Is Taiwan Prepared for the EU Carbon Border Adjustment Mechanism (CBAM)?

By Armin Ibitz

Addressing Carbon Leakage in Global Trade

The European Union (EU) has long positioned itself as a global leader in climate action. Between 1990 and 2019, EU greenhouse gas (GHG) emissions fell by 24%, while the economy grew by approximately 60%. This achievement is often cited as evidence of successful decoupling between economic growth and emissions.

However, a significant factor behind this reduction has been the outsourcing of industrial production—along with its carbon footprint—to non-EU countries. Today, the EU imports goods and services associated with over 700 million tons of CO₂ emissions, amounting to roughly 20% of its total territorial emissions.

This phenomenon, known as carbon leakage, occurs when stringent climate policies in one region push carbon-intensive production to countries with weaker environmental regulations. The result is a shift in emissions rather than an absolute reduction.

Carbon leakage takes two primary forms:

1. Energy-price-driven leakage – When countries adopt climate policies and transition away from fossil fuels, global energy prices fall, incentivizing increased fossil fuel consumption elsewhere.

2. Competitiveness-driven leakage – Carbon pricing and environmental regulations raise production costs for manufacturers in regions with strict climate policies, making them less competitive against producers in countries without similar regulations.

For the EU, reducing emissions internally while importing carbon-intensive goods undermines its climate objectives. To tackle this challenge, the EU is implementing a Carbon Border Adjustment Mechanism (CBAM).

The European Green Deal and Carbon Border Adjustment Mechanism (CBAM)

Under the European Green Deal (2019), the EU aims to become the first carbon-neutral continent by 2050. A key milestone in this transition is a 55% reduction in emissions from 1990 levels by 2030. However, concerns over carbon leakage and industrial competitiveness have intensified.

Failing to account for environmental damage in pricing effectively can be perceived as a subsidy for polluting industries. While companies in the EU bear the cost of emissions through carbon pricing, competitors in countries without such policies gain a cost advantage. To address this disparity, the EU introduced CBAM—a tariff on imported goods based on their carbon content—to ensure a level playing field.

CBAM applies to imports from countries without a comparable carbon pricing mechanism, targeting sectors such as steel, aluminum, cement, fertilizers, and electricity. The mechanism aims to:

✅ Prevent carbon leakage by discouraging companies from shifting production to countries with lax climate policies.

✅ Protect EU industries from unfair competition.

✅ Generate revenue to support the EU’s green transition.

✅ Encourage trading partners to strengthen their climate commitments.

Challenges and Global Reactions

As expected, CBAM has sparked opposition both within the EU and among trading partners. Critics argue that it could disrupt global trade, increase costs for businesses, and strain diplomatic relations. Developing economies, in particular, see CBAM as a form of green protectionism, disproportionately affecting their industries.

Besides challenge about alignment with World Trade Organization (WTO) rules, which require trade policies to be non-discriminatory and proportionate, also concerns over administrative complexity and compliance costs remain.

Implications for Taiwan

Taiwan is deeply integrated into global supply chains, particularly in semiconductors, electronics, and communications equipment. The EU is Taiwan’s fourth-largest trading partner, and trade volumes between the two have been growing steadily. However, some of Taiwan’s major export sectors—such as steel, chemicals, and metals—are highly emissions-intensive and thus directly impacted by CBAM.

Currently, 38% of Taiwan’s manufacturing sector consists of emissions-intensive and trade-exposed industries, employing nearly a million people. The introduction of CBAM could not only increase export costs for Taiwanese manufacturers and reduce competitiveness in the increasingly important EU market, but also pressure Taiwan to accelerate carbon pricing reforms.

As of today, Taiwan lacks an Emissions Trading Scheme (ETS). In 2024, Taiwan decided to implement a carbon pricing system — possible a key factor in assessing CBAM exemptions (or at least tariff reductions).

The Ministry of Environment (MoE) has approved a carbon fee of NT$300 (approximately US$9.32) per ton for specific emission sources, with very generous preferential rates for certain industries during a transitional period. The initial focus will be on sectors with high carbon leakage risks, such as steel and cement manufacturing.

According to the MoE Taiwan's carbon fees are scheduled to be collected starting in 2026, and are potentially reducing EU CBAM tariffs imposed on Taiwanese exporters.

As of late 2024, Taiwan has also updated its greenhouse gas (GHG) emission reduction targets to align with more ambitious goals. The government now aims to reduce emissions by 26-30% by 2030, compared to 2005 levels, an increase from the previous target of 23-25%.

To achieve these objectives, Taiwan has developed a comprehensive strategy known as the "12 Key Strategies" Action Plan (2023), which includes:

• Energy Transition: Expanding renewable energy sources like wind and solar power.

• Industrial Transition: Promoting green manufacturing processes.

• Lifestyle Transition: Encouraging sustainable consumption and transportation habits.

• Social Transition: Enhancing public awareness and participation in climate action.

While these initiatives represents a first step to Taiwan's commitment to reducing carbon emissions and integrating into the global carbon pricing framework faces headwinds.

For Taiwan, CBAM presents an opportunity to accelerate renewable energy adoption and decarbonization of its emission intensive industrial base. Without substantial policy reforms, Taiwanese exporters will face increased costs under CBAM, putting key industries at risk.

With carbon tariffs on the horizon, Taiwan faces a pivotal decision: react to external pressure or proactively embrace decarbonization to secure its place in a low-carbon global economy.