The Export Costs Of Steel And Aluminum Industries May Increase Significantly. China Clearly Opposes The EU Carbon Boundary Adjustment Mechanism

"The carbon border regulation mechanism is essentially a unilateral measure, which extends the climate issue to the trade field without principle. It violates the WTO rules, impacts the free and open multilateral trading system, seriously damages the mutual trust and economic growth prospects of the international community, and does not conform to the principles and requirements of the United Nations Framework Convention on climate change and its Paris Agreement, In particular, the principle of common but differentiated responsibilities, as well as the institutional arrangement of "bottom-up" countries' independent decision-making contributions, will contribute to the wind of unilateralism and protectionism, and will greatly harm the enthusiasm and ability of all parties to deal with climate change. "

At the regular press conference of the Ministry of ecology and environment in July, Liu Youbin, spokesman of the Ministry of ecology and environment, made a statement on the carbon border adjustment mechanism (CBAM) announced by the EU in mid July, which is an important part of its climate policy reform plan.

The carbon boundary adjustment mechanism is planned to be launched in 2023. From 2026, producers of aluminum, cement, steel, fertilizer and electricity exported to the European market will have to pay the same price as European producers for carbon emissions in their production process in accordance with EU law. According to the current proposal of the European Commission, the free quota under the mechanism will be fully reduced by 2035. Details of the relevant draft were published in the "fit for 55 package" issued by the European Commission on July 14.

This mechanism was formally proposed by the European Commission at the end of 2019. Once it was proposed, China, the United States, Russia, Australia, Brazil, South Africa, India and other WTO members expressed serious concerns respectively. A number of experts told the 21st century economic reporter that the carbon boundary adjustment mechanism will not have a significant impact on China EU trade in the short term, but the future impact will depend on the specific contents officially promulgated.

Green international trade barrier risk

According to the report released by the United Nations Conference on Trade and development, if the carbon price of the EU carbon boundary adjustment mechanism is $44 per ton, the income of developed countries will increase by $2.5 billion, while that of developing countries will be reduced by $5.9 billion.

In fact, according to the proposal of the European Commission, the carbon boundary adjustment mechanism will be gradually launched in three stages. The first pilot phase is 2023-2025, during which EU importers are only required to report embedded CO2 emissions from their imports at no charge.

In the second stage, from 2026 to 2034, importers will have to pay for their embedded carbon dioxide emissions, that is, the carbon price under the EU emissions trading mechanism. But this only pays for the share of carbon emissions not covered by the free quota for EU producers.

The European Commission proposes to reduce the free quota by 10% every year. Dominien vangenechten, a policy adviser on industrial transformation and industrial decarbonization of E3G, told 21st century economic news that this means that importers must pay for the corresponding fees under the mechanism, and the share of emissions obtained will increase year by year until the free quota is completely abolished by 2035, At that time, the carbon boundary adjustment mechanism will be applicable to 100% of the embedded emissions of imported goods, which is also the third stage of the carbon boundary adjustment mechanism.

Pierre leturcq, a European policy analyst at the Jacques Delors Institute, a European climate think tank, told the 21st century economic report that the carbon boundary adjustment mechanism and the existing European carbon market (EU ETS) are indispensable to each other. If CBAM wants to implement it, it is not allowed to increase the free quota on the basis of the existing free quota. Because according to WTO rules, CBAM will be regarded as "double relief" and "illegal subsidy".

Therefore, the possible import and export costs under the carbon boundary adjustment mechanism are different from the concept of "carbon tariff".

Liu Zhe, director of the research, data and innovation department (RDI) of the Beijing Representative Office of the World Resources Institute, said in an interview with the 21st century economic report that at present, the CBAM mechanism has not involved in taxes or tariffs, because in the whole process of policy formulation, CBAM pays attention not to violate WTO rules, especially articles 1, 3 and 20, That is, the principle of universal most favored nation treatment, the principle of national treatment and the general exception principle of providing "exemption" channel for economic security of Member States.

According to Liu Zhe, CBAM is currently designed according to the way of quota trading, which is a means of environmental regulation within the jurisdiction of the European Union. Later, the policy implications beyond the jurisdiction of the EU may be produced by gradually tightening CBAM. At present, the relationship between CBAM and EU ETS has not been clearly defined at the policy level, so the interaction between CBAM and EU ETS, such as whether the quotas under the two mechanisms can form certain offsets or joint performance, is not known at this stage. The proposal proposed by EU on July 14 is only the starting point of its legislative process, and the process of CBAM needs further observation.

