The impacts of the EU carbon border adjustment mechanism on China

Abstract The EU is China's second-largest commodity exporter. As the object of taxation via CBAM, discussing the impact of CBAM on China can provide a data basis for China to deal with the EU’s carbon border adjustment mechanism. Based on the analysis of the export trade relationship between China and the EU, this study uses the input-output model to calculate the embodied carbon of China's exports to the EU. In addition, the overall and industrial impact of CBAM on China's exports to the EU is compared and analyzed in four scenarios from the perspectives of direct and indirect carbon and embodied carbon, and the research shows that: (1) the machinery and equipment manufacturing industry is the industry with the most embodied carbon in China's exports to EU, accounting for 41.63%, and the seven industries, i.e. iron and steel, aluminum, fertilizer, cement, chemicals, polymers and electricity, covered by CBAM account for 10.89%; (2) Based on the taxation industry and taxation scope proposed by CBAM adopted on June 22, 2022, and under the current EU ETS carbon price of €70/ton, China will be levied $1.23 billion; (3) According to the taxation scope and taxation industry that may be expanded in the future mentioned in the CBAM proposal, that is, the expansion of CBAM tax scope from direct and indirect carbon to embodied carbon, and the expansion of industries from seven major industries to all industries of the China's export to the EU, the impact on China's exports to the EU is becoming more and more serious, the largest impact is 28 times that of the current proposal. In particular, the industries of machinery and equipment manufacturing, textiles, clothing, shoes, hats, leather, down feather and their products, woodworking products, furniture, and construction, where the impact of embodied carbon emissions is 16 times, 20 times, 56 times, and 14 times that of direct and indirect carbon emissions, respectively. Although these industries are not covered by the current CBAM text, they should not be ignored in the event of the taxable industries expanding in the future.