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

A New Carbon Order: How China Is Responding to the EU's Carbon Border Adjustment Mechanism

The European Union's Carbon Border Adjustment Mechanism (CBAM), formally adopted in 2023, has become the world's first carbon tariff tool and is rewriting the rules of international trade and energy transition. As the world's largest emitter and an important EU trading partner, China's response strategy concerns not only the development of its domestic carbon market but will also profoundly affect the direction of global energy investment and the landscape of climate governance. A new CSIS report, *A New Carbon Order: China's Response to Europe's CBAM*, points out that China is turning external pressure into internal decarbonization momentum through institutional adjustments, with implications that extend well beyond the trade arena.

Industry Background: The Origins and Mechanism Evolution of CBAM

CBAM is a policy tool designed by the EU to address the problem of "carbon leakage." Carbon leakage refers to the relocation of high-carbon industries abroad as a result of the EU's stringent emission reduction policies, meaning that global emissions are not actually reduced. To prevent this, the EU decided to levy charges on the embedded carbon emissions in imported goods, making non-EU producers bear a carbon cost comparable to that of companies within the EU. CBAM was first proposed in 2019 as part of the European Green Deal and was formally adopted in March 2023 with the "Fit for 55" climate package, marking the transition of carbon border adjustments from concept to practice.

At present, CBAM covers six carbon-intensive sectors: cement, fertilizers, electricity, steel, aluminum, and hydrogen. EU importers are required to annually declare the embedded carbon emissions in their goods and purchase the corresponding number of CBAM certificates. In the first quarter of 2026, the CBAM certificate price was set at €75.36 per tonne of CO2, and from 2027 onward it will switch to the weekly average auction price of EU Emissions Trading System (EU ETS) allowances. This means that the carbon price will fluctuate with the market, further increasing uncertainty in export costs. By 2028, the scope of CBAM is expected to expand, making its impact on carbon-intensive exporting countries even more pronounced.

China, at this moment, faces dual pressures. On the one hand, as the world's largest greenhouse gas emitter, its decarbonization process is under close scrutiny from the international community. On the other hand, as an important EU trading partner, a large volume of its export products will be directly affected by CBAM. China has its own national carbon emissions trading system, whose design is partly modeled on the EU's, but it still lags behind in terms of coverage, price levels, and enforcement. CBAM's "equivalent carbon price" exemption mechanism—under which exporters are not required to purchase CBAM certificates if they have already paid an equivalent carbon cost in their country of production—actually provides a clear institutional reference for China.

Current Developments: How China Is Building "Credible" Carbon Governance

According to CSIS analysis, China's response to CBAM is not a simple protest or boycott, but rather a pragmatic strategy of institutional convergence. Its core lies in building a carbon governance system that is recognized by the international community while also meeting domestic development needs.First, China’s national carbon market is expected to accelerate its expansion. Although the likelihood of a formal EU–China ETS link in the short term is low, China is proactively broadening industry coverage in its domestic carbon market, raising carbon price levels, and strengthening the monitoring, reporting, and verification (MRV) system for carbon emissions data. These measures are not only aimed at meeting CBAM data requirements but also at demonstrating to the international community the seriousness and transparency of China’s carbon management.

Second, China is strengthening the formulation and enforcement of carbon emission standards. CBAM requires importers to accurately calculate the full life-cycle carbon emissions of products, which pushes Chinese export enterprises to build more robust carbon footprint accounting capabilities. Local governments are also actively involved, providing training and technical support to relevant enterprises to help them adapt to both domestic and international carbon management rules. This combination of a “top-down” and “bottom-up” approach is accelerating the institutionalization of carbon governance.

More importantly, CBAM provides a window for China: by establishing a credible domestic carbon pricing mechanism, China can not only reduce export trade barriers but also gain a voice in the new international carbon order. The CSIS report points out that this institutional alignment is a long-term trend, reflecting the economic reality of deep Sino-European trade interdependence.

Impact on the Energy System: How Carbon Price Signals Reshape the Power Structure and Investment Logic

The impact of CBAM on China’s energy system is multi-dimensional, with its core lying in making carbon costs explicit, thereby altering energy investment and power generation structures.

From the energy supply perspective, rising export costs of high-carbon products will prompt domestic high-energy-consuming industries to accelerate decarbonization, shifting energy consumption from coal to natural gas and renewable energy. As a global leader in renewable energy installation, China has seen continued declines in the costs of solar photovoltaics and wind power; the addition of carbon costs will further weaken the competitive position of fossil fuels. The carbon intensity of the power system is expected to decline accordingly, thereby reducing the embedded emissions of exported products.

From the power structure perspective, if the national carbon market is expanded to cover more industries, carbon price signals will be transmitted along the industrial chain, raising the price of high-carbon electricity and promoting green power trading and renewable energy consumption. This will attract more capital into clean energy fields such as solar, wind, energy storage, and hydrogen, accelerating the shift of energy investment structure toward low-carbon options.

From the energy security perspective, reducing dependence on imported fossil fuels is also an important goal of China’s energy strategy. The external constraints brought by CBAM may prompt China to accelerate the development of its domestic clean energy supply chain, thereby achieving decarbonization goals while ensuring energy security.

However, carbon pricing also means that electricity costs may rise in the short term, especially for industrial users that rely on coal-fired power. This requires China to design reasonable compensation mechanisms while advancing carbon market construction, so as to avoid excessive impact on the real economy.

Challenges Ahead: From Carbon Price Gaps to Global Governance Coordination

Despite the clear trend, China still faces multiple challenges in responding to CBAM.First, the disparity in carbon pricing levels. The EU carbon price has exceeded €75 per tonne, while China's carbon market price remains at a relatively low level. This gap means that Chinese exporters will still have to pay relatively high CBAM fees during the transition period. Narrowing this gap requires a significant increase in domestic carbon prices, which could trigger inflationary pressures and corporate competitiveness issues.

Second, emission data quality and monitoring capabilities. CBAM places extremely high demands on data transparency, while China still has technical shortcomings in carbon emission accounting for complex supply chains. How to ensure the accuracy and consistency of data is a key challenge for China's carbon market to gain international recognition.

Third, policy uncertainty. CBAM is still in its rule-adjustment period, and the scope expansion in 2028 may bring new compliance costs. At the same time, China's domestic carbon market legislation is also being continuously improved. This dual uncertainty makes it difficult for enterprises to formulate long-term investment plans.

Fourth, the contest at the global governance level. If institutional convergence in carbon governance between China and the EU deepens, a vast carbon adjustment trading bloc may take shape, from which the United States could be excluded. This is not only an economic issue but also a strategic one, with the potential to affect transatlantic cooperation and the global trade order. The CSIS report specifically reminds US policymakers to pay close attention to this dynamic.