Carbon tariffs will be imposed in 2026, the EU’s Green New Deal is unprecedented

Within the EU, the subsequent game and implementation will still be a long process; for China, the most important thing is the introduction of carbon tariffs.

On July 14, local time, the European Commission officially launched the European Green Deal, which further clarified the goal of reducing greenhouse gas emissions by 55% by 2030 compared with 1990, and plans to achieve carbon neutrality by 2050.

In the 2015 Paris Agreement, the EU pledged to reduce emissions by 40% in 2030 compared to 1990. In September 2020, the EU raised its emission reduction target to 55%. In June 2021, the EU climate law will be implemented, and achieving carbon neutrality by 2050 has become a legal goal.

The "European Green New Deal" has formulated a detailed roadmap for the EU to achieve this goal, covering many areas such as the carbon market, energy, energy efficiency, transportation, construction, and carbon border adjustment mechanisms. European Commission President Ursula von Delane stated at a press conference on the 14th that Europe is now the first continent to have established a comprehensive framework for achieving climate change goals.

Europe has explored many climate change-related issues such as green energy transition, carbon market, power market, and green transportation for many years. The consensus on green transition and related market mechanisms are leading the world. To reduce emissions by 55% in 2030 and achieve carbon neutrality by 2050, the EU’s green transformation will be faster and broader in scope, and will also increase the operating costs of related industries. The carbon tariff mechanism will face international pressure. Competition fairness and social fairness brought about by the transformation are also facing challenges. Whether the plan can be successfully implemented is still facing challenges.

Banned the sale of fuel vehicles in 2035

In the field of transportation, the Green New Deal proposes to reduce carbon emissions by 90% by 2050 compared to 2021. Land transportation contributes 20.4% of the EU's greenhouse gas emissions and is the focus of emission reduction. The plan sets the goal of reducing emissions from passenger cars and vans by 55% and 50% respectively (previous targets were 37.5% and 31% respectively) in 2030, and for the first time puts forward the goal that all new vehicles sold in 2035 will be zero-emission vehicles. This means that the EU will ban the sale of fuel vehicles from 2035.

Beginning in 2026, carbon emissions from road transportation will be covered by carbon trading to set a price on pollution, thereby indirectly stimulating investment in clean transportation technologies.

To support the development of new energy vehicles, it is also necessary to invest heavily in infrastructure such as charging piles. The plan proposes to set up a charging station every 60 kilometers and a hydrogen refueling station every 150 kilometers on major highways by 2030.

It is estimated that by 2030, there will be 3.5 million charging stations in Europe, and the number of charging stations will reach 16.3 million in 2050. In terms of new fuels, the EU plans to have 2% of traffic fuels from green hydrogen and 2.6% from biomass in 2030.

Aviation and shipping contributed 3.8% and 4% of greenhouse gas emissions, respectively, and the European Union plans to gradually reduce their emission allowances. In aviation, the European Union plans to reduce emissions quotas by 4.2% per year for intra-European routes, and will no longer provide free allowances from 2026. All the carbon emissions required by companies will be purchased from the carbon market; in maritime transport, it will be used for 3 years from 2023. Time will gradually incorporate maritime carbon emissions into the European carbon market, with a focus on the carbon emissions of large ships.

The role of the carbon market is further expanded

In the EU's Green New Deal, the carbon market is a key player. In the past 16 years, the carbon emission intensity of electricity, heating, and energy-intensive industries covered by the carbon market has decreased by 42.8%, which has contributed significantly to emissions reduction, and the reduction has mainly come from the power generation industry. And out of expectations for the Green New Deal, especially after the EU first proposed a 55% reduction target in 2030 in September 2020, the carbon price in the EU carbon market has continued to hit new highs in the past six months, and is currently stable at 50 euros/ton. the above.

According to the EU's plan, the future carbon market quotas will be tightened even more. The EU plans to reduce carbon emissions in the areas covered by the carbon market by 2030 by 61% compared to when the carbon market was established in 2005, which means that there is still a gap of 18%. To this end, the European Union plans to increase the rate of future carbon market quota reduction from 2.2% to 4.2% per year, and has designed a mechanism to flexibly adjust the total quota. At the same time, the European Commission proposes to retain the 24% annual excess quota reduction rate under the market stability reserve mechanism.

The scope of the carbon market will also expand. The European Union plans to phase out the free carbon allowances for aviation and plans to include maritime transport in the carbon market. For road traffic and construction, the European Union plans to establish a new independent carbon emissions trading system. This system is planned to be implemented from 2025. The target of the system is fuel suppliers, not car owners and homeowners.

Qin Yan, chief power and carbon analyst at Refinitiv, told Caijing that the core of the Green New Deal is to deeply reform the EU carbon market. The EU takes the carbon market as the cornerstone of its climate policy and proposes to expand the coverage of industries to shipping, road transportation and construction, make full use of carbon prices to guide green and low-carbon investment and energy efficiency investment, and use quota auction revenues for innovation funds and social climate Funds, etc., to ensure social equity under the climate change policy.

