Editor's Note: Greetings! This edition of the CCCEU Weekly Update keeps you informed of key regulations under the EU's flagship "Fit for 55 programme as well as European Commission President von der Leyen's recent speech on China and China's Q1 GDP reading. Enjoy reading and have a nice weekend!

▶︎ Focus

On 18th April, the European Parliament approved the reform of the EU's Emissions Trading System (EU ETS), the Carbon Border Adjustment Mechanism (CBAM) and a new Social Climate fund – key parts of the "Fit for 55 in 2030 package", which is the latest progress since the Council of EU and European Parliament reached an agreement on 18th December last year. If the Council of the European Union finally endorses, the relevant laws will be officially published and then come into effect, at which time the EU will become the first market around the world to implement carbon tariffs.

The reform plan of the EU ETS has established a timetable for phasing out the free allowances, starting from 2026 and gradually achieving complete cancellation by 2034. The reformed EU ETS has significantly expanded in terms of covering industries. On the one hand, the maritime sector has been voted to be included in the system for the first time, and the free allowances for the aviation sector will be gradually phased out. On the other hand, a separate new ETS II for fuel for road transport and buildings will be created in 2027. To maintain price stability, a new mechanism will be set up to ensure that if the price of an allowance in ETS II rises above 45 euros (note: the allowance price in EU ETS has reached 90 euros), 20 million additional allowances will be released. Furthermore, 24% of all ETS allowances will be placed in the market stability reserve to address possible imbalances between the supply of and demand for allowances due to external shocks.

After the transition period from 2023 to 2026, the CBAM, which is planned to fully hit the goals by 2034, will be phased in at the same speed that the free allowances in the ETS will be phased out. Since EU domestic enterprises have already borne the emission costs under the EU ETS, the CBAM requires enterprises exporting to the EU to pay carbon tariffs by purchasing certificates in order to balance the cost difference between EU domestic products and imported products, thereby protecting the competitiveness of EU enterprises in the local market.

Under the CBAM, the direct emissions of imports of cement, electricity, fertilisers, iron, steel, aluminium, and hydrogen will be subject to carbon tariffs. It is planned that the scope of carbon tariffs extend to indirect emissions of some products, including greenhouse gas emissions caused by electricity as an input factor in the production process. In addition to indirect emissions, the European Commission will also assess whether to impose carbon tariffs on imports of organic chemicals and polymers that pose a risk of carbon leakage, as well as on greenhouse gas emissions generated in transportation services, before the end of the transition period. During the three-year transition period, enterprises in subject industries only need to fulfil their reporting obligations, including the actual carbon emissions of goods (including direct and indirect carbon emissions) and any carbon costs paid in third countries when exporting to the EU, without the need to purchase a CBAM certificate.

The EU Social Climate Fund was also agreed to be set up in 2026 to support vulnerable households, micro-enterprises, and transport users who are particularly affected by energy and transport poverty and to promote building renovation, decarbonization solutions, and integration of renewable energy, as well as purchasing and infrastructure for zero- and low-emission vehicles, as well as the use of public transport and shared mobility services, by means of long-lasting structural investments.

In the exemption clauses of the CBAM, the pricing mechanism of carbon emissions in exporting countries is an important consideration. China's nationwide carbon emissions trading system, established in 2021, initially covers power generation enterprises. It is expected that during the 14th Five-Year Plan period, eight emission-intensive industries, including steel, non-ferrous metals, building materials, papermaking, etc., will be included.

However, due to factors such as quota supply and demand, industry development, the carbon prices borne by domestic manufacturers under this trading system are significantly lower than the EU level. This means that even if the subjected enterprises have already borne the emission costs domestically, they still need to pay the additional emission costs required by the CBAM when exporting to the EU.

However, although China is the largest source of imports of the EU, the proportion of imported products subject to the first round of carbon tariffs in China's gross export value to Europe is not significant. In the short term, the impact of the CBAM may be limited to the iron, steel and aluminum industries. However, in the long run, once the downstream manufacturing industries are included in the implementation scope of the CBAM, it will have a significant impact on the EU-China bilateral, which is mainly composed of industrial manufactured goods such as machinery and transportation equipment (SITC class number: 7).

