Metallurgy / Chemicals / Rubber & Plastics

According to the report of Huacheng Import and Export Data Observation, on December 13, 2022, the European Council announced that the European Council and the European Parliament had reached a conditional interim agreement on the carbon border adjustment mechanism (CBAM), which was to be confirmed by the Council's Permanent Representative Committee and the Parliament.

In October 2023, CBAM will be officially implemented, which is 10 months later than the previously determined implementation time. The EU carbon tariff proposal was approved by the European Parliament in June 2022 and was originally scheduled to be implemented on January 1, 2023. The timetable released this time shows that the EU carbon tariff will be formally and fully levied from 2027 to 2026, which is a transitional period. According to the relevant agreement, the EU carbon tariff will cover steel, aluminum, cement, fertilizer, electricity and hydrogen energy industries.

Lin Xiaodong, partner of KPMG's China Carbon Management and EU Green New Deal, said that considering China's industrial structure and progress in carbon emissions, it is not difficult to foresee that Chinese enterprises will face major challenges: under the EU's carbon border regulation mechanism, Chinese importers will have the obligation to comply and even pay taxes, and it is impossible to stay out.

Not conducive to the export of heavy industrial countries with high carbon emissions

The European Council said that the initial carbon tariff was only applicable to the reporting obligation and aimed at collecting data. However, with the gradual implementation of the policy, subsequent companies need to pay for their carbon emissions when importing products, and the price is linked to the European Union's carbon emissions trading system (ETS). ETS is the main policy tool for emission reduction in the European Union. It requires power plants and industrial enterprises that emit pollutants to purchase carbon dioxide emission licenses and set caps on emissions.

Before the end of the EU carbon tariff transition period, the European Commission will consider including other commodities with carbon leakage risk, including organic chemicals and polymers, with the goal of including all commodities covered by ETS by 2030. According to some estimates, assuming a carbon tax of US $100 per ton is imposed, China's exports to the EU will be subject to a carbon border regulation tax of up to US $35 billion per year, accounting for 7.7% of China's total exports to the EU.

From the perspective of the content of the provisional agreement of the EU's carbon border regulation mechanism, CBAM aims to balance the carbon emission costs of products within the EU and imported products, that is, enterprises importing products to the EU must purchase CBAM quotas to pay the difference between the carbon price of the producing country and the carbon quota price under the EU ETS.

Compared with the first version of the proposal proposed by the European Commission, the interim agreement reached this time has the following key progress: First, CBAM will be applied from October 1, 2023, and importers have only reporting obligations in the two-year transition period. In order to avoid double protection of the EU industry from the EU ETS free quota, the length of the transition period and the CBAM quota purchase arrangement will be linked to the gradual reduction of the free quota under the ETS. Second, the application scope of CBAM will be extended to cover hydrogen products and some downstream products. CBAM will cover steel, cement, aluminum, fertilizer and electricity as proposed by the Commission, and expand to hydrogen, indirect emissions under specific conditions, some precursors and some downstream products, such as steel products such as screws and bolts.

Most of the work of CBAM will be handled by the European Commission. The Commission will conduct a comprehensive review of CBAM at the end of 2027, including the assessment of the progress made in the international climate change negotiations and the impact on developing and underdeveloped countries.

As a mechanism to deal with climate change, CBAM is not only a pure tax system, but a mechanism of tax and incentives. From the perspective of the European Union, CBAM is a major incentive mechanism for those enterprises that really carry out energy conservation and emission reduction, because enterprises can use this tax system to form price advantages in the market. With the withdrawal of free quota and the rise of carbon price, this advantage will become more obvious in the medium and long term.

However, for China and the developing countries, this view is not fair. After all, many enterprises in China have not established a mature greenhouse gas management system or conducted effective emission reduction; The cost of completing this work, together with the direct cost of purchasing CBAM quota in the medium and short term, is beyond the reach of Chinese enterprises.

"The impact of CBAM is far beyond the EU's system itself. As a border mechanism to regulate international trade, other countries and regions are likely to follow the EU's steps and establish their own carbon tariff mechanism. In fact, we have seen some developed countries and regions put carbon border regulation mechanism or similar carbon tariff mechanism on the agenda. Even if China has established an equivalent carbon border regulation mechanism, it will still be in the country We are at a disadvantage in international trade. " Liang Yinle, the partner in charge of KPMG's supply chain in China, said.

