Author: Wu Bixuan
"Carbon tariffs" have recently become a buzzword in the news.
This is a popular name, and the official name in the European Union is "Carbon Border Regulation Mechanism".
This official name avoids the ambiguity and negative associations brought about by the word "tax".
No matter what the name is, its essence is to increase taxes on products imported into the EU, so that imported products and EU products "equalize" the carbon cost.
On March 10 this year, the European Parliament passed a principled resolution on the establishment of a carbon border adjustment mechanism.
According to the timetable, the European Parliament will propose a draft legislation before the end of June this year. It is expected that the legislation will be completed in 2022 and implemented in 2023.
Carbon tariffs will directly affect the trade competitiveness of the EU and its trading partners, and the EU's attention to this is no weaker than its attention to climate change.
The European Parliament stated that it will pass taxes on imported products from countries with weaker emission reduction measures to ensure that they are not cheaper than EU products.
In 2020, China has become the EU's largest trading partner, with a trade surplus with the EU reaching 180.8 billion euros.
If the EU's carbon tariffs are implemented, China will be the first to be affected.
To a certain extent, China’s export costs will increase and trade competitiveness will decline.
China is a big exporter, so carbon tariffs should be pre-evaluated and dealt with appropriately.
Regarding the possible specific institutional design of EU carbon tariffs, the author will analyze the form of policy tools, covering trade flows, collection countries, industry scope, emission scope, and tax base.
Covering trade flows-imports vs.
Exit.
It is generally understood that carbon tariffs are aimed at imports and are intended to reduce the carbon cost advantage of imported products.
But on the other hand, EU products exported to countries with lower emission standards also have a carbon cost disadvantage.
From the perspective of protecting the competitiveness of EU products, is it necessary to “rebate” the export of EU products—repaying carbon costs?
"Export tax rebate" will bring two problems.
First, this runs counter to the overall goal of promoting global emissions reduction advocated by the implementation of carbon tariffs.
Second, to refund the cost of carbon on the condition of export, there is a greater risk of violating WTO countervailing rules.
In this regard, the European Parliament’s "Resolution" is that the European Commission may consider the possibility of "export tax rebates" on the premise that it has a positive impact on the climate and conforms to WTO rules.
The author believes that, at least in the initial stage of implementation, carbon tariffs only involve imports and will not "export tax rebates" for EU products.
The form of policy tools.
During the public consultation phase, the EU listed four possible forms of carbon tax, including tariffs, expanding the EU Emissions Trading System (ETS), mirroring the EU Emissions Trading System (ETS) and consumption tax.
According to the "Resolution" of the European Parliament, the EU's most likely approach is to mirror ETS, that is, to set up a virtual emission quota pool for imported products outside the EU emissions trading system, and the price of the virtual emission quota anchors the EU carbon market's emission quota price.
This kind of proposition is quite self-explanatory, and it means that all commodities exported to Europe will have to pay the EU standard carbon price.
The EU’s reasoning is that foreign and local manufacturers should bear the same carbon costs.
The implicit assumption is that a country’s carbon cost equals its emission reduction efforts.
This is a bit similar to saying that the labor cost of a country is equal to the level of labor protection.
It ignores all other factors that affect labor costs, such as population size and age structure.
Country category.
The basic principle of carbon tariffs is that carbon tariffs apply to products exported to Europe from all countries.
Under this general principle, the European Parliament’s "Resolution" emphasized that the least developed countries and small island developing States should be given special treatment.
The European Roundtable on Climate Change and Sustainable Transformation (ERCST) also recommended exempting countries that have established a carbon market link with the EU on the grounds that their carbon costs are the same as those of the EU and there is no risk of carbon leakage.
In essence, this is to promote the EU standards to the world, and it is likely to be adopted.
Will the EU grant exemptions based on other countries’ emission reduction commitments, accession to the Paris Agreement and other climate action indicators?
Unlikely.
First, the EU believes that commitments do not equal actual actions.
Pascal Canfin, chairman of the Environmental Committee of the European Parliament, pointed directly at China when talking about carbon tariffs.
He said that exemptions based solely on China's emission reduction commitments are not serious. China's commitments are commendable, but they are useless from the perspective of industrial competition.
His words help to figure out the actual intention of the EU to push carbon tariffs.
Industry scope.
According to the relevant statement of the European Parliament's "Resolution", carbon tariffs will apply to all products that have been included in the EU ETS control, and it seems that semi-finished products and finished products containing controlled product ingredients will be included.
It also does not rule out limiting the scope of taxation to industries with high carbon leakage risk identified by the European Union in the early stage.
In short, the power, cement, steel, aluminum, oil refining, paper, glass, chemical, and fertilizer industries will almost certainly be on the list.
An important uncertainty is whether and how carbon tariffs extend downstream.
In some industries, carbon tariffs imposed on upstream raw materials can cause carbon leakage to be transmitted downstream.
In the public consultation stage, all parties generally believe that it is not enough to focus solely on ETS control products, but also to consider the value chain.
The European Roundtable on Climate Change and Sustainable Transformation (ERCST) suggested that the scope of carbon tariffs should be extended to some downstream products to solve the problem of carbon leakage to the downstream.
The European Parliament emphasized in the "Resolution" that the design of carbon tariffs should avoid disrupting the EU's internal market and the entire value chain.
How to avoid it is not clear from the current data.
Emission range.
According to the world's most widely used greenhouse gas accounting system (GHG Protocol), corporate greenhouse gas emissions are divided into three "scopes."
Scope one is the direct emissions of enterprises, such as combustion emissions and company vehicle emissions.
