EU Carbon Border Adjustment Mechanism: What It Means for Business in China

China currently faces minimal immediate exposure to heightened costs under the EU Carbon Border Adjustment Mechanism (CBAM) due to the unique characteristics of its export trade with the EU. However, the long-term scenario could evolve as the CBAM enters full implementation mode between 2026 and 2034. This impending shift may necessitate China to adopt more rigorous industrial policies aligned with EU standards, prompted by the EU's carbon allowance cost assessment. Businesses must proactively adapt to these changes, considering the escalating global emphasis on emissions targets.

What does the EU carbon border adjustment mechanism mean, and how will it work?

The EU crafted the CBAM to level the playing field between its industries and importers, mitigating the risk of carbon leakage resulting from production relocation to countries with lax policies. Unlike past practices of free allowance distribution, CBAM addresses carbon cost differentials directly, promoting fair competition between domestic and international producers while curbing leakage and addressing competitiveness concerns. Importers under the EU's CBAM will be obligated to cover the price disparity between the carbon price in the production country and the EU's carbon allowances.

While successful CBAM implementation allows the EU to optimize emissions reductions and minimize international backlash, it comes with the trade-off of potential carbon cost transfers to retail prices. This dynamic may impact revenue margins for EU producers and exporters, influencing global carbon pricing. As the CBAM shapes the future landscape of emissions regulation, China, a major EU exporter, must anticipate and strategically adjust to the evolving climate initiatives on a global scale.

How does CBAM impact China?

Limited Immediate Impact:

From a trade perspective, the current Carbon Border Adjustment Mechanism (CBAM) is not set to significantly affect Chinese goods. Specifically, products covered by CBAM constitute less than 2 percent of China's total exports to the EU, totaling approximately €6.5 billion (US$7.18 billion). The majority of these exports, around 99 percent, involve aluminum and iron & steel. This limited exposure is due to the fact that most CBAM-covered products are positioned in the upstream of the industrial value chain, emphasizing energy-intensive processes, which go against Chinese policies promoting domestic supply security and environmental considerations. Other safeguard measures implemented by the EU to protect its domestic industries, like steel, further contribute to keeping the impact low.

A 2021 report by the Green Development Program in China estimated that China's aluminum and iron & steel industries might face combined annual payments of RMB 2–2.8 billion (US$295–413 million) in Carbon Border Tax (CBT) to the EU. This could translate to increased costs ranging from RMB 652–690 (US$96–102) per ton on iron and steel, and RMB 4,295–4,909 (US$634–725) per ton on aluminum.

Long-term Concerns Persist:

While the immediate trade impact seems restrained, the long-term consequences of CBAM implementation loom large for export-oriented manufacturers. Given CBAM's coverage of both direct and indirect emissions, manufacturers must reduce their product carbon intensity to stay competitive. This entails improvements in energy efficiency, adoption of lower-carbon fuels, and optimization of production processes. China's reliance on coal for power generation might prompt a shift toward renewable energy to align with CBAM standards.

CBAM currently targets carbon-intensive precursors, possibly including battery precursor chemicals like nickel, though this remains unconfirmed by the EU. As China plays a significant role in global battery precursor chemical production, companies in this sector must stay adaptable to potential regulatory changes.

On another front, the EU's ongoing efforts to bolster low-carbon regulations and enhance industrial competitiveness could lead to policies restricting China's advantageous industries. In response, China has proposed multilateral talks at the World Trade Organization (WTO) to address environmental measures, starting with CBAM, citing concerns that the Carbon Border Tax doesn't align with global trading rules.

Riccardo Benussi, Head of European Business Development at Dezan Shira & Associates, comments, "While this measure may benefit the environment, it could also result in supply chain fragmentation and higher costs for companies unable to absorb the additional expenses."

To effectively adapt to the implications of CBAM, Chinese businesses are advised to undertake the following steps:

Evaluate Operational Impact:

Scrutinize sales data, potential costs, transactional models, and logistics flows to gauge the applicability of CBAM to their operations.

Assess Business Model Impact:

Consider the influence of CBAM on the overall business model, identifying opportunities for strategic transformation. Focus on minimizing the impact on competitiveness in the EU market and corporate value.

Analyze Supply Chain and Procurement Strategies:

Examine the impact on supply chain and procurement strategies, providing insights for future strategic planning.

Review Global Value Chain and Footprint:

Evaluate the global value chain and footprint concerning the EU region and CBAM to make informed decisions.

Companies must thoroughly evaluate the potential repercussions of CBAM on their operations and proactively explore sustainable practices for long-term environmental responsibility. CBAM is just the initial disruptor; a comprehensive strategy is essential to navigate evolving business landscapes effectively.

For more information, please contact:

Karlheinz ZUERL - CEO of GTEC (German Technology & Engineering Cooperation)

E-Mail: [email protected]

Mobile: + 86 13482438080