In response to the carbon tariff mechanism, how can companies adjust their carbon management methods?
At the end of July, the application time for the third reporting cycle of the EU Carbon Border Adjustment Mechanism (CBAM) expires. From the next quarter to the end of 2025, although it is also a transition period and no additional carbon tariffs are required, for importers of the six major industries covered by the EU CBAM at this stage-steel, cement, aluminum, fertilizer, hydrogen and electricity-their requirements have shifted from voluntary declaration to mandatory declaration, and the carbon binding force is slowly increasing.
Origin of CBAM
In 2021, the EU released a climate plan called "Fit for 55", which includes 12 more proactive policy measures including energy, industry, transportation, construction, etc., and promises to reduce greenhouse gas emissions by the end of 2030. The goal of reducing emissions by 55% compared with 1990, this ambitious plan has also become the core of the EU's low-carbon development strategy.
Since then, the pressure on local European producers to reduce carbon emissions has increased and costs have increased. In order to allow importers and local manufacturers to compete fairly in terms of carbon emissions, the EU has launched a CBAM policy to impose carbon tariffs on imported high-carbon goods. The CBAM legislation was issued in May 2023, and the transition period will begin on October 1, 2023 and end on December 31, 2025. During the transition period, CBAM is only targeted at high-carbon-intensive industries that are vulnerable to carbon leaks. The six major categories of products together account for approximately 45% of the EU Carbon Trading System (ETS). They only fulfill reporting obligations and no additional fees are required.
Starting from 2026, the EU will formally implement the CBAM policy and plans to further expand the coverage of industries. At that time, EU importers will need to purchase the corresponding number of CBAM certificates based on the declared carbon emissions. Before May 31 of each year, they will need to pay the CBAM certificates corresponding to the embedded emissions of imported goods in the previous year, which is equivalent to ETS's payment of similar local goods. Carbon fee for goods, while deducting the carbon fee already paid for the product at the origin of origin.
Significant increase in carbon footprint requirements for CBAM products
During the transition period, the EU requires importers to submit quarterly reports on their imported CBAM products and embedded greenhouse gas (GHG) emissions, by the end of the following month following each quarter.
Specific requirements for reporting obligations vary during different periods of the transition period: in the first three reporting cycles (i.e., the fourth quarter of 2023 and the first and second quarters of 2024), importers can calculate and declare embedded emissions based on default values published by the European Commission. However, starting from the third quarter of 2024 (i.e., the report submitted in October 2024), EU importers must cooperate with suppliers to collect and report actual emission data, and emissions calculated at default values cannot account for more than 20% of total emissions. In other words, export companies covered by CBAM must from now on accurately track their product carbon footprints and provide detailed and complex emission data declarations in accordance with EU CBAM requirements, which means more additional pressure on companies.
Although the CBAM policy is of great benefit to the EU's achievement of emission reduction targets, the policy has also encountered resistance from the market in its advancement, and there is certain uncertainty whether it can be implemented to the letter in the future. Although the use of default values greatly simplifies the calculation of carbon emission data and makes it convenient for importers, the EU only received about 13000 reports before the deadline for the first report, and the actual declaration amount was far lower than the expected total number of submissions; According to CBAM requirements, there are about 20,000 German companies that need to report their emissions, and the German Emissions Trading Board (DEHSt) only received less than 10% of the declarations; the Swedish Environmental Protection Agency also received only 11% of the expected number of reports.
Although the current quantity and amount of products exported by China to the EU in the six major industries are not large, after 2026, lime, glass, ceramics, pulp, paper, cardboard, plastics and other products may be included in the scope of CBAM management, and by then, China will be affected. The influence of exporting enterprises will be significantly expanded. No matter how this policy changes in the future, companies in relevant industries in China need to pay attention to the policy direction and take early response measures.
At the business level, priority should be given to strengthening product carbon footprint management
Export companies not only need to master China's corresponding industry carbon emission accounting methods, but also should be familiar with international standards such as the European Union, and with the help of professional energy conservation and carbon reduction service organizations, accurately measure the implied carbon emission data of their own product production processes and the purchase of precursor products. The difficulty is that according to this system, exporting companies will require suppliers to provide corresponding carbon emission data on raw materials and parts, while upstream companies may not export themselves and do not need or have the ability to record product carbon emission data.
This will also have a certain impact on upstream companies: companies that can accurately provide product carbon emissions are more conducive to downstream companies 'carbon footprint management and carbon data declaration during export, and may gain additional competitive advantages and market share, forcing a wider range of companies to implement carbon footprint management.