In addition to the WTO rules, CBAM should also consider the effects of climate change on policy-making. Sam van den plas, policy director of carbon market watch, believes that the current EU proposal to allow CBAM to overlap with free quotas before 2035, rather than as an alternative to free emission quotas, will open the door to free emission quotas for key industries after 2030“ We believe that such an exemption would completely free the heavily polluted industrial sector from its predicament and send a very negative signal internationally. "

Due to the current excess of free quota has a certain adverse effect on promoting emission reduction, the carbon market mechanism has failed to achieve the effect of encouraging European producers to invest in low-carbon emission reduction technologies. As an introduction mechanism to combat carbon leakage in the context of rising EU carbon prices, CBAM can only be introduced when the free quota of the sectors covered is reduced.

Dimitri de Boer, the chief representative of the European Environmental Protection Association's Beijing office and China project leader, further explained: "this is because only when the free quota is continuously reduced will the EU producers be at a disadvantage compared with other producers and have to pay a higher carbon cost, thus resulting in the risk of" carbon leakage ". So simply put, if we want to introduce CBAM mechanism, the free quota reduction of carbon market will be put on the agenda. Otherwise, it will be inconsistent with the provisions of the WTO. "

"The European Commission's proposal appears to be prudent, consensus oriented and focused on avoiding discrimination and is therefore strong in terms of WTO legitimacy. However, the EU still needs to solve some problems related to the destination of income, the treatment of underdeveloped countries, and the recognition of greenhouse gas emission reduction systems in other countries and regions. On the last point, we call for the establishment of a multilateral forum on comparability of emission reduction policies, which could be hosted by the WTO Committee on Trade and environment. " Pierre explained.

China's steel and aluminum industries bear the brunt

Pierre told 21st century economic report that the two major industries affected by CBAM in China are steel and aluminum.

According to the research and analysis report of "carbon border regulation mechanism: progress and prospect" jointly released by energy foundation, sandbag and E3G, assuming that the EU's carbon border regulation mechanism is fully in force, based on the scenario of EU's complete abolition of free quota in 2035 and collection of 60 euro per ton of carbon dioxide, taking the Sino EU trade data in 2019 as an example, the trade volume of steel products exported from China to the EU is about 4.7 billion euro, About 265 million euro carbon border regulation tax will be levied. The carbon border adjustment mechanism will increase the steel cost of China to the EU by about 25%, and the aluminum cost by about 9%.

From the perspective of CBAM's impact on international trade flows, Pierre believes that China will not be the country most affected by the CBAM proposal, and the countries most affected are Turkey, the United Kingdom and Ukraine. But both steel and aluminum will continue to receive free quotas in Europe until 2035. As a result, the adjustment in the first few years was relatively small. There are two main reasons why it may even remain marginal after 2030.

First of all, because steel and aluminum are also covered by China's carbon market in the future. Chinese producers will pay for their carbon emissions in the production process, even if there is a big gap between China's carbon price and the EU's carbon price. At present, China's carbon price is about 50 yuan / ton, while that of EU is about 50 euro / ton.

Second, China is currently the world's largest producer of steel and aluminum, and state-owned enterprises occupy a dominant position in the steel and aluminum markets, and have begun considerable scale of decarbonization investment. For example, Chinese aluminum producers also have considerable capacity in the production of decarbonized aluminum by hydropower; Baosteel, the world's largest steelmaker, has also announced its carbon peak in 2023 and carbon neutral in 2050.

Liu zhe believes that at present, China's steel, aluminum and other products exported to the EU are subject to the environmental protection standards of EU imported products, and should do a good job in environmental protection compliance. The carbon content per unit product should be at a relatively low level in China, and may even reach or exceed the level of the European Union. In that case, it is possible to make profits under the CBAM mechanism.

It is worth noting that the current package of EU climate policy reform has triggered heated discussions within the EU. Liu zhe said that the EU needs to balance the protection of the competitiveness of its enterprises and the protection of its consumers' rights and interests. Therefore, the price implication of EU CBAM should tend to be neutral, and more international cooperation may be considered in the next stage. A large number of policy and institutional innovations are needed to change the global governance pattern.

"At present, countries are committed to controlling the temperature rise by about 2.3-2.4 degrees, and countries need to discuss how to bridge the gap between controlling global temperature rise by 2 degrees and less than 1.5 degrees. In this process, Chinese enterprises can give full play to their own advantages to demonstrate and lead and strive for a win-win situation with diversity. " Liu zhe said.