3. How CBAM works  

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 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 costs of imported goods match 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: 

• 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. 

• 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. 

• 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.

•  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. 

• 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.

•  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. 

• 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 landscape and industrial structure, while also providing an opportunity for countries to work together to achieve global climate solutions and build a more sustainable future.  

The development trend of net-zero carbon emissions by 2050 has become an extremely important transition risk for countries and enterprises. According to research, if a country sets the cost of carbon pricing at $40 per ton of CO2 equivalent to promote low-carbon development, the export value of energy-intensive industries will drop by about 2.5% (Morris, 2018). The country's push for strict carbon emission limits will lead to damage to competitiveness and carbon leakage. According to research (CBO, 2013), carbon leakage ranges between 5-19%, with an average of about 12%. Therefore, in order to maintain trade fairness, advanced low-carbon developing countries in Europe and the United States are actively planning to implement "carbon border tax" (or border carbon tariff) (CBT) (ERCST, 2020). Considering the export-oriented nature of our industry and its key position in international supply chains, our country has high climate trade vulnerability. At a critical moment when advanced countries in Europe and the United States begin to implement border carbon tariffs, China must quickly respond and formulate appropriate layouts to create a new situation of low-carbon development. This cannot be ignored and requires swift and effective action. 

I. What is "carbon leakage"? 

In order to achieve deep carbon reduction goals, countries implement policies to limit carbon emissions from domestic industries or increase carbon emission costs through carbon pricing methods (such as carbon taxes or carbon trading systems), resulting in the loss of market share in highly emission-intensive or trade-exposed (EITE) industries, which is known as carbon leakage. The main pathways of carbon leakage can be summarized into three aspects (Kuik and Hofkers, 2010; ICAP, 2020）。

 Firstly, industrial carbon emission restriction policies may lead to a decrease in the competitiveness of high-emission-intensive industries in the domestic market, and then seek to move to regions with looser emission regulations to avoid increased costs. Secondly, the implementation of carbon pricing measures can increase production costs for high-emitting industries, thereby reducing their international competitiveness. This could prompt these industries to move to countries without corresponding carbon prices, leading to carbon leakage. If a country implements carbon pricing but its main trading partners do not take similar measures, this can lead to carbon leakage. Industries with high carbon costs may face competition from countries that have not implemented carbon prices, resulting in market share. Therefore, the resolution of carbon leakage issues requires international coordination to ensure the fairness and effectiveness of carbon pricing and emission reduction measures, avoiding negative impacts on the economic system while achieving global carbon reduction goals. 

II. Carbon border tax will impact China's economy 

As an export-oriented country, the total export value in 2020 is about 3354 billion US dollars, of which about 229 billion US dollars (6.64%) are exported to the EU and about 506 billion US dollars (14.64%) to the United States. 

1.Export-oriented economic structure: 

Our economic system is export-oriented, especially for energy-intensive and relatively high-emission industries. This makes my country more vulnerable to impacts when facing countries such as Europe and the United States that implement carbon border taxes, as these taxes may increase the price of my country's products and reduce their competitiveness in the international market. 

2. High proportion of high-carbon emission industries: 

In my country's economic structure, there are still a large number of high-carbon emission industries, and these industries may face a gradual shrinking market from countries that have implemented carbon border taxes, thereby affecting my country's overall economy.

 3. Impact on international supply chains: 

China is an important part of the international supply chain, and countries implementing carbon border taxes may choose to exclude high-carbon emission links from the global value chain, which may lead to the loss of market share in related industries in China. 

4. Relatively high carbon emission intensity: 

Our carbon emission intensity is high, that is, the amount of carbon dioxide emitted per unit of production is high. Under the trend of global net-zero carbon emissions, countries implementing carbon border taxes may prefer to choose low-carbon imported products, posing a serious challenge to China's highly carbon-intensive industries. 

In general, due to my country's economic structure and industrial characteristics, the implementation of carbon border taxes may have a negative impact on my country's economy, and it is necessary to actively respond and adjust the industrial structure to ensure the reduction of climate trade vulnerability. 

III. The background of the EU in promoting carbon tariffs is as follows (European Parliament, 2021): 

1. Emission reduction and economic growth: 

As of 2019, the EU has successfully achieved the target of reducing greenhouse gas emissions by 24% compared to 1990, while achieving 60% GDP growth, achieving the phenomenon of absolute decoupling of GDP and greenhouse gases. However, this achievement is not fully reflected in the EU's international trade activities and global carbon footprint. For example, in 2015, the EU imported about 13.17 million tons of CO2e, while exports were only 4.24 million tons of CO2e, and imported greenhouse gas emissions are about three times that of exports. 

