The Carbon Border Adjustment Mechanism (CBAM) 

The Carbon Border Adjustment Mechanism (CBAM) is a new tax system for EU tariff border importers who import goods that exceed a certain emission level or high-emission goods and have a demand for imported goods. For certain imported goods with high carbon emissions and control, carbon credits must be purchased to offset carbon leakage within the permitted range of carbon emissions.

 What is carbon leakage?

 Based on the perspective of regional economics, how to achieve an equal status of carbon tax costs for overseas and domestic industries on the basis of regional and overseas balance, and establish a set of carbon tax benchmarks for the regional economy to be protected and outside the regional economy, and prevent overseas goods that have not been taxed on carbon costs from entering the EU for circulation, resulting in carbon leakage without carbon taxation. By establishing a CBAM carbon border adjustment mechanism, the EU can offset the embodied carbon emissions of imported products, allowing foreign goods to meet the same regulations that domestic manufacturers must meet. This prevents companies within the EU from circumventing carbon emission regulations by importing goods through third-country suppliers.

 European Commission Achieving Climate Neutrality 

On July 14, 2021, the European Commission passed a series of legislative proposals outlining how climate neutrality measures are expected to be achieved in the EU by 2050, including the medium-term target of reducing greenhouse gas emissions by at least 55% by 2030. The sub-project proposes to amend a number of elements of the EU's climate legislation policy, including the EU CO2 emissions trading system, efforts to share regulations, transport and land use legislation, to regulate in a practical way the way the European Commission expects to achieve the EU's climate goals under the European Green Deal. According to the EU Emissions Trading System (EU ETS), industrial facilities that are considered to be at risk of significant carbon leakage will be subject to special regulations to support their competitiveness. Carbon leakage refers to what can happen when a company avoids importers moving production to other countries with less stringent emission restrictions due to costs associated with climate policies. This could lead to an increase in global or EU emissions due to its total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries as a result. 

To maintain the competitiveness of industries covered by the EU ETS, industries and related supply chain production that are considered to be exposed to significant carbon leakage risk impacts are granted a higher proportion of free allowances compared to other industrial industries. After the implementation of the CBAM EU carbon border adjustment mechanism, it is expected to cover more than 50% of the emissions of ETS-covered goods. The products covered are:  

The following table provides an overview of specific emissions and greenhouse gases, covering and how to determine the CBAM scope for direct and indirect emissions for each section:  

The EU's Carbon Border Adjustment Mechanism (CBAM) is a policy tool launched by the EU to address issues such as climate change and carbon leakage, aiming to ensure that carbon emissions from imported products are also controlled, thereby achieving a more sustainable global supply chain and emission reduction goals. The implementation of CBAM will have a profound impact on the global trade landscape and industry structure, and we will delve into its background, implementation steps, impact, and future prospects here. 

1. Background and necessity of CBAM 

The EU has been committed to achieving the goal of climate neutrality, which is to reduce carbon emissions to net-zero levels by 2050. However, the control of carbon emissions is not only carried out domestically, but also needs to ensure that the carbon footprint of imported products does not pose a threat to the EU's emission reduction efforts, which is where CBAM is necessary. In today's increasingly inseparable global supply chain, some high-carbon emission industries may choose to shift production to areas with looser carbon emission regulations, leading to the so-called "carbon leakage". CBAM aims to curb this phenomenon and protect the EU's climate goals and market competitiveness.   

2. The implementation steps of CBAM are divided into several stages: 

• Trial stage (from October 1, 2023): Importers need to submit carbon emission-related data, but there is no need to pay fees for the time being. 

• Transition period (from January 1, 2026): Officially implement CBAM on a paid basis. The initial phase covers high-carbon emission industries such as steel, cement, fertilizers, aluminum, and electricity, with the scope expanded as appropriate. At the same time, the free emission allowances of the EU ETS will be gradually reduced.

•  Comprehensive evaluation period (before the end of 2027): The EU will conduct a comprehensive assessment of CBAM, considering the progress of international agreements and the impact on imports from developing countries. After 2027, CBAM will be fully implemented and expanded to more industries.

•  Full implementation period (2034): All EU ETS free quotas will be abolished; CBAM is fully implemented and expanded to other industries. 

3. How CBAM works CBAM 

The way CBAM works is relatively complex. Importers need to submit carbon emission data of imported products and purchase a corresponding number of CBAM certificates to prove that the carbon emissions of the products have been controlled. The price of CBAM certificates will be calculated based on the allowance prices of the European Union Emissions Trading System (EU ETS). Importers need to purchase CBAM certificates per ton of CO2 emissions to match the carbon footprint of their imported products. However, if importers can prove that they have paid the carbon price tax in their country of origin, they can receive corresponding reductions when purchasing CBAM certificates. In addition, companies can calculate the carbon emissions of their products through two methods. First, the default method can be used, which assumes that the carbon emissions of imported products are equal to the average emissions of the worst 10% of EU producers of the same product. Secondly, importers can use specific data to calculate the actual carbon emissions of their products, taking into account the carbon price paid by the country of origin.

