Taiwan’s metals, plastics, and chemicals manufacturers will need to adapt to new international policy measures to secure price competitiveness in key export markets.
When the European Union’s Carbon Border Adjustment Mechanism (CBAM) comes into full force in three years, it will have a heavy impact on the cost structure for many exporters to the EU.
CBAM is a key environmental policy instrument for the EU to achieve climate neutrality by 2050 by preventing “carbon leakage,” the outsourcing of climate-unfriendly production. The mechanism involves calculating the emissions embedded in imported goods and then using the data to determine an EU import tariff.
As the EU is Taiwan’s fourth-largest export market, the implementation of CBAM may cause difficulties for a range of energy-intensive manufacturing categories in Taiwan. Carbon-free renewable energy currently accounts for only 8.3% of Taiwan’s power generation, significantly lower than the global average of 29% in 2022, according to separate data from Taiwan’s Energy Administration and the Paris-based International Energy Agency.
Given the scarcity of renewable energy in Taiwan, Taiwanese exporters will struggle more than many of their international competitors to enjoy low EU import tariffs and thereby maintain competitive pricing. Adding to the pressure is that some of Taiwan’s other export markets, including the United States and Canada, have been considering implementing their own CBAM policies.
Notably, the Clean Competition Act, introduced by U.S. Senator Sheldon Whitehouse (D-RI) in June last year, would impose a narrow-based, border-adjusted carbon tax targeted at goods across certain carbon-intensive industries. In addition, the bipartisan PROVE IT Act, introduced by Senators Coons (D-DE) and Kevin Cramer (R-ND) in June this year, would direct the U.S. Department of Energy to conduct a product-level emissions study as a first step in designing carbon tariffs or a border-adjusted carbon tax. Although the fate of these bills is uncertain, it is becoming clear that carbon tariffs will play a prominent role in future trade.
Indeed, the clock is ticking – the EU’s CBAM entered its transitional phase on October 1. This phase affects imports of certain goods and selected precursors involving carbon-intensive production, including cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.
During the transitional phase, EU importers will need to submit quarterly reports of the greenhouse gas (GHG) emissions embedded in their imports without making financial payments or adjustments. From 2026, they will be required to buy CBAM certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU’s carbon pricing rules.
To put things into perspective, UK-based industrial consultancy Wood Mackenzie recently projected that Chinese and Indian producers could see the cost of their steel exports into the EU rise by 49% and 56%, respectively, by 2034.
The good news is that Taiwan doesn’t export meaningful volumes of cement, fertilizers, electricity, and hydrogen. The government-funded Industrial Technology Research Institute (ITRI) therefore projects that CBAM’s current scope would have a relatively mild impact of about US$2 billion a year, accounting for less than 1% of Taiwan’s overall annual export value.
Nevertheless, anxiety over this sweeping regulatory change featured prominently during expert forums at a trade show for the Taiwanese fastener sector in Kaohsiung earlier this year. Steel and aluminum topped the list of export categories expected to be hit hardest, given that about 70-80% of those sectors’ output is exported.
Experts at the event predicted the coming inclusion in the CBAM of the emissions-heavy plastics and chemicals sectors. By the end of the transition period, the product scope of the CBAM will be reviewed to assess the feasibility of including other goods already covered by the EU Emissions Trading System (EU ETS) and susceptible to carbon leakage. The EU has already identified chemicals and polymers as two potential areas for inclusion.
European importers at the show urged Taiwanese fastener manufacturers to find ways to supply their customers with accurate and verifiable emissions data.
“I am very alarmed because I am perceiving that Taiwanese businesses think that there is still a lot of time until 2026, when the embedded emissions will actually cost money,” says Li-jiuan Chen-Rabich, director of Tamkang University’s Center for European Union Studies, who has been researching the CBAM issue intensively. “They disregard the fact that the EU importers now already need them to present all that data, because otherwise they can’t fulfill their own reporting obligations and face being fined.”
Chen-Rabich notes that one of the main issues is that the monopoly position of state-owned Taiwan Power Co. (Taipower) discourages investment in Taiwan’s renewable power sector by keeping electricity prices artificially low.
“Taiwanese factory owners are still not able to strive for electricity autarchy through rooftop installations since they are obliged to sell the electricity to Taipower, unlike in Germany, where there has been a liberated electricity market since the 1990s,” she says.
High dosage of bureaucracy
Under the new CBAM regime, Taiwanese exporters are being asked to fill out the 10-page “CBAM communication template for installations,” the final version of which was published as recently as August 21, a few days after the release of the CBAM Implementing Regulation.
