Shenwan Hongyuan 2026 Spring ESG Investment Strategy | From "Double Resistance" to Carbon Tariff: Trade Barriers Forcing China's Carbon Market Breakthrough

(Source: Shenwan Hongyuan Rongcheng)

Summary

International trade friction is extending from traditional sectors to high-tech industries, with policy tools shifting from simple “double anti” measures to “green” trade barriers. Early disputes mainly focused on traditional advantage industries such as photovoltaics, coated paper, and steel, primarily involving anti-dumping and anti-subsidy measures. Since 2023, marked by the EU launching anti-subsidy investigations into Chinese electric vehicles and implementing carbon tariffs, the focus of trade friction has shifted to strategic areas like high-tech industries and green standards.

The EU’s March 2026 “Industrial Accelerator Act” continues restrictions related to Chinese electric vehicles. In September 2023, the EU officially launched an anti-subsidy investigation into Chinese electric vehicles. In October 2024, the EU announced the investigation results, confirming subsidies to Chinese EV companies and imposing high anti-subsidy tariffs for five years. After multiple negotiations, in January 2026, the EU accepted a price commitment plan and decided to exempt these tariffs. However, just two months later, in March, the new “Industrial Accelerator Act” proposed introducing “EU manufacturing” requirements in public procurement and projects receiving financial support, covering products like EVs, batteries, photovoltaics, and other zero-emission technologies.

The EU’s carbon tariffs, implemented from January 2026, aim nominally to address “carbon leakage,” but in practice serve as a new form of green trade barrier, continuing previous anti-dumping investigations on Chinese steel and aluminum. To boost EU manufacturing, since 2007, the EU has frequently launched anti-dumping investigations on Chinese steel and aluminum, imposing high tariffs. Simultaneously, the EU launched its carbon market in 2007, introducing concepts related to carbon leakage and tariffs. The formal release occurred in 2023, with tariffs starting on January 1, 2026, and payments due from January 1, 2027. Currently, the scope covers cement, aluminum, fertilizers, electricity, hydrogen, and steel, but the EU has drafted legislation to expand CBAM to about 180 downstream products, including machinery, automobiles, auto parts, and household appliances, starting from 2028.

For Chinese export enterprises, the immediate impact of the “carbon tariff” mainly affects the steel industry. The tariff is calculated based on the difference between EU carbon prices and those of exporting countries. Since China’s carbon price is relatively low—averaging only 73.18 yuan/ton in 2025—while the EU’s is as high as 607.32 yuan/ton, the price gap is 534.14 yuan/ton. This could mean an additional carbon cost of about 144 euros per ton for China’s steel industry. Moreover, the EU’s criteria for recognizing green electricity are strict, only accepting direct supply and long-term power purchase agreements, not green certificates.

Baosteel, a benchmark enterprise in low-carbon transformation within the steel industry, is also impacted by the carbon tariffs. The company has optimized production processes to reduce carbon emissions, adjusted its overseas capacity strategy, and effectively responded to high carbon costs. It has set decarbonization targets—8% reduction by 2025, 30% by 2035, and achieving carbon neutrality by 2050—aligning with disclosed progress and annual goals. The company also manages carbon assets and product carbon footprints scientifically, replacing default values with third-party verified footprints to significantly reduce CBAM payment bases and uncertainties. In its overseas strategy, Baosteel is building the world’s first green, low-carbon full-process thick plate factory in Saudi Arabia, producing low-carbon steel from low-cost green and hydrogen energy sources, reducing unit carbon intensity and CBAM costs, and supplying nearby markets in the Middle East and North Africa to lessen dependence on high-barrier EU markets. Additionally, in EU exports, the company focuses on high-end automotive clients, promoting low-carbon product collaborations.

Under the dual pressures of increasing international trade barriers and domestic low-carbon transformation, China’s carbon market is entering an accelerated development phase. On one hand, the government has introduced policies to promote a unified national carbon market, expanding coverage and raising carbon prices to narrow the gap with EU prices. On the other hand, the green certificate market trading mechanism is being improved to further highlight the environmental value of green electricity, enhance international recognition, and help enterprises effectively reduce actual carbon emissions during production.

Considering current international trade realities and the future development of China’s carbon and green certificate markets, the “14th Five-Year Plan” emphasizes accelerating comprehensive green transformation of the economy and society to build a beautiful China. Specific goals include actively and steadily advancing carbon neutrality, continuously improving environmental quality, enhancing ecosystem diversity and stability, and accelerating the formation of green production and lifestyles. Specifically:

Concepts of the carbon market: The national unified carbon market consists of the Carbon Emission Allowance (CEA) trading market and the Carbon Emission Reduction (CCER) trading market. The CEA market includes primary and secondary markets; the primary market is managed by the Ministry of Ecology and Environment, which allocates total allowances to companies. The secondary market is operated on the Shanghai Environment and Energy Exchange, where companies trade allowances based on their needs. The CCER market supports the development of clean projects to generate emission reduction credits, which can be used to offset their own allowances.

Concepts of green electricity/green certificates: Green certificates are the sole proof of green electricity production and consumption, approved and issued by the National Energy Administration, tradable once, with a validity of two years. One green certificate equals 1 MWh or 1,000 kWh of electricity. Green electricity/green certificates are traded in two ways: “certificate and electricity combined” and “separate trading.” The former means purchasing green electricity automatically includes a green certificate, granting environmental rights alongside physical power. The latter involves trading only green certificates separately. Currently, China’s carbon and electricity markets are “carbon and electricity separated,” meaning green electricity or green certificates cannot be used for carbon allowance offsets in the carbon market.

Current and future outlook of the carbon market: Even before the 2020 “dual carbon” goal was proposed, China had established a basic framework for its carbon market. After the goal was announced, relevant mechanisms were rapidly improved, and the market entered a period of accelerated development. Currently, the national carbon market covers power, electrolytic aluminum, cement, and steel industries, with plans to gradually include civil aviation, glass, paper, chemical, and petrochemical sectors. As the number of participating enterprises increases, market activity continues to rise. In 2024, China’s carbon market average price is 91.82 yuan/ton, expected to decline to 73.18 yuan/ton in 2025 due to ample free allowances for newly included industries. However, as allowances tighten and EU carbon tariffs exert pressure, China’s carbon prices are expected to gradually rise.

Development of the green certificate market: According to national policies, provinces and high-emission industries are required to meet mandatory green electricity consumption quotas, which are increasing annually. If targets are not met, companies must purchase green certificates to make up the shortfall. Driven by policies, the environmental value of green electricity continues to be recognized. By 2025, green certificate prices are projected to rise from 1.12 yuan per certificate to 5.15 yuan, with potential for further increases. Green power plants, as the core suppliers of green certificates, can generate stable additional revenue through sales. Based on this, some notable A-share and Hong Kong-listed green electricity companies are highlighted for investors’ reference.

Risk warning: Investment in the carbon market involves risks; renewable energy investments involve risks; policies related to green electricity may impact green certificate values; EU carbon tariffs and related policies carry uncertainties; sustainable investments involve risks.