Five Things to Know About How China Is Bracing for the EU’s ‘Carbon Tariff’

1. The European Union’s Carbon Border Adjustment Mechanism (CBAM), commonly referred to as a “carbon tariff,” began operation on January 1, aiming to impose a cost on the carbon emissions of imported goods such as steel, aluminum, cement, and fertilizers. Importers must purchase certificates corresponding to these goods’ embedded carbon emissions, essentially requiring foreign producers to pay the difference between their domestic carbon price and that within the EU. This measure is central to the EU’s broader policy target of slashing carbon emissions by 55% compared to 1990 levels by 2030 and seeks to impede “carbon leakage,” where production shifts outside the EU to countries with weaker climate policies. China, as a major exporter, faces new compliance costs and risks, and has criticized CBAM as protectionism under environmental pretenses, pledging to counter any perceived unfair trade barriers. [para. 1][para. 2][para. 3][para. 4]

2. CBAM is being phased in, with the transition period from October 2023 to the end of 2025 mainly involving emissions reporting and system tests. As of 2026, the mechanism covers actual imports; payments for CBAM certificates will start in 2027, where certificates are priced in line with the EU Emissions Trading System. Exporters’ CBAM costs will be calculated upon accepted actual emissions data; otherwise, higher “default values” set by the EU will apply, significantly increasing compliance costs. Furthermore, default values will increase by 10% per year from 2026-2028 due to an automatic cost escalation feature called “mark-up.” [para. 6][para. 7][para. 8][para. 9]

3. The mechanism targets six sectors: iron and steel, aluminum, cement, fertilizers, electricity, and hydrogen, with iron and steel being the most significantly impacted—responsible for over 70% of CBAM-covered trade value, mainly due to their high carbon intensity. China is expected to become the largest buyer of CBAM certificates, with other major steel exporters like Turkey, India, and Russia also facing heavy liabilities. Though China’s steel exports to the EU constitute only about 7.2% of the bloc’s total steel imports at nearly 2 million tons in 2024, these shipments are high-value, making them vital for Chinese competitiveness in Europe. The new costs—roughly 144 euros per ton for Chinese steel and higher for other countries—add pressure on exporters. Similarly, China’s aluminum industry, with about 750,000 tons exported to the EU in 2025, faces an added compliance cost of about 340 euros per ton. The EU plans to expand CBAM in 2028 to include approximately 180 additional downstream products, further amplifying its scope. [para. 10][para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18]

4. China’s concern stems from its major trading relationship with the EU, which hit 5.93 trillion yuan ($853 billion) in 2025, representing 13% of China’s total foreign trade. While only 3.5% of Chinese exports to the EU are immediately affected, unresolved questions—such as the determination of default values, EU’s recognition of China’s carbon price, and CBAM’s prospective expansion—fuel uncertainty and risk. Chinese officials warn CBAM could become a major China–EU trade flashpoint. International researchers suggest CBAM’s influence reaches beyond trade, signaling possible adoption by other nations (e.g., the U.K. plans its own CBAM in 2027, and the U.S. and Canada have expressed interest) and possibly reshaping industrial strategies through global expectations of carbon pricing. [para. 19][para. 20][para. 21][para. 22][para. 23]

5. China formally protested CBAM at the official level when it took effect, labeling the policy as “unfair and discriminatory,” especially criticizing high and annually-increasing default values and the planned scope expansion. While centrally-coordinated ministries and local authorities are beginning to assist exporters in preparing for compliance (e.g., via training sessions in manufacturing hubs), most companies remain reactive, relying on default values and not fully gauging true costs, especially those outside CBAM’s present scope and unsure if they’ll be included in the future. [para. 24][para. 25][para. 26][para. 27][para. 28][para. 29]

6. Key operational challenges persist, including ambiguity over rules and benchmarks, shortages of accredited verification institutions, the EU’s preparedness to verify large data volumes, and the tightness of reporting timelines. Smaller businesses have struggled with insufficient preparatory information, resulting in delayed contracts and increased risk aversion. The large gap in carbon prices—China’s at 50–90 yuan/ton versus much higher EU prices—means that even full EU recognition of China’s domestic carbon market will only alleviate a small part (about 8%) of compliance costs for steel. Additionally, the intricate and sometimes proprietary nature of production in sectors like fertilizers and cement complicates compliance while safeguarding trade secrets. [para. 30][para. 31][para. 32][para. 33][para. 34][para. 35][para. 36]