With so many reforms, where will the rising European carbon price go? Qin Yan said that the EU has substantially increased the emission reduction targets of industries covered by the carbon market and cut allowances. These strong climate policies will continue to support the EU's carbon price. In general, the EU carbon price will remain at the current price in the past two to three years, around 50 euros, to promote the development of clean energy and further promote the decarbonization of the European power industry, and the high carbon price will make the industrial sector more aware of emission reduction The importance of stimulating industrial investment in low-carbon technologies, such as CCUS, hydrogen energy, etc. Refinitiv Carbon Research expects that the EU carbon price will rise to nearly 100 euros in 2030.

Companies affected by the carbon market will also be more cautious in their response. Qin Yan believes that the traditional industrial industries covered by the carbon market are facing the reality that they need to buy quotas through auctions, and they will inevitably be more cautious in selling the existing excess quotas. The market stabilization reserve mechanism will further reduce excess quotas, reduce the number of auction quotas every year, further tighten the supply and demand of carbon market quotas, and raise carbon prices.

The shipping industry that is newly included in the carbon market will also gradually start to purchase EU carbon allowances. Therefore, although the expansion to the shipping industry will face opposition from the shipping industry of other countries, the final result is not certain, and some companies cannot be ruled out early. Layout, buying EU carbon allowances as a hedge.

The carbon border adjustment mechanism will be implemented in 2026

The EU's Green New Deal has the greatest impact on China is the Carbon Border Adjustment Mechanism (CBAM), which is the so-called "carbon tariff". If it is implemented, the EU will become the world's first economy to implement carbon tariffs.

The EU believes that in the context of the EU’s own climate goals, non-EU countries do not have the same intensity of environmental and climate policies, which will lead to the so-called “carbon leakage”, that is, emissions transferred outside the EU, affecting Europe and the world’s response to climate change. s hard work. To this end, it is necessary to introduce a new mechanism for the products imported by the European Union, and to set a price for the pollution generated during the production of imported products.

In other words, products exported to the EU need to pay for the carbon emissions generated during the production process, which is specifically reflected in the CBAM voucher. The price of the CBAM voucher will be linked to the weekly average price of the EU carbon market.

In the first stage, the carbon border adjustment mechanism will cover the five major industries of cement, steel, aluminum, fertilizer, and electricity. The period from 2023 to 2025 is the trial operation stage. At this stage, export companies only need to submit emission data. It will be implemented in 2026. Starting from 2026, EU importers need to declare the emission data of products imported into the EU in the previous year before May 31 each year, and submit a CBAM certificate calculated based on the emission data. In addition, if the importer can prove that the carbon price has been paid based on the verifiable evidence submitted by the third country producer, the corresponding amount can be deducted.

As it involves levying taxes on products exported to Europe, relevant Chinese companies will have a potential impact. According to Qin Yan's analysis, from the perspective of trade intensity, the EU's carbon border adjustment mechanism will inevitably affect Chinese steel and aluminum exporters. Although there are still five years before this mechanism is implemented, companies should prepare as soon as possible.

The first is to establish a complete enterprise energy consumption and carbon emission data detection and verification system as soon as possible, and to be in line with international standards, and strive to have more advantages in negotiations with the EU carbon authority; second, to deploy early to reduce the carbon footprint of products; third, to actively participate The Chinese carbon market strives to use the carbon price cost paid in China as a climate policy equivalent to that of the EU.

The introduction of the carbon border adjustment mechanism plan is also full of games within the EU. Qin Yan said that the subsequent negotiations of the proposal will face greater variables. On the one hand, European steel and aluminum companies are reluctant to lose their current free quotas, believing that the current carbon market mechanism is sufficient to encourage low-carbon industrial development, and there is no need to introduce new complex carbon tariff mechanisms. Carbon market reforms will also push up carbon prices. Influencing the cost of industrial enterprises, the aluminum industry called for removing itself from the industries covered by carbon tariffs on the grounds of indirect emissions and retaliation from trading partners.

Qin Yan said that the current plan introduces a three-year transition period and will postpone its implementation until 2026. The reduction of free quotas for industrial enterprises will be postponed until 2026. These measures are much looser than the previously leaked version of the proposal. The industry has made concessions under pressure. On the other hand, many think tanks and NGOs in the EU believe that free carbon allowances will only bring additional profits to the industry and advocate cutting carbon allowances as soon as possible. In the ensuing legislative negotiations, the two sides will face each other more closely.

Increase the proportion of renewable energy to 40%

The green transition of energy has always been the core issue of climate change. Greenhouse gas emissions in the energy sector contribute 75% of Europe’s emissions. The EU’s package of proposals starts from two aspects: increasing the proportion of clean energy and improving energy efficiency.

In terms of energy structure, in 2019, renewable energy accounted for 19.7% of the European energy structure. The European Union plans to increase this proportion to 40% by 2030, a significant increase from the previous target of 32%. The EU has also set targets for the proportion of renewable energy in different sectors such as transportation, heating and cooling, construction, and industry.

