EY provides an in-depth analysis of the risks and opportunities of the CBAM

On April 11, Ernst & Young held an expert dialogue on the theme of "Impact and Countermeasures of the Carbon Border Adjustment Mechanism (CBAM)" at the 22nd China International Environmental Protection Exhibition. Ms. Lei Yue, Indirect Tax Services Partner at Ernst & Young (China) Advisory Co., Ltd., Hu Mingyu, Senior Research Fellow at the Policy Research Institute of Sinopec Economic & Technical Research Institute, and Robert Earley, Technical Manager of SCS Global Services, discussed the risks and opportunities brought by CBAM to enterprises, and shared practical management strategies and suggestions.

CBAM is a key climate measure taken by the EU to achieve its 2050 goal of "carbon neutrality", aiming to promote the reduction of global greenhouse gas emissions by imposing a carbon price on imported goods that is comparable to that within the EU. The mechanism not only promotes the development and application of low-carbon technologies, but also has a profound impact on the global trade pattern and environmental protection. The EU has made it clear that it plans to bring all product categories subject to the European Union's Emissions Trading System (EU ETS) under CBAM management by 2030, a decision that will further expand the coverage of the CBAM.

The final text of the CBAM bill was officially published in the Official Journal of the European Union on 16 May 2023, marking an important step in the legislative process for the mechanism. According to the regulations, the transition period from October 1, 2023 to December 31, 2025 is the CBAM, which will be fully implemented from January 2026.

However, the current understanding of CBAM policy is still in the early stage of exploration, and the full implementation of CBAM is imminent. In this context, Yue Lei suggested that enterprises should seize the time to understand the policy in depth so as to better respond to the challenges and seize the opportunities for transformation and upgrading. Only by fully understanding the policy requirements can enterprises formulate scientific and reasonable response strategies, so as to occupy a favorable position in market competition.

Yue Lei pointed out that for Chinese enterprises, the implementation of CBAM is both a challenge and an opportunity for transformation and upgrading. Companies need to strengthen the monitoring and management of product carbon footprints to meet CBAM's stringent requirements for carbon emission data. As of July 1, 2024, companies will no longer be able to rely on carbon emission defaults for a long time, and will have to provide more accurate carbon emissions data. In particular, when calculating transition emissions, companies can use the process of quantifying carbon emissions and data quality assurance by December 31, 2024, including monitoring, reporting, The three processes of Verfication, namely the MRV regulatory system and alternative methods, can only rely on actual emission data, forcing companies to build and improve their own carbon emission data collection and management systems to ensure data transparency and reliability, and reduce potential adverse impacts and additional compliance costs.

Robert Earley believes that in the CBAM declaration process, companies need to pay attention to the accuracy and completeness of the data to ensure that the carbon emissions of the whole chain from raw material procurement to production, transportation and final products are covered. At the same time, companies must strictly adhere to the timeline of filing to avoid missing deadlines and facing fines or other disciplinary actions. In addition, companies should also consider adopting advanced information technology and automation tools, such as the Internet of Things (IoT) and blockchain technology, to improve the efficiency of data collection and management.

Hu Mingyu shared the impact of the CBAM on China's petroleum and petrochemical industry. First of all, in the future, the CBAM will dynamically adjust the scope of collection based on carbon emission data and the feasibility of collection, and consider expanding the current direct carbon emissions to the whole production link and the whole industrial chain, which will have a greater impact on the petroleum and petrochemical industry with a relatively long industrial chain. Second, the gradual implementation of the EU CBAM will accelerate the evolution of the global petroleum and petrochemical trade pattern. In addition, in the future, the EU's carbon emissions and carbon border adjustment mechanism will become more and more perfect, resulting in a higher level of carbon content in products, and carbon tariffs will further raise export costs, thereby intensifying the international market competition of China's basic bulk petroleum and petrochemical products. Finally, the EU carbon tariff has led other developed countries to follow suit, giving rise to more green trade measures, and if they cannot be treated equally, China's petroleum and petrochemical industry exports may face more trade barriers. Enterprises should actively participate in international trade dialogues, prevent and respond to possible trade frictions, protect their own interests, and look for new development opportunities.

As the range of products covered by the CBAM continues to expand, those that are not currently included should not sit idly by. Yue Lei believes that companies should take the initiative to study the possible impact of CBAM, whether it is the impact of tax costs or the impact of export markets. By preparing in advance and adjusting strategies, companies can better respond to possible trade barriers in the future and reduce potential economic losses.

When discussing the difficulties faced by enterprises, Hu Mingyu mentioned that the main challenges faced by enterprises are the technical carbon emission measurement, the inconsistency of the organizational structure, and the differences between domestic and foreign standards and algorithms. In order to overcome these difficulties, enterprises need to strengthen communication with government departments and strive for policy support and guidance. At the same time, enterprises should actively explore technological innovation, improve energy efficiency, and reduce carbon emissions to meet the requirements of CBAM.

Hu Mingyu suggested that enterprises should adopt an open attitude and take the initiative to seek partners to jointly research and share CBAM best practices. By working together inside and outside the industry, companies can more effectively address the risks and opportunities presented by CBAM.

Yue Lei said that through proactive response and strategic planning, enterprises can not only reduce potential risks, but also seize the opportunities of green transformation to achieve sustainable development. Recently, the State Council issued the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Trade-in", implementing four major actions: equipment renewal, consumer goods trade-in, recycling and recycling, and standard improvement. This also requires enterprises to transform to low-carbon production, save energy and reduce emissions, and comprehensively utilize renewable resources. Driven by this policy, enterprises are expected to better respond to CBAM requirements and meet the competition in the international market. It is recommended that enterprises strengthen cooperation, innovation and the application of green technologies to adapt to the new trend of low-carbon economy.

Overall, the implementation of CBAM is both a challenge and an opportunity for businesses. The analysis of Lei Yue, Mingyu Hu and Robert Earley provides us with valuable insights into how companies can adapt to this new international trade rule by improving internal management and enhancing technological innovation.