Hung-Jeng Tsai / Director of Graduate Institute of Marine Affairs, and Director of the Center for Carbon Research and Solution (CCRS) at National Sun Yat-sen University

On December 22nd, 2023, the Taiwan Carbon Solution Exchange (TCX) officially opened, providing a formal channel for carbon credit trading in Taiwan. The concept of “putting a price on carbon” has become an actual monetary trading behavior. Coming up,Taiwan will begin the imposition of carbon fees in 2025, but the calculation and data collection for carbon emissions will start in 2024. For the EU Carbon Border Adjustment Mechanism (CBAM), certificate fees imposition will begin in 2027, while product carbon content will be calculated starting in 2026. In the face of these successive waves of carbon-related costs, corporations have shown two distinctly different reactions. On one hand, almost all of the companies that purchased the first batch of carbon credits from TCX understood that what they bought are voluntary carbon credits, which can only be used for carbon neutrality. In fact, many of these companies are highly familiar with their own internal carbon cost structures, some have even implemented advanced internal carbon pricing systems, requiring each department to allocate its own budget for carbon emissions as an accounting item. This approach motivates employees to treat carbon reduction as a valuable asset. On the other hand, some industry associations continue to hope the government will make arrangements allowing both domestic and international voluntary carbon credits to be used to offset the carbon fees that will soon be levied, or even CBAM costs. However, such expectations are the result of misunderstanding and mixing up the three carbon pricing systems (voluntary carbon credit trading, mandatory carbon taxes/fees, and cap-and-trade and allowance trading) along with the EU CBAM.
 

There are two types of methods for pricing carbon emissions. The first is implemented under a government mandate, grounded in public authority and legally binding, which is referred to as mandatory carbon pricing, such as carbon taxes/fees and the EU Emissions Trading System (EU ETS). Its effectiveness is guaranteed by the public authority of the country, so in theory, mandatory systems in different countries can be aligned through international trade negotiations to establish offsetting arrangements. If Taiwan’s carbon pricing system is to align with international standards, it primarily refers to mandatory pricing.
 

The second type falls outside of government regulations and the carbon reduction or carbon negative behavior is done by corporations, civic groups or individuals voluntarily, to earn emission allowances commonly referred to as carbon credits that permit the emission of an equivalent amount of CO₂ reduced. These credits can be sold in the voluntary market to companies unable to reduce their own emissions, allowing them to offset their excessive emissions and achieve net-zero, also known as “carbon neutrality”. The carbon credits traded on TCX are voluntary carbon credits. When Taiwan drafted the Climate Change Response Act, the government allowed voluntary carbon credits to offset carbon fees up to a certain percentage, in order to ease the impact on industries. However, this measure has led to conceptual confusion between the two types of carbon pricing. In fact, voluntary carbon credits cannot be counted toward another country’s mandatory system for offsetting purposes in the context of international alignment. Therefore, voluntary carbon credits cannot be used to deduct CBAM fees.
 

The reason Taiwanese companies may have such expectations for offsets could be that they have long misunderstood the EU CBAM as a form of “carbon tariff”. In fact, the EU official website clearly states that the purpose of the CBAM is to address the issue of “carbon leakage”. This refers to the situation where companies within the EU are burdened by higher carbon costs, and would relocate productions to countries with lower carbon costs. As a result, capital flows out of the EU, and the overall effect of global emissions reduction is diminished. Therefore, CBAM requires other countries to adopt EU’s carbon emission standards, which means it does not violate the WTO principle of national treatment. The reason Taiwan tends to see it as a carbon tariff is that carbon emission costs have traditionally been treated as an “external cost” that does not need to be paid domestically. Now, being subject to the EU’s high carbon fees, it is naturally perceived as an extra “tariff” for exports to Europe.
 

A global increase in carbon costs is an unavoidable trend and will lead to a major restructuring of Taiwan’s industrial competitiveness, making the “carbon anxiety” very real within the corporation community, especially among small and medium-sized enterprises. To react to this significant shift, the first thing that the government and corporations must consider is how to establish a solid carbon pricing mechanism, assign a price to carbon emissions and enable price discovery, so that Taiwanese enterprises can adapt to the process of increasing carbon costs. The second is to assist enterprises in developing various carbon reduction processes, green energy solutions, and carbon-negative technologies to create new opportunities for industries in Taiwan.
 

n the case of Taiwan’s current carbon fee system, its primary advantage is the relatively low administrative cost of implementation. Given the existing experience with the air pollution fee as a reference, it is a system that government bureaucracies are already familiar with and can readily operate, and it is also a model well known to the business sector. Another advantage is that carbon fee prices are stable, making it easier for companies to predict the growth of their carbon costs, and decide based on their production capacities whether to pay for the carbon fee or to replace equipment and adopt new energy-saving and carbon reduction technologies. These arrangements may require securing financing, rescheduling orders, and other related steps. Thus, stable estimates of carbon costs help support the long-term operations of enterprises.

However, the complexity involved in carbon fees is definitely far beyond air pollution fees. The greatest drawback of a carbon tax/fee system is the inability to control emissions from manufacturers and the public, which means it cannot ensure that emissions will decrease year by year to meet the 2050 net-zero target. Unless the government can guarantee an annual increase in carbon fee rates at a pace substantial enough to drive both corporations and the public to act in line with the required emission reduction roadmap to achieve the 2050 net-zero target, and to create sufficient incentives for the development of carbon-reduction and carbon-negative industries. Yet, under Taiwan’s electoral political culture, the political feasibility of raising carbon fees annually will face serious challenges.
 

Even if politicians possess sufficient political will to carry out this task, government-controlled carbon pricing may lack market mechanisms, making it difficult to achieve price discovery and market efficiency. This can lead to challenges such as setting appropriate free allowances for companies with different sizes, determining proper earmarked uses for large amounts of carbon fee revenue, and effectively promoting investment in carbon-negative industries. All of these issues will inevitably require an effective cross-ministerial planning mechanism, which may require new capacity-building within the existing government bureaucracy.

🔗Article Source：Liberty Times Net