A Further Step to the EU Carbon Tariff

On the afternoon of June 22, the European Commission voted to construct the first regulation on the Carbon Boundary Adjustment Mechanism (CBAM) in the worldwide range. This event marks that the European Commission (on July 15, 2021), the Council of the European Union (on March 15, 2022), and the European Parliament (on June 22, 2022) have released their own versions of the CBAM regulations.

The construction of official regulation on carbon tariffs is around the corner and the European Parliament has made preparations to negotiate with member states. After the agreement is reached through the negotiation of the European Commission, the Council of the European Union and the European Parliament, the legislation of carbon tariffs will be completed.

01 Updates to the EU Carbon Tariff

As to the collection of carbon tariffs, the European Parliament has made subtle adjustments to the collection industry, time, scope, and EU-ETS free allowances. Here are the main differences of three versions of the CBAM regulations:

Main contents comparisons

Contents	CBAM (EC)	CBAM (ENVI)	CBAM (EP)
Involved Industry	Electricity, iron and steel, cement, aluminum, fertilizers	Electricity, iron and steel, cement, aluminum, fertilizers, oil refinery, hydrogen production, organic chemical, polymer	Electricity, iron and steel, cement, aluminum, fertilizers, organic chemical, plastic, hydrogen, ammonia
Time	2026	2025	2027
Scope	Direct emission	Direct and indirect emission	Direct and indirect emission
Free allowances for EU-ETS	Phasing out by 2035	Phasing out by 2030	Phasing out by 2032

It is evident that the European Parliament has modified the radical proposal by the Environment, Public Health and Food Safety (ENVI) in terms of the transitional period, which postpones its implementation time, retards the progress of phasing out free allowances granted to EU industries under the EU-ETS and releases an official proposal on phasing out the free allowances. According to the official proposal, the free allowances will be gradually reduced in the following steps: 100% in 2023-2026; 93% in 2027; 84% in 2028; 69% in 2029; 50% in 2030; 25% in 2031; and phasing out in 2032. The CBAM will be adopted to provide services to all sectors in EU-ETS at that time.

02 Status of China-EU Trade

According to the report published by the Eurostat on the 23rd EU-China summit hold on April 1, 2022, China remains the largest partner for EU imports of goods. In 2021, the volume of EU imports from China reached €472 billion with a year-to-year growth of 37%, accounting for about 22% of the total imports of the EU. The exports are concentrated in mechanical and electrical products (56% of the EU imports in this category), other manufactured goods (35%) and chemicals (7%).

Between 2011 and 2021, EU imports and exports to China are on an upward trend and the trade deficit with China also keeps increasing.

03 The Impact of CBAM on China Export to the EU

According to the statistics released by the Central Administration of Customs of the PRC, the export volume of China to the EU reached 3,348.3 billion CNY, accounting for 15.41% of the total export in 2021. Among all international trade commodities arranged in 99 chapters and 22 categories, commodities that have a large proportion rank in subsequent: mechanical and electrical products (accounting for 43.00%); raw materials and products of textile (9.06%); miscellaneous products (7.87%); base metal (steel and aluminum) and their products (7.86%); products in the chemical industry and relevant industries (6.35%); vehicles, aircraft, ships and transportation equipment (5.17%); plastics, rubbers and their products (4.82%). Although the top three are not included in the drafted range of carbon tariffs, products under key supervision of CBAM are included such as steel, aluminum, organic chemicals, fertilizers, ceramics, glass, paper, plastics, etc.

The Exclusive Report on CBAM and Its Impact on Energy-intensive Commodities in China made by the CITIC Futures suggested that CBAM has a relatively limited influence on China Export to the EU. The volume of four major energy-intensive industries, including iron and steel, aluminum, fertilizer, and cement industries, only accounts for 1.33% of the total volume of China's exports to the EU in 2020. However, the export volumes of these four industries to the EU accounted for 11.25%, 5.55%, 1.02%, and 0.07% respectively of the export volume of this industry. A conclusion can be made from these figures that iron and steel, and aluminum industries have been greatly affected.

The CITIC Futures also unveiled that the carbon tariffs of these four industries respectively account for 17%, 20%, 17%, 31% of their export volumes with a carbon price of € 80/ton, which could cause fierce competitiveness to carbon-intensive industries.

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