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CBAM implications and solutions for industries in Asia


The ECCT's Energy & Environment committee jointly hosted the first in a planned seminar series together with Mt. Stonegate Green Asset Management on the topic: "Embracing Net Zero Era Series - Chapter 1: The gap between the reality and your understanding". The event brought together government and industry experts from Europe and Taiwan to explore the various implications of CBAM for industries in Asia and to share practical experiences and solutions for markets in Asia.

Opening remarks were made by Energy & Environment committee co-chairs, Raoul Kubitschek and Jules Chuang (who is also Managing Director of Mt. Stonegate Green Asset Management). This was followed by five presentations and a Q&A session jointly moderated by the co-chairs.

The speakers were Cynthia Kiang, Director General of the Bureau of Foreign Trade (BOFT), under the Ministry of Economic Affairs (MOEA); Wu I-min, General Manager, Department of Environmental Protection from China Steel Corporation & Vice Chairperson of the Committee on Environment and Work Safety for the China National Federation of Industries (CNFI); Albert Sutanto, Manager, RE100 New Markets for Mt. Stonegate Green Asset Management; Angus McEwin, Managing Director of Monsoon Carbon and Paolo Caridi, Policy Coordinator for the Directorate General for Climate Action (DG CLIMA) of the European Commission.

In her presentation, Director General Cynthia Kiang spoke about net zero challenges and opportunities for Taiwan from a trade perspective.

She noted that all agencies under the MOEA have been instructed to take measures to combat climate change and exchanges with international partners have increased to discuss potential collaboration. For example, Taiwan was mentioned in the EU's Indo-pacific strategy and the BOFT recently held a virtual meeting with the European Commission's Directorate General for Trade to exchange views on net zero carbon reduction challenges.

15 countries have put net zero targets into law, 10 of which are Europeans, indicating European leadership in addressing climate change. Given Taiwan's reliance on trade, local companies have joined several industry alliances that have been formed to promote low carbon supply chains and sustainability initiatives, for example, in the areas of electronics, fashion, chemicals and automotive.

CBAM will initially apply only to five sectors (cement, steel, aluminium, fertiliser and electricity) but there have been recommendations to add other items such as organic chemicals, polymers and hydrogen.

The National Development Council (NDC) published Taiwan's Path to Net Zero Emissions in 2050 on 30 March 2022 and the cabinet has drafted the Climate Change Response Act. The review process of the act has already begun. Reaching net zero will be challenging given Taiwan's dependence on imported fossil fuels and the slow pace of adding renewable energy capacity.

The BOFT has a 2x2 framework for energy transition – meaning moving first to low carbon before transitioning to zero carbon. Part of the government's plans is to introduce a carbon fee for heavy emitters (which will not affect SMEs, which account for the largest number of businesses). State-owned enterprises will serve as demonstration models.

Under Taiwan's pathway to net zero, there are 12 key strategies, including increasing the use of renewables, energy storage and electric vehicles and improving energy efficiency, hydrogen, carbon capture utilisation and storage, resource recycling, and even lifestyle changes.

In the area of hydrogen, the MOEA has already set up a working group, which includes representatives from the BOE and the Industrial Development Bureau. The main goal is to develop hydrogen technologies and applications. The private sector is also active in this area. For example, TSMC is working with Air Liquide and Siemens is working with Taipower. In addition, a lot of local companies with European partners on EV technologies.

BOFT has translated CBAM and distributed it to interested parties and held a lot of seminars for industry and eight workshops for various sectors. The bureau has created a supply chain industry map that lists related companies upstream and downstream, which is available on its website to find potential partners, for example in batteries.

Taiwan has also begun international cooperation with Thailand and will hold a seminar next week with Thai counterparts. Australia is also active in hydrogen and is seeking additional partners.

Many international forums have been held to boost ties with Europe. The Netherlands plans to have a fully circular economy by 2050. Taiwan is also seeking cooperation with Germany on lithium batteries. There are also opportunities in EVs, hydrogen and the circular economy.

In his presentation, Wu I-min gave insights on CBAM, international views on it and the perspective of Taiwanese firms.

