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

As the European Union's Carbon Border Adjustment Mechanism (CBAM) officially enters its implementation phase, global carbon governance is facing an unprecedented institutional restructuring. As the world's largest greenhouse gas emitter and a major trading partner of the EU, China's response strategy not only concerns its domestic energy transition and industrial competitiveness, but will also profoundly influence the future direction of international carbon market rules. Based on CSIS' latest research, this article analyzes how China is responding to this external pressure through institutional adjustment and market development, and assesses its long-term impact on the global energy system and climate policy.

A New Era of Global Carbon Governance: The Rise and Mechanism of CBAM

The EU Carbon Border Adjustment Mechanism (CBAM) was first proposed in 2019 as part of the European Green Deal, and was adopted by the European Council in March 2023, becoming one of the core tools of the "Fit for 55" climate policy package. The original purpose of CBAM was to prevent "carbon leakage" — that is, EU companies losing competitiveness due to bearing carbon costs, leading to the relocation of high-carbon production to countries outside the EU with lower environmental standards. The mechanism requires importers to pay for the carbon emissions generated during the production of their products, unless the country of origin has already paid an equivalent carbon price. This design makes CBAM the first truly meaningful carbon tariff instrument at the international level.

According to the CSIS report, CBAM currently covers six carbon-intensive sectors: cement, fertilizers, electricity, steel, aluminum, and hydrogen. EU importers are required to report the embedded greenhouse gas emissions of these goods on an annual basis and submit the corresponding number of CBAM certificates. In the first quarter of 2026, the trading price of CBAM certificates was €75.36 per ton of CO2 equivalent. Starting in 2027, certificate prices will be directly linked to the weekly average auction price of the EU Emissions Trading System (EU ETS). In addition, the scope of CBAM is expected to expand further in 2028, at which point its impact on major exporting countries and carbon-intensive emerging economies such as China and India will be particularly significant.

The policy spillover effects generated by this mechanism should not be underestimated. CBAM not only creates direct cost pressure on exporting enterprises, but more importantly, through its "equivalent carbon price" recognition logic, it conveys a strong institutional incentive to other jurisdictions: in order to conduct smooth trade with the EU, they must establish credible carbon pricing and governance systems that are compatible with EU standards. This incentive mechanism has clearly attracted the attention of Beijing's decision-makers.

It is worth noting that China has already established a national carbon emissions trading system, the design of which has, to some extent, drawn on the experience of the EU ETS. However, compared with the mature EU carbon market, China's ETS is still at a development stage in terms of coverage, price discovery mechanisms, and regulatory enforcement. The arrival of CBAM has forced China to re-examine the compatibility of its own carbon management system with international rules.

China's Institutional Response to CBAM

From the CSIS analysis perspective, China's response to CBAM is not simply confrontation or resistance, but rather a gradual, institution-level adjustment and integration. The report points out that although formal linkage between China's and the EU's ETS is unlikely in the short term, China's long-term path of carbon governance may increasingly move closer to Europe. This trend has already become visible at multiple domestic levels.

First, China's national carbon emissions trading market is expected to expand in coverage. Since its official launch, China's ETS has gradually established a unified national trading framework, but industry coverage is still being expanded. This expansion overlaps considerably with CBAM's scope, meaning that by broadening industry coverage of carbon pricing, China is in effect providing export enterprises with an institutional foundation for "carbon price recognition." As more industries are included in the ETS, Chinese companies may obtain a certain degree of exemption when facing CBAM, thereby reducing trade barriers.

Second, the carbon emission reporting, monitoring, and verification (MRV) system is being strengthened. CBAM requires importers to provide emission accounting based on actual production data, which places higher demands on the data transparency and accuracy of exporting countries. To help domestic enterprises meet EU compliance requirements, China is strengthening national-level carbon emission statistics and accounting standards and promoting alignment with international standards. At the local level, pilot projects have also emerged aimed at supporting industry carbon peak goals and helping enterprises become familiar with domestic and international carbon rules. These measures show that China is building a carbon management infrastructure capable of supporting international mutual recognition.

In addition, deeper reforms are brewing in the price mechanism of China's carbon market. Although at the current stage there is still a noticeable gap between China's carbon allowance prices and those of mature international markets, market liquidity is improving, and participation by financial institutions and enterprises is increasing. The gradual strengthening of domestic carbon price signals will help guide enterprises to incorporate carbon emission costs into long-term investment decisions, thereby accelerating the commercial application of low-carbon technologies. This endogenous transformation driven by external pressure may become a new driver of China's energy transition.