To promote new energy investment and development, the EU will also improve policy mechanisms, accelerate the approval of new energy projects, promote renewable energy power purchase agreements (PPA) measures, set targets and certification mechanisms for renewable hydrogen production, and promote cross-border cooperation. Promote the financing of renewable energy projects and so on.

The transformation of the energy structure focuses on energy production. At the same time, the EU also pays equal attention to the effect of improving energy efficiency on the consumption side in reducing emissions. The plan puts forward a target of 36%-39% increase in energy efficiency by 2030, which is also an increase from the previous target of 32.5%. This means that all member states must meet European energy efficiency standards, and the annual rate of energy efficiency improvement from 2024 to 2030 will increase from the current 0.8% to 1.5%, which is almost doubled.

In addition to these areas, the plan has also formulated detailed plans in several related fields such as environment, soil, agriculture, social climate funds, taxation, and emission reduction sharing resolution (ESR). According to the press release issued by the European Union, these programs are interrelated and complementary. We need this balanced package and the value it generates to ensure that Europe completes its transformation in a fair, green, and competitive manner, and operates in different sectors. Share responsibilities with member states and provide additional support when appropriate.

Disputes and challenges

All parties in Europe are still full of differences on this plan, especially regarding the expansion of the carbon market and the implementation of the carbon border adjustment mechanism.

The European Parliament, European government officials and environmental organizations generally welcome the plan, and some environmental organizations believe that the transition is still not fast enough. And many business representatives worry that radical transformation plans will weaken the competitiveness of European companies. Siegfried Russwurm, President of the German Industry Association (BDI), said that the EU has proposed a bold and specific road map, but it is lacking in how to ensure safe competition in European industry and innovation; only in the process of decarbonization, the industry still maintains global competitiveness. The climate plan will succeed and find followers.

Wolfgang Große Entrup, chairman of the German Chemical Industry Association (VCI), reminded that companies need to protect a level playing field. Otherwise, rather than creating a climate-neutral European industry, it may become a climate-neutral Europe without industry. Regarding the carbon border adjustment mechanism, he also stated clearly that the signal from our international trading partners is clear: the EU's carbon tariff test is very dangerous and is doomed to fail.

Hildegard Müller, chairman of the German Automobile Industry Association, has different opinions on the ban on the sale of fuel vehicles in 2035. He believes that this restricts innovation and technological openness, restricts consumer choice, has a huge impact on many suppliers, and also affects employment. Comprehensive consideration of economic and social impact. On the other hand, he also welcomes the legal support for the expansion of charging facilities proposed by the plan, and believes that there is still room for improvement in the construction goals of hydrogen refueling stations and the goals of renewable fuels.

Carbon tariffs are another focus of controversy. In addition to the aforementioned disputes within the EU, how effective they are, how they are implemented, and whether they conflict with existing international trade rules are all facing disputes.

Although the EU declared in its plan that the carbon border adjustment mechanism is compatible with WTO rules, there is no international consensus on this point. Georg Roderburg, a partner of the London-based internationally renowned law firm Fuerde Law Firm, believes that whether CBAM complies with WTO laws, especially the nondiscrimination rules under the General Agreement on Tariffs and Trade, is still controversial. First, there are signs that EU steel, iron, aluminum and fertilizer producers will have an advantage over non-EU producers. For example, carbon dioxide emitters in the European Union can currently purchase allowances, which are valid until 2030. Therefore, they can compensate for future emissions by surrendering the allowances obtained before the implementation of CBAM. The result is that EU emitters can save costs, while non-EU companies that produce CBAM products cannot do this. Second, the compensation rules for paying carbon prices in third countries may violate the WTO’s most-favored-nation principle.

How quickly the EU’s transformational ambitions can reach a consensus and become decision-making is also one of the concerns. The CEO of Siemens Energy stated in a comment before the launch of the plan that it is important to set the right goals, but more importantly, it is to speed up the implementation of the project, especially to speed up the approval process. For example, in Germany, it takes 12 years to build a transmission line, and such a long cycle is fatal to any energy transition.

In addition, the impact of transformation on social justice for low-income groups is also one of the focal points of controversy. Pascal Canfin, Chairman of the Environmental Committee of the European Parliament, stated in a statement after the release of the Green New Deal that he proposed to emissions from transportation and buildings are included in the carbon market and a carbon price is set. However, for places that live 20 to 30 kilometers away from the urban area, where there is a lack of public transportation, people have no other choice. To reduce emissions.

German Environment Minister Svenja Schulze made three comments on the plan, the second of which emphasizes fairness and solidarity. She said that low-income people and regions especially need help to achieve climate neutrality, and climate protection only It will be successful if it is done socially.

In the next step, the relevant legislative plan of the plan must first be approved by the European Parliament, and must also be discussed and approved by the European Council. Under the multi-interest game, it can be met. The subsequent negotiation, game and landing will still be a long process.

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