Can Carbon Emissions from Recognized ETS Systems Be Discounted Under CBAM?

The European Union’s Carbon Border Adjustment Mechanism (CBAM) aims to ensure that imports to the EU face equivalent carbon pricing to domestically produced goods, which are regulated under the EU Emissions Trading System (ETS). However, a key element of CBAM is the possibility to “discount” emissions already covered under a recognized ETS system from non-EU countries. This principle seeks to prevent double payment of carbon costs, a crucial concern for companies involved in complex global supply chains. But how does this mechanism work, and what are the practical implications for importers?

ETS Recognition and CBAM

Under CBAM, importers must purchase certificates based on the embedded emissions of the imported goods. However, if the country of origin operates an ETS recognized by the EU, importers can deduct the carbon costs already incurred under that system. This principle applies to avoid double carbon pricing and is consistent with World Trade Organization (WTO) rules, which require that carbon costs not be applied twice for the same emissions.

For an ETS to be recognized, it must have equivalent levels of transparency, coverage, and carbon pricing as the EU ETS. This ensures that the carbon costs applied in the country of origin are comparable to those within the EU. Countries with robust ETS systems—such as Switzerland, which already has formal links with the EU ETS—may easily qualify, but for others, such as China, formal recognition remains uncertain? .

Case Study: Vietnam-Chinese Steel Import to the EU

To illustrate this process, let’s consider the case of Hot-Dip Galvanized (HDG) steel imported into the EU from Vietnam, produced using Hot-Rolled Coil (HRC) sourced from China. China has operated a national ETS since 2021, which initially targeted the power sector and is gradually expanding to include industries like steel.

The critical question for EU importers is whether the carbon emissions from the HRC, produced in China, can be deducted from the total emissions declared under CBAM. This would avoid paying carbon costs twice—once in China and once under CBAM.

Recognition of China’s ETS

For the discount to apply, the EU must recognize China’s ETS as meeting its standards for monitoring, reporting, and verifying carbon emissions. While China’s ETS is expanding, it is still in its early stages, and recognition by the EU is not yet guaranteed . Furthermore, even if the Chinese ETS covers emissions from steel production, proving compliance with EU standards for transparency and carbon cost calculation will be critical for importers.

If recognition is granted, importers would need to submit detailed emissions data showing the amount of carbon priced under China’s ETS for the HRC. If these emissions were already accounted for, they could be subtracted from the total emissions that need to be covered by CBAM certificates .

Supply Chain Complexity

The Vietnam-China example highlights another challenge: complex supply chains. In this case, HRC from China is processed into HDG steel in Vietnam before being imported to the EU. Tracking and verifying the emissions embedded in each stage of production is critical. While the emissions from the Chinese HRC might be subject to carbon pricing under China’s ETS, the emissions from processing in Vietnam would not be covered and would still need to be accounted for under CBAM.

Moreover, the documentation must clearly differentiate between the emissions priced in China and those occurring during further production in Vietnam. If emissions data is incomplete or not verified to EU standards, importers may not be able to apply for the discount .

Practical Implications

For importers, this process adds significant administrative burden. The need to track carbon emissions across international borders, ensure data accuracy, and navigate different ETS systems requires close cooperation with suppliers. Additionally, as CBAM evolves, so will the rules regarding ETS recognition and the application of discounts.

Without the recognition of the Chinese ETS, importers of HDG steel using Chinese HRC will likely need to account for the full carbon emissions in their CBAM declarations, even if a portion of the emissions was already priced in China. This could increase costs significantly for companies reliant on materials from regions with evolving carbon pricing schemes.

Conclusion

The possibility of discounting emissions covered by a recognized ETS under CBAM offers a significant opportunity for importers to reduce costs and avoid double carbon pricing. However, as seen in the example of HDG steel imported from Vietnam using Chinese HRC, this possibility hinges on complex factors such as formal recognition of the ETS by the EU and the ability to provide verified emissions data. While CBAM is a powerful tool in the EU’s decarbonization strategy, it also introduces significant challenges for industries operating in global supply chains.

Luigi Villani is the owner of GTG Consulting and specializes in analyzing industrial trends in materials science. For more insights, visit www.gtgcons.com.