New EU Carbon Tax Puts Chinese Steelmakers to the Test

China’s steel industry is grappling with major challenges under the European Union’s new Carbon Border Adjustment Mechanism (CBAM), which came fully into force on January 1, 2024. The CBAM requires importers of several key goods—steel, aluminum, cement, fertilizers, electricity, and hydrogen—to buy certificates that correspond to the carbon emissions embedded in their products. The system is intended to level the playing field by forcing importers to pay the difference between the carbon prices in their country of origin and those in the EU, thereby preventing companies from relocating carbon-intensive production to countries with looser regulations (a phenomenon known as "carbon leakage") [para. 1][para. 2].

Within CBAM’s scope, the steel sector is expected to be hit hardest, as it makes up over 70% of the total trade volume covered. Due to China’s reliance on the carbon-intensive blast furnace-basic oxygen furnace production method, Chinese exporters are forecasted to become the largest buyers of CBAM certificates. This poses an acute dilemma for Chinese steelmakers, who must now prove their decarbonization achievements according to strict EU standards; failing to do so results in the imposition of high "default values" that penalize all Chinese exports regardless of actual emissions [para. 3][para. 4].

To comply, companies need a Monitoring, Reporting, and Verification (MRV) system that aligns with EU requirements. Without one, even producers with low actual emissions will be assessed according to punitive default values. According to Liu Xueye, a project lead at the Institute for Global Decarbonization Progress, Chinese stainless steel could be assigned a default carbon emission intensity as high as 5 to 6 tons of CO2 equivalent per ton of steel, much higher than actual emission rates. This discrepancy could mean that, despite recent progress in Chinese emission reductions, exporters could pay for carbon costs equivalent to 4-5 tons of emissions per ton of steel [para. 5][para. 6][para. 7][para. 8].

The rules further disadvantage steelmakers deploying cleaner processes or mixed methods; even if part of their output comes from electric arc furnaces, scrap, or low-carbon electricity, the carbon intensity must be calculated as a weighted average with more carbon-intensive processes. This discourages further investment in greener technology [para. 9][para. 10]. Furthermore, a punitive "mark-up" clause can escalate costs: from 2026 to 2028, companies using the default value will see a 10% annual increase in assigned emissions, compounding the expense against rising carbon prices [para. 11].

The calculation of CBAM costs is also complex, involving deductions for free allowances to EU firms and for carbon costs already paid in the country of origin. However, China’s low domestic carbon price covers only about 8% of the total CBAM bill, and the criteria for recognizing these domestic carbon credits remain unclear [para. 12].

Experts at an industry conference argued that while CBAM functions as a trade barrier, it can also be seen as a communication mechanism for global climate policy. The EU has indicated it will revise default emission values if more reliable data is provided. Thus, major Chinese steel firms are seeking international recognition for their low-carbon products. Yet, technical validation alone is insufficient; companies must also ensure their reductions are credible and documented according to EU standards, which requires collaboration with research institutions and transparent public data [para. 13][para. 14][para. 15][para. 16][para. 17].

Industry cooperation is vital to avoid destructive competition and spur collective investment in cleaner technologies, which will build China’s steelmakers' competitiveness in a low-carbon future [para. 18].