Business set-up and consulting in China

European CBAM regulations on decarbonization and their impact in China

By C.i. Process (Shanghai)
 
.
CBAM regulations and China
 
  Publication updated on April 12, 2024      

1. Presentation of the Carbon Border Adjustment Mechanism

the CBAM decarbonization regulation and impact in China  

The Carbon Border Carbon Adjustment Mechanism (CBAM) is a policy designed to combat climate change. It introduces carbon pricing measures on imports of certain goods into the European Union.

Since October 1, MACF, also known as CBAM (Carbon Border Adjustment Mechanism), has been activated by the European Union through Regulation (EU) 2023/956. son règlement (UE) 2023/956.

The initiative reflects the EU's commitment to achieving carbon neutrality by 2050.

In order to comply with this regulation, companies need to be aware of their obligations under this new regulatory framework to combat pollution and NOx emissions.

The CBAM aims to establish a level playing field by imposing the same cost on goods imported into the EU with a high carbon footprint as on locally manufactured products. This measure aims to encourage less polluting industrial production in non-EU countries. The European Customs states that "the CBAM is neither a trade policy measure nor a tariff measure, but an environmental policy measure".

The sectors concerned will be obliged to offset the carbon emissions associated with their goods imported into the EU by purchasing carbon certificates. The tariff will be that determined by the EU Emissions Trading Scheme.

 

2. The main provisions of the CBAM decarbonization regulation

    • The goal : to reduce gas (NOx) emissions associated with the production of certain goods imported into the EU. The aim is to encourage companies to adopt more environmentally-friendly practices.

    • Sectors concerned : 6 carbon-intensive economic sectors. Their list is presented in section 4 of this article. Subject to carbon emission thresholds, importers must pay an import tax if the emissions associated with the production of the goods exceed these thresholds.

    • Calculation of carbon emissions : based on data supplied by importers. Reference standards are those of the EU. Companies must declare emissions for each imported product.

    • Pricing : companies exceeding the thresholds are subject to a tax on their imports. This tax aims to equalize the cost of production between imported goods and goods produced within the EU. In so doing, the scheme encourages the reduction of carbon emissions.

    • Revenues : these will be reinvested in projects that encourage the reduction of emissions, as well as those that promote a transition to a greener economy and combat pollution.

    • Adjustment measures : the system incorporates adjustment mechanisms to avoid distortions of competition. It also takes account of efforts to reduce atmospheric carbon pollution.

    • Scope and exclusions : The CBAM is applicable to customs procedures for the release of goods for free circulation (release for consumption in the EU). Products intended for re-export may benefit from temporary admission, which is not a customs procedure subject to the CBAM. Thus, the CBAM does not apply to goods in transit or under the temporary admission customs procedure. On the other hand, if a listed product or its components are subject to inward processing (processing in Europe, for example), the importer is subject to CBAM obligations. This applies even if the finished product is re-exported outside the EU.


    In short, these decarbonization measures are designed to reduce the carbon deposits in the atmosphere associated with imports of certain goods. To achieve this, they impose carbon pricing on companies that exceed the thresholds. The aim is to encourage the transition to a low-carbon economy, while maintaining the competitiveness of European businesses.

     

    3. A two phase policy for implementing obligations

    a. Transition phase (from October 1, 2023 to December 31, 2025)

    Submit a quarterly report summarizing data on imported products andquantities of each type of goods :

    • Imported quantities of each type of goods
    • Their intrinsic direct emissions (linked to the production process)
    • Indirect emissions (electricity consumption during production)
    • Indirect emissions (electricity consumption during production)
    • The carbon price paid in the country of origin, including any rebates or offsets available.


    b. Permanent phase (after January 1, 2026)

    • Be an authorized CBAM declarant prior to importing the merchandise concerned
    • Have CBAM certificates corresponding to the emissions generated by the goods imported in the following year.
    • Hold a minimum stock of certificates at the end of each quarter.
    • Submit, by May 31 at the latest, an annual declaration listing import data for the previous year.

     

    4. What is the list of products affected by the regulation?

     

    a manufacturing production site for steel bars and tubes in China  

    The CBAM covers imports of goods (excluding military products) from the following 6 target industrial sectors:

    • iron and steel products
    • aluminium
    • electricity
    • l'hydrogen
    • nitrogen fertilizers
    • cement

    During the transition period, a quarterly report summarizing data on imported goods must be submitted.

    In order to comply with this regulation, companies need to be aware of their obligations under this new regulatory framework.

    The MACF aims to establish a level playing field by imposing the same cost on goods imported into the EU with a high carbon footprint as on locally manufactured products. This measure aims to encourage more environmentally-friendly industrial production in non-EU countries.

    The sectors concerned will be obliged to offset the CO2 emissions associated with their goods imported into the EU by purchasing carbon certificates at a rate determined by Europe's Emissions Trading Scheme.

