China relaxes carbon policies on steel, aluminum sectors amid tariff dispute

China continues to firmly oppose the EU's Carbon Border Adjustment Mechanism and is calling for further negotiations with the EU to address CBAM-related concerns, Liu Zhenmin, the country's special envoy for Climate Change, told state media Xinhua in an interview published late April 16.

Amid the escalating US-China standoff, it seems that the Chinese government is paving the way to strengthen the relationship with the EU government to counter the headwinds. Liu's recent interview, however, signaled that the CBAM is still a considerable inconvenience that hinders the two economies' collaboration in climate-related agendas.

Liu said that he welcomed the resumption of negotiations between the EU and China regarding electric vehicle prices. On April 10, the EU and China agreed on setting a minimum price on made-in-China EVs, instead of adopting tariffs as the EU had initially proposed.

Liu called for similar constructive negotiations on CBAM-related issues, Xinhua reported.

"If developed countries recklessly implement the carbon tariff, it will not only increase the burden on enterprises and hinder the emission reduction efforts of developing countries but also be detrimental to global decarbonization collaborations and impact the free and open multilateral trading system," Liu Zhenmin said, according to Xinhua.

China's challenges

The EU's CBAM is expected to start charging a carbon tariff on emission-intensive commodities exported to the region. Between 2026 to 2040, China is expected to export 868.94 million mt of CBAM-liable commodities to the region, 42% of which relate to iron and steel, 8% to cement, and 6% to aluminum, forecasts from S&P Global Commodity Insights showed.

In the US-China standoff, China's steel and aluminum industries are among the most significantly impacted sectors. The US has imposed a 25% tariff on steel and aluminum imports globally, on top of the 20% fentanyl-related tariffs and the escalating reciprocal tariffs targeting imported goods from China.

Domestically, China's steel, aluminum and cement producers are also expected to start compliance emission trading in 2025, surrendering China Emission Allowances (CEAs) equivalent to their annual emissions incurred in 2024 by Dec. 31, 2025.

However, given all the external pressure, China's Ministry of Ecology and Environment has announced issuance of free CEAs to companies in the three newly onboarded sectors based on their 2024 emissions. As a result, none of the companies need to actually pay for any CEAs in their first compliance cycle.

Platts, part of Commodity Insights, assessed the nearest-December EU Emission Allowance price at Eur66.83/mtCO2e ($76.10/mtCO2e) on April 16. China's CEA price was at Yuan 83.50/mtCO2e ($11.36/mtCO2e) on the same day.

Proactive measures

Liu told Xinhua that China has also been proactively working on the development of carbon footprint accounting standards, such as the carbon footprint standards for batteries, solar PV products and EVs, which are collectively known as the "three new pillars of China's export growth". Liu said the purpose of such developments is to prepare for potential carbon-related trade barriers in these new markets.

Notably, the EU has introduced carbon footprint thresholds to halt imports of carbon-intensive battery products.

In January, the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME) proposed a non-compulsory carbon footprint benchmark of 0.415 mtCO2/KWp for its solar modules catering to overseas markets.

"For solar PV modules, no external carbon footprint constraint has been set by importing countries. However, they may introduce one [external constraint] in future," CCCME told Platts earlier this year.

In recent years, the EU has become one of the largest export markets for China's solar modules and electric vehicles. Amid the white-hot tariff war between China and the US, the EU markets will become even more important, market participants said.

China Photovoltaic Industry Association data showed that last year 40.7% of made-in-China solar modules were exported to European markets.

Based on official customs data, China's total battery EV export to the EU27 countries was around 222,000 units in the first half of 2024, down by 14.6% year over year due to tariff-related concerns.