Impact on the Energy System and Industrial Landscape

The impact of CBAM on China's energy system is first reflected in the cost structure of high-carbon industries. Steel, aluminum, cement, and fertilizer are energy-intensive industries in China and also important end-use sectors for coal consumption. To remain competitive in the EU market, these industries must rapidly reduce the carbon intensity of their products, which will directly promote the decarbonization of the energy structure. Enterprises will face two options: one is to improve energy efficiency and optimize processes, and the other is to increase the use of renewable electricity, or even deploy breakthrough technologies such as green hydrogen-based direct reduced iron. Regardless of the path chosen, this will promote the application of clean energy in the industrial sector.## Multiple Challenges in Aligning with the Rules

From the perspective of the power system, CBAM could accelerate China's electricity market reform and renewable energy deployment. As more industries are included in the carbon market, carbon costs will be transmitted more broadly to industrial electricity prices, further enhancing the competitiveness of renewable energy relative to fossil energy. At the same time, to support the green certification of export products, companies may need to prove the low-carbon attributes of their electricity sources through green electricity trading or green certificates. This will stimulate investment in renewable energy generation and supporting energy storage facilities, and promote the intelligent and flexible upgrading of the power grid.

At the industrial chain level, the impact of CBAM is not limited to direct exporters; it will also be transmitted through the supply chain to upstream raw material and intermediate goods suppliers. For example, if machinery and equipment exported by China contain high-carbon steel, its embedded carbon will also be included in the accounting scope. This means that the entire manufacturing value chain will need to restructure its carbon footprint management. In the long run, CBAM may prompt China to develop full life-cycle carbon management capabilities from raw material extraction to end products, which in turn will enhance China's voice in the global green supply chain.

Multiple Challenges in Aligning with the Rules

Although China has shown a proactive stance in responding to CBAM at the institutional level, it faces multiple challenges. The primary issue is the maturity of the domestic carbon market. Currently, the allocation of allowances in China's ETS is still largely free of charge, and the carbon price level is insufficient to create strong emission reduction incentives. If it merely expands the scope in form without ensuring that price signals truly take effect, Chinese companies will still find it difficult to obtain sufficient cost exemptions under CBAM. The EU's recognition of "equivalent carbon prices" requires not only the existence of a carbon pricing mechanism, but also its strict enforcement and environmental integrity.

Second, the differences between China and the EU in carbon accounting standards and technical specifications are practical obstacles to mutual recognition. CBAM adopts the accounting methodology developed by the EU itself, requiring companies to provide precise emission data. Although Chinese companies' carbon emission data management systems are being improved, meeting the EU's audit requirements in full still requires substantial capacity-building investment. How to achieve data sharing while protecting business secrets and data security is also a contentious issue.

Third, the issue of trust in the international community cannot be ignored. There have always been doubts globally about the reliability and transparency of China's carbon emission data. If China's carbon market reform is seen merely as a "superficial move to respond to CBAM" rather than a genuine emission reduction effort, its credibility in international climate governance will be greatly diminished. China needs to prove to the world that the strengthening of its carbon governance stems from endogenous development needs, not a passive response to trade barriers.

Finally, geopolitical factors make the issue more complicated. The United States is currently not participating in the EU's carbon border adjustment system, and its domestic climate policy is unstable. If China and the EU form closer institutional coordination on carbon governance, it may give rise to a carbon adjustment alliance covering the largest volume of global trade, from which the United States would be excluded. Such a landscape would intensify transatlantic tensions and may prompt the United States to seek to establish its own carbon border mechanism, ultimately leading to fragmentation of the global carbon market.## Future Outlook: Toward a New Carbon Order

Looking ahead 5 to 20 years, the CBAM is highly likely to become not just an isolated EU measure but a template for global carbon pricing and carbon border adjustment. It is expected that more and more jurisdictions will design their own carbon border adjustment instruments, thereby forming a new set of international trade rules driven by carbon costs. In this process, China's choices will be of decisive significance.

If China can successfully build a credible, robust carbon governance system compatible with EU standards, it will occupy a more favorable position in global climate negotiations and may become a bridge connecting developing and developed countries' carbon markets. China's vast market size and manufacturing advantages also give it the ability to define low-carbon technology standards for several industries. At the same time, the long-term convergence of China-EU carbon markets will deepen mutual dependence in clean energy supply chains, with far-reaching implications for the global energy competition landscape.

For China, a more likely path is to transform the external pressure of CBAM into a catalyst for domestic low-carbon economic transition through forced reforms. The deepening of the carbon market will advance in coordination with strategies such as power market reform, green financial policies, and hydrogen energy development. By then, China will not only become the world's largest exporter of clean energy technologies, but may also become one of the major suppliers of global carbon credits.

Of course, this process will not be smooth sailing. Resistance from domestic vested interests, technical bottlenecks, and uncertainty in the international environment may all slow down the reform process. But what is certain is that the global energy system is entering an era of internalizing carbon costs. Over the next decade, renewable energy investment, energy storage deployment, and smart grid construction will continue to accelerate, and institutional innovation in carbon governance will determine the speed at which these technologies are deployed.

Under the new carbon order, no country can remain immune. China's response to CBAM is not just a policy adjustment, but a strategic game about the future of global energy governance and trade rules. For industry and investors, understanding and adapting to this trend will be key to maintaining competitiveness in the low-carbon era.