What do we need to know about EU carbon tariffs?

At about 2:9 p.m. Beijing time on February 7, the EU's revised Emissions Trading System (ETS) and Carbon Border Adjustment Mechanism (CBAM) were voted in favor, and the bill is expected to be officially passed after a full vote of the European Parliament in the second quarter of 00. On October 2023, 2023, the European "carbon tariff" came into effect during the transition phase.

1. 1. What is CBAM (Carbon Border Adjustment Mechanism)?

2. Carbon Border Adjustment Mechanism (CBAM), also known as "carbon tariff", refers to countries or regions that strictly implement carbon emission reduction and require the import (export) of high-carbon products to pay (return) corresponding taxes or carbon quotas.

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4. 2. The purpose and significance of CBAM

CBAM aims to prevent "Carban Leakage", which refers to the fact that a more stringent dual-carbon route in a region will lead to an increase in the carbon cost in the region, forcing companies producing high-carbon products to move to low-carbon cost areas, resulting in industrial transfer. Under the EU's dual carbon roadmap, carbon quotas will be gradually tightened until they are eliminated, and the carbon cost of enterprises will rise accordingly, and the price of high-carbon products will also rise, resulting in the market importing high-carbon products from outside the EU or transferring high-carbon product production lines to low-carbon cost areas outside the EU, which will damage the EU's economy. As a domestic and foreign carbon cost balance mechanism, CBAM will reduce the occurrence of carbon leakage to a certain extent.

1. 3. CBAM development history

1. 4. Products covered by CBAM

CBAM aims to align with ETS scope. With regard to products and industries within the scope of the new rules, CBAM will initially cover some specific products in some of the most carbon-intensive industries: steel, cement, fertilizer, aluminum, electricity and hydrogen, as well as some precursors and downstream products such as screws and bolts and similar items of iron or steel, and indirect emissions under certain conditions will also be regulated in a strictly defined manner. 

5. Implementation Date According to the interim agreement, the transition period from October 2023, 10 to December 1, 2025 is the transition period, and the implementation time of the official "carbon tariff" is linked to the time of free quotas, and free allowances will be abolished by 12.31% by 2026, 2% in 5, 2027% in 5, 2028.10% in 2029, 22.5% in 2030, 48% in 5, 2031.61% in 2032, and 73% in 5. 2033% cancellation in 86.

1. 6. Responsibilities and obligations faced by enterprises

The CBAM for the transition period basically only applies to reporting obligations for the purpose of collecting data, and companies will enforce data declaration.

1. 7. CBAM settlement method

CBAM clearance obligations are borne by the importer. Importers must register with the competent CBAM authorities in their EU member states and become "registered importers" after approval before importing relevant products. Each EU member state has a separate CBAM registration system and database, and each registered importer has a separate account in its own CBAM system. CBAM adopts an electronic voucher (CBAM certificate) system, and each CBAM certificate corresponds to an imported commodity with a carbon emission of one ton. For each tonne of carbon emissions contained in an imported product, importers must purchase a CBAM certificate from the CBAM authority of the EU member state where they are located, and each CBAM certificate corresponds to an individual number. The quantity, price and date of purchase of CBAM certificates by registered importers are recorded in their CBAM system accounts.

1. 8. What is the scope of carbon emissions accounted for by the EU under CBAM?

According to the EU draft, the CBAM mechanism mainly covers three types of carbon emissions:Scope 1: Direct emissions, that is, greenhouse gas emissions directly generated by the enterprise itself in the production and manufacturing process, such as carbon dioxide emissions generated during the production process, emissions of fuels used for production, etc.;Scope 2: Indirect emissions, that is, carbon emissions from purchased electricity, heating, steam, etc., because carbon emissions do not occur within the scope of the enterprise, so they are indirect carbon emissions;Scope 3: Full carbon footprint, including all greenhouse gas emissions related to the extraction of raw materials, all emissions from materials and components required to produce the product, emissions from the production process, including the provision of necessary energy, emissions from the transportation of raw materials and intermediate products to the production process site and product transportation to consumers, emissions caused by the use phase, and emissions related to the disposal/end-of-life phase of the product. At present, the EU only specifies that companies report direct and indirect emissions during the transition period.

1. 9. How is carbon emissions calculated?

The EU distinguishes imported products into simple and complex products and assigns different calculation formulas, as follows: Simple Goods: Products that require only materials and fuels with zero Specific Embedded Emissions in the manufacturing process. For example, products that are processed directly from materials found in nature. The carbon emissions of a simple product are the total amount of direct emissions in its production process. Complex Goods: Products that need to be manufactured with simple products in the manufacturing process, that is, reprocessed using simple products. Most of the common products are complex products. The carbon emissions of complex products are the direct carbon emissions of the production process plus the direct emissions implied by the simple products used. When calculating the carbon emissions of imported products, if the actual emissions cannot be determined, they are calculated sequentially in the following ways:(1) use default values based on the average emission intensity of exporting countries, adjusted upwards based on an "amplification factor";(2) If reliable data from the exporting country is not available, the average emission intensity of the 10% facility that is set as the worst performing <>% in the EU is used as the default value.(1) Free emission credits obtained by enterprises with similar products in the EU can be deducted, which is equivalent to tax base adjustment.(2) Deductible for the amount corresponding to the carbon price already paid by the imported product in the country of origin, which is equivalent to the tax deduction

1. 10. How is the carbon tax calculated?

1. CBAM fee = CBAM certificate price x carbon emissions = (EU carbon trading price - carbon price in the country of origin of the product) x (product carbon emission - free allowance for similar products in the EU)11.EU Does CBAM take into account various standard offset mechanisms such as VCS, CCER? The EU CBAM does not take into account the above-mentioned offset mechanism. EU CBAM is a "nominal carbon market", enterprises purchase CBAM certificates from government authorities according to their connotative carbon emissions, and the price of CBAM certificates is related to the EU quota price and quota free allocation ratio. In terms of indirect impact, the use of offset mechanisms will cause a decrease in carbon prices, but the impact on CBAM certificate prices is small.

   1. 12. If the products of Chinese enterprises have reached carbon neutrality in China, should they bear the cost of EU CBAM?

   Whether the EU recognizes that the products of Chinese enterprises have reached "carbon neutrality" depends on what methods and indicators the EU chooses to judge, and which standards are related.