The template requires the reporting of data on precursors, production routes, fuel input, and installations’ emissions, including those of GHGs such as carbon dioxide, biomass emissions, and nitrous oxide. However, it doesn’t require data on logistics-related emissions or the energy efficiency of factory buildings, as these are not covered in the EU ETS.
To help businesses adjust to the template, several Taiwanese government agencies, industry associations, universities, and the European Economic and Trade Office in Taiwan (EETO) have launched education efforts in the form of forums and webinars.
“We will give maximum flexibility during the transition time, as illustrated by businesses being allowed to use their own third-country national reporting systems for the first year and a half,” says Aleksandra Kozlowska, EETO’s trade section head. “Experience gained during that phase will feed into any future amendments of the EU’s own final reporting methods.”
“I do not think it will become a big bureaucratic burden for exporters, as the moment you realize where your emissions come from, it is just a question of multiplying it by the number of tons of your goods,” she adds.
Nevertheless, Kozlowska notes that Taiwan’s SMEs in the steel and aluminum sectors have some reasons to worry. Because GHG emissions are largely concentrated in the upstream processes, they are at the mercy of raw material suppliers, such as state-owned China Steel.
Although Taiwan is expanding its renewable energy sector, Kozlowska says there is still much room for improvement in energy efficiency. Government subsidies have resulted in low residential electricity costs, which have made energy conservation less of a priority in Taiwan than in most other countries.
“That said, I am optimistic given that the Taiwanese government has embraced the new circumstances and adapted, and that the money that is now being invested in CBAM preparations will eventually be recouped through saving on EU CBAM certificates,” notes Kozlowska.
She adds that Taiwan’s commitment to this initiative was reflected in April with the establishment of the preparatory office for the Climate Change Administration under the new Ministry of Environment. Administration officials have since paid several visits to Brussels for CBAM-related exchanges. Another positive development has been the inauguration of the Taiwan Carbon Solution Exchange, which facilitates carbon credit trading and incentivizes businesses to reduce carbon emissions.
Kozlowska notes that both the EU and Taiwan advocate for the development of carbon capture, utilization, and storage (CCUS) technologies, which could play a crucial role in reducing carbon emissions. The U.S. government also champions the development of CCUS technologies, seeing great possibilities in capturing carbon emissions from industrial processes and storing them underground. Other innovative technologies, such as advanced batteries, sustainable aviation fuels, and carbon-neutral manufacturing processes, are expected to enable even more breakthroughs in emissions reduction efforts.
For its part, Taiwan’s ITRI has been helping exporters increase the added value of each kilowatt-hour of electricity through measures such as process improvement, energy conversion, and the promotion of a circular economy.
In a written communication with TOPICS, ITRI’s CBAM analyst team notes that these efforts have long been bearing fruit. Between 2005 and 2019, fuel oil consumption in the manufacturing sector decreased by nearly 80%. Coal burning decreased by nearly 20%, which ITRI attributed mainly to the switch to low-carbon natural gas to reduce carbon emissions. Most impressively, fluorinated GHG emissions in the electronics industry have been reduced by nearly 90% through the installation of damage removal equipment.
The Taiwan government’s stated aim is for renewable energy to make up 20% of the total energy mix by 2026. The government is also seeking to improve the production efficiency of renewable energy by developing more efficient silicon-stacked photovoltaic modules, utilizing floating offshore wind power turbines, and expanding installation fields.
A concrete sign of hope for Taiwan’s SMEs in the steel and aluminum sectors is the newly launched pilot plant for co-production of steel and chemicals in Kaohsiung, the result of collaboration between ITRI and China Steel. This groundbreaking initiative represents Taiwan’s first cross-industry cooperation, integrating carbon capture and reuse into both the steel and chemical industries.
ITRI is using the existing carbon footprint database to assist steel-forging companies in evaluating the carbon reduction benefits of material improvements in the manufacturing process. It says replacing quenched-and-tempered steel with non-quenched-and-tempered steel has helped reduce the carbon footprint of steel production by 32%.
Regarding potential expansion of the scope of CBAM, ITRI predicts that the Information and Communication Technology (ICT) sector will not be covered for some time. The electronics and ICT industries’ upstream and downstream supply chains and product definitions are highly intricate, complicating the calculation of carbon emissions. For now, the industries responsible for the lion’s share of Taiwan’s exports are not likely to be impacted.