Liang Yinle believes that, unlike the tariff system defined by "human", the carbon tariff system is based on the objective measurement of greenhouse gas emissions (and emissions reduction); The progress of China and other developing countries and their enterprises in carbon emission management and emission reduction determines their inferior position. Unless there is intervention from other systems, such differences between advantages and disadvantages will even exist for a long time and even expand day by day. China and other developing countries may have to protect their industries through other systems and means, and this process may have an impact on the existing international trade order (such as WTO) and accelerate the process of "deglobalization". Huacheng Import and Export Data Observation Report.

Carrying the burden of high carbon

The European Parliament said that by 2027, a separate new carbon emissions trading system (ETSII) would be established for road transport and construction fuel. According to the requirements of the parliament, fuels from other industries such as manufacturing will also be covered. If the energy price is abnormally high, ETS II may be postponed to 2028. In addition, a new price stabilization mechanism will be established to ensure that if the subsidy price in ETS II exceeds 45 euros, an additional 20 million subsidies will be issued.

The European Parliament also said that it would establish a social climate fund to support vulnerable households, microenterprises and transport users to cope with the price impact of building emissions trading systems, road transport and other sectors of fuel emissions trading systems. Pascal Canfin, the French member of the Parliamentary Environment Committee, said that the provisional agreement now needs the confirmation of EU member states and the European Parliament, which will hold a plenary meeting in January or February 2023.

It is reported that the carbon tariff is part of the EU's "Fit for 55" package, which aims to combat climate change by reducing greenhouse gas emissions by at least 55% from 1990 levels by 2030, and to protect employment and citizens. By 2050, the net emissions will be reduced to zero, achieving carbon neutrality. Huacheng's import and export data observation report.

The EU intends to force developing countries to introduce their green technologies, standards and production equipment by guiding the supply chain from high carbon countries to low carbon countries, and further promote the development of the EU's green industry, thus helping to achieve a virtuous circle in the field of green competition. Under the global production network, the implementation of EU carbon tariffs will further aggravate the imbalance of trade interests between developed countries and developing countries, leading to the risk that developing countries will not only be blocked at the low end of the value chain by developed countries, but also bear the high carbon burden brought by climate trade rules such as carbon tariffs.

Chinese enterprises must have long-term thinking

As the world's largest exporter, China's manufacturing industry is characterized by high carbon emissions at this stage. The EU's carbon border regulation mechanism and other relevant climate policies will inevitably increase the total cost of China's exports and reduce market competitiveness. Enterprises that have not yet established a mature greenhouse gas management system will face greater financial and operational impact in the future.

KPMG suggested that the affected Chinese enterprises should respond as soon as possible to the emerging and increasingly strong relevant climate policies. Through monitoring, reporting and checking greenhouse gas emission data, fully identify the emission reduction risks and opportunities faced by enterprises, assess the baseline situation and set emission reduction targets based on this, and assist in the formulation of subsequent decarbonization strategies. Affected enterprises should establish a complete greenhouse gas management system as soon as possible, including completing the quantification of product baseline, introducing, establishing and improving carbon emission management mechanisms such as MRV, preparing and responding to verification and certification, developing low-carbon/carbon reduction methodologies and projects, scientifically and effectively achieving emission reduction goals, and reducing the impact and impact of global climate-related policies.

Specifically, in order to meet the challenges brought by the EU's carbon border regulation mechanism, enterprises should identify products and suppliers within the scope, including reviewing the supply chain and customs codes. In addition, enterprises should adopt the monitoring, reporting and verification mechanism to analyze and evaluate the product carbon footprint from the perspective of CBAM. It should be noted that the legal systems related to EU ETS/CBAM and greenhouse gas accounting and management are relatively complex and highly technical. Enterprises should select consultants with carbon-related engineering background, EU verification and certification qualification, EU ETS and CDM related experience, and familiar with the legal systems related to EU ETS, CBAM and greenhouse gas accounting and management. Furthermore, enterprises should assess the financial and commercial impact of the policy and consider it as the organization's potential carbon assets and liabilities. Finally, enterprises should identify and analyze the existing emission reduction opportunities in the organization and value chain to cope with the impact and impact of global climate policies including CBAM and the US Inflation Reduction Act.