EU carbon border tax: China’s cooperation will send right climate signal

China is seeking high-level dialogue with the EU on its Carbon Border Adjustment Mechanism even as it strengthens its carbon market
The level of China’s climate ambition sends a very important message to the rest of the world

Gerassimos Thomas

Published: 5:30am, 15 Nov 2023

Why you can trust SCMP

In recent months and years, extreme weather disasters in both China and the European Union have made our citizens acutely aware of climate change’s devastating effects.

As two of the world’s leading economies, implementing bold and decisive carbon mitigation strategies can help us accelerate the fight against this dramatic deterioration and act as a role model for emerging economies.

Carbon pricing is an instrument with proven success. China’s carbon emissions trading scheme (ETS), introduced in 2017, is the world’s largest such scheme in terms of covered emissions and holds sway over 40 per cent of national emissions.

The EU’s pioneering ETS has been in place since 2005, helping to reduce emissions from power and industrial plants by 37 per cent in that time. It has recently been extended to cover an even broader swathe of industrial activities, as well as the aviation and maritime sectors.

But we cannot sit back and watch while EU climate action is undermined by less ambitious policies elsewhere. That’s why we began implementing the groundbreaking EU Carbon Border Adjustment Mechanism (CBAM) last month.

The mechanism has two goals: to prevent the “carbon leakage” that happens when production moves outside the EU to take advantage of lower environmental standards or are replaced by more polluting imports; and, to encourage industry worldwide to embrace greener technologies.

Designed to be compatible with World Trade Organization rules, the mechanism is not about trade protection, but about protecting EU and global climate ambition, as determined at the UN Conference of Parties.

The EU is introducing the CBAM in a logical, gradual and predictable manner. The mechanism started applying in the EU on October 1 and its 2½-year transitional phase will last until the end of 2025. During this period, EU importers of CBAM goods (iron and steel, aluminium, cement and fertilisers, as well as hydrogen and electricity) sourced in non-EU countries will only need to provide certain information on the carbon intensity of their products.

We will ensure the burden on Chinese companies is equivalent to that of EU producers.

The European Commission has provided extensive industry guidance on how the mechanism will work during the transitional phase. We are also engaging with non-EU businesses so they understand their role in supplying EU partners with relevant data on the emissions of greenhouse gases expended during production.

China’s exposure to the CBAM is mostly concentrated in the steel sector, which represents less than 2 per cent of the value of Chinese exports to the EU.

Nevertheless, given China’s status as our second-largest trade partner, we understand China’s strong interest in the new measure and its roll-out. That’s why we welcome China’s invitation to set up an EU-China High-Level Dialogue on CBAM. When designing the mechanism, it’s important that we do so in the fullest transparency.

For my part, it is a privilege to travel to Beijing this week to meet my interlocutors in the Chinese authorities.

Our goal is to increase mutual understanding, look for synergies and simplifications between our systems, see how we can lower any reporting burdens for the Chinese companies concerned, and inform our partners on the European Commission’s work to design the final CBAM scope and methodology from 2026. Feedback from Chinese business and civil society is also important for us.

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In mid-2025, we will draw on the lessons of this period and use the information gathered to refine the mechanism’s scope and the methodologies for calculating embedded emissions before CBAM payments begin in 2026. At that time, importers to the EU will begin buying and surrendering “CBAM certificates” based on the embedded emissions of their imports.

We will also look at the possible extension of the CBAM’s scope to a limited number of additional sectors at risk of carbon leakage which are also covered by the EU emissions trading scheme. The CBAM will never cover more than a small fraction of our trade with China.

China’s plans to extend its ETS to sectors other than energy is a very positive development. Effective carbon prices or taxes already paid in the country of production can be deducted from the CBAM payment, and we will need to work out how any levies paid in China will affect those payments.

Part of our active and transparent outreach to Chinese authorities and businesses, including to EU businesses active in China, is to better understand the country’s carbon pricing reporting system and methodologies so we can most effectively take them into consideration after the end of the CBAM transitional period.

For our part, we encourage China’s plans to further strengthen its ETS, and we note plans to further strengthen carbon pricing in the country. The EU will remain fully engaged in international discussions in this area and look forward to working closely with our international partners in the dedicated Organisation for Economic Cooperation and Development forum on carbon mitigation approaches and the G7 climate club.

Given its global influence and pivotal position as the world’s largest greenhouse gas emitter, the level of China’s climate ambition sends a very important message to the rest of the world. And we can only encourage China to grow that ambition, particularly in the run-up to the COP28 climate change conference at the end of this month.

We all have the same goals when it comes to climate change. And, as important new climate measures like the CBAM take effect, we should maximise international cooperation so we can learn from each other and reap the benefits.

Gerassimos Thomas is director general for taxation and customs union at the European Commission