The carbon boundary may affect China's steel and aluminum exports to terminate the energy tax exemption for the aviation and shipping industry

The EU’s drastic climate policy reforms will have a profound impact on the carbon market, aviation and shipping, energy, steel, aluminum and other fields and industries.

In order to ensure that the EU’s greenhouse gas emissions in 2030 will be reduced by at least 55% from 1990 levels, the EU announced on July 14th the thousands-page “Fit for 55” reform package.

A series of extensive reforms were released this time, covering key EU climate policies, as well as related laws on transportation, energy and taxation, including proposals to strengthen eight existing legal provisions and five new initiatives. The European Commission stated that this requires a “careful balance” between pricing, targets, standards and support measures.

For the electricity and industrial carbon markets that have existed for more than 15 years, the impactful change may be the goal itself. Compared with 2005 emissions, the proposal raises the 2030 target from 43% to 61%, which is equivalent to reducing the covered emissions by more than 50% from 2020 to 2030. It also proposes to start from 2026 Include ocean shipping in the carbon market.

Drafts of some of these documents were leaked at the end of June and aroused extensive discussion. Some of the reforms received strong support from some member states, but they also drew strong opposition from other member states. For example, the proposal to include building heating and road transportation into the carbon emission trading system has attracted criticism from countries such as Poland, but this is the main priority of German policy.

Johanna Lane, a policy adviser to the European climate think tank E3G, believes that it is very difficult to reach a “big deal” among member states on the priorities of the “Fit for 55” package, especially since the European Parliament also has a say in this process.

In addition, non-governmental organizations, activists, various sectors of industry and even opponents of climate action will discuss and lobby on the reform plan. But a recent poll by Eurobarometer showed that Europeans are showing overwhelming support for the EU’s ambitious climate action. Negotiations on the package will take several years and may involve in-depth discussions on national priorities in each area.

France opposed it, and Germany’s support for E3G industrial transformation and industrial decarbonization policy adviser Domien Vangenechten told 21st Century Business Herald that the establishment of a second carbon market for the construction and road transportation sectors is a controversial part of the European Commission’s proposal. It will be independent of the existing electricity, heat, industrial and aviation carbon markets.

“The European Commission hopes to adopt policies and economic measures to increase climate ambitions in construction and road transportation, two areas that have hitherto been considered difficult to decarbonize. Competitiveness.”

However, many member states, members of the European Parliament and other stakeholders are skeptical of this idea. At present, France has stood up and questioned the rationality of this measure. Pascal Canfin, a member of the European Parliament from France, even called this measure “political suicide.” But this proposal was affirmed by Germany.

A previous report issued by the Cambridge Econometric Society stated that the expansion of the European carbon market to the two areas of road transportation and building heating will have an impact on low-income households, but at the same time, the measures will reduce the impact of these two areas. The platoon effect is not as effective as imagined.

The regressive nature of carbon pricing may have adverse effects on poorer households. In an interview with the 21st Century Business Herald, Pierre Leturcq, a European policy analyst at the Jacques Delor Institute, a European think tank, said that recent studies have shown that the above-mentioned proposal may have a significant impact on the socio-economic, especially for Europe’s low risk of falling into energy poverty. Income family. Their purchasing power may be severely affected by rising fuel prices and heating prices.

Due to the above-mentioned possible knock-on effects of establishing a carbon market for construction and road traffic, Domien said: “It is not clear whether this proposal will survive the upcoming negotiations.”

To make up for this, the European Commission proposes to set up a social climate fund with a budget of 10 billion euros to provide 144 billion euros of financial assistance to energy-poor households in seven years.

Among the 13 legislative proposals also ambitious is the proposal to increase the annual linear reduction factor of emission allowances under the European Union Emissions Trading System (EU ETS) from 2.2% to 4.2%. By 2030, this measure will reduce emissions from sectors covered by the EU’s emissions trading mechanism by 61%.

The carbon boundary may affect China’s steel and aluminum exports to the EU’s reform package has a major premise, that is, the total emission reduction is-a 55% reduction in greenhouse gas emissions compared to 1990, carbon market quotas, carbon boundary adjustment mechanism quotas, The total carbon emission control of the emission reduction mechanism such as the quota amount generated by the new carbon market will be planned within this framework. Some carbon market analysts predict that the average European carbon price in the second half of this year will be around EUR 56/ton.

Sam Van den plas, policy director of Carbon Market Watch, a carbon market research organization, said that in fact, the evolution of EU carbon prices in the short term is difficult to predict because it depends on several external factors, such as coal and natural gas. Prices, economic recovery related to the impact of the epidemic, etc.

But in the long run, carbon prices will increase with the continuous tightening of carbon market quotas and climate policies. After undergoing the last European carbon market reform in 2018, carbon prices have gradually increased from 5 euros/ton to 20-30 euros/ton in a few years. The European carbon price has almost doubled recently, rising to about 55 Euros/ton. Domien believes that this is because European carbon market participants regard the rising trend of carbon prices as part of the European Green Agreement.

