Study on the Potential Impact of EU Carbon Tariff on China's Aluminum Industry
2022-05-12 Company News HITS:

According to the current planning of the EU, the carbon border adjustment mechanism (hereinafter referred to as carbon tariff) will be implemented in 2023, and carbon tariff will be imposed in 2026. As a key export area of China's aluminum products, the EU's implementation of carbon tariffs will pose a new challenge to China's participation in international competition. However, in the evolution of trade pattern, China's aluminum processing industry has been deeply integrated with the international market, playing an important role in the global aluminum industry chain supply chain. We oppose the formation of new trade barriers by carbon tariffs. We firmly believe that only open cooperation can achieve win-win sharing, otherwise it will harm others and harm ourselves.

I. China's aluminum exports to the EU

Aluminum products exported from China to the EU mainly show the following characteristics:

First, the export products are mainly aluminum materials and products. China hardly exports electrolytic aluminum to the EU, but only a small amount of refined aluminum, high-purity aluminum and aluminum alloys. The rest of the products are aluminum and aluminum products. In 2021, it will export 10000 tons of refined aluminum and high-purity aluminum, 36000 tons of aluminum alloy, 380000 tons of aluminum materials and 560000 tons of aluminum products.

Second, the EU is China's major export market for aluminum products. In 2021, China will export 940000 tons of aluminum materials and products to the EU, accounting for 11.3% of the total global exports of 8.29 million tons. Among them, aluminum exports to Europe accounted for 6.9%; The export of aluminum products accounted for 19.8%.

Third, the export of aluminum products to the EU has maintained a rapid growth, and the export of aluminum products has fallen back. Since the beginning of the new century, China's exports of aluminum products to the EU have grown at an annual average rate of 19.1%, with a growth rate of 31.5% in 2021. China has become the main force of aluminum products exported to the EU. Affected by the trade friction cases between the EU and China, such as aluminum sheet, foil and profile, the number of aluminum products exported by China to the EU has decreased year by year since 2019, which has been 580000 tons, 450000 tons and 380000 tons in recent three years. The decrease rate in 2020 and 2021 will be 21.7% and 17.6% respectively.

II. Scope of EU carbon tariff collection

Aluminum, cement, steel, electricity and fertilizer are proposed to be included in the EU carbon tariff products category. According to the current plan, aluminum products include unwrought aluminum and aluminum materials, and aluminum products are not included. In 2021, China will export 382000 tons of unwrought aluminum and aluminum products to the EU, involving an amount of 1.53 billion dollars. From the perspective of EU import sources, aluminum profiles and aluminum rolled products are mostly imported from China, with high weight, accounting for more than a quarter of the total. In 2021, China will export 70000 tons of aluminum profiles, 170000 tons of aluminum strips and 120000 tons of aluminum foils to the EU.

There are still variables in the scope of the above products. If the scope of final taxation involves aluminum products or end consumer goods, the impact will be further expanded.

The Impact and Challenge of Three Carbon Tariff on China's Aluminum Export

According to the EU carbon tariff draft, we believe that in the long run, carbon tariffs and their spillover effects will bring pain to China's aluminum product foreign trade, and even affect the global trade pattern. However, in the short term, the impact on China's aluminum exports is relatively limited. Especially under the situation of the superposition of COVID-19, European energy crisis, Russia Ukraine conflict and other events, the European carbon price has dropped, and it is expected that the EU carbon tariff process will also be delayed. According to preliminary judgment, the possible impacts and challenges of carbon tariffs on China's aluminum exports include:

First, increase the export cost and affect the competitive advantage of our aluminum products. Based on the estimation of 382000 tons of unwrought aluminum and aluminum products exported from China to the EU in 2021, 0.7 tons of carbon dioxide emissions per ton of aluminum products, and 80 dollars of carbon tax per ton of carbon dioxide, China will be charged more than 20 million dollars of carbon tax (without deducting the free emission quota) to Europe every year. The annual carbon tax will exceed 300 million US dollars if estimated based on the full life cycle carbon dioxide equivalent. The increased carbon tariff rate will be shared by our export enterprises and European import enterprises. In addition, our exporters need to cooperate with European importers to submit the carbon footprint report of aluminum products, and will also increase costs related to enterprise carbon emission management, data monitoring and regular accounting.

Second, based on the current energy resource status in China, in the short term, if there is no disruptive technology, the carbon emission intensity of aluminum in the whole life cycle will have limited space to decline; In the long run, the impact of carbon tariffs on China is expected to gradually weaken by adjusting the energy structure, significantly increasing the proportion of clean energy consumption, and accelerating the low-carbon transformation.

Third, carbon emissions may become a major "trade weapon" for major economies to cope with climate change. The United States and Europe are working together to promote the establishment of a "carbon club" and attract more countries such as the United Kingdom and Japan to join. It is planned to set barriers to market entry for "not low enough carbon" products. The EU may also grant export tax rebate to export enterprises in the region. Compared with competitors with low carbon emissions, China's export enterprises have less advantages.

IV. Countermeasures

First, carbon tariffs should comply with the WTO rules and strongly oppose the formation of new trade barriers. The intensification of global industrial competition and international political games have led to the intensification of trade protectionism, the improvement of market access barriers and the enhancement of geopolitical objectives in Europe, the United States and other countries. The carbon tariff mechanism proposed by the EU not only continues its trade defense policy, but also shows a new trend of setting trade barriers in the name of "jointly addressing the challenge of climate change". We strongly oppose the introduction of carbon tariffs and other policies that violate WTO rules, and resolutely safeguard the liberalization and facilitation of international trade.

The second is to closely follow up and arrange in advance. We should closely follow the progress of the carbon tariff policy, fully grasp the provisions of the mechanism, and make sure that we know it well and plan ahead of time. On the one hand, we should actively promote clean energy consumption, energy conservation and emission reduction technology transformation, carbon tax cost accounting, comply with the global low-carbon development trend, and seek practical solutions for the sustainable development of the industry. On the other hand, if carbon tariff becomes a disguised trade protectionism measure, China's aluminum industry chain is bound to unite, jointly respond and resolutely counter.

Third, make good use of the policy transition period and do a good job in building domestic carbon market capacity. The carbon tariff will be implemented from 2023; The transition period is from 2023 to 2025, where only carbon emission declaration is made without taxation; Carbon tariff will be officially implemented from 2026. By 2026, complete the basic capacity construction of carbon accounting and carbon pricing. On the one hand, do a good job in aluminum carbon footprint report and carbon emission intensity assessment; On the other hand, establish and improve the carbon emission trading right system, define the "explicit carbon reduction cost" of our enterprise, strive for corresponding carbon tariff deduction, and avoid double taxation of carbon emissions on aluminum products exported from Europe.

Fourth, adjust the energy consumption structure of electrolytic aluminum and increase the utilization ratio of recycled aluminum. Under the constraints of "green and low-carbon" mechanisms such as carbon tariff and ASI certification, considering the full life cycle carbon footprint, aluminum enterprises should make raw materials "low-carbon". On the one hand, they should give priority to purchasing electrolytic aluminum produced by clean energy, and on the other hand, they should improve the utilization ratio of recycled aluminum. This needs to further promote the optimization of the energy structure of electrolytic aluminum and the integrated development of regeneration, primary and aluminum processing.


Information source: World Aluminum Network