As the European Union marks the first anniversary since the publication of the final text of the Carbon Border Adjustment Mechanism (CBAM) law, companies are still grappling with their understanding of this initiativeThis lack of clarity introduces significant uncertainties regarding the implementation of CBAM.

"The current sense of urgency for businesses stems primarily from the need to prepare for transformation following the implementation of CBAMStarting July 1st of this year, companies will no longer be able to rely on the previously established default values for carbon emissions for reporting under CBAMThey will be required to provide much more accurate data regarding their carbon emissions," noted Yue Lei, a partner in indirect tax services at Ernst & Young Consulting, during an interview on April 12th.

CBAM stands as the world’s first legislation fundamentally addressing the concept of a "carbon tariff." In straightforward terms, CBAM taxes carbon emissions associated with certain imported goods into the European Union

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This mechanism mandates that high-carbon products imported into the EU or exported from it are subject to specific tax rates or require corresponding carbon emission allowances to be refunded.

According to EU regulations, CBAM consists of two primary phases: a transition period and a substantive implementation periodThe transitional phase is delineated as running from October 1, 2023, until December 31, 2025, with the official rollout of substantive measures commencing on January 1, 2026.

From the perspective of various nations, the impact of CBAM on enterprises is not uniform"From our observations, the implementation of CBAM presents both a challenge and an opportunity for Chinese companies," Yue elaboratedIn this context, businesses are encouraged to bolster their monitoring and management of product carbon footprints to meet the stringent carbon emission data requirements that CBAM stipulates.

Previously, as outlined in EU publications, during the transition phase, EU importers are tasked with submitting quarterly CBAM reports

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These reports must include the overall production volumes from each facility in the country of origin, the total implied emissions, total indirect emissions, and carbon pricing for the implied emissions from the country of origin.

Consequently, EU importers must solicit production emissions data from their overseas suppliers to fulfill their reporting obligations under CBAM.

Yue further explained that when calculating emissions during the transition period, companies can utilize alternative methods for quantifying carbon emissions and ensuring data quality until December 31, 2024. Post that date, they will be required to rely solely on actual emissions data, which will compel companies to refine and enhance their carbon emissions data collection and management systems, ultimately mitigating potential adverse impacts and additional compliance costs.

Examining the oil industry as an example, CBAM will levy taxes based on carbon emissions data

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This will impact the entire production cycle and supply chain of the sector, especially given the complexity and length of the oil and petrochemical industry’s supply chain.

Hu Mingyu, a senior researcher at the Policy Research Institute of the China Petroleum and Chemical Industry Federation, perceives that the gradual implementation of the EU CBAM will significantly alter global trade patterns for oil and petrochemical products"We believe that the EU's mechanisms for carbon emissions and border adjustments will increasingly refineThis progression will see gradually elevated levels of carbon content in productsConcurrently, the implementation of carbon tariffs will add to the export costs, intensifying competition for our base crude oil and petrochemical products in international markets," stated Hu.

Reports indicate that the EU's carbon tariff has sparked imitation from other developed nations

For instance, countries such as the United States, the United Kingdom, and others are now heating discussions around implementing similar carbon tariff-related initiatives, potentially triggering a wave of similar legislative actions across the globe.

"Although the EU carbon tariff is still in its transitional phase, the move is likely to activate further green trade measures resonating across nationsIt’s crucial to note that if the EU does not apply these regulations uniformly, the Chinese petrochemical sector may face additional trade barriers," Hu warned.

Addressing this issue, China’s Ministry of Ecology and Environment has previously provided clarification.

In a press briefing back in February, Zhao Yingmin, Deputy Minister of Ecology and Environment, expressed that CBAM represents a unilateral measure that has drawn significant attention from a wide range of countries, particularly developing nations.

Zhao emphasized the need for global climate governance to respect the varying national circumstances and capabilities of different countries, cautioning against unilateral actions

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"Global climate governance should thoroughly respect national contributions arranged 'bottom-up' and duly acknowledge the distinct conditions and capabilities of various countriesNegotiations should focus on achieving broad global consensus for carbon market collaboration under the Paris Agreement's Article 6, and unilateral actions should be avoided to reduce unnecessary adverse spillover effects on nations outside the region," Zhao articulated during the policy briefing.

For enterprises, actively engaging in international trade dialogues and preemptively addressing possible trade friction has become a vital learning point during this transitional phase of CBAM.

Yue contended that through active engagement and strategic planning, firms can not only lower potential risks but also seize opportunities for green transformation and achieve sustainable development.

In Yue's perspective, driven by the CBAM policy, companies are positioned to better respond to the stipulations of CBAM as they prepare to face international market competition