The iron and steel sector will be the most affected by CBAM since Taiwan's exports of the other four targeted sectors are not significant. The speaker explained how costs are calculated and the timeline for implementation. When fully implanted, companies which import designated products from countries out of EUETS scope have to calculate the "embedded emissions" of the products and buy CBAM certificates equal to their liable emissions and surrender them to offset these emissions.

However, there are some questions remaining about the CBAM system since not all details have been declared yet. In particular: How should the specific embedded emissions of products be calculated? What is the definition of simple/complex products? How can companies prove that products have been charged carbon pricing at home in order to receive the deductions? And, what is the definition of the free allowance issued by EUETS for specific products in order to calculate the deductions of CBAM?

In terms of the international response to the CBAM proposals, not all countries are on board. BRICS countries, Australia and South Korea have opposed CBAM saying that it should be aligned with the Paris Agreement while the US and Canada have said they will establish their own system.

In response to CBAM, the Taiwan government has initiated several tasks in order to ensure compliance with the draft of CBAM and to reduce the impact. In particular, the EPA has drafted amendments to the Climate Change Response Act and will introduce a carbon fee (to reduce impact of CBAM).

The impact of CBAM on Taiwan industry is not expected to be significant given low exports of products from the designated sectors to the EU. For those affected, like China Steel, it will increase the price of goods in the EU. The company is concerned that the details of CBAM, such as methodology of calculating embedded emission, definition of simple/complex products, and other relating factors, are not clear and need to be declared as soon as possible since companies affected by CBAM will evaluate the risk and take actions only when sufficient information is provided. Moreover, while CBAM is seen as a good initiative, industry players are concerned that proceeds will be used to help EU industry and thereby undermine free competition.

Nevertheless, China Steel is making preparations for CBAM. It has conducted a project to calculate product carbon intensity of each product using its own accounting database in 2021. The company also carried out a project to assess the carbon inventory of processes, which is similar to the EU benchmarking system for the steel industry. It also conducted a product carbon footprint inventory in 2022. The data will be verified by a third party by the end of this October and will be made available to its customers upon request.

The speaker concluded with three suggestions: 1) The government's domestic carbon pricing system should be connected to CBAM to avoid double carbon charges. In addition, sufficient verification capacity shall be secured; 2) Guidance on how embedded emissions should be calculated should be declared as soon as possible, especially for those companies which have never taken GHG inventories and 3) Funds collected from CBAM should be used in a sustainable way to avoid unfair competition.

In his presentation, Albert Sutanto gave an overview of net zero policy and roadmap of Southeast Asian countries.

He first introduced Mt Stonegate which provides carbon asset management and CSR services, renewable energy certificates, among others. The firm is active in India, China, South Korea, Thailand, Indonesia, Malaysia, The Philippines and Taiwan.

Southeast Asian has a population of over 600 million and is experiencing robust economic growth. Indonesia accounts for more than 50% of the region's emissions. Most countries have set net zero targets (Indonesia, along with China, has set a target date of 2060). However, they have not announced formal plans. Singapore is ahead of other countries in that it has already implemented a policy document and a carbon tax. Meanwhile, Cambodia claims that it is already carbon neutral on account of carbon sinks. Thailand has a carbon credit and carbon offsetting programme and is implementing cap & trade (as a pilot programme that does not cover the power sector). Philippines reportedly gets 30% of its energy from renewables but Singapore will have more challenge because of its small land area and high energy use.

In his presentation Angus McEwin gave an overview of I-REC in Southeast Asia.

Monsoon Carbon is consultancy based in Vietnam. It assists its clients to manage risks and opportunities related to environmental and social aspects of their activities, provides services related to climate change, particularly the environmental attributes of renewable energy, including International Renewable Energy Certificates (I-RECs). In particular, the firm is an originator and aggregator of I-RECs. It assists owners of renewable energy power plants to monetize the environmental attributes of their renewable electricity, provides an end-to-end service from registering the power plant to selling the I-RECs. The firm currently manages over 65 I-REC projects for different project owners, including wind, solar, biogas, and hydropower projects. It manages the I-RECs for power plants across 10 countries around the world from Uganda to Indonesia.