According to policy analyst Pierre, this is a carbon price level that meets the EU’s 2050 climate neutral goal. The increase in carbon prices will affect the entire EU industry, but for some industries that are still unwilling to carry out decarbonization and emission reduction activities in the EU, it is very likely to change the existing rules. For example, for steel and cement producers, they will gradually stop receiving free grants.

The current fluctuations in European carbon prices are mainly affected by the EU power sector, which purchases carbon emission allowances through auctions. At this stage, most of the carbon emission allowances for energy-intensive industries such as steel, cement, and chemicals are free. Sam told the 21st Century Business Herald reporter that the resulting market failure should be corrected. “We call for the’polluter pays’ principle to be used where appropriate, and all emission allowances will be auctioned to heavy industries instead of being distributed for free.”

The European Commission (European Commission) has previously predicted in its impact assessment that the European carbon price may reach 85 euros/ton in 2030. In fact, many market analysts in Europe are more optimistic, believing that carbon prices will rise even higher, reaching 100-120 euros in 2030.

At present, the expected price of the proposed second carbon market is still unclear. The European Commission predicts in its impact assessment that the carbon price of this carbon market for buildings and transportation in 2030 can reach 48-90 Euros/ton.

The continuous rise of carbon prices may affect the export of some commodities in China after the carbon boundary adjustment mechanism is launched. The EU plans to gradually replace the existing carbon leakage measures through a carbon boundary adjustment mechanism during the 10-year period from 2026 to 2036. Domien believes that the two main industries affected by China will be aluminum and steel, which account for 9% and 8% of EU imports, respectively. “But until 2035, both industries will continue to receive free quotas in Europe.”

Termination of the energy tax exemption for the aviation and shipping industry Since 2014, aviation within the European Economic Area has been a part of the European carbon market. So far, airlines in the coverage area have received most of the quotas for free, but according to the European Commission’s recommendations, this practice will be cancelled by 2026 and all quotas will be auctioned instead.

In addition, the European Commission also proposes to implement the International Civil Aviation Organization’s global offset mechanism “Carbon Offset and Reduction Mechanism for International Aviation (CORSIA)”, which will cover all flights from outside the European Economic Area, including flights to and from China, but the premise is Both the EU and China have implemented CORSIA.

Sam believes that the additional costs that this proposal may incur in the Sino-European trade process will be very limited and almost negligible, because CORSIA will not bring any significant costs to airlines.

CORSIA is the ICAO’s official certification system for qualified emission reduction projects. The mechanism is currently in the voluntary pilot phase from 2021-2023. The subsequent voluntary phase will be implemented between 2024-2026, and then the mandatory second phase will be in Implemented between 2027-2035. In 2020, the 219th Council of the International Civil Aviation Organization reviewed and approved the evaluation report on the CORSIA qualified emission reduction project system issued by its Technical Advisory Committee, and recognized that the China Voluntary Greenhouse Gas Emission Reduction Project (CCER) can be CORSIA from 2021 to 2023. Qualified carbon emission reduction indicator provider during the pilot period.

As for shipping, it will be included in the existing carbon market before 2026, and the scope will go beyond the aviation industry. In the proposal of the European Commission, the carbon market will cover all emissions from shipping within the European Economic Area, all emissions during berthing at European ports, 50% of inbound voyages and 50% of outbound voyages.

Although the above reform proposals may have some cost and trade impacts, these impacts will be limited. According to the impact assessment of the European Commission, it is estimated that by 2030, the prices of certain products will have a small increase within 0.7%, while the demand for commodities will hardly be affected, with only less than 1% fluctuation.

In addition to the carbon market mechanism, the European Commission also hopes to link taxation with the energy content and environmental performance of fuels. In a package plan, it proposes to abolish preferential tax treatment for fossil fuels and promote sustainable alternatives after revising energy tax rules. growth of. The regulation is part of a broader package that harmonizes the EU’s economy with stricter 2030 climate goals, which includes different low taxes on vehicle fuel, heating fuel and electricity.

After the EU issued the “Energy Tax Directive” in 2003, it has been following the rules at that time for nearly 20 years. The proposed reform proposal aims to ensure that the EU’s energy tax is more consistent with the new climate targets, and proposes to shift from a quantity-based energy tax to an energy content-based, and introduce fuel classification.

According to this proposal, governments can increase taxes on fossil fuels, that is, carbon dioxide-intensive fuels, and reduce taxes on low-carbon fuels. In addition, the proposal also proposes a new low tax rate, and the existing fossil fuel tax exemption will be greatly restricted. The navigation within the European Union and the aviation industry has been taken into consideration, and it is expected that the low tax rate will be raised during the 10-year transition period.

Domien said that it can be seen that the goal of the proposal is to keep pace with the proposed reform of the European carbon market to rebalance the taxation of fossil fuels and low-carbon energy including electricity.

It is worth noting that the governments of EU member states can impose fuel taxes on international shipping, but the possibility of this happening is not high. Sam told the 21st Century Business Herald reporter that this is because ships can easily refuel outside the EU, so this proposal has little impact on international trade. “The proposal to impose a fuel tax on all flights between the European Union is of great significance. However, it does not include cargo flights and flights outside the European Union, so it is unlikely to have much impact on Chinese companies or Sino-European trade.”

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