2. Challenges of the Emissions Trading System: 

The European Union has implemented the Emissions Trading System (ETS) since 2005, which has increased production costs in industrial sectors within the EU and led to carbon leakage. This not only allows certain import sectors to gain unfair profits, but also adversely affects the decarbonization of industries within the EU. 

3. Proposal of the Carbon Border Adjustment Mechanism (CBAM):

 In order to enhance the effectiveness and significance of the EU's emissions trading system while promoting the EU's decarbonization transition, the EU has proposed the Carbon Border Adjustment Mechanism (CBAM). The implementation of this mechanism will allow the EU to impose additional carbon taxes on imports from third countries that implement higher carbon pricing.   

 IV. In terms of the EU's carbon pricing mechanism: 

1.Three phases of the emissions trading system:

 The EU ETS has completed three phases (2005-2020) and achieved a target of about 21% emission reduction, equivalent to reducing emissions by about 500 million tons of CO2e, compared with the total control in 2005. The fourth phase (2021-2030) aims to achieve a 43% reduction in emissions, which is about 1 billion tons of CO2e, relative to the total amount controlled in 2005. 

2. System reform and expansion: 

Since the third phase (starting in 2013), the EU ETS has expanded the auction ratio of emission allowances and established a strict efficiency benchmark, which is the average of the top 10% of the industry's best efficiency levels, to allocate emission allowances. The EU has begun to pay attention to the issue of carbon leakage and has established a series of supporting measures, such as defining industries with high carbon risks or leakage, electricity price subsidies, and free allocation of emission allowances. These measures aim to address the challenges posed by the implementation of emissions trading systems and ensure the fairness and effectiveness of carbon pricing. 

V. The reforms of the fourth phase of the EU ETS (2021-2030) are as follows: 

1. Emission reduction targets: The main goal of the fourth phase of the EU ETS is to achieve a 43% reduction in emissions compared to 2005, which is part of the overall EU's 30% reduction by 2030.

 2. Annual emission reduction rate: This phase will implement an annual emission reduction of 2.2%, starting in 2021. This means that the EU will further promote the reduction of carbon emissions to address the challenge of climate change. 

3. Market Stability Reserve Mechanism: The introduction of the Market Stability Reserve (MSR) mechanism aims to improve market stability and resilience. This mechanism will help adapt to market changes and ensure the stability of carbon prices.

 4. Carbon leakage risk response: In response to carbon leakage risks, new (or growing) factories and high-climate risk factories will significantly increase the allocation of free emission rights. This move aims to ensure that these factories do not lose competitiveness in the face of rising carbon prices while ensuring industrial balance within the EU.

 5. Use of auction revenue: Auction proceeds will be used to finance low-carbon innovation and energy transition. This initiative encourages innovation in low-carbon technologies and the development of renewable energy, prompting industries to achieve green transformation more quickly. 

These reforms aim to strengthen the effectiveness of the EU's carbon trading system, promote more active emission reduction actions, and address the risk of carbon leakage, ensuring the competitiveness of the industry and the stability of carbon prices. 

VI.The purpose of implementing carbon tariffs in the EU can be summarized in four points (ERCST, 2020): 

1. reduce carbon leakage to prevent carbon emissions from being transferred to other regions; 

2. Maintain the competitiveness of industries in the EU and ensure the position of local enterprises in the global market; 

3. Induce foreign trading partners to reduce the carbon footprint of their products and comply with the EU's low-carbon standards; 

4. Generate approximately US$2 trillion in carbon tariff revenue by imposing carbon tariffs on high-carbon imports (such as steel, cement, electricity, aluminum, fertilizers, and chemicals) to support low-carbon investment activities in the EU (Abnett, 2020). 

 In order to promote carbon tariffs, the EU has arranged relevant legislative processes: 

2022: 

1. Completion of the Inception Impact Assessment (March); 

2. Release the EU Border Carbon Adjustment Issues and Options Assessment Report (September);

 3. Conduct public consultation (July-October);

 4. Release the EU CBTM and WTO compatibility report (October). 

2023: 

1. European Commission Conference (January);

 2. Publish the draft Carbon Border Adjustment Mechanism (CBAM) (June);

 3. Legislation to complete the carbon border tax (2022); 

4. Formal implementation of CBAM (2023). 

The Inception Impact Assessment (IIA) was completed by the European Commission in March 2020 to provide relevant information to citizens and stakeholders as a basis for future consultations and legislative references. CBAM must be compatible with the WTO and EU free trade agreements, reflect the carbon cost of imports, and align with the carbon price of the European Union Emissions Trading System (EU ETS) to reduce the risk of carbon leakage for EU companies, including energy-intensive and SMEs. 

