From aviation to raw materials: exploring the role of China in the EU’s CBAM
Amid increasing concerns over climate change, the European Commission pushed forward a proposal for establishing a Carbon Border Adjustment Mechanism on the 14th of July 2021, increasing carbon prices on imported goods to avoid carbon leakage. Following the EU Emission Trading System (ETS), the European Green Deal and the climate law, this proposal is another green step that exemplifies the EU’s interest in coordinating global climate governance.
Due to its large volume of carbon emissions and close trade relations with the EU, China is an important player in the implementation of the Carbon Border Adjustment Mechanism. On the one hand, China is committed to fighting against global warming, which can be noticed from President Xi’s pledge to reach carbon neutrality by 2060. The inclusion of the “Paris Agreement” in the EU-China Comprehensive Agreement on Investment (CAI) reaffirms the willingness of climate cooperation between two parties. On the other hand, the EU’s climate efforts are not always appreciated by China. Beijing regards the aviation carbon tax as a form of “green protectionism.”
Based on the cooperation and quarrel between the EU and China in global climate governance, this paper tries to understand the role China plays in the Carbon Border Adjustment Mechanism. After reviewing the bilateral dispute over the aviation carbon tax, this paper analyses the influence of the Carbon Border Adjustment Mechanism on China. This paper highlights that, whenever the EU, as a strategically autonomous actor, pushes forward its sovereign market regulations and green policies, worldwide promotion of these measures can influence China’s decarbonisation agenda and thus lead to tensions despite growing cooperation between the two. In case of conflicts, the EU needs to consider how to make the most of its market tools.
Aviation: lessons from the past
After establishing the EU ETS to reduce carbon emissions with market tools, aviation was included in the system in 2008. This directive depends on the commitment of Member States to implement extraterritorial applications. The inclusion of aviation was relevant to all flights “which depart from an aerodrome situated in the territory of a Member State and those which arrive in such an aerodrome from a third country” and the scope widened by adding the European Free Trade Association (EFTA) States, with an extraterritorial implication. In order to implement this directive, Member States are responsible for managing aircraft operators and can ask for an operating ban in case of non-compliance and decide how to use the revenues from the carbon tax to promote green development. Despite the extraterritorial aspect, the administration and revenues spending are determined by the Member States.
The inclusion of aviation in the EU ETS is closely related to Chinese industries due to the importance of the EU in the development of China’s air service. Up to 2010, Chinese airlines had developed 302 international routes, of which more than 80% were connected with European countries, showing the importance of the EU as a destination for Chinese airlines. Based on the development opportunities realised with the EU, the directive of the aviation carbon tax would considerably impact China, with 35 Chinese airline operators included in the EU ETS. If China followed the EU directive, the airline industry’s economic activities would be heavily constrained. China Air Transport Association estimated that the cost of Chinese airlines would increase by 900 million yuan in 2012, dealing a heavy blow to the aviation industry’s rapid development. The cost of non-compliance is also high because an operating ban would paralyse over 80% of China’s international routes.
Despite the high cost of non-compliance, China has opposed the aviation carbon tax instead of showing a supportive attitude. At the domestic level, with the approval of the State Council, the Civil Aviation Administration of China (CAAC) has prohibited Chinese airlines from participating in the EU ETS and included a carbon tax in ticket prices, considering that aviation should be regulated at a multilateral level, contrary to what it calls the EU’s unilateral approach. Internationally, China has increased its leverage by standing in line with over 30 countries against the EU’s aviation carbon tax, such as the “coalition of the unwilling” consisting of Russia, India, the US, and China. Countermeasures such as prohibition from CAAC, trade retaliation and even a trade war constitute pressure for the EU.
Although the EU has considered using a market instrument such as an operating ban while writing the regulation, it has paid more attention to climate values than market interests. In the proposal of including aviation into the ETS system by the European Commission, the objective is clearly stated as “address[ing] the growing climate change impact”. Although market instruments can be used to implement the directive, compared with climate goals, interest-related considerations such as influence on service trade with concerned countries are not enough in the policy formulation. In the process of implementation, the EU has tried to persuade other opposing countries of the necessity of taking global action to fight against climate change. Faced with the non-compliance of Indian and Chinese airlines that did not submit their emission data on time, European Commissioner for Climate Action Connie Hedegaard has mentioned the possibility of punitive measures taken by the Member States, without specifying the actions to take or the airline companies likely to be subject to such measures. However, when stressing global responsibilities, the commissioner did not specify what market instrument would be adopted to promote these norms or what implication this decision would bear for its market.