The second scope is indirect emissions, which refer to the emissions produced by the purchased electricity, steam, and heat consumed by the company.
Scope three is all other indirect emissions, covering all other indirect emissions of the company in its value chain activities, such as purchased raw materials and services, transportation and distribution, business trips, employee commuting, garbage, and so on.
The "Resolution" of the European Parliament says that when calculating the carbon content of imported products, both direct emissions and indirect emissions should be included.
If you include indirect emissions, you must answer: 1. Are emissions from purchased electricity included?
2. Which of the other indirect emissions are included?
In December last year, when asked how to accurately quantify the carbon cost of imported products, Pascal Canfin, Chairman of the Environmental Committee of the European Parliament, said that one of the options is to look at a country’s electricity The carbon density of the structure calculates the carbon content of the product.
His words echoed each other's "Resolution" of the European Parliament.
In this interview, Kanfen basically regards China as his imaginary enemy, and the European Union is also very clear that the energy structure has led to a much higher carbon density in China's power grid than in the European Union.
China's coal power ratio is 60% to 70%, while the EU's coal power ratio is 10% to 20%.
The European Roundtable on Climate Change and Sustainable Transformation (ERCST) recommended that carbon emissions of imported products = fuel emissions + emissions related to raw materials, but not included in the emissions of purchased electricity.
The reason for ERCST is that the cost of emission reduction carried by electricity prices borne by EU companies should continue to be resolved through the EU’s current electricity price subsidy mechanism, rather than through carbon tariffs.
Determine the carbon content of imported products (tax base).
Judging from the "Resolution" of the European Parliament, if exporting companies cannot provide their own emission intensity data, then a default emission density industry benchmark (benchmark) will be applied to calculate the carbon content of the product.
Industry benchmarks may be refined to different production processes.
Looking at it now, the EU seems to be inclined to use the global average industry emission intensity as a benchmark.
Export companies will have the opportunity to self-certify that their actual emission intensity is lower than the default value, but the data must be verified and certified by a third-party organization recognized by the European Union.
Without this "separate tax rate" mechanism, carbon tariffs may become a measure to reward high-carbon (low abatement costs) products to occupy the EU market.
Prevent double protection and double taxation.
The purpose of carbon tariffs is to make imported products pay the same carbon cost as EU products.
The EU’s energy-intensive/trade-exposed industries have received a lot of free emission allowances, and only the emissions outside the free allowances need to bear the cost.
If all the carbon emissions of imported products are taxed, EU products will receive "double protection".
Therefore, the free emission quota of EU products must first be deducted from the carbon emissions of imported products.
It is also necessary to avoid double taxation on the carbon content of imported products.
If the exporting company has already paid the carbon cost in the country, then this part of the cost should be deducted from the carbon tariffs payable.
When exporting companies purchase EU emission allowances, they only need to pay the difference between the EU allowance price and the carbon price of the exporting country.
If the exporting company also obtains free emission allowances in the country, then there is no cost for the part of carbon emissions covered by the free allowances, so this part of carbon emissions should be purchased at the normal price of EU allowances.
But if the exporting country does not have a carbon pricing mechanism (neither an emissions trading system nor a carbon tax), how should its domestic carbon price be quantified?
The European Roundtable on Climate Change and Sustainable Transformation (ERCST) believes that even in countries where there is no clear carbon price, various emission reduction measures have an implicit cost of carbon emissions.
Therefore, ERCST recommends that the EU and exporting countries negotiate an implicit carbon price.
This suggestion is a bit utopian.
If the EU carbon tariff is implemented, it will have a full attack on China's exports and should not be underestimated.
Carbon tariffs will fully affect the value chain of exported products, including raw material costs, energy efficiency requirements for production processes, and product carbon footprint management.
Foreign research shows that when the cost of carbon is US$40 per ton, the output value of industries exposed to high-energy-consuming trade will drop by 2.5%.
The current EU carbon price has exceeded 50 euros.
Judging from the current information, the EU's carbon tariff system design does have concerns about trade barriers, and many anti-dumping systems can be seen in the methodology.
Carbon tariffs are a new hot spot in global rulemaking. The EU is actively becoming the dominant player, and its measures will have strong extraterritorial effects.
Judging from the "Green Growth Strategy" recently announced by the Japanese government, in order to ensure the competitiveness of Japanese companies, Japan is also discussing the implementation of carbon tariffs.
It is generally believed that because the United States does not have a national emissions trading system, the implementation of carbon tariffs is not logically feasible, and the mechanism does not work.
But it should be noted that as soon as US President Biden took office, he issued an executive order "to put the climate crisis at the core of US foreign policy and national security."
In this way, climate measures are justified by putting on the cloak of national security.
The President has the right to impose tariffs on the grounds of national security, without the need to pass a lengthy legislative process.
Carbon tariffs seem to be climate measures, but they are actually trade measures, which should be dealt with by trade authorities.
The European Parliament has put the label of "climate dumping" on the issues addressed by carbon tariffs and put forward the concept of "anti-climate dumping".
In the future, carbon trade barriers are likely to become one of the main forms of trade friction. "Carbon dumping", "carbon subsidies" and even "carbon safeguard measures" may appear.
China’s trade authorities should pay close attention to and begin theoretical and practical preparations.
Actively participate in the discussion and formulation of international rules, and at the same time learn from the European Union, study and formulate China's carbon tariff-related laws and regulations, and begin to conduct industrial carbon tariff trade vulnerability assessment.
At the corporate level, an export carbon risk assessment should be considered.
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