Chart of the Week: New EU border tax incentivises China to decarbonise

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The new EU Carbon Border Adjustment Mechanism (CBAM)[1] which came into force on 1 October 2023 could prove to be a positive force for the transition to net zero. By imposing reporting obligations and ultimately a tax on carbon-intensive imports into the EU, the mechanism incentivises countries including China to decarbonise their exports. The CBAM was introduced to stop carbon leakage due to the cost advantage that non-EU countries have over EU countries, which have to abide by the limits on emissions imposed by the EU Emissions Trading System. The sectors covered by the mechanism initially include cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. The China Iron and Steel Association has criticised the CBAM for imposing a new trade barrier on China, as its steel production is currently reliant on coal. Although China’s steel exports to the EU, scaled to GDP, are far from the largest in the world, it is the largest non-EU exporter to the EU in nominal terms, as well as the world’s largest emitter of CO₂. Furthermore, the EU makes up 15.6% of China’s total global exports. Therefore, the CBAM poses a threat to Chinese exports, unless the country decarbonises quickly (although the initial sectors covered by CBAM only account for less than 2% of the country’s exports to the EU). China has in recent years invested heavily in decarbonising, aiming to reach peak emissions before 2030: for example, it is working on making iron plants run on hydrogen and natural gas. This is costly, however, and developing and deploying new technologies takes time. In the initial, transitionary phase of the CBAM, exporters only have to report greenhouse gas emissions embedded in their goods; but when the next phase comes into force in 2026 taxes will be payable – leaving little time for China and other exporters to decarbonise their production. Multiple other countries are now considering similar measures, such as Canada, Australia, and the UK.

[1] Carbon Border Adjustment Mechanism – European Commission (europa.eu)

 The views expressed in this article are the views of the author, not necessarily those of LSEG.

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