On 14 July 2021, as part of the "Fit for 55 Package" package to tackle climate change, the European Commission proposed regulations to establish a Carbon Border Adjustment Mechanism (CBAM) aimed at reducing the risk of carbon leakage by imposing carbon tariffs on highly carbon-intensive products imported from outside the EU. It also aims to help encourage EU partner countries to also develop carbon pricing policies to combat climate change.
The CBAM proposal decides whether to legislate at EU level through the EU Ordinary Legislative Procedure. The general legislative process is mainly done by three bodies, namely the European Commission, the European Parliament and the Council of the EU. The CBAM proposal was proposed by the European Commission and jointly revised and approved by the European Parliament and the Council of the European Union. For more information on the main responsibilities of the three EU institutions and the EU's general legislative process, it can be obtained from the article "Is the EU Carbon Border Adjustment Mechanism Really Coming?"。The EU's general legislative process stipulates that the responsible committee of CBAM is the Environment, Public Health and Food Safety (ENVI) committee of the European Parliament. In December 2021, ENVI completed the first reading of the CBAM proposal and submitted their proposal to the European Parliament. On 15 March 2022, at a meeting of the Council's Economic and Financial Affairs Committee (ECOFIN), the Council of the EU agreed on a general approach to the CBAM regulation and provided more details on CBAM coverage and proposed centralized CBAM governance. The main updates to the CBAM regulation by the Council of the European Union are as follows:
The EU Council's position is broadly in line with the draft CBAM presented by the European Commission in July 2021, confirming steel, cement, electricity, aluminium and fertilizers as the first industries to be included in the CBAM. In addition to this, the Council has introduced a minimum threshold where imported goods with an intrinsic value of less than €150 per shipment are not covered by CBAM. This measure helps to reduce the complexity of administration, as around a third of EU goods fall into this category, and the total value and quantity of these goods will result in negligible greenhouse gas emissions. This helps avoid negative impacts on small businesses to mitigate the cost of the carbon tax burden they bear.
CBAM centralized governance
Compared with the European Commission's original proposal, the European Council proposes a greater degree of centralization of CBAM governance, which means that companies intending to import goods that fall within the scope of CBAM do not apply to the relevant authorities of the company location, but must apply to the new CBAM Declarant (Importer) Registry established at EU level. In addition to this, the Commission will establish a central database accessible to the public, including detailed information on operations and information such as the location of third-country producer facilities.
The EU Council's position only confirms the general approach to the CBAM regulation, with some outstanding issues, in particular the timetable for phasing out the free carbon allowance of the EU Emissions Trading System (EU ETS) and the CBAM's revenue distribution scheme remain unresolved. In addition, the Council stressed the importance of paying greater attention to working with outside countries, including the United Kingdom, through the establishment of a "climate club" to facilitate discussion and cooperation among countries on carbon pricing policies. Currently, the CBAM regulatory approach focuses on imports, ignoring potential issues that may exist with EU exports, which could be addressed in subsequent discussions. According to the ordinary legislative process, once the Council of the European Union has made sufficient progress, the Council will begin negotiations with the European Parliament after agreeing with its position, and if the Council proposes amendments to the proposal, the proposal will be returned to parliament for "second reading", and the CBAM proposal will be approved when the two sides reach a consensus.
The EU's future legislation on carbon pricing, energy taxes and other related regulations are still in discussion at the political level, and different interest groups are pursuing different goals and are expected to have heated discussions. But in most cases, it is undeniable that the price of imported products covered by CBAM will increase, and the market price of any product subject to carbon market or CBAM will rise unless exporting companies are affected by their own carbon pricing policies to reduce greenhouse gas emissions.
Therefore, China should actively prepare feasible countermeasures, such as expanding the coverage of the national carbon market and reducing the proportion of free carbon emissions to ensure that the domestic carbon price is at a relatively high level. For China's export enterprises, they should also quickly begin to examine the expected impact and comprehensive analysis of the implementation of CBAM, and develop in a green and low-carbon direction, such as seeking low-carbon technologies or using new alternative low-carbon or zero-carbon resources. This will also align and contribute to the climate commitment of China's "double carbon" goal.
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* This article was edited and published by the author in Chinese, because the author accepted an invitation from China Daily.