Carbon Border Adjustment Mechanism (CBAM)

On July 14, 2021, the European Commission unveiled the Fit for 55 climate initiative, detailing a series of legislative proposals aiming for the 27 EU countries to collectively achieve a 55% reduction in net greenhouse gas emissions by 2030 compared to 1990 levels.

However, the public focus is primarily on the draft of the Carbon Border Adjustment Mechanism (CBAM). At its core, it aspires to attain a 55% reduction in greenhouse gas emissions by 2030 while ensuring trade partners bear the same carbon costs as industries within the EU, preventing industries from relocating to countries with more lenient carbon regulations, thus maintaining domestic industrial competitiveness.

CBAM is slated for a preliminary launch on January 1, 2023, with the new draft extending the transition period by a year to the end of 2026, with official charges starting in 2027. Exporting countries will need to comply with specified carbon content levels; imports that exceed these will not only require purchasing 'carbon credits', but products may also face carbon tariffs.

When will the tax be imposed? Put simply, after January 1, 2023, any enterprise in our country, especially in the five high carbon-emission sectors of cement, electricity, fertilizers, steel, and aluminum, will, before 2027, require importers to declare the previous year's CBAM information by May 31 each year. During the transitional phase (2023 to 2027), there's no need to buy CBAM certificates, but quarterly CBAM reports are mandatory. Post-2027, rules change as CBAM will fully enforce importers to remit CBAM certificates purchased from authorities, minus fees already paid in the exporting country and any free allowances. CBAM certificate prices will be calculated based on the average weekly auction prices of EU ETS quotas, with the unit being euros per ton of CO2 emissions.

This poses a significant challenge for Taiwan. According to Taiwan's Ministry of Economic Affairs, out of the 248 products regulated by CBAM, which include cement, electricity, fertilizers, steel, and aluminum, Taiwan accounts for 212 items, worth NT$24.5 billion, primarily in steel products. Without implementing related carbon tariff policies, measures, or standards, losing goods to carbon taxes is a minor concern compared to the more severe issue of export barriers. If the EU enacts these measures, other countries are likely to follow suit, adhering to international consensus, inadvertently leading to a self-imposed trade blockade unless adjustments are made to accommodate customer demands.

Reflecting on current discussions, the European Parliament is contemplating expanding the taxation scope to cover indirect emissions, meaning emissions from electricity used during manufacturing, production, and transportation. For Taiwan's manufacturing sector, the primary source of carbon emissions is scope 2, which covers indirect emissions from purchased electricity, heat, or steam usage. Should the EU adopt this regulation, the repercussions for Taiwanese businesses would be significant. Taiwan must expedite the formulation of carbon tariffs and emissions standards and regulations to remain integral to global economic activities.