baosteel said it will strive for carbon neutrality by 2050. The company has defined the basic paths of carbon emissions reduction as the transformation of the iron and steel production process, the adjustment and upgrading of its energy structure, acceleration of research and development of a new low-carbon emissions process, and implementation of technological innovation to reduce carbon emissions. China also sets national ambitious for upgrading to electric furnace steel production to reach over 15% by 2025.

2. How to minimise export burdens when CBAM rolls out?

3. How to verify embedded carbon emissions of exported products?

4. The payoff between lower carbon production and pay the carbon price in EU ETS

[1] The Electric Arc Furnace: or EAF, is an even more modern method of steel production. While the common inputs for BOF (basic oxygen steel- making furnaces) steelmaking are iron ore and coal, the EAF furnace operates using scrap steel – steel already produced and ready to be recycled. Blast Furnace route (BF) pig iron is extracted from iron ore using coke.

[2] Baosteel Sustainability Report:

[3] “Carbon Club” refers to a group of nations that have tough climate regulations and that allow CBAM-free trade between them. Imports into the club from the rest of the world would still pay a border charge.

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