China Galaxy Securities has released a research report stating that low-carbon technologies and industries are the core support for high-emission sectors to address the Carbon Border Adjustment Mechanism (CBAM) and achieve a green transformation. During the 15th Five-Year Plan period, policies will further focus on energy structure transition, energy conservation and carbon reduction, industrial green retrofitting, and the broader application and commercialization of low-carbon technologies. The primary transformation pathways for the three major high-emission industries—steel, aluminum, and cement—all involve the recycling of waste industrial products. The circular economy, supported by both policy backing and corporate transition needs, is set to become a new engine for green, low-carbon growth. Furthermore, within high-emission sectors, leading enterprises that have made relatively rapid progress and achieved certain results possess advantages in technology and capital, demonstrating significant emission reduction outcomes. In the long term, these companies are expected to enhance their international competitiveness through low-carbon transformation and are worthy of attention.
The main viewpoints of China Galaxy Securities are as follows:
After a transition period of over two years, the EU's CBAM is scheduled to take full effect on January 1, 2026. Initially, CBAM will cover six high greenhouse gas-emitting sectors: iron and steel, aluminum, cement, fertilizers, electricity, and hydrogen. For the steel, aluminum, hydrogen, and electricity sectors, only direct greenhouse gas emissions from the production process need to be declared. The cement and fertilizer sectors, however, must report embedded greenhouse gas emissions. Upon full implementation, importers will be required to surrender certificates in the following year for the carbon emissions associated with their imports from the previous year, meaning the first surrender of CBAM certificates will occur in 2027. Additionally, the EU may expand CBAM's coverage to include steel- and aluminum-intensive downstream products (such as machinery and auto parts) by 2028.
As part of the EU carbon market reforms, CBAM will gradually align its carbon quota system with the EU Emissions Trading System (ETS). Between 2026 and 2034, CBAM will progressively increase the proportion of paid certificates required for these sectors. Concurrently, the free allowances allocated to corresponding sectors under the EU ETS will be phased out. Both EU domestic producers and importers will face a trend of decreasing proportions of free emission allowances and increasing proportions of paid CBAM certificates. Starting in 2035, free allowances for relevant sectors in the EU ETS will be completely eliminated, achieving full integration of CBAM with the EU carbon market. Moreover, the price of CBAM certificates will be based on the average carbon market price.
CBAM essentially functions as a green trade barrier. Its introduction stems from the EU's needs to revitalize its domestic economy and advance global climate governance, and is closely related to internal and external challenges the EU faced prior to CBAM legislation. Following the COVID-19 pandemic, the European economy suffered significant damage. During the global recovery in the post-pandemic era, it has faced three major challenges: the energy crisis, technological competition, and geo-economic conflicts. These all point to two core issues: supply chain security and industrial competitiveness, leading to increasingly prominent development anxieties within Europe. Consequently, Europe requires a new trade policy to aid its recovery from the pandemic and promote economic greening and digital transformation. During the transition period, the "Brussels Effect" of CBAM has already begun to manifest, with various countries taking corresponding measures. Combined with other carbon-related regulations, the EU has formed a suite of green trade policies and is attempting to strengthen its role as a "regulator" in the global green trade arena through these measures.
CBAM is expected to significantly increase the short-term carbon costs for China's high-emission industries. On one hand, the emission intensities of China's three major high-emission industries are higher than the EU average. On the other hand, the large difference in carbon pricing between China and Europe means that domestic carbon costs provide limited offset against CBAM certificate liabilities. In the short term, the cost pressure on these three industries ranks as follows: cement > steel > aluminum. The CBAM carbon cost as a proportion of the value of their corresponding exported goods is estimated at 14.2%-15.9%, 8.5%-9.5%, and 2.9%-3.2%, respectively. Simultaneously, to meet CBAM's reporting requirements, exporting enterprises in these sectors will also bear additional "hidden costs," such as carbon footprint verification and carbon data management, further exacerbating short-term pressure on exporters.
China's high-emission industries need to accelerate their transition. In response to the impact of CBAM, China has made preparations, accumulating certain policy reserves and achieving progress in industrial transformation. However, entering the 15th Five-Year Plan period, China will adhere to the guidance of its "dual carbon" goals, with carbon management and assessment becoming stricter. Enterprises in high-emission industries will face dual carbon costs domestically and internationally, necessitating a gradual low-carbon transition through technological innovation. In the long term, trade patterns and supply chains are likely to be reconfigured, which also presents an opportunity for high-emission industries to accelerate their transformation. Companies that can seize this opportunity will be better adapted to the new global environment and international rules, and are likely to demonstrate more outstanding technological innovation and operational performance.
Risk warnings include: 1. The risk of intensified geopolitical and trade frictions; 2. The risk of insufficient understanding of policies; 3. The risk of policy implementation falling short of expectations; 4. The risk of slower-than-expected progress in technology deployment.
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