From an internal perspective within the European Union, the previous debate on the CBAM has also been intense. EU domestic enterprises believe that although the CBAM aims to achieve fair competition in the EU domestic market, the simultaneous phasing out of the free allowance will greatly weaken the export competitiveness of EU enterprises to other global markets. Moreover, even for the domestic market of the EU, whether import tariffs, including carbon tariffs, are borne by exporting enterprises themselves by compressing profit margins or transferred to the EU demand side (EU downstream enterprises or consumers) ultimately depends on the price elasticity of the product, which is determined by the industrial competitiveness of both supply and demand sides. For industries with weak competitiveness in the EU, imposing carbon tariffs on upstream industries not only makes it difficult to protect the local market, but also increases their procurement costs. Meanwhile, whether local enterprises, import enterprises, upstream raw material enterprises, or downstream manufacturing enterprises, their emission costs will ultimately be reflected in commodity prices, undoubtedly exacerbating the current high price levels affected by high inflation for EU consumers.

Overall, considering the wealth gap between member states within the EU, the CBAM may bring a dual blow to some member states with weaker industrial competitiveness and lower income levels, both on the demand and production sides.

▶︎ Hot Topics

>>von der Leyen:Decoupling is clearly not viable, desirable or even practical for Europe;

EU Needs a Consistent Strategy Toward China<<

In Strasbourg, France, the President of the European Commission Von der Leyen gave a speech on EU-China relations at the European Parliament on 18th, local time.

Von der Leyen firstly affirmed China's achievements in poverty alleviation, economic strength and international status, and said that decoupling is clearly not viable, desirable or even practical for Europe; EU needs de-risking but not decoupling; the central part of EU's future China strategy must be economic de-risking.

At the same time, von der Leyen identified four key areas for Europe to work on:

(1) Continue to strengthen the EU's resilience and competitiveness in key areas such as energy, health and pharmaceutical products, food security;

(2) Bolder and better use of the EU's existing trade defense instruments;

(3) Research and development of new tools for key sectors and the need to ensure that EU companies' capital, their expertise, their knowledge are not used to enhance the military and intelligence capabilities of those who are also our systemic rivals;

(4) Strengthen cooperation with partners on economic security and trade to reduce its own vulnerability.

>>International opinion on China's first quarter economic data<<

According to china.com, National Bureau of Statistics of China (NBS) released data on the 18th, the first quarter of China's gross domestic product 2,449.97 billion yuan, at constant prices, up 4.5% year-on-year, up 2.2% from the previous year in the fourth quarter.

The spokesman Fu Linghui from NBS said that, in general, the first quarter with the epidemic prevention and control of faster and stable turn, the steady growth and stable employment and price policy initiatives forward to force, the accumulation of positive factors increased, the national economy stabilized and rebounded, which is a good start.

The Wall Street Journal published an article reviewing the first three months of China's economic development trend. According to the article, China's economic growth accelerated in the first three months of this year, which indicates that the Chinese economy is recovering strongly. Adjustments in epidemic prevention and control policies and strong government policy support have helped reignite growth.

Financial Times reported that there is a significant growth in China's retail, transportation and construction sectors. Among them, the construction business activity index stood at 65.6%, a record high since July 2011. The level of prosperity in China's service and construction sectors also continued to improve. Bloomberg pointed out that, people's travel and consumption are gradually recovering, which is driving the development of the service sector, and both logistics and factories will benefit from this. The positive impact is spreading to all sectors.

The New York Times reported that companies in European countries are seizing the opportunity when Washington tries to reduce its economic ties with Beijing. Two powerful engines of the German economy, Volkswagen and chemical company BASF, have expanded their huge investments in China.

>>Shanghai held the first international A-class car show after Covid-19 in China<<

According to Economic Daily, on April 18, the 20th Shanghai International Automobile Industry Exhibition opened. This is the first international A-level auto show after covid-19 in china.

The theme is "Embracing the New Era of the Automobile Industry". It has attracted more than 1,000 high-profile exhibitors from around the world, more than 150 new cars have made their global debuts, and a total of more than 1,500 complete cars have been unveiled. More than half of the world's top 100 component suppliers participated in the exhibition, and industry leaders from new energy manufacturing and autonomous driving solutions showcased their latest technologies and products.

