The EU Carbon Border Adjustment Mechanism and China

The EU has announced ambitious new climate targets, pledging to reduce greenhouse gas (GHG) emissions by 55 percent by 2030 and achieve carbon neutrality by 2050. To help achieve these goals, the EU proposed implementing a carbon border adjustment mechanism (CBAM) in its European Green Deal legislation. The CBAM would operate alongside the EU emissions trading system (ETS), the bloc’s flagship climate policy, in order to prevent carbon leakage, protect industry competitiveness, and safeguard the EU’s new climate targets. The European Commission will publish draft legislation for the EU CBAM and formally launch the legislative process in July 2021, a process that involves complex negotiations between the European Commission and the European Parliament. The exact design and implementation timeline of the EU CBAM remains uncertain. As the EU CBAM will put a price on the GHG emissions embedded in goods imported into the bloc, the mechanism will have a significant effect on both international trade and climate diplomacy. Understanding how the CBAM will impact China is critical, as it is one of the EU’s main trading partners and has also announced its own carbon neutrality target. China’s perception of and potential response to the EU CBAM will have a significant impact on the mechanism’s design and implementation.

Against this backdrop, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) commissioned adelphi to prepare a policy paper and a subsequent workshop on key insights to shed light on how the forthcoming EU CBAM will interact with China’s carbon and trade landscapes, as well as how the mechanism can enhance climate diplomacy between the two trading partners. This paper was made possible with support of the project Sino-German Cooperation on ETS, Carbon Market Mechanisms, and Industry-related N2O Mitigation. The project is part of the International Climate Initiative (IKI), an initiative of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU).  

For the policy paper, experts from adelphi partnered with experts from Tsinghua University to provide an understanding of how the EU CBAM might impact China and how it could become a vehicle for climate cooperation between the two regions. It offers an overview of key CBAM design features, how the mechanism would interact with current climate policies in the EU and China, stakeholder views on the mechanism from both regions, and how the EU CBAM could impact China’s exports to the EU. It also provides policy suggestions to both EU and Chinese policymakers regarding the CBAM and other climate measures. The paper is based on research by means of qualitative analysis.