CBAM: Challenges of carbon border tax at present
After explaining the importance of market interests in the climate measures, it is important to understand China’s interests, which can be potentially influenced by a carbon border tax. According to Annex I of the proposal 2021/0214 (COD), a carbon border tax is supposed to cover cement, electricity, fertilisers, iron, steel and aluminium. The scope of application illustrates the EU’s green agenda whose starting point is tackling direct emissions related to raw materials instead of direct or indirect emissions in the process of manufacturing finished goods.
Despite close trade relations between the EU and China, a Carbon Border Adjustment Mechanism would exert limited influence on China’s exports to the EU because China, with its abundant labour market, has more comparative advantage in manufactured goods than raw materials. In 2019, the top 3 main imported goods from China by the EU were machinery and vehicles, manufactured goods and chemicals, all of which made up 96% of total imports. Imports of raw materials from China made up 0.5% of total imports. Compared with China, the EU’s close neighbours such as Turkey and Russia, are bigger import sources of raw materials. For instance, the EU’s 2019 steel imports from China represented 7% of its total imports, which was a third of the EU’s steel imports from Turkey.
If the Carbon Border Adjustment Mechanism comes into force, China has more interest in the regulatory power of carbon pricing than having a limited trade volume of raw materials. According to the proposal 2021/0214 (COD), if the carbon leakage in international trade is avoided by carbon regulations in the country of production already, producers can claim a reduction of CBAM in compensation of the carbon price paid during production. On the contrary, in the absence of a carbon market in the country of production, the EU is able to promote its decarbonisation standard worldwide by putting a levy on the imported raw materials. In this case, EU producers, already adapted to the regulation due to market practices, can spend fewer adaptation fees than outsiders and thus grab a first-mover’s advantage. At the same time, China also demonstrates interest in regulating the carbon market. On July 16th 2021, two days after the Commission’s CBAM proposal, the Chinese carbon market started trading.
Although this market covers over 4 billion metric tons of carbon dioxide per year, only electricity, as a starting point, is involved in the current carbon trading scheme, leaving a vacuum of carbon regulation in terms of cement, fertilisers, iron, steel and aluminium. For the industries without corresponding carbon pricing systems in China, the implementation of CBAM would influence products exported from China and, more importantly, China’s future carbon regulation. In order to maintain its regulatory power over the carbon market, China can either extend its carbon market from electricity to other industries before CBAM comes into force, or adopt an opposing position towards CBAM, just as in the case of the aviation carbon tax. The former situation can be realised if China can finish the extension of its carbon market before the end of a transitional period, that is to say, in 2025. However, the current carbon market in China has gone through a long trial period since October 2011, meaning that China’s regulatory pace does not match the agenda of CBAM. In the latter case, the opposition from China, an important player in global trade and climate governance, will influence the implementation of CBAM. Judging from the experience of the aviation carbon tax, compatibility to WTO rules, legitimacy of the EU’s unilateral measures in the global governance and respect for common but differentiated responsibility are likely to be the major disputes over the two parties.
Conclusion: Cooperation or conflict in the future?
In 2012, the EU tried to promote green efforts by including aviation into its ETS system. However, imposing a carbon tax to push for decarbonisation in the aviation industry prompted opposition from China. Without maximising its use of market instruments, the EU eventually abandoned the international aspect of aviation regulation. From this failed attempt, it can be mentioned that unilateral climate measures, not necessarily appreciated by China, have to be supported by corresponding market considerations.
Similar to the aviation carbon tax, CBAM, another EU attempt to weigh on climate governance is likely to prompt opposition from China. As the proposal 2021/0214 (COD) does not cover manufactures, the most exported category of Chinese goods to the EU, China’s export value will not be tremendously influenced in the short run. At the same time, it is unlikely that China, whose carbon market has already started based on electricity, should give up its regulatory power in the carbon pricing system faced with the EU’s unilateral measure.
With climate determination from both sides, green cooperation indicates the general pattern of climate governance in the future while the global promotion of CBAM, unilaterally elaborated by the EU, can lead to tensions. The CBAM proposal, still in the process of internal decision-making, remains somewhat uncertain, such as to what extent the mechanism will be extended to manufactured goods. European hesitation about how to respond to Chinese opposition is still likely to linger, which will put the EU in a disadvantaged situation in case of disputes.
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