Understanding the Carbon Border Adjustment Mechanism (CBAM)
The Carbon Border Adjustment Mechanism (CBAM)
The European Commission announced on July 14, 2021, the “Fit for 55” climate change package, clarifying that the EU’s 27 member states will collectively achieve a target of reducing net greenhouse gas emissions by 55% by 2030 compared to 1990 levels—a series of legislative proposals.
Among this series of legislative proposals, public attention has particularly focused on the draft Carbon Border Adjustment Mechanism (CBAM), whose core value is to achieve the 55% greenhouse gas reduction target by 2030 while ensuring trading partner countries bear the same carbon costs as EU domestic industries, preventing industries from relocating to countries with looser carbon regulations, thereby maintaining domestic industry competitiveness.
CBAM was originally scheduled to take effect on January 1, 2023, with the new draft extending the transition period by one year to the end of 2026, with formal levying beginning in 2027. By clearly defining the carbon content of exporting countries’ products, if it exceeds the importing country’s regulations, importers—besides purchasing “carbon credits”—will also face carbon tariffs on their products.
So when would the tax apply? Simply put, after January 1, 2023, if any Taiwanese company—especially in the five high-carbon-emission industries of “cement, electricity, fertilizer, steel, and aluminum”—needs to submit CBAM-related information for the previous year by May 31 each year before 2027. During the transition phase (2023 to 2027), no CBAM certificates need to be purchased, but quarterly CBAM reports must be submitted. However, after 2027, things change—CBAM will be fully implemented, and importers, after deducting fees already paid in the exporting country and free emission allowances enjoyed, must submit CBAM Certificates purchased from the management authority. The price of CBAM certificates will be calculated based on the weekly average auction price of EU ETS allowance quotas, in units of euros per ton of CO2 emissions.
This is a major challenge for Taiwan. According to statistics from Taiwan’s Ministry of Economic Affairs, among the 248 products regulated by CBAM in cement, electricity, fertilizer, steel, and aluminum, Taiwan accounts for 212 of them, valued at NT$24.5 billion, mostly steel products. Therefore, if Taiwan does not establish related carbon tariff policies, measures, or even standards, paying more carbon tax would be a minor issue—but being unable to export goods would be a far more serious problem. And after the EU implements this, other countries will follow suit based on international consensus. Without managing this, Taiwan would effectively be locked out, having to pay customers to accept its goods instead.
Based on current discussions, the European Parliament hopes to expand the scope of the levy to indirect emissions—meaning the electricity emissions from manufacturers’ production, manufacturing, and transportation. For Taiwan’s manufacturing sector, the main source of carbon emissions is Scope 2 electricity emissions—that is, indirect emissions from externally purchased electricity, heat, or steam energy use. If the EU passes this regulation, the impact on Taiwanese companies would not be negligible. Therefore, Taiwan must accelerate the establishment of carbon tariff and carbon emission-related standards and regulations in order to link up with the world’s economic activities.