The first trial submission period for the EU Carbon Border Adjustment Mechanism (CBAM) ends at the end of February 2024. According to the Financial Times, the European Commission provided statistics on the first submissions, showing that the number of reports of carbon-intensive products from China is more than double that of other countries. Taiwan also ranks among the top five, slightly surpassing India. Why?
The CBAM, which began its pilot program in October 2023, was originally scheduled to collect its first carbon data by January 2024. However, due to technical issues, the EU delayed the process by 30 days, ultimately completing it at the end of last month. However, due to this initial reporting period, issues such as difficulty logging into the system and a generally low reporting completion rate were noted, pending further adjustments by the CBAM's implementing body.
With the implementation of CBAM, EU importers will make their first declarations based on products from the fourth quarter of 2023. According to the declaration data obtained by the Financial Times in an interview with the European Commission, Taiwan ranks among the top five countries in terms of the number of carbon-intensive products, slightly surpassing India. Among the 13,000 reports submitted by local EU manufacturers, about 5,000 data entries were shown to be from Taiwan.
Unsurprisingly, China leads the export of high-carbon-intensive products, with about 25,000 items; closely behind is the United States, with about 10,000 items, more than half less than China; followed by the United Kingdom, Turkey, Taiwan and India, all between 5,000 and 10,000 items; the number of declarations from South Korea and Japan is far less than 5,000.
Looking at the export output value of each country to the EU in the six major industries managed by CBAM, China also tops the list, followed by Turkey, Switzerland, the United Kingdom, the Soviet Union, India, and South Korea. KPMG Managing Director Huang Lijia said in an interview: "Taiwan's export output value is not low to begin with, ranking eighth in the world." Therefore, he was not surprised that Taiwan ranked fifth in the initial disclosure of the declaration volume by CBAM.
Based on this ranking, Huang Lijia inferred that Taiwan ranked fifth: first, because Taiwan's export output value to the EU is not low to begin with; second, the largest product exported by Taiwan to the EU is downstream steel products - screws and nut parts, and the screw and nut manufacturers in Taiwan are all small and medium-sized enterprises, so there are relatively more manufacturers; third, in response to the CBAM pilot, the Ministry of Economic Affairs invited the Industrial Technology Research Institute and others to hold a number of briefings last year, which was effective. "More manufacturers understand it and are more willing to fill out the form," Huang Lijia said, and Taiwanese companies are more cautious and submitted the information as scheduled before the end of February.
The completion rate of first-time applications is low, with Germany and Sweden completing only around 10%.
However, according to data provided to the Financial Times by the German Emissions Trading Agency, approximately 20,000 companies in Germany are required to submit their emissions tax returns, with a first-time completion rate of less than 10%. Other EU member states also experience low compliance rates, such as the Swedish Environmental Protection Agency, which reports a completion rate of only around 11%.
Germany's Federal Environment Agency (UBA) stated that it expects to receive significantly higher numbers of reports during the CBAM pilot program. UBA attributes the low initial reporting rate to the fact that most domestic importers are still unaware of their reporting obligations. After all, the CBAM is still in a so-called "transitional period," with fees not officially starting until 2026
Although the CBAM has not yet been officially implemented, importers of the seven major items covered by the CBAM will still face fines of up to 50 euros per ton of carbon emissions if they fail to complete their reporting obligations before mid-July 2024.
The initial public declaration rate for the CBAM pilot program was only 10%. Huang Lijia frankly stated, "To be honest, this number is not very good." However, he remains cautiously optimistic. Since the pilot period is as long as two years and the declaration frequency is as high as once a quarter, local importers still have many opportunities to learn the operation. The CBAM enforcement agency can hold more briefings and guide importers to understand the filing process, which will help improve the overall learning curve.
From the perspective of the exporting country, he pointed out another observation: the difference in expertise between importers and exporters. EU importers, as uploaders of CBAM-compliant data, specialize in commercial activities such as import trade and customs clearance. Exporters, as manufacturers, are most familiar with technical aspects such as how their products are manufactured and calculating carbon footprints. Both sides must collaborate to complete declarations, which still requires further explanation, guidance, and time. Furthermore, penalties for failing to complete declaration obligations are imposed. Huang Lijia expressed optimism, "The completion rate is expected to increase further in the future."
The number of undeclared CBAM cases is difficult to estimate.
Citi analysts warned that the EU imports a large amount of products from Russia, Turkey, India and China, and it is expected that the input costs of cement and lime, fertilizers, steel and aluminum will increase in the future.
Preliminary statistics from the initial nearly 13,000 reports received indicate that China accounts for the largest share of carbon-intensive products in the EU, far exceeding other countries like the United States, the United Kingdom, and Turkey. This is why China has long criticized the CBAM's reporting requirements, and the current data clearly points to the concentration of carbon leakage in China.
However, during the first CBAM declaration period, not only did technical problems such as difficulty logging into the system occur, but the number of reports that should be received each quarter was also difficult to assess.
A senior EU official told the Financial Times that the European Commission only mentioned that the annual import volume for 2021 would be nearly 240,000. The current requirement for manufacturers to report quarterly remains a practical challenge, as it still involves calculating the number of manufacturers that should report each quarter based on a rough estimate of annual transaction volume from the previous year.
Given that there are still many issues to be resolved before CBAM is implemented, the European Commission has not yet addressed the issue of "undeclared" black numbers. It has only stated that the system operation will be simplified to make it easier for manufacturers who need to register.
EU officials believe: "We must ask the right questions so that we can have a more accurate understanding of the reported data."
Source: CSR World
