General

On May 15th, the EU Carbon Border Regulation Mechanism Act, also known as the Carbon Tariff (CBAM) Act, officially came into effect. In June 2022, multiple US senators also proposed the Clean Competition Act (CCA) draft and entered the Senate review process. A series of actions by developed economies such as Europe and America indicate that "carbon tariffs" may become an important factor affecting international trade in the future. In this context, how should Chinese international trade export enterprises view and respond?

For Chinese international trade and export enterprises, this is both an opportunity and a challenge. "The latest research report released by Su Meng, a partner at Jindu Law Firm, and Xi Sodi, a senior lawyer, believes that the opportunity lies in China's reliance on years of green technology development, accumulating a lot of technology in the new energy field, and also being in a leading position internationally. The challenge is that the "carbon tariffs" of developed economies may have higher requirements for monitoring, data quality, and third-party evaluation in product production, which not only imposes new requirements on Chinese export enterprises, but also on third-party evaluation and regulatory agencies.

Exploring coping strategies during the transition period

On April 18th, the European Parliament passed the Carbon Border Regulation Mechanism (CBAM) bill. On April 25th, the European Council officially approved the CBAM bill. At this point, the bill has completed the decision-making process for the entire EU legislation and will take effect 20 days after being published in the Official Journal of the European Union.

The EU Carbon Trading System (EU ETS) reform bill was also passed along with CBAM in the aforementioned legislative process. The bill proposes to gradually abolish free carbon quotas while imposing a fee on implicit carbon emissions in imported goods. In addition to the CBAM of the European Union, the United States is also implementing legislation related to carbon tariffs. However, the Clean Competition Act has not yet passed a parliamentary vote.

If Chinese export enterprises do not take effective measures to respond, the most obvious adverse effect is that they will increase the cost of their exported products and reduce the price advantage of their exported products. Lawyer Jindu pointed out that both the EU's "carbon tariffs" and the still in its infancy CCA bill have left a window for Chinese export enterprises, Enable them to better understand and familiarize themselves with the various systems under various bills and find ways to respond to future changes in the international carbon market and international trade.

According to Lawyer Jindu, the CBAM Act will enter a transitional period in October this year. Imported goods need to declare their implied carbon emissions according to the CBAM Act, but there is no actual payment required yet; Starting from 2026, the EU's free carbon quotas will be gradually abolished and "carbon tariffs" will be imposed on imported goods. At present, there are still some general or programmatic provisions in the CBAM bill, which may be refined or adjusted based on the implementation of the transition period. In the process of adjusting and improving CBAM, Chinese international trade export enterprises not only need to understand the specific system of CBAM, but also need to understand the basic logical core of CBAM system, in order to find ways to remain unchanged and adapt to changes

Exporting to the European Union requires purchasing a "carbon tariff" certificate

In addition to helping the EU achieve its 2030 climate target, CBAM's more direct goal is to focus on addressing carbon leaks. Carbon leakage refers to the increase in total emissions caused by companies transferring production to other countries or regions with more lenient greenhouse gas emission restrictions due to stricter climate policies adopted by a certain country or region.

The core logic of CBAM is to reduce the cost of carbon emissions for EU enterprises by transferring production to other countries and regions around the world, and to reattach them to corporate costs by collecting 'carbon tariffs', flattening the carbon costs between the EU and other countries and regions. Lawyer Kindu analyzed that the EU is a global leader in the low-carbon field, both in terms of mandatory emission reduction requirements and the development level of the carbon market, This also means that the 'carbon cost' of EU enterprises producing products is relatively high. In the era of globalization and collaboration, market patterns have led companies to constantly search for "depressions" in carbon costs. Many EU companies seek to transfer their production to other countries and regions with lower carbon costs and export their products back to the EU, thereby reducing their carbon costs and enhancing their market competitiveness.

Therefore, for each ton of carbon emissions in the production process of products imported into the European Union, a CBAM certificate needs to be purchased upon entry into the EU customs, that is, 1 CBAM certificate=1 ton of implied carbon emissions. The CBAM voucher price is calculated by the European Commission based on the average closing price of carbon quotas in the EU ETS on the auction platform. The total CBAM price that the enterprise should pay is equal to the number of CBAM vouchers (implicit carbon emissions) × CBAM voucher price.

The total CBAM price that the enterprise should pay calculated by the formula is not the final amount that the enterprise should pay. "Lawyer Jindu reminds the export enterprise that there are still some possible deductions for the enterprise. From the perspective of preventing carbon leakage, CBAM's tax target is the carbon costs saved by enterprises transferring production to countries and regions outside the European Union. Therefore, CBAM also needs to further adjust the carbon costs already paid by different enterprises in the product production process. The total CBAM price that enterprises should pay will also be adjusted based on two factors: first, the free carbon quota that similar industries in the EU can obtain, and second, the carbon price that products imported into the EU have already paid in their production countries.

If Chinese export enterprises can prove in a way recognized by the European Union that they have already paid carbon costs in China, they may reduce the total amount of CBAM they may pay based on this fact. Lawyer Jindu emphasized that CBAM's default premise in calculating taxable prices is that the carbon emissions generated by the imported product in its export country are higher than the carbon quotas granted by the European Union to similar enterprises for free, And the carbon cost it has to pay in the exporting country is lower than the carbon cost that similar industries have to pay for production in the EU, and taxes are levied on these two differences.