 4. The impact of CBAM on the industry 

The implementation of CBAM will have a direct impact on some high-carbon emission industries, including steel, cement, fertilizers, aluminum, and electricity. These industries will need to purchase CBAM certificates based on the carbon emissions of their products, which may increase their production costs. However, this will also stimulate these industries to pay more attention to the application of emission reduction and environmental protection technologies, thereby promoting the development of clean energy and low-carbon technologies. Additionally, the implementation of CBAM may have an impact on the price and market competitiveness of imported products. Some importers may need to pay additional CBAM certificate fees, which can lead to higher product prices. However, it also helps boost the sales of local products, thereby increasing the competitiveness of the industry. 

5. The impact of EU CBAM on Taiwan 

According to statistics, Taiwan is one of the main suppliers of many products imported into the EU, especially in steel products. However, the implementation of CBAM may have a certain impact on some industries in Taiwan. According to the EU's list, some products in Taiwan will need to submit carbon emission-related data and purchase CBAM certificates, which may increase their import costs. In addition, the prices of some products may be affected, which may pose a certain degree of challenge to Taiwan's export market. However, it is important to note that there is a transition period in the implementation of CBAM, allowing importers in Taiwan time to adjust and adapt to the new rules. At the same time, the Taiwanese government can formulate corresponding policies and measures to encourage industries to reduce emissions and upgrade technology to cope with the possible impact of CBAM. In addition, Taiwan can also consider cooperating with the European Union to promote bilateral or multilateral climate cooperation projects to achieve common emission reduction goals. 

 6. Product calculation method of CBAM 

The calculation method of CBAM covers different product emission categories. 

• Simple Commodities (Scope-1): For direct emission sources, i.e., commodities that require the use of input materials (precursors) and fuels with zero embedded emissions. Producers are required to declare the carbon emissions of their products to the EU, which can be achieved by monitoring energy use and emissions during production. 

• Purchased electricity (Scope-2): This refers to the purchase of electricity from external suppliers, which does not require direct pricing of emissions, but it is also a category that needs to be declared. Producers need to transparently disclose the proportion of their purchased electricity from different energy sources to ensure that the associated emission costs are accounted for. As for purchased steam, it is included as input materials from Scope 1 direct emission sources. 

• Complex Commodities (Scope-3): Includes emissions from goods other than simple commodities (with embedded or precursor materials). Emissions calculations in this area are complex and involve multiple links and collaboration. Producers need to work with the supply chain to collect and share relevant data to ensure that these indirect emissions are reasonably calculated and reported.

 The calculation method of CBAM varies depending on different categories, from simple to complex goods, requiring producers to declare and calculate emissions. This mechanism aims to ensure that the carbon emission cost of imported goods matches the cost of goods within the EU, further promoting carbon emission reduction and sustainable development.  

7. CBAM's product carbon emission inspection process 

CBAM (Carbon Border Adjustment Mechanism) product carbon emission inspection process is as follows, according to the latest information announced by the EU: 

(1) Declarant (importer): Importers are the starting point of the product carbon emission inspection process, and they need to submit relevant information and documents about their imported products.

(2) National Accreditation Bodies: National accreditation bodies in EU member states are responsible for confirming and approving third-party certification bodies to ensure their qualifications and capabilities in product carbon emission verification. 

(3) Verifier: A third-party verifier is approved by a state-authorized entity and is responsible for verifying the carbon emissions of imported products. They will assess and verify the carbon emissions of imported products according to the calculation methods and requirements specified by the EU. 

(4) 3rd Country Installations - Input Products: If the production process of imported products involves production facilities in other countries, the energy types, raw materials, and production methods used by these facilities will need to be declared and included in the carbon emission calculation. 

(5) 3rd Country Installations - Final Products: If the final production facilities of imported products are located in other countries, the carbon emissions of these facilities also need to be included in the calculation and verification process. 

(6) Declarant (importer): Importers need to submit relevant information on carbon emission calculation and verification of their products to national authorized entities and inspectors to prove that their products' carbon emissions meet EU requirements. 

(7) European Commission: The European Commission oversees and manages the implementation of CBAM policies. They may review the carbon emission verification process of imported products to ensure that all parties comply with policy requirements.

 CBAM's product carbon emission verification process covers multiple participants such as declarers, national authorized entities, inspectors, production facilities in other countries (input and final), and the European Commission to ensure the correctness of the carbon emissions of imported products and meet EU requirements. The above information is based on the latest EU announcement and may be adjusted due to policy changes. 

8. Future prospects 

The implementation of CBAM is an important step for the EU in addressing the challenges of climate change and carbon leakage, and it is also one of the measures to encourage the development of clean industry around the world. However, CBAM is just the beginning, and as the global climate agenda evolves, more countries may consider introducing similar carbon border adjustment measures. This may lead to changes in the global trade pattern and provide a new opportunity to achieve global emission reduction goals. 

The EU Carbon Border Adjustment Mechanism (CBAM) is an important policy tool aimed at addressing carbon leakage, promoting the development of global clean industries, and ensuring the achievement of global emission reduction goals. The implementation of CBAM will have a profound impact on the global trade pattern and industrial structure, while also providing an opportunity for countries to work together to achieve global climate solutions and build a more sustainable future.