(1) Global challenges of carbon pricing policies

Countries around the world are facing unprecedented threats from climate change. With the extreme weather, rising sea levels, and destruction of natural ecosystems brought about by climate change, the global social and economic structure is constantly adapting and striving to find effective mitigation and adaptation measures. In this context, carbon pricing policies have gradually become the core means of addressing carbon emissions, and the EU's Carbon Border Adjustment Mechanism (CBAM) is an important breakthrough point in the global carbon pricing system.

(2) Why did the EU formulate CBAM: the issue of carbon leakage and the background of CBAM proposal

As a pioneer in global efforts to address climate change, the European Union has been actively promoting carbon reduction policies. The European Union implemented the world's first large-scale carbon emissions trading system (EU ETS) in 2005, allowing EU companies to purchase or sell carbon emission quotas and gradually reduce overall emissions through market mechanisms. However, as carbon prices within the EU gradually rise, the EU industry is concerned about the phenomenon of so-called 'carbon leakage'.

Carbon leakage refers to the situation where companies, in response to strict carbon emission regulations within the European Union, choose to transfer their production activities to countries or regions with lower carbon emission standards in order to reduce their own costs, resulting in an increase in global total emissions instead of a decrease. This not only weakens the EU's efforts to combat climate change, but also damages the competitiveness of European businesses.

Therefore, the European Union proposed the Carbon Border Adjustment Mechanism (CBAM) in 2021 as part of the European Green Deal. The establishment of CBAM aims to prevent carbon leakage and ensure that EU companies are not at a disadvantage in the face of global competition due to carbon taxes. CBAM requires importers to pay a tax equivalent to the carbon emission price under the EU ETS when importing goods such as steel, aluminum, cement, and electricity into the EU market, in order to balance the carbon cost difference between inside and outside the EU.

(3) Introduction to the Carbon Border Adjustment Mechanism (CBAM) of the European Union

The Carbon Border Adjustment Mechanism (CBAM) is a carbon pricing system for imported goods, aimed at adjusting the carbon emission costs of imported products to the carbon emission prices of products within the European Union, ensuring that all goods are on a "fair competition" basis in terms of carbon emission costs. The specific implementation of CBAM requires importers to purchase "CBAM certificates", and the prices of these certificates will be adjusted according to the market prices of the EU ETS.

CBAM is closely related to the EU ETS, which together form the core system for carbon emission management within and outside the EU. However, how can carbon reduction actions be synchronized with industrial protection? The EU ETS began operating in 2005, setting carbon emission quotas for power plants and high carbon emitting industries within the EU. If these enterprises exceed the quota, they need to purchase additional emission quotas; If the quota is below the limit, the excess quota can be sold. This market mechanism promotes carbon reduction and establishes a unified carbon pricing mechanism within the European Union. However, as carbon prices rise, the EU ETS gradually becomes unable to cover the carbon emissions of imported goods. Therefore, CBAM has emerged as a supplementary mechanism aimed at imposing the same carbon cost on imported goods. Importers are required to purchase CBAM certificates based on the embedded carbon emissions of the product, with prices referenced from ETS auction prices. In this way, both internal and external producers in the EU need to pay similar prices for carbon emissions, in order to avoid carbon leakage and protect fair competition in EU industries.

(4) Legal background and policy evolution of carbon border adjustment mechanism

The Carbon Border Adjustment Mechanism (CBAM) is a policy tool introduced by the European Union to prevent carbon leakage, ensure fair competition, and promote international carbon reduction policy coordination in the face of global climate change challenges. The legal framework of this mechanism has undergone multiple discussions and revisions, gradually establishing its core position in the EU's carbon reduction strategy. We will provide a detailed introduction to the legislative background, legal basis, and legal disputes within the European Union and internationally.

