On February 9, 2023, Europe adopted a carbon tariff policy, requiring imported or exported high-carbon products to pay or refund the corresponding taxes or carbon quotas. From October 1, 2023 to December 31, 2025 is the transition period, and the scope of industries involved is the direct emissions from 6 major industries, such as steel, cement, fertilizer, electricity, aluminum and hydrogen, etc. After January 1, 2026 is the official implementation period, which may be expanded to other industries, including organic chemicals, plastics industry, etc. We suggest to follow the trend and focus on chemical companies with low-carbon raw materials, processes and products: 1) synthetic biology companies; 2) green hydrogen coupled with coal chemical technology; 3) nuclear energy coupled with thermochemical hydrogen production technology; 4) bullish on new technological breakthroughs in the field of comprehensive utilization of waste plastics.
At around 7:00 p.m. Beijing time on February 9, the European Parliament Committee on the Environment, Public Health and Food Safety (ENVI) officially adopted the European Carbon Border Adjustment Mechanism (CBAM) agreement, with a specific effective date of October 1, 2023 this year.
The EU CBAM, also known as the Carbon Tariff or Carbon Border Adjustment Tax, is designed to reduce the risk of carbon leakage due to the reduction of free quotas by requiring importers to pay the difference between the carbon price of imported products imported into the EU at their place of production and the carbon price of EU ETS, in order to ensure that imported products bear the same cost of carbon emissions as local products.
October 1, 2023-December 31, 2025 is the transitional period, mainly reporting the greenhouse gas emissions of imported products without actual payment. After January 1, 2026 is the official implementation period, importing entities need to report the import quantity and greenhouse gas emissions of imported goods in the previous year. During 2026-2034, importing entities can use the free allowances of EU Emissions Trading System (EU ETS) to partially cover the emissions of CBAM-related products, and the free allowances will be cancelled after 2034.
Involved industries covered by the CBAM transition period is direct emissions from 6 major industries, including steel, cement, fertilizer, electricity, aluminum, and hydrogen, etc. as well as indirect emissions under certain conditions, certain precursors, and some downstream products, such as screws and bolts and similar items of iron or steel; after formal implementation, this may expand to other industries, including organic compounds, and may also include indirect emissions and more downstream products. The ultimate goal is to cover all industries and sectors covered by the EU ETS by 2030.
The transition period CBAM mainly affects the fertilizer industry. After the transition period, it may be expanded to the organic chemical and plastics industries.
According to Wind data, the current amount of money of fertilizers exported from developing countries to the EU only accounts for 0.06% of the overall exports from developing countries to the EU, accounting for 2.8% of developing countries’ overall fertilizer exports. The transition period CBAM mainly affects the fertilizer industry, but the impact is expected to be limited. The current amount of money of organic chemicals and plastics exported from developing countries to the EU accounts for 3.69% and 2.74% of the countries’ overall exports to the EU, in which the exports of organic chemical to the EU accounts for 20.36% of the countries’ overall organic chemical exports, and that of plastics to the EU accounts for 10.72% of the overall plastic exports. After the transition period, CBAM may expand to the organic chemical and plastics industry. According to Wind data, carbon emissions of chemical industry in the developing countries account for 4.3% of the countries’ total carbon emissions. From the breakdown of the sector, petroleum processing and coking accounts for 2.17%, chemical raw materials and products accounts for 2.07%, chemical fibers accounts for 0.05% and rubber and plastic products accounts for 0.03%, and the impact is relatively manageable.
The long-term competitiveness of companies with low-carbon raw materials, processes and products will be significantly enhanced.
From a short-term perspective, chemical companies in developing countries can strengthen cooperation with European importers who have more free quotas or large chemical usage. The more free quotas available, the smaller the impact of short-term cost shifting.
From a long-term perspective, under the political and policy guidance of carbon neutrality, chemical enterprises need to continuously compare the relationship between the cost and investment in low-carbon technology in the short-term and the increase in social cost of carbon in the long-term. And the long-term competitiveness of enterprises with good use of low-carbon technology and mature corporate low-carbon business model will be significantly enhanced, mainly reflected in:
1) Low carbonization of raw materials: coal to oil and gas in the basic raw materials, electricity as raw material will increase the proportion of green electricity.
(2) Low carbonization of processes: energy-saving devices, energy-saving self-provided electricity, and low carbonization of purchased electricity.
3) Low carbonization of products: traditional high carbon products to reduce production to transfer to low carbonization, and vigorously develop new energy-related products to support the low-carbon transformation of society.
Risk factors
The implementation of the policy is lower than expected; new changes in policy; progress in technology is less than expected.
Investment strategy: follow the trend, focusing on chemical companies with low-carbon raw materials, processes and products
1) The CO2 emissions of bio-based materials have dropped significantly, and the cost advantage is expected to be further increased, focusing on the synthetic biology industry.
(2) Green-hydrogen coupling is expected to become an important competitiveness of large chemical companies represented by coal chemical industry under the stage of "double carbon".
(3) Nuclear energy coupled with thermochemical hydrogen production technology is expected to provide a new solution for green hydrogen production in coastal areas: nuclear energy coupled with thermochemical hydrogen production technology is also expected to become a new green hydrogen production solution, which can use the heat source provided by high temperature gas-cooled reactor to produce hydrogen through iodine sulfur cycle process.
4) Optimistic about the new technological breakthrough in the field of comprehensive utilization of waste plastics: According to the data released by European Plastics Manufacturers Association, global plastic production and consumption will continue to grow, with the production of 367 million tons in 2020 and per capita consumption of 46 kg, and it is expected that by 2050, plastic production will reach 1.1 billion tons, and the problem of landfill or recycling of waste plastics needs to be solved.
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