Therefore, CBAM can be considered as an auxiliary measure to the EU ETS. The industrial sectors covered by the EU ETS include combustion equipment, mineral oil refineries, coke furnaces, metal and sulfide refineries, pig iron or steel manufacturing, cement, glass or fiberglass manufacturing, ceramics, etc. Emissions sources from these industrial sectors are included in the EU ETS. 

VII. EU CBAM and WTO Compatibility Report 

The European Parliament authorized the "Committee on the Environment, Public Health and Food Safety" (Committee on the Environment, Public Health and Food Safety) to complete a research report in October 2020 titled "Towards EU CBAM and WTO Compatibility" (Towards). a WTO-compatible EU Carbon Border Adjustment Mechanism) (European Parliament, released on 2021/02/15). 

The report evaluates the provisions of CBAM's design compatible with the WTO or GATT (General Agreement on Tariff and Trade), including the most-favored-nation principle (Article I), the national treatment principle (Article III), and the general exception principle (Article XX). The general principle of exceptions allows WTO member states to take necessary measures for the protection of humans, animals, life on Earth, as well as health or natural resources. The report pointed out that if the design of CBAM clearly serves an environmental purpose, such as reducing global greenhouse gas emissions, maintaining environmental integrity, and not having anti-carbon leakage issues, CBAM should be compatible with the WTO. In general, as long as the CBAM ensures that the purpose of its implementation is clear, meets the requirements of environmental protection, and does not cause anti-carbon leakage issues, it can be consistent with the relevant provisions of the WTO. 

VIII. The European Parliament puts forward the following opinions on the design of CBAM compatible with the WTO:

 1. In order to reduce the impact of the Emissions Trading System (ETS) on the EU's internal market and the corresponding value chains, it is recommended to implement CBAM for all imports that produce the same products (including intermediate and final products) as ETS-controlled enterprises, such as cement, steel, aluminum, petroleum refining, paper, glass, chemical, and fertilizer.

 2. Enterprises importing the above products should provide the latest product efficiency value (carbon emissions per unit of product). If the importer does not have access to the relevant data, the EU will replace it with the global average efficiency value of the product, which should include direct and indirect greenhouse gas emissions. For importers who can provide data, it is recommended to provide the efficiency value (carbon intensity of energy consumption) of the production facility.

 3. CBAM should be regarded as a supplementary measure to the EU emissions trading system and should avoid double protection issues, such as free allocation of emission allowances in the carbon market and whether CBAM will create undue dual protection and discrimination against imports. Ensure that the implementation of CBAM does not harm the competitiveness of enterprises within the EU and complies with relevant WTO regulations. 

IX. Opinions of the European Parliament on the design of CBAM compatible with the WTO 

1. Environmental Effectiveness will be the highest priority criterion for assessing CBAM policy options, as well as forecasting and assessing carbon price levels (sufficient incentives) that will meet the EU-Paris Agreement targets. 

2. Based on its compatibility with the WTO, CBAM should have a dynamic correspondence with the carbon price level of the EU ETS, that is, the demand of importers of high-carbon products to purchase EU carbon allowances, and their carbon price should correspond to the ETS market trading carbon price level. 

3. Importers are encouraged to propose low-carbon innovation investments and low-carbon product certificates in accordance with ETS MRV. Wood burning should not be considered carbon neutral (ETS considers it carbon neutral), carbon emissions still need to be calculated. 

4. CBAM fees/tax rates should be linked to the EU ETS market carbon price and avoid two carbon emission fees on imports. The EU carbon tariff is a policy initiative developed by the European Union to combat climate change and promote environmental protection. 

This form of tariff aims to price imported products, taking into account their carbon footprint, which is the greenhouse gases emitted during their production and transportation. The development of the EU carbon tariff can be traced back to the European Union's long-standing commitment to climate change and environmental sustainability. The EU's focus on climate change has driven the development of a range of policies and regulations to achieve its carbon neutrality goals. The goal of carbon neutrality aims to achieve a reduction in carbon emissions in the coming decades to combat global climate change. To achieve this goal, the EU needs to take several measures, one of which is carbon tariffs. The implementation of carbon tariffs can encourage importing countries and businesses to reduce the carbon footprint of their products, thereby driving global emission reductions. This is also a measure taken by the EU to ensure fair competition in its own market and prevent carbon leakage, where companies migrate to areas with lower carbon prices due to carbon price differences. 

Overall, the development background of the EU's carbon tariff is rooted in concerns about climate change and a strong commitment to carbon neutrality goals, aiming to promote carbon emission reduction on a global scale through carbon price incentives while ensuring fair competition in the EU's internal market.  

EU Carbon Border Adjustment Mechanism (CBAM) Taiwanese export companies should pay attention to 

The EU carbon border adjustment mechanism will be implemented in October 2023! Voluntary carbon reduction credits may not correspond to CBAM?