(5) The voting process and major changes in the European Parliament and the Council of the European Union

In the EU legislative process, the CBAM draft needs to be reviewed and voted on by the European Parliament and the Council of the European Union. In April 2023, the European Parliament passed the CBAM draft with 450 votes in favor, 115 votes against, and 55 abstentions. In May of the same year, the European Council officially passed the draft with a majority vote of 24 member states, making the carbon border adjustment mechanism a part of EU law.

(6) Governments' reactions and policy modifications

The implementation of CBAM has had a significant impact both inside and outside the European Union. The main reactions within the EU include:

Germany and France: As the two pillars of the EU economy, Germany and France support CBAM, believing that it can effectively prevent carbon leakage and ensure the competitiveness of their respective industries. But Germany expressed concerns about its potential impact on the metal manufacturing industry in the early stages of the draft.

Eastern European countries (Poland, Czech Republic, Hungary): These countries are concerned that CBAM may lead to an increase in energy prices and further impact the already weak manufacturing industry. Therefore, these countries require more transitional periods and exemption clauses in the legislative process.

The main reactions from outside the EU include:

China: China criticizes CBAM as an act of trade protectionism and may have adverse effects on global trade rules. The Chinese government has expressed concerns that CBAM may violate the WTO's Most Favored Nation (MFN) principle.

Russia and Türkiye: As major exporters of steel and aluminum, Russia and Türkiye are worried that CBAM will have a major impact on their exports and may lead to bilateral trade frictions.

(7) Scope of application and compliance requirements of CBAM

The CBAM (Carbon Border Adjustment Mechanism) aims to ensure that imported goods maintain consistency in carbon emission costs with products within the European Union. Its scope of application covers multiple high carbon intensive industries and is expected to gradually expand to more commodities and downstream industries in the future. Importers must report the carbon emissions of their goods and purchase corresponding carbon tax certificates for compliance. The following will provide a detailed explanation of the applicable industry scope of CBAM, the calculation method for embedded carbon emissions, and the compliance declaration process.

(8) Possible future additions: including downstream products and other high carbon intensive products

The initial design of CBAM covered the most carbon intensive basic industrial products in the manufacturing process, but with the advancement of carbon pricing policies, the EU plans to gradually expand to the following goods after 2026:

1. Plastics&Chemicals: including PVC, polyethylene, and other petrochemical based products.

2. Building materials: such as glass, ceramics, and reinforced concrete products.

3. Metal products: such as copper, nickel, lead, and their alloy products.

4. Downstream Products: including various assembled products such as automotive parts, household appliances, and heavy machinery.

How to calculate embedded carbon emissions?

The embedded carbon emissions calculation of CBAM is the core of importer compliance. Importers need to calculate the embedded carbon emissions based on the carbon emissions of their imported goods during the production process, and use this data as the basis for purchasing CBAM certificates.

Definition and calculation method of embedded carbon emissions

Embedded carbon emissions refer to the total direct and indirect carbon emissions generated during the production, transportation, and processing of a commodity. The calculation of embedded carbon emissions can be divided into two categories:

1. Direct Emissions: Carbon dioxide and other greenhouse gases released during the combustion of fossil fuels or chemical reactions in the production process.

2. Indirect Emissions: Indirect carbon emissions resulting from the purchase of electricity, steam, or other energy sources.

(9) Method for calculating embedded carbon emissions: application from on-site data to estimated values

During the transition period (2023-2025), importers may choose to use one of the following methods to declare their carbon emissions:

On site data: Calculate carbon emissions using actual data provided by producers (subject to third-party verification).

Equivalent Method: Calculate using equivalent emission factors recognized by the European Union, such as the parameters of the International Organization for Standardization ISO 14067.

Default Values: In cases where accurate data cannot be obtained, industry average emission values set by the European Union can be used (only allowed during the transition period).

Purchase and declaration process of carbon tax certificate

The declaration and compliance requirements of CBAM involve multiple steps, and importers need to ensure that each step complies with EU regulations to avoid fines or market entry risks.