New Carbon Order: China's Response to the EU's Carbon Border Adjustment Mechanism

New Carbon Order: China's Response to the EU Carbon Border Adjustment Mechanism

The EU Carbon Border Adjustment Mechanism (CBAM), as the world's first carbon tariff tool, is reshaping the carbon rules of international trade. As the EU's largest trading partner, China is facing direct pressure from this mechanism, which has accelerated its efforts to expand the domestic carbon market, improve carbon accounting systems, and promote the low-carbon transformation of its energy system. This process not only affects the China-EU trade landscape but also provides an important observation window for global carbon governance and energy transition.

Industry Background

The EU first proposed the CBAM in 2019 as part of the European Green Deal, and it was adopted by the European Council in March 2023, becoming a core measure of the "Fit for 55" package. The CBAM aims to prevent "carbon leakage", i.e., where emissions reductions within the EU are offset by imports with high carbon emissions. The mechanism requires importers to purchase CBAM certificates for the carbon emissions embedded in their products, unless an equivalent carbon price has already been paid in the country of production. In the first quarter of 2026, the price of CBAM certificates was approximately EUR 75.36 per tonne of CO2. From 2027 onwards, the certificate price will be linked to the auction price of allowances in the EU Emissions Trading System (ETS).

China is the world's largest emitter of greenhouse gases, with a coal-dominated energy structure and relatively high carbon intensity in industrial production. According to EU trade data, 21.3% of EU imports in 2024 came from China, making it the EU's largest trading partner. Although Chinese exports covered by the CBAM account for only 0.8% of its total exports to the EU, steel and aluminium dominate, with steel accounting for 92% and aluminium 7%. A 2025 study estimated that the CBAM could impose costs of about USD 1.4 billion on China, representing only 0.3% of its total export value to the EU. However, the EU plans to expand the CBAM to approximately 180 steel- and aluminium-intensive downstream products, including mechanical components and household appliances, by 2028, at which point the impact will expand significantly.

China has established its "dual carbon" goals: to reach peak carbon emissions before 2030 and achieve carbon neutrality before 2060. In 2025, China further committed to reducing total greenhouse gas emissions by 7% to 10% below their peak by 2035, marking the first time China has proposed an absolute emission reduction target.

Current Developments

In response to the external regulatory pressure brought by the CBAM, China is adjusting its carbon governance system on multiple levels. The national carbon emissions trading market has been established and is gradually expanding its coverage to more energy-intensive industries. This expansion not only helps improve domestic carbon pricing but also provides export enterprises with a comparable proof of "carbon price paid".

At the same time, China is strengthening enterprise-level carbon emission reporting, monitoring, and verification mechanisms, and promoting the development of standards. Some provincial governments have also launched initiatives to support industry carbon targets and help enterprises address domestic and international carbon governance, assisting export companies in familiarizing themselves with international rules.At the international level, China is also actively participating in multilateral dialogues related to carbon pricing. Although the possibility of a direct link between the EU ETS and China's ETS is unlikely in the short term, China's carbon governance system is gradually moving closer to EU standards in order to reduce compliance costs for exporting enterprises.

Impact on the Energy System

CBAM provides additional economic incentives for the transformation of China's energy system. Since CBAM levies tariffs based on the embodied carbon emissions of products, Chinese exporting enterprises have strong incentives to use low-carbon electricity, improve energy efficiency, and adopt alternative energy sources such as green hydrogen. This will accelerate the deployment of clean energy in the industrial sector, especially the development of new processes such as electric arc furnace steelmaking and hydrogen-based direct reduced iron.

At the same time, the impact of CBAM is changing the direction of energy investment. To reduce the industrial carbon footprint, capital is flowing into infrastructure such as renewable energy power generation, energy storage systems, grid upgrades, and green hydrogen production. China is the world's largest manufacturer and installer of renewable energy equipment, and this trend will further consolidate its dominant position in the photovoltaic, wind power, and battery supply chains.

The internalization of carbon costs is also accelerating power market reform. As more industrial sectors are included in the ETS, the electricity pricing mechanism will more fully reflect carbon emission costs, thereby incentivizing the gradual phase-out of coal power and providing greater space for nuclear, hydro, and renewable energy.

Challenges Ahead

Although China has made progress in carbon governance, there is still a gap relative to EU standards. First, China's ETS currently relies mainly on free allowances, and carbon prices are far lower than EU levels, making it difficult to form an equivalent carbon cost. Second, the data infrastructure for carbon accounting remains incomplete, and the accuracy and traceability of product-level emission data are insufficient, which may become an obstacle to mutual recognition of carbon data between China and the EU.

The expansion of CBAM will significantly increase the compliance burden on Chinese exporting enterprises, especially small and medium-sized enterprises, which may lack the professional capacity to handle complex reporting requirements. In addition, the continuous adjustment of EU CBAM rules has created policy uncertainty, making it difficult for enterprises to formulate long-term investment plans.

At the international level, a mutual recognition mechanism for carbon governance systems between China and the EU has yet to be established. If China cannot provide carbon price certification that meets EU standards, its exporters will have to pay CBAM tariffs in full, weakening the price competitiveness of Chinese products. Meanwhile, the United States has not yet established a federal-level carbon pricing mechanism, and institutional convergence between China and the EU on carbon governance may marginalize the United States in the formulation of international carbon rules.

Future Outlook

From a perspective of five to twenty years, CBAM may become an important force driving the convergence of global carbon pricing systems. China will most likely continue to expand the industry coverage of the ETS, gradually tighten allowance allocation, and explore mutual recognition arrangements with the EU on carbon accounting methods. As the cost of renewable energy continues to decline, the carbon intensity of China's industrial electricity use will steadily decrease, thereby reducing the actual CBAM tariff amount.China may also integrate carbon governance with industrial policy more deeply. For example, it could support the export of high-value-added, low-carbon products through green trade channels and low-carbon supply chain standards. At the global level, a trading bloc linked by carbon pricing may gradually take shape, and China's role in it will depend on the credibility and execution of its domestic carbon governance.

For the energy system, the key variable going forward will be the race between carbon price levels and clean energy costs. If China can establish a carbon pricing system aligned with international standards and continue to expand clean energy deployment, its energy transition process will accelerate significantly, and global carbon reduction targets will also gain more solid support.