October 2023
"Carbon" Ambush in Autumn of 2023 – From the Taiwan Carbon Solution Exchange and the EU's CBAM
October 2023
Aaron Chen and Sally Yang
Facing intensified extreme climate change and carbon reduction demands under relevant international agreements, Taiwan recently renamed and passed the Amendments to the Climate Change Response Act, under which relevant greenhouse gas reduction measures are adopted. In addition to the carbon fee system,[1] long-term reduction plans include the implementation of a total volume control and emissions trading system. The preliminary measures include the establishment of systems for voluntary reductions, allocation of emission quotas, and trading.[2]
To achieve the goals of the Climate Change Response Act, the Taiwan Carbon Solution Exchange (hereinafter, the "TCX") was officially launched on August 7, 2023, garnering significant attention from all walks of life. Given that the European Union's Carbon Border Adjustment Mechanism (CBAM) has been put into effect since October 1, 2023, how businesses and governments respond and strategically plan for related carbon reduction will surely become a focus of attention.
I. Establishment of the TCX
Currently, the business items initiated by the TCX are limited to "carbon consultation," primarily aimed at assisting the government in promoting policies and conducting educational training on carbon audits, carbon neutrality, carbon tariffs, and other related topics, as well as cultivating professional talent and organizing training courses.
In the future, after the relevant regulations of the Climate Change Response Act are established to establish the rules on related transaction modes and carbon fees, the TCX will continue to promote "domestic carbon credit trading" and "foreign carbon credit trading." However, these services are not yet available at the present stage. According to the TCX, the expected services will include the following:
(1) Domestic carbon credits
1. Voluntary reduction project system: According to the explanation provided by the Ministry of Environment, the voluntary reduction mechanism is the "carbon credit offset mechanism." Businesses or government authorities at all levels can apply for voluntary reduction projects based on reduction methods recognized by the Ministry of Environment, which is the central competent authority, and after the projects are reviewed and approved by the Ministry of Environment, the quotas obtained after demonstrating actual reductions are referred to as "reduction quotas." The voluntary reduction system has already been implemented for years, and in June 2023, the Ministry of Environment pre-announced the draft Greenhouse Gas Voluntary Emission Reduction Projects Regulations, which will allow companies to transfer, trade, or auction the quotas on a trading platform as needed.
2. Incremental offset mechanism: Under the draft Regulations for the Management of Offsetting the Increased Greenhouse Gas Emissions, pre-announced by the Ministry of Environment in July 2023, activities involving a significant increase in greenhouse gas emissions must undergo a certain percentage of incremental offset, while multiple sources for greenhouse gas incremental offset shall be provided at the same time, such as the offset quotas obtained by replacing old vehicles, motorcycles, and equipment, switching to biogas or biomass fuels, and so on. In the future, the TCX will provide a platform for businesses to offset the carbon reduction requirements needed for plant construction or new facility establishments as part of the environmental impact assessment.
(2) International carbon credits
The TCX remarked that it will join hands with credible international certification bodies to provide carbon consulting services and quality overseas carbon trading support to assist the supply chain in reducing carbon emissions and implementing carbon neutrality requirements.
II. EU's CBAM transition phase starting on October 1st
The product categories currently covered by the CBAM include steel, cement, aluminum, fertilizers, electricity, hydrogen, certain downstream aluminum products, and certain downstream steel products (such as screws, bolts, and related products). The CBAM will apply to the direct carbon emissions from the production process of regulated products and the indirect emissions from electricity consumption.
The period between October 1, 2023 and the end of 2025 is a transition period for the CBAM, during which importers are first required by the European Union to report the embedded emissions for imported products. This transitional phase intends to provide businesses with sufficient preparation time, and businesses are not yet required to pay financial adjustments.
Starting from January 2026, importers will be charged financial adjustment based on the carbon content, with importers purchasing corresponding "CBAM certificates" as carbon prices based on the quantity and carbon content of their imported products. The carbon price collection standard under the CBAM will reflect the price of the EU's own carbon emissions trading system (EU ETS), which fluctuates as it is conducted through daily auctions. Therefore, CBAM certificates will be based on the weekly average price of EU ETS. However, if importers have already paid carbon prices in non-EU countries, such paid carbon prices may be offset.