Therefore, with the trend of strengthening global carbon regulations, whether they are export-oriented enterprises or not, product carbon management should be strengthened. The International Organization for Standardization launched ISO 14067 in 2013 as an international standard specifically for quantifying the carbon footprint of products. This standard stipulates product-level greenhouse gas evaluation, calculation methods, product carbon footprint reports, etc., as well as environmental labeling and declarations, product life cycle analysis, greenhouse gas verification and other related contents, including more than 95% of the entire product life cycle (including product scrapping and recycling) Carbon footprint data, the calculation results are generally accepted internationally by supply chain companies, consumers and other stakeholders, and can be used as universally recognized product carbon footprint data.
Enterprise strategic level should formulate an implementation path for carbon neutrality
In the long run, formulating and implementing carbon neutrality strategies is the only way for companies to deal with global carbon neutrality and maintain sustainable development. As economic organizations, enterprises have a wider accounting scope for organizational carbon than product carbon, and their carbon reduction goals and tasks are larger. Enterprises increase investment in carbon neutrality measures, continue to reduce resource and energy consumption, and commit and disclose carbon neutrality to the society, which will help enhance brand image and gain the favor of investors and consumers.
The specific implementation paths of corporate carbon neutrality strategies are generally divided into short term (5-10 years) and long term (more than 20 years). According to ISO 14068, the international standard for carbon neutrality launched in 2023, carbon neutrality is divided into two stages: the early stage is for the organization to reduce its carbon footprint through greenhouse gas emission reduction and removal, and offset the carbon footprint through various forms of carbon credits. Until "greenhouse gas emissions that cannot be reduced"; in the later stage, the organization's carbon footprint is zero or negative, or only "residual greenhouse gas emissions" are left.(Note: Carbon neutrality status allows for carbon footprints that cannot be removed.) Organizations offset this part of the carbon footprint by purchasing carbon credits for removal. Enterprises can formulate carbon neutrality processes, intensity and measures based on their own conditions.
Three misunderstandings should be avoided
For enterprises, organizational carbon neutrality is long-term and voluntary, while product carbon footprint management is an unavoidable and urgent carbon regulation. Enterprise management should have a clear understanding and judgment on this, and avoid three Mistakes that are easy to fall into.
First, insufficient attention or even neglect. Although every enterprise is involved in carbon emissions, since the current domestic and foreign carbon regulations mainly cover power plants and high-carbon intensive enterprises, new energy enterprises and carbon sink enterprises, many companies in other industries believe that carbon reduction and their own production and operation have little to do with it; in addition, domestic and foreign carbon accounting rules are highly professional, wide-ranging, and are constantly innovating, so there are many business owners who know little about this. Other companies have established carbon neutrality strategies and standardized management with the help of professional institutions, but the top management of the company does not really understand the importance of carbon management. They simply understand it as "calculating emissions and buying some emission reductions to offset them.", invest very little energy and resources and treat it as an image project.
The second is to exaggerate or even falsify emission reduction data. Some companies have indeed carried out emission reduction work, but they have not achieved the claimed emission reduction targets when advancing the project, and instead have attracted doubts and criticism. At present, the verification and punishment mechanisms for carbon emission reduction at home and abroad are still far from complete, but the shortcomings are constantly being improved. Starting in 2023, the Science-Based Carbon Targets initiative (SBTi)(The Science Based Targets initiative (SBTi) is a global initiative jointly sponsored by the Carbon Disclosure Project, the World Resources Institute, the World Wide Fund for Nature and the United Nations Global Compact project). Companies or organizations that fail to submit emission reduction target verification within 24 months have posted it on their official website, marking it as "COMMITMENT REMOVED", making these removed companies or organizations suspected of "greenwashing" and "greenwashing". More than 9000 companies around the world have participated in the initiative, and hundreds of companies have been marked and removed, including many well-known multinational companies.
Third, emission reductions are underestimated and additional carbon fees are paid. Some companies are actually promoting emission reductions, but due to their unfamiliarity with differences in domestic and foreign accounting methods and standards, some emission reductions are recognized domestically but not abroad, which may increase export costs in the future. For example, renewable energy electricity purchased through the power grid can be calculated as emission reductions in China, but some countries require that renewable energy power generation must be purchased directly. The purchase through the power grid can only be calculated based on the average carbon emission factor of China's power grid. In this way, the calculated emissions are much higher than the actual ones.
The author is an associate researcher at the Institute of Applied Economics, Shanghai Academy of Social Sciences
