New Carbon Order: How Does China Respond to the EU's Carbon Border Adjustment Mechanism?

The EU Carbon Border Adjustment Mechanism (CBAM) enters a critical implementation phase in 2026. As the world's first carbon border tariff tool, it is reshaping international trade rules and putting pressure on major exporting economies. As an important trading partner of the EU and the world's largest greenhouse gas emitter, China is responding to this external challenge through a series of domestic carbon governance reforms. The latest report by the Center for Strategic and International Studies (CSIS), "The New Carbon Order: China's Response to Europe's CBAM," points out that China is gradually converging with European carbon governance standards at the institutional level, which could profoundly affect the global energy transition and climate governance landscape.

Industry Background: CBAM and the Current State of China's Carbon Market

CBAM was first proposed in 2019 as part of the European Green Deal and was formally incorporated into the "Fit for 55" legislative package by the European Council in March 2023. Its core purpose is to prevent "carbon leakage"—that is, EU emission reductions being offset by high-emission production in other regions. Under CBAM rules, EU importers must annually declare the embedded carbon emissions of six categories of goods—cement, fertilizers, electricity, steel, aluminum, and hydrogen—and submit the corresponding number of CBAM certificates. In the first quarter of 2026, the CBAM certificate price was €75.36 per tonne of CO2; from 2027 onward, certificate prices will be dynamically calculated based on the weekly average auction price of EU Emissions Trading System (ETS) allowances. By 2028, CBAM's scope is expected to expand further, making its impact on major exporting countries and carbon-intensive emerging economies even more pronounced.

China launched its national carbon emissions trading market in 2021, currently covering the power sector, making it the world's largest carbon market by covered emissions. However, China's carbon market still lags significantly behind the EU in trading activity, price discovery, and sectoral coverage. The introduction of CBAM has effectively established an "external benchmark" for carbon pricing for non-EU producers, including China: only by paying an equivalent carbon cost at home can they avoid additional tariffs when exporting to the EU. This has compelled China to accelerate the improvement of its carbon pricing and governance systems.

The CSIS report notes that Washington's energy policy circles often view China either as a dominant exporter of clean energy technology or as the largest emitter—a binary narrative that overlooks Beijing's significant progress in carbon management and accounting. It is precisely these advances that are reshaping China's energy system and exerting broad influence on its trade agenda, competitiveness in frontier technologies such as artificial intelligence, and its role in global governance. China and the EU have long recognized this dynamic in their trade and energy policy debates, and U.S. policy circles should also pay attention.

Current Developments: China Accelerates the Restructuring of Its Carbon Governance System

The CSIS report argues that although a formal linkage between Chinese and EU carbon markets is unlikely in the short term, China is moving closer to Europe in the institutional design of its carbon governance. This convergence is reflected at multiple levels.

First is the expansion of the national carbon market. China has made clear that it will gradually include energy-intensive industries such as steel, cement, and electrolytic aluminum in the national carbon market—precisely the key sectors covered by CBAM. By bringing more industries into mandatory carbon trading, China provides a price signal for domestic emissions reduction while also giving exporters verifiable carbon cost evidence. The report expects that the expansion of China's carbon emission trading system will further strengthen the constraining role of carbon pricing.

Second is the strengthening of emission reporting and accounting standards. CBAM requires importers to provide verified embedded emission data, which forces China to establish a stricter monitoring, reporting, and verification (MRV) system. At present, several voluntary carbon accounting and disclosure pilots have emerged at the local level in China, helping companies become familiar with international rules and convert domestic data into EU-recognized formats. China is also strengthening the formulation and enforcement of carbon emission standards to enhance the credibility of carbon data.

Third is coordinated advancement at the local and industry levels. Many provincial and industrial park authorities are formulating carbon peak implementation plans and building supporting carbon emission data management platforms. These measures not only serve national goals but also aim to enhance enterprises' ability to respond to cross-border carbon regulation. The report mentions that local-level initiatives are intended to support sectoral targets and help companies navigate the carbon governance environment both domestically and internationally.

These developments indicate that China is internalizing external pressure as a driving force for institutional upgrading rather than simply resisting it. For China, building a credible carbon governance system is not only a diplomatic necessity but also key to maintaining its competitive advantage in global supply chains. In the future, the compliance, monitoring, and enforcement credibility of China's carbon governance system will determine the success of its carbon governance efforts and also affect international trust in its approach.

Impact on the Energy System: Accelerating Power Decarbonization and Green Investment

Although CBAM's impact on China's energy system is not directly aimed at electricity imports and exports, its indirect effects should not be underestimated. Since the production of CBAM-covered goods such as steel and aluminum is highly dependent on electricity, the carbon intensity of electricity used in these industries will determine their export costs. Therefore, CBAM effectively links power decarbonization with the export competitiveness of industry.

First, this provides new economic incentives for renewable energy development. Using more clean electricity such as wind and solar power means lower embedded emissions in export products and a lighter CBAM burden. This will encourage large industrial enterprises to sign long-term power purchase agreements with renewable energy developers, accelerating the growth of clean power installed capacity.

