China lays groundwork for pushback against EU's cross border carbon tax

China is consolidating wider support in its pushback against EU's carbon border adjustment mechanism, or CBAM, and has proposed multilateral talks at a key World Trade Organization (WTO) platform on the rationale and impact of the policy as one of the avenues.

Beijing expects its proposals at WTO's Committee on Trade and Environment (CTE), through which the talks are being held, to lay the groundwork for resisting future cross border carbon taxation mechanisms such as the ones being planned by the US.

While there is no indication that China intends to file an official WTO complaint against CBAM yet, or that a dispute is on the horizon, the talks could feed into the agenda of the WTO's 13th Ministerial Conference, or MC13, schedules in the United Arab Emirates in February 2024, and COP28 in Dubai later this year, experts said.

According to documents submitted to the WTO in March and June and made publicly available, Beijing has proposed "dedicated multilateral discussions" that are "informative, evidence-based, well-structured, with the view of enhancing understanding and promoting cooperation."

It has proposed five broad themes for the discussions -- the basic operating mechanism and underlying methodologies of CBAM, challenges around its implementation, the policy's contribution to environmental objectives like emissions reductions, the overall impact on international trade and developing countries, and the policy's inclusiveness.

Beijing is likely to push for more formal discussions on these aspects of Europe's CBAM in coming months as a means to garner support from impacted countries, according to officials and industry sources.

Market participants said that while China may not be able to dislodge CBAM itself, intensifying debate on such platforms could allow affected countries to negotiate harder for concessions, and give them greater say in the carbon policy, even as Brussels is still in the process of fleshing out the details.

Challenges on practicality

Policy experts are still unclear on the nature of the legal challenges to CBAM and countries that will be impacted in Asia are still getting a handle on how severe the impact could be. Beijing itself is grappling with wider economic and geopolitical concerns.

However, the topics proposed by China for multilateral discussions cover some controversial and polarizing themes, such as the mirroring of emissions reductions under EU ETS in the emissions reductions of another country, the lack of global carbon intensity standards and disagreements over carbon pricing mechanisms between different jurisdictions.

Just opening up these topics for discussions could allow impacted countries to expose deficiencies in the broader adoption of cross border carbon taxes, experts said.

Besides challenging CBAM's practicality, Beijing also cited academic studies led by its top think tank Tsinghua University saying the policy will result in a significant drop in trade between the EU and its trading partners.

Compared with an EU ETS-only scenario, the introduction of CBAM could see EU's imports of CBAM-liable commodities [chemicals, non-metallic minerals, ferrous and non-ferrous metals analyzed in the study] drop by 30% from India and 10% from China, by 2040, due to increasing costs to trade, one study said.

Given that the EU is a net importer in upstream energy-intensive sectors and a net exporter in downstream high-end manufacturing, gross export values of the EU would decrease by 0.81%, a second Tsinghua study showed.

EU's trade will fall more than most developing countries exposed to CBAM, resulting from increasing input costs faced by downstream manufacturers, resulting in a no-win situation for all trading partners, the study said.

The studies also pointed out that CBAM may not effectively resolve "carbon leakage" as the EU expects it to, because, despite shrinking exports, trade will flow to countries that do not have a price on carbon.

Carbon club

In its WTO communication, Beijing argued that "the extra-territorial economic costs of the CBAM are mainly borne by developing countries for the following two reasons: first, developing countries tend to be more carbon intensive per unit output due to their status of development, stages in energy transition and limited access to financial support and technology."

"Second, their economy is more sensitive and vulnerable to higher carbon prices," the document said.

"Furthermore, should an exclusive carbon club be formed along with the CBAM, the output and welfare of developing countries could incur greater losses and global trade could experience a notable decline, leading to greater trade distortions and global inequality," Beijing argued.

One Tsinghua study simulated the impact of a "carbon club" comprising Switzerland, Norway, Canada, the US, Japan, Korea, and Australia, a carbon price of $75/mtCO2e and an equivalent tariff on developing nations.

It said this would result in an export decline of 7.5% in China, 8.2% in India, 10% in Brazil; 8.1% in the US, 11.1% in the EU, 13.3% in Japan and 14.6% in South Korea.

State media Xinhua reported recently that in addition to countries who opposed CBAM during COP27, China's proposals gained support from Australia, Singapore, Saudi Arabia, New Zealand, Columbia and the Philippines during the WTO's meeting in June.

It remains to be seen how much more support Beijing can muster.