On August 17th, local time, the European Commission officially released the detailed implementation rules for the European Union's Carbon Border Adjustment Mechanism (CBAM) transition period. These rules will come into effect from October 1st of this year and will continue until the end of 2025. The official implementation will begin in 2026, and it will be fully enforced by 2034. With this, the world's first carbon import tax is about to be introduced, and CBAM becomes the world's first mechanism to address global climate change in the form of a carbon tariff.

 Specific requirements

        The regulations stipulate that during the initial transition phase, importers are only required to submit carbon emission information reports related to their goods, without the need for any financial payments or adjustments.

After the transition period and full implementation on January 1, 2026, importers will be required to annually report the quantity of goods imported into the European Union in the previous year and their associated greenhouse gas emissions, and surrender the corresponding number of CBAM certificates.

The price of these certificates will be calculated based on the weekly average auction price of European Union Emissions Trading System (ETS) allowances, expressed in euros per ton of carbon dioxide emissions.

During the period from 2026 to 2034, the gradual phase-out of free allowances under the EU Emissions Trading System will be synchronized with the phased adoption of CBAM, ultimately achieving a complete elimination of free allowances by 2034.

Under the new legislation, all EU industries covered by the ETS will be granted free allowances, but from 2027 to 2031, the proportion of free allowances will gradually decrease from 93% to 25%. In 2032, the proportion of free allowances will be reduced to zero, three years ahead of the original draft's exit timeline.

The scope of impact

         The experts from Boston Consulting Group (BCG) stated that companies that export goods to the EU may directly impact the competitive landscape and even change the trade landscape due to carbon tariffs. If these companies cannot quickly adapt to the new policy by reducing their carbon footprint, they may lose market share and be replaced by other EU companies or companies with higher carbon efficiency from other countries.

         It can be clearly stated that developed countries can protect their domestic industries and generate carbon trading revenue by imposing carbon taxes, and they can also gain from the low-carbon economy development dividend by exporting energy-saving equipment and transferring low-carbon technologies. Developing countries will suffer net losses due to the implementation of carbon border taxes, and the economies of severely dependent developing countries on high-carbon exports will be significantly affected.

       By 2022, the total value of exports from China to the EU that are subject to the coverage of the CBAM may amount to around 20 billion euros, which accounts for 3.2% of China's total exports to the EU. The scale is within the control range. 

        According to the data released by the European Union Statistical Bureau, in 2022, by trade volume: China ranks first in terms of imported "CBAM steel products" for the EU, with a value of 151 billion euros; China also ranks first in terms of imported "CBAM aluminum products" for the EU, with a value of 45 billion euros; China ranks ninth in terms of imported "CBAM fertilizer products" for the EU, with a value of 3.3 billion euros; The CBAM-covered cement products, which are listed in Chapter 25 of the European Union Customs Code, had a total import value of 114.6 million euros (2.1 million tons) from China to the EU in 2022, which did not rank in the top 10.

Therefore, the main industries that the EU CBAM has a real impact on in China are steel and aluminum.

       Of course, there are also opportunities under the CBAM mechanism.

       The launch of the EU CBAM is expected to provide benefits to the hydrogen industry, which was almost ignored in exports to the EU before.

       Expert in the hydrogen industry believes that the passage of the EU CBAM will further promote the development of China's green hydrogen production and consumption market.

        In the short term, the electrolysis equipment industry for producing hydrogen from water is expected to benefit, especially the rapid pace of exports of electrolysis tanks. The proportion of renewable energy off-grid hydrogen projects in China is expected to increase, while CBAM will promote the cultivation of the domestic green hydrogen consumption market, and international cooperation projects such as green hydrogen, green ammonia, and green alcohol will increase significantly. Companies involved in hydrogen-related exports, whether it is equipment manufacturing and hydrogen energy exports, should strengthen their overseas presence and promote the integration of relevant products into the international hydrogen certification system, improve innovation and research and development levels, and avoid low-priced and same-level competition.