Noteworthy trends
The purpose of the EU's CBAM is to prevent carbon leakage. Therefore, in principle, carbon prices or carbon taxes already paid in foreign countries can be offset. This legislation is expected to drive various governments to consider ways to collect carbon taxes or carbon fees from their domestic companies, as it is more beneficial to keep the tax revenue in their own countries rather than having companies pay carbon taxes when they export to the EU. For example, the U.S. Senate's Clean Competition Act (CCA)[3] has cleared through its second reading. After the CBAM trial, whether it will continue to be promoted is worth monitoring, and businesses should be prepared as early as possible.
As far as Taiwan is concerned, the collection of carbon fees may also be influenced by the EU's CBAM and the considerations mentioned above. Although, in principle, carbon fees paid in Taiwan can be offset against the CBAM, how to offset them will depend on negotiations between governments, as Taiwan's carbon fee calculation regulations have not yet been established. How Taiwan's carbon fee system aligns with the EU's CBAM is an urgent concern for industries, and the government's subsequent accommodating measures remain to be observed.
Regarding the voluntary reduction projects that the TCX plans to trade in the future, they are not eligible as offset targets for the CBAM. In practice, the CBAM regulates carbon emissions under the mandatory reduction scheme, which is different from the carbon credits obtained in a voluntary market for voluntary carbon reduction. The CBAM aims to push businesses to reduce carbon emissions. Therefore, they cannot be offset by purchasing carbon credits.
With the effectiveness of the CBAM, carbon pricing has become an international trend. Businesses should proactively assess their carbon emissions and initiate carbon reduction efforts, as well as pay attention to the progress of related legislation in Taiwan and other countries, and be prepared as early as possible.
[1] For relevant introductory information, please refer to a newspaper article published by the Firm in March 2023 and titled: The ESG Matters Enterprises Should Understand in 2023 - Brief Introduction on the Carbon Fee System from the Climate Change Response Act (Taiwan).
[2] Article 34, Paragraph 2 of the Climate Change Response Act.
[3] S.4355 - Clean Competition Act, CONGRESS.GOV,
https://www.congress.gov/bill/117th-congress/senate-bill/4355/actions (last visited: September 21, 2023)
Aaron Chen and Sally Yang
Facing intensified extreme climate change and carbon reduction demands under relevant international agreements, Taiwan recently renamed and passed the Amendments to the Climate Change Response Act, under which relevant greenhouse gas reduction measures are adopted. In addition to the carbon fee system,[1] long-term reduction plans include the implementation of a total volume control and emissions trading system. The preliminary measures include the establishment of systems for voluntary reductions, allocation of emission quotas, and trading.[2]
To achieve the goals of the Climate Change Response Act, the Taiwan Carbon Solution Exchange (hereinafter, the "TCX") was officially launched on August 7, 2023, garnering significant attention from all walks of life. Given that the European Union's Carbon Border Adjustment Mechanism (CBAM) has been put into effect since October 1, 2023, how businesses and governments respond and strategically plan for related carbon reduction will surely become a focus of attention.
I. Establishment of the TCX
Currently, the business items initiated by the TCX are limited to "carbon consultation," primarily aimed at assisting the government in promoting policies and conducting educational training on carbon audits, carbon neutrality, carbon tariffs, and other related topics, as well as cultivating professional talent and organizing training courses.
In the future, after the relevant regulations of the Climate Change Response Act are established to establish the rules on related transaction modes and carbon fees, the TCX will continue to promote "domestic carbon credit trading" and "foreign carbon credit trading." However, these services are not yet available at the present stage. According to the TCX, the expected services will include the following:
(1) Domestic carbon credits
1. Voluntary reduction project system: According to the explanation provided by the Ministry of Environment, the voluntary reduction mechanism is the "carbon credit offset mechanism." Businesses or government authorities at all levels can apply for voluntary reduction projects based on reduction methods recognized by the Ministry of Environment, which is the central competent authority, and after the projects are reviewed and approved by the Ministry of Environment, the quotas obtained after demonstrating actual reductions are referred to as "reduction quotas." The voluntary reduction system has already been implemented for years, and in June 2023, the Ministry of Environment pre-announced the draft Greenhouse Gas Voluntary Emission Reduction Projects Regulations, which will allow companies to transfer, trade, or auction the quotas on a trading platform as needed.