    Note: the exhaustive list and customs nomenclatures (HS codes) of the goods
    of the goods concerned are available in Annex 1 of the regulation.

     

    5. What are importers' customs obligations?  


    European importers submitting CBAM reports during the transition period (2023-2024) must register with their National Competent Authority in order to access the CBAM platform.

    Companies can defer the submission of reports by using the services of a representative who acts as an authorized declarant. As of January 1, 2025, importers or their customs agents must hold CBAM authorized declarant status. 

     

    6. How CBAM affects imports from China?


    This decarbonization regulation may have a significant impact on imports from China, and in particular on the sectors and products subject to them. Here are some of the expected impacts:


    • Additional costs: Chinese companies exporting goods in the sectors covered by the MACF may have to bear or offset additional costs due to CO2 pricing. If producers in China exceed carbon emission thresholds, their products could be less competitive on the European market.

    • Pressure to reduce emissions: The scheme encourages companies to reduce their CO2 emissions to avoid the additional costs of carbon pricing. This could encourage Chinese producers with high export volumes to Europe to invest in more environmentally-friendly technologies and practices if they want to retain their market share.

    • Towards a shift in exports: Chinese exporters may seek to diversify their exports to the EU by offering less carbon-intensive products or adapting their production practices to reduce emissions.

    • Potential for disputes: Trade associations of Chinese suppliers could challenge the calculations of CO2 emissions or tax rates imposed by the MACF. A possible source of trade disputes between China and the EU.

    • Incentive to transition to a green economy: The measure may encourage China to accelerate its transition to a low-carbon economy to maintain its competitiveness on the European market and meet emission reduction requirements.

    • An impact that potentially affects Russian inputs into Chinese production: EU restrictive measures prohibit the import of steel, iron and cement, among other products, from Russia. On the other hand, proving the non-Russian origin of certain inputs can be quite a challenge.

    • Towards supplier diversification: some European importers have already begun to reorganize their supply chain. In other words, they are selecting new suppliers in China or from elsewhere, who offer better quality conditions that take into account the additional costs of CBAM.


    7. Customer case: CBAM optimization and import tariff reclassification

     

    The customer: a European importer of steel products from China. Its products are subject to import duties in France which, for certain references, are excessive compared to the practices of certain competitors. Most products are not subject to a BTI (Binding Tariff Information) requested by the customer from French customs. As a reminder, a BTI is a European system that enables importers to secure their import operations by fixing the tariff classification of their goods.

    The request: to review and optimize the classification of products in appropriate tariff headings (HSN codes) for imports from China. 3 objectives for this approach:

    • optimize import tariffs where possible
    • legally avoid the application of CBAM regulations if reclassification makes this possible
    • prepare arguments and evidence for the absence of inputs (steel) of Russian origin.

    Our delivrable:

    • Complete review of customs codes used for imports into Europe
    • Analysis of the relevance of classification according to HSN codes proposed by the customer
    • Suggested reclassification and proposal of new justifiable codes
    • Full justification of the new classification based on French and European HSN codes.



    [ contact us to discuss a similar issue ]

     

    8. Conclusion, projections and challenges for the future

    In conclusion, the exact impact on Chinese importations of iron, steel, aluminimum, fertilizers, cement will depend on the sectors concerned. It will also depend on CO2 emission levels, planned adjustments and how Chinese companies react to the regulations.

    However, China's regulatory system for standards is constantly evolving. The government has made a formal commitment to achieve carbon neutrality by 2060. As a reminder, this target has been set at 2050 for both the European Union and the United States. China has launched the process of this transition. For some years now, it has been imposing increasingly stringent environmental regulations on many domestic production sectors. Every manufacturer must submit a periodic environmental impact report to the Chinese authorities. Compliance requirements are becoming more stringent every year.

    In March 2024, China announced a goal to decarbonize its steel industry by increasing the use of electric arc furnaces (EAF), which emit less CO2. Currently, 10% of its steel production is carried out with these furnaces. It aims to produce 15% of its steel with EAF by 2025 and 20% by 2030. At this stage, the question of profitability and availability of the raw material still represent a challenge. By 2050, China could produce up to 75% of its steel with EAF, subject also to investments in adequate manufacturing infrastructure.

    Over the past decade, many of China's polluting industries have been forced to close down. Or to relocate further away from coastal regions and major seaports. Or to adopt production processes in line with the trend towards more virtuous and eco-responsible industrial development. The recent official statement on the new investment catalog for 2024 confirms a policy shift that emphasizes both the move towards a green economy and the expansion of high-tech industries.

 
 
top of CBAM impact in China page
.
| any reproduction prohibited without the express authorization of the author | content &  design 2024 by C.i. Process (Shanghai)|