It can be seen that internationalization has become the biggest highlight of Shanghai International Automobile Industry Exhibition  2023. Not only because the scale of China's auto market is huge, but also because of the accelerated transformation of China's auto industry.

>>Hungary, Poland and Slovakia: Imports of grain and other food products from Ukraine suspended<<

According to Reuters, Globes Times and China News Service,On the 20th local time, Hungary stated that it has banned the import of honey and certain meat products and grains from Ukraine until June 30.

A day earlier, the European Commission said it planned to support farmers and limit Ukrainian grain imports.

Not only Hungary, but also Poland and Slovakia have recently said that they will temporarily stop importing grain and other food products from Ukraine.

The Ukrainian crisis has prevented grain exports from Black Sea ports, and a large number of Ukrainian agricultural products, which are cheaper than EU agricultural products, have been stranded. At the same time, in order to aid the Ukraine crisis, the EU gave Kiev "completely tax-free and very free trade opportunities". Such measures made Ukraine's cheap agricultural products flow into Poland, Hungary and other European countries uncontrollably, causing the prices of local agricultural products to drop rapidly,affected the sales of local agricultural products.

▶︎ what are experts talking about？

Baerbock's visit to China, just a formality?

by YuFang Zhu

from：Guancha News

According to the author, Baerbock, who comes from the German Green Party (which has always pursued values-based diplomacy), "should be considered to have gone through the motions according to the established script". "In the current German government, the chancellery and the foreign ministry do not have the same policy towards China".

On the one hand, sharp remarks against China were made by Baerbock recently,the federal minister for foreign affairs of germany,and she called on German companies not to be overly dependent on China. On the other hand, Olaf Scholz, the chancellor of Germany, who visited China with business representatives at the end of 2022 to actively promote the economic and trade exchanges between Germany and China.

The contrast stems from the different parties the two politicians belong to. Chancellor Scholz is from the Social Democratic Party and Baerbock is from the Green Party, the two parties have had a dispute over the dominance of foreign policy. At present, the German government has not clearly stipulated the ownership of foreign policy, which usually depends on the strength of the chancellor and foreign minister. This also led to the difficult delivery of the German government's "China Strategy".

Not only within Germany, France and EU are not on the same frequency in terms of foreign policy. During the visit to China, French President Macron called on the EU not to become a "follower" of the United States and signed a lot of large trade deals with China,which contradicts the relevant remarks of Von der Leyen,who hopes to improve Atlantic relations and is running for NATO Secretary-General, and put the latter in an embarrassing situation.

The author argues that there are two reasons for the fragmentation of European foreign policy: (1) the different interests and political traditions of the EU member states; and (2) the emergence of political forces in European politics in recent years that promote universal values.

A change of tack on EU-China relations

by Maria Demertzis

from:Bruegel

European Commission President von der Leyen's important speech at the end of March changed the situation that the EU had been afraid to choose sides in the U.S.-China competition.

Von der Leyen's statement in her speech that "the imperative for security and control now trumps the logic of free markets and open trade" is, in the author's view, an ironic revelation of Von der Leyen's view of what EU policy toward China should look like, or perhaps that was the intention all along. 

Von der Leyen argues that the EU must follow the same logic of limiting free markets and restraining open trade in its response to the Chinese system. The country that can ultimately rejoice in this process is the United States, because it sees the EU going down the same tactical route it has already taken.

The article analyzes the European Commission's subtle changes in language and argues that, unlike the US, the EU never really advocated actual decoupling from China for economic reasons. As a result, the EU is silent on decoupling and has proposed a more realistic and constructive concept - "de-risking" - which is now replacing "decoupling".

The concept of 'diplomatic and economic de-risking' is replacing the term 'strategic autonomy';

the concept of 'alignment with partners' replaces the term "like-minded" countries, a subtle move away from the inadequate idea of the EU only cooperating with those that are similar.

Moreover, the concept of "China as a systemic rival" is meaningless and only reveals the EU's inability to make its mind up. Now, this concept has been sidelined (although not abandoned) and replaced by "most powerful nation,and strategic posture", which Von der Leyen uses to question China's status as a developing country.

END

Please note: the English version of this issue is slightly different from our Chinese one. The views and opinions expressed in this article do not necessarily reflect the official position of the CCCEU.