Methodology Differences in Carbon Emissions Estimation within EU Carbon Pricing Mechanisms and their Impacts on Steel Industry

Abstract Description: The discussion around carbon pricing often centers on whether the carbon price is high enough to impose a cost burden on industries and encourage investments to improve carbon reduction. For example, the EU recently launched the Carbon Border Adjustment Mechanism (CBAM) to impose carbon tariffs on imports, strongly asserting that it is designed to create a level-playing field and prevent carbon leakage due to the high carbon pricing on its industries under its Emissions Trading System (ETS). Thus, the EU's climate objectives are not undermined.

However, the actual carbon cost burden depends on whether carbon pricing mechanisms include complementary measures and how carbon emissions are estimated for specific sectors, which are often overlooked. For instance, the EU ETS was designed to impose carbon costs to incentivize investment to improve carbon reduction within industries like iron and steel industry. However, the EU provides free allowances in the ETS to offset factory emissions, significantly reducing payable carbon costs. Furthermore, differences in the carbon emissions reporting method and the free allowance allocation method under the ETS have caused discrepancies in the reported values. Many EU steel companies can report lower emission values due to the limited scope of the carbon inventory. Additionally, they can receive free allowances exceeding the reported emission values by using inflated historical product quantities and including exported waste gas emissions that should have been deducted. Different steel mills may have significant variations in their estimated emissions and free allowances due to differences in production processes. After deductions, the surplus of free allowances can be sold, effectively providing a carbon subsidy to the steel industry.

On the other hand, even if foreign steel products have similar carbon emission intensity to that of EU’s steel enterprise, EU CBAM's emissions reporting method uses lower emission factors for deductions, which could result in higher reported emissions compared to EU ETS method, potentially leading to a greater carbon cost burden for foreign steel companies.

Although the EU claims its CBAM complies with WTO rules, which may be correct based on the CBAM’s provisions, the discrepancies in emissions estimation methodologies between the ETS and CBAM will likely create unfair outcomes and unnecessary carbon cost burdens for foreign industries, distorting trade and complicating global climate efforts. Therefore, the EU should first address the inconsistencies in its own methodologies between the ETS and CBAM and further negotiate with other countries to establish a universal methodology based on consistent scientific standards before reasonably and fairly promoting its CBAM.