summary:
Most countries are setting targets and taking action to curb climate change. The European Union (EU) has taken the most proactive approach, declaring in its Green Deal a commitment to a 55% reduction in greenhouse gas emissions by 2030 compared to 1990 levels and an 80% reduction by 2050, aiming to achieve carbon neutrality. To effectively curb carbon leakage across borders caused by increasingly stringent environmental regulations and safeguard the international competitiveness of domestic industries, the EU decided in 2021 to implement the Carbon Border Adjustment Mechanism (CBAM), which will be piloted gradually starting in 2023 and is expected to be fully implemented in 2026. This article attempts to understand the potential impact of the CBAM on Taiwan's small and medium-sized enterprises (SMEs) at this stage based on current trade conditions. It assesses that the impact of the CBAM on Taiwan's trade during the transition period and initial implementation is currently minimal, but the increased environmental costs caused by green tariffs will still impose a burden on business operations, necessitating appropriate countermeasures. Furthermore, the article explores the impact of subsequent international reactions and the potential tightening of EU measures on future developments, offering suggestions and possible ways for SMEs to enhance their adaptability or seek guidance and assistance in the face of rising costs and policy changes.
I. CBAM Implementation Measures:
According to the latest revisions to the European Council regulations issued on April 25, 2023, six major products, namely steel, aluminum, chemicals, cement, fertilizers, and electricity, will be included in the initial round of regulatory controls. A transition period will be implemented from October 2023 to the end of 2025, with detailed regulations and subsequent plans adjusted based on the implementation process. During the transition period, manufacturers only need to complete and submit carbon disclosure reports for their products, free of charge. After the formal implementation, they must submit their carbon inventory information to an EU-approved third-party verification agency and submit it by May 31 of the following year. The carbon content per unit product is calculated by dividing production process emissions by the number of products. Production process emissions are categorized into simple and complex products. For simple products (presumably raw materials), only direct emissions from energy use in the manufacturing process are calculated, while for complex products (presumably processed products), direct emissions from intermediate products are included. For cement and fertilizers, indirect emissions from electricity use are included. If carbon content certification is unavailable, the emission intensity of the worst X% of similar facilities in the EU will be used for calculation. Detailed regulations for electricity input will be set separately. The carbon price is calculated based on the previous week's average EU ETS price. Manufacturers must pay the carbon content per unit of product, multiplied by import volume, and the carbon trading price. The full amount must be purchased using certificates (measured in tons), and these can be used to offset carbon fees already paid in the exporting country. Initially, different proportions of free allowances will be allocated to different industries, with these quotas gradually decreasing annually, ultimately reaching zero by 2034. This fully implements volume-based pricing, requiring the purchase of corresponding allowance certificates for any product's carbon footprint, accelerating businesses' progress towards achieving net zero goals.
II. Impacts on my country's Small and Medium-sized Enterprises and Responses:
1. Impact
Looking at China's overall trade with the EU, preliminary estimates suggest the impact will be minimal. In 2022, exports to the EU will be approximately US$34.92 billion (accounting for approximately 7.3% of global exports), of which approximately US$4.38 billion will be CBAM-controlled items (accounting for 12.1% of EU exports). Of the six major controlled items, only steel ($4.22 billion) and aluminum ($156 million) have significant trade volumes, while the remaining four have minimal output. Furthermore, CBAM-controlled items account for over 97% of total steel and aluminum exports, encompassing virtually all export items. This suggests that the steel industry will be the hardest hit in the initial wave of impact. If we consider the average export volume of regulated steel items to the EU over the past five years, which is 1.4 million tons* (the carbon content per unit of product is approximately 0.3-2.3 tons CO2e), then [the figure is missing in the original text]. Based on the average ETS carbon trading price of 85.2 euros, it can be estimated that after the official implementation of CBAM, the steel industry will have to pay fees of approximately NT$1.19 billion to NT$9.11 billion each year, accounting for approximately 2.4% to 20% of the industry's trade volume. Although the overall proportion is not high, it is still a considerable burden for related companies.
Observing the possible direct export impact on my country's small and medium-sized enterprises, among the detailed items of steel industry exports to the EU in 2022, the largest item was direct exports of steel raw materials (approximately US$2.21 billion), which is presumably from the upstream raw material supply side, mainly large enterprises. The second largest item was processed steel screws, bolts, nuts and other fasteners (approximately US$1.68 billion). This industry is most likely to be the main area of impact for small and medium-sized enterprises. In 2022, the trade volume of small and medium-sized enterprises' exports to the EU in the metal manufacturing industry was approximately US$660 million, and it is estimated that a considerable proportion will fall into this industry. This industry is located in the middle and lower reaches and is processing and export-oriented. China is the world's third largest exporter. The industry is mainly characterized by small and medium-sized enterprises, distributed in Luzhu, Taoyuan, Rende, Tainan, and Gangshan, Kaohsiung, forming industrial clusters. They mostly adopt traditional business models, with relatively few applications of digital technology and smart manufacturing. They have low resilience to shocks and have received attention in recent years and have been listed as a priority for guidance and upgrading. Furthermore, the role of small and medium-sized enterprises (SMEs) in the supply chain of products indirectly exported to the EU also needs to be clarified. These enterprises will be affected by supply chain pressures, and whether they have the ability to independently complete carbon inventories and achieve emission reduction targets remains to be seen.