RECs are the ‘green' attribute of green or renewable energy – zero carbon emissions. A megawatt hour (MWh) of electricity is divided or de-bundled into the actual electricity and the green or environmental attribute. The green attribute associated with each MWh of renewable electricity can then be sold separately from the actual electricity. This de-bundled environmental attribute of the electricity is a REC. 1 REC is equivalent to the environmental attribute of 1 MWh of renewable electricity

I-RECs is one two global standards along with TIGRs (although use of TIGRs is much smaller than I-REC). I-RECs are used across 42 countries, including southeast Asia.

To be eligible for recognition under the RE100 or SBTI, RECs must be: Purchased from RE power plants that operate in the same country as where the electricity is consumed, generated during roughly the same time period as when the electricity was consumed (usually within the same year, but there are calls to use them even sooner) and only applicable for GHG emissions from electricity consumption.

RECs differ from carbon credits, which can be used to offset emissions. Carbon credits can be sold on international markets across the globe and be banked for several years. In addition, there are many eligibility criteria for registration of projects rules are relatively complex. Credits are applicable for offsetting GHG emissions from any source. RECs have different prices in different countries.

According to market statistics, the issuances of I-RECs has have risen sharply over the past few years. While China is the largest issuer, growth has also been strong in southeast Asia and the Middle East. However, the volume in Taiwan volume is still small given relatively little renewable energy capacity.

Factors that influence the supply include domestic policy, which may restrict the number of projects that may apply for IRECs. Sometimes national utilities offer bundled RECs. In some countries (like Taiwan) you can directly buy or sell electricity through PPAs. Some countries don't have much renewable energy capacity or project owners are not interested in participating in the market.

Demand for I-RECs is increasing as more companies accept them as a way to reduce their carbon footprints not only internally but through their supply chains. There is also interest from industrial parks which hope to sell power to their tenants.

Prices of I-RECs depend on type of renewables, the size of the source and the country. Prices are rising where supply is constrained, such as Taiwan.

I-REC rules could see changes in future to allow cross border use. For example, countries like Singapore want RECs from bordering Malaysia to be recognised for energy used in Singapore. However, this is controversial as it is viewed by opponents as a way for Singapore to dodge its responsibility to reduce its own emissions.

In his presentation Paolo Caridi spoke about how the CBAM works. He began with an overview of Fit for 55, which covers mitigation, renewables, energy taxation mechanism and CBAM. He noted that the CBAM is still subject to the parliamentary process and that the European Parliament has expressed negative views on some aspects.

He noted that the main objectives of the CBAM are to prevent carbon leakage to ensure the effectiveness of EU climate policy and to change behaviours (incentivise countries outside the EU to reduce their emissions and adopt green policy frameworks). He stressed that the objective is not to create revenue for the EU. CBAM reflects the effects of the EU ETS on imports. It is not a tax. It builds as much as possible on the EU ETS with some minor differences when duly justified.

The five sectors targeted are because of high emissions and high risk of leakage. It may be extended to other sectors later.

EU businesses pay a carbon price on their production in the EU. Imports will need to pay a carbon adjustment, corresponding to the price they would have paid if the goods had been produced under the EU's carbon pricing rules (ETS). The CBAM charge will be adjusted to reflect the level of EU ETS free allowances allocated to EU production of sectors in scope. There will be no double pricing. If a non-EU producer can show that they have already paid a carbon price for the production of the imported goods in a third country, that amount can befully deducted for the EU importer.

CBAM will only apply to the proportion of emissions that do not benefit from free allowances under the EU ETS. In the first phase (up to 2026), CBAM will only collect information on actual emissions. From 2026, CBAM will be collected to reflect real emissions in third countries and the revised EU ETS - especially the reduction of available free allowances.

The event was concluded with a Q&A session moderated by the committee co-chairs.

You may download the speakers' slides from the links below:

DG Cynthia Kiang_Impact of the CBAM on Taiwan's market

WU I-Min_EU CBAM current situation and insights of the export manufacturing industry

Albert Sutanto_Net zero policy & roadmap of southest asian countries

Angus McEwin_IRECs in SE Asia

Paolo Caridi_the impact of the EU'sFit for 55