Second, the importance of energy storage systems is rising. To balance the volatility brought by a high proportion of renewable energy, energy storage has become key infrastructure supporting green industrial electricity use. China's investment in electrochemical energy storage and pumped-storage hydropower continues to grow, and the implementation of CBAM is expected to further strengthen this trend.Third, the internalization of carbon costs will affect investment decisions in the power sector. As the national carbon market expands to more sectors, the environmental costs of coal-fired power will become more fully explicit, which will improve the economics of high-efficiency, low-emission units and CCUS (carbon capture, utilization, and storage) technologies, while accelerating the phase-out of outdated coal-fired power. Carbon pricing also makes green hydrogen more competitive, as hydrogen has been included in CBAM's scope, and export-oriented chemical and steel companies will adopt green hydrogen more actively to reduce carbon costs.

In addition, CBAM has also promoted the development of green hydrogen. For the steel and chemical industries, green hydrogen is an important path to deep decarbonization. The development of China's hydrogen industry will benefit from the demand pull of export-oriented enterprises, which is also in line with the trend of the rise of global hydrogen trade. Overall, CBAM is becoming an "accelerator" for China's energy transition, making carbon cost a key parameter in investment decisions.

Challenges Ahead: Institutional Gaps and Transition Pains

Although China's overall direction in responding to CBAM is clear, the challenges remain formidable.

First, the carbon market price gap with the EU is enormous. China's current carbon price is far lower than that of the EU, and even after expansion, it will be difficult to reach an equivalent level in the short term. This means that Chinese companies will still bear CBAM costs for a certain period, affecting profits and competitiveness. The CSIS report also suggests that the carbon price level in China's carbon market is not yet sufficient to be regarded as an equivalent mechanism.

Second, there is a lack of international mutual recognition mechanisms. CBAM currently does not recognize China's carbon market as an equivalent mechanism, which may cause Chinese exporters to face double carbon costs—paying domestically and being taxed at the border. Negotiations between China and the EU on mutual recognition of carbon pricing are still at an early stage, with considerable uncertainty. Such policy uncertainty creates difficulties for companies' long-term investment decisions.

Third, the actual implementation capacity of the MRV system. China's carbon emission data foundation is still weak. Some enterprises have imperfect emission measurement equipment, and the capacity and credibility of third-party verification bodies need improvement. If data quality does not meet EU standards, companies will find it difficult to effectively utilize CBAM exemption clauses. In addition, small and medium-sized enterprises generally lack professional carbon management talent, which also increases compliance costs.

Fourth, domestic industrial adjustment pressure. Rising carbon costs may trigger social issues such as production cuts and unemployment in energy-intensive industries. Especially for a large number of small and medium-sized export enterprises, responding to CBAM requires additional investment in carbon accounting and management, which may lead to the relocation of some production capacity to other countries or trigger trade frictions.

Fifth, policy uncertainty. The scope, calculation methods, and implementation timeline of CBAM may still be adjusted. Disputes within the EU over CBAM, as well as potential World Trade Organization compliance challenges, add variables to the future direction of the rules. China must consider these external uncertainties when formulating long-term strategies.

Future Outlook: The Global Carbon Landscape over the Next 5-20 Years

From a longer-term perspective, CBAM may become a catalyst for the restructuring of the global carbon governance system, and China's response will influence the formation of this system.In the next five years, China will most likely complete the first expansion of its national carbon market, establish a more comprehensive MRV system, and explore pathways for aligning its carbon price with international standards. The "demonstration effect" of carbon border adjustments will also prompt other economies, including the United States, to consider similar mechanisms. The CSIS report specifically points out that if China succeeds in building a credible carbon governance system, its experience could serve as a reference for other countries' policy design, and even offer lessons for the United States.

Over the next 10 to 20 years, the world may see the formation of several "carbon clubs" with interconnected carbon pricing, and institutional convergence between China and Europe will become an important pillar. Although formal linkage faces difficulties, the two sides may gradually coordinate on carbon accounting standards and international green trade rules. Deeper institutional convergence could affect transatlantic cooperation and may also leave the United States excluded from large carbon-adjustment trading blocs. This will become a major issue in global governance.

For China, improving carbon governance is not only a means to respond to CBAM, but also an opportunity to enhance its international influence and participate in rule-making. China's voice in global climate change negotiations will continue to rise, and its carbon market mechanism design may become a reference for countries in the Global South. In the energy system, carbon constraints will become a long-term norm, with multiple zero-carbon technologies such as renewable energy, energy storage, nuclear power, and green hydrogen developing in synergy. Green investment will continue to grow, but capital will pay more attention to carbon performance, and ESG standards will become stricter.

China's response will not only concern its own energy transition, but may also define the shape of the future global "new carbon order." As the world moves toward net-zero emissions, balancing trade competitiveness with climate responsibility is a challenge that all major economies must confront. And the answer China provides will reshape global energy and climate politics for decades to come.