II. Response Actions
Most small and medium-sized enterprises (SMEs) today understand the potential carbon impact and potential concerns of the future. However, due to limited resources and manpower, and the lack of clear regulatory frameworks for SMEs to reduce emissions, they generally lag behind larger enterprises in carbon inventory and proactive action. To address this, Taiwan has implemented relevant guidance measures. For example, the SME Accelerated Investment Action Plan has approved suppliers of several components, including coated stainless steel and coil wire, to invest in low-carbon production lines, green energy equipment, and intelligent data management systems. Furthermore, the Industrial Development Bureau and the Metal Industry Research and Development Center have allocated budgets and established a Carbon Reduction Service Team to assist with carbon inventory, verification, technical equipment upgrade guidance, and talent development programs. The screw fastener industry, particularly affected by this, has also been assisted by the China Steel Corporation and the Metal Center, following the call of the Federation of Hong Kong Industries and the attention of trade unions, to meet the administrative requirements of the CBAM. The government also provides a carbon footprint guidebook, carbon reduction calculation tools, and online consulting services. The government hopes to leverage international trade requirements to bring together large enterprises, the government, and industry research institutions to provide guidance and accelerate SMEs' net-zero path planning.
III. International Development
The international community is generally opposed to the EU's move, viewing it as protectionist tariffs disguised as environmental protection. Major commodity exporters and export-oriented developing countries have reacted most strongly, initiating international legal action and developing countermeasures. However, to safeguard the competitiveness of domestic industries and their regional policy objectives of sustainable development, the EU has made this move imperative. Related industries must proactively prepare for and plan carbon reduction strategies to mitigate the impact. While Taiwan is not currently a primary target of the tariffs, key trading partners such as the United States and Japan are interested in adopting similar mechanisms, potentially multiplying the impact. Furthermore, Taiwan's exports primarily consist of electronic components and machinery manufacturing, and based on international trends, they are unlikely to be subject to regulations in the short term. However, if all metal processing products are regulated in the future, this will have a significant impact on export trade, necessitating proactive carbon reduction strategies to mitigate these impacts.
IV. Summary
Currently in its pilot phase, the impact of the initial CBAM inventory on the industry is manageable, and a significant proportion of free allowances will remain available in the initial stages of implementation. However, small and medium-sized enterprises (SMEs) should seize this opportunity to capitalize on the international trend toward carbon reduction. By implementing relevant measures alongside the carbon reduction and inventory requirements and government guidance provided by larger enterprises, they can seek reference and consultation opportunities. By conducting a full-chain carbon footprint inventory, they can effectively reduce resources and manpower requirements, cultivate relevant talent, and fully disclose analytical information and risks, enhancing industry transparency and competitiveness, thereby preventing their industry from being overwhelmed by stringent regulations.
We should also continue to monitor international developments to avoid possible environmental operational risks. These include the CCA system, which the United States is about to follow, or the possibility of the EU continuing to expand its scope of products. For example, the EU ETS project is intended to be included in the CBAM list, resulting in increased transportation and fuel costs, or the inclusion of more items in electricity emissions calculations. Because Taiwan's energy emissions coefficient is too high, this move will seriously weaken the competitiveness of its export products. We must rely on energy transformation and development to reduce the harm. The plastics industry was originally included in the list of regulated items, and we should clarify the relationship between the industry supply chain and the carbon emission intensity of products as soon as possible to respond promptly.
Taiwan also established a carbon trading exchange in April and plans to implement a carbon fee in 2024. Since carbon fees paid by the original exporting country can be offset against CBAM, this move can shift trade costs into domestic green investment funds. However, the EU carbon trading system has been in place for a long time and is relatively mature and stable. The recent carbon trading price of 93 euros has reached the highest benchmark of $50-100 per ton of CO2 recommended by the International High-Level Commission on Carbon Pricing by 2030. Compared to neighboring regions such as mainland China at approximately $8 per ton of CO2 and South Korea at approximately $28 per ton of CO2, this price is undoubtedly too high. It is expected that Taiwan will adopt a moderate and gradual approach to implementation, accompanied by incentives such as offsets and subsidies. However, regardless of how the carbon price is set, early carbon inventory and lowering of product carbon content standards are the most direct and effective measures for both domestic and export sales.
Source:
1. The EU has not yet clearly defined the list of product categories, defining them based on general understanding. 2. Implementation details are still pending from the European Commission. Based on a previously reviewed version, the estimated percentage is 10%.
Organizer: Ministry of Economic Affairs, SME Administration
Executing Unit: Plastics Industry Technology Development Center
