According to a 2018 report by the Intergovernmental Panel on Climate Change (IPCC) of the United Nations, the world needs to achieve net zero emissions by 2050 in order to limit the global temperature rise to within 1.5℃. The UN Climate Change Conference in Glasgow (COP26) in 2021, passed a resolution to set the target of 45% reduction in carbon emissions by 2030. Nearly 140 countries around the world have now proposed net zero goals. The European Union has been the most proactive in driving green transformation and sustainable development.
The European Commission had initially set a 20% carbon reduction target by 2020 and 40% by 2030 in its climate and energy policy package. However, the new European Green Deal aims to raise the target for 2030 to 55% in order to achieve climate neutrality by 2050. The vision is for Europe to become the first continent to reach climate neutrality. To this end, the European Union has come up with an implementation plan known as the ‘Fit for 55 package’, which will be an important milestone on the road to subsequent green transformation and sustainable development.
Among the policy measures for net zero, carbon pricing is an important and effective tool. However, the longstanding low price of carbon makes it difficult for this to drive carbon reduction despite the European Union having made numerous adjustments to its Emissions Trading Scheme (ETS). To accelerate the global action for carbon reduction, the European Union’s Fit for 55 package includes a draft for the Carbon Border Adjustment Mechanism (CBAM). The initial impact assessment for CBAM commenced in March 2020, and it was prioritized in the European Union’s 2021 agenda in September. In March 2021, the European Parliament committed to the WTO-compatible CBAM by including all products currently under the EU ETS. All the CBAM revenue will be used to fund the European Green Deal, so it is hoped that the carbon price will reach a level sufficient to tackle climate change.
EU parliamentary discussions confirmed the seven principles for the working of CBAM: (1) It must be compatible with the WTO rules and other trade agreements. (2) It is based on an allowance system similar to the EU ETS and shall take into consideration the climate policy and development standards of the third country. (3) As an extension of the EU ETS, CBAM is applicable to all imported products (including intermediate and final products) of companies under the ETS governance. (4) Importers of high-carbon products will be required to purchase EU carbon credits, the price of which will be based on the market transaction price of ETS. (5) Exemptions or deductions are provided to the imports from countries with their own carbon pricing mechanisms, in order to ensure the same overall price for imported carbon emissions. (6) Importers are encouraged to provide evidence of investment in low-carbon innovation and certification for low-carbon products. (7) Double protection should be avoided. For example, if the free emission allowances under the ETS and CBAM lead to improper double protection for EU manufacturers or discrimination against imports.
The European Commission regards CBAM as an extension of the EU ETS, with the primary goal of phasing out free emission allowances. To ensure fairness, the CBAM adopts a gradual implementation approach. According to the latest version, during the transitional years from 2023 to 2027, the carbon emissions of imports must be reported, but there is no need to purchase certificates. Partial introduction of purchasing carbon certificates will begin in 2027 for items not benefitting from the ETS free emission allowances. The industries not covered by CBAM can still enjoy free emission allowances. The ultimate goal is to completely phase in CBAM by 2032 and phase out ETS free emissions allowances, so that the ETS can truly realize the carbon auction system.
CBAM applies to all the European Union’s imports, making the environmental issue become an economic and trade issue. This will impact international trade and has prompted many other countries to start planning similar policies. The U.S., Japan and South Korea have all begun the planning of carbon taxes. Collective solutions to carbon leakage risks via carbon tariffs or carbon border adjustment mechanisms are expected to be the international trend going forward.
Taiwan is a trade-oriented country. The implications of carbon tariffs will be limited if the EU’s CBAM is the only mechanism to be implemented. However, the impact will be paramount if carbon border taxes become internationally prevalent and Taiwan does not have a mechanism in place for reductions or exemptions. There may also be an impact if the scope of products is expanded or indirect emissions across the supply chain are included. According to reports issued by Academia Sinica and by Greenpeace, the implementation by the European Union of the carbon border adjustment mechanism will increase Taiwan’s export costs by 1% for high-carbon sectors such as chemical fertilizers, steel and aluminum. However, the export costs will swell by five times if major trade partner countries follow suit. For instance, the export costs of the cement industry will increase from 9% to 17%, resulting in the loss of annual production value of over NT$10 billion. The aforementioned only covers the high-carbon sectors. If the electronics industry and the electric machinery industry are also included, the economic impact will be much harder to estimate.
Companies must act fast to keep up once the European Union’s Green Deal becomes the international mainstream. The most proactive measure is to introduce green energy or the circular economy into production and operational flows, such as by purchasing environmental-friendly machinery, replacing the use of fossil fuels with green electricity and investing in nature restoration to offset the carbon emissions of the production process (e.g., greenery sponsorships and tree planting schemes). This will save costs and enhance product competitiveness. The higher the carbon emissions of the industry, the more aggressive investments are in order. This is the only way to stay in the game once the international carbon emission trading market matures.