2. Incremental offset mechanism: Under the draft Regulations for the Management of Offsetting the Increased Greenhouse Gas Emissions, pre-announced by the Ministry of Environment in July 2023, activities involving a significant increase in greenhouse gas emissions must undergo a certain percentage of incremental offset, while multiple sources for greenhouse gas incremental offset shall be provided at the same time, such as the offset quotas obtained by replacing old vehicles, motorcycles, and equipment, switching to biogas or biomass fuels, and so on. In the future, the TCX will provide a platform for businesses to offset the carbon reduction requirements needed for plant construction or new facility establishments as part of the environmental impact assessment.
(2) International carbon credits
The TCX remarked that it will join hands with credible international certification bodies to provide carbon consulting services and quality overseas carbon trading support to assist the supply chain in reducing carbon emissions and implementing carbon neutrality requirements.
II. EU's CBAM transition phase starting on October 1st
The product categories currently covered by the CBAM include steel, cement, aluminum, fertilizers, electricity, hydrogen, certain downstream aluminum products, and certain downstream steel products (such as screws, bolts, and related products). The CBAM will apply to the direct carbon emissions from the production process of regulated products and the indirect emissions from electricity consumption.
The period between October 1, 2023 and the end of 2025 is a transition period for the CBAM, during which importers are first required by the European Union to report the embedded emissions for imported products. This transitional phase intends to provide businesses with sufficient preparation time, and businesses are not yet required to pay financial adjustments.
Starting from January 2026, importers will be charged financial adjustment based on the carbon content, with importers purchasing corresponding "CBAM certificates" as carbon prices based on the quantity and carbon content of their imported products. The carbon price collection standard under the CBAM will reflect the price of the EU's own carbon emissions trading system (EU ETS), which fluctuates as it is conducted through daily auctions. Therefore, CBAM certificates will be based on the weekly average price of EU ETS. However, if importers have already paid carbon prices in non-EU countries, such paid carbon prices may be offset.
Noteworthy trends
The purpose of the EU's CBAM is to prevent carbon leakage. Therefore, in principle, carbon prices or carbon taxes already paid in foreign countries can be offset. This legislation is expected to drive various governments to consider ways to collect carbon taxes or carbon fees from their domestic companies, as it is more beneficial to keep the tax revenue in their own countries rather than having companies pay carbon taxes when they export to the EU. For example, the U.S. Senate's Clean Competition Act (CCA)[3] has cleared through its second reading. After the CBAM trial, whether it will continue to be promoted is worth monitoring, and businesses should be prepared as early as possible.
As far as Taiwan is concerned, the collection of carbon fees may also be influenced by the EU's CBAM and the considerations mentioned above. Although, in principle, carbon fees paid in Taiwan can be offset against the CBAM, how to offset them will depend on negotiations between governments, as Taiwan's carbon fee calculation regulations have not yet been established. How Taiwan's carbon fee system aligns with the EU's CBAM is an urgent concern for industries, and the government's subsequent accommodating measures remain to be observed.
Regarding the voluntary reduction projects that the TCX plans to trade in the future, they are not eligible as offset targets for the CBAM. In practice, the CBAM regulates carbon emissions under the mandatory reduction scheme, which is different from the carbon credits obtained in a voluntary market for voluntary carbon reduction. The CBAM aims to push businesses to reduce carbon emissions. Therefore, they cannot be offset by purchasing carbon credits.
With the effectiveness of the CBAM, carbon pricing has become an international trend. Businesses should proactively assess their carbon emissions and initiate carbon reduction efforts, as well as pay attention to the progress of related legislation in Taiwan and other countries, and be prepared as early as possible.
[1] For relevant introductory information, please refer to a newspaper article published by the Firm in March 2023 and titled: The ESG Matters Enterprises Should Understand in 2023 - Brief Introduction on the Carbon Fee System from the Climate Change Response Act (Taiwan).
[2] Article 34, Paragraph 2 of the Climate Change Response Act.
[3] S.4355 - Clean Competition Act, CONGRESS.GOV,
https://www.congress.gov/bill/117th-congress/senate-bill/4355/actions (last visited: September 21, 2023)
