Beijing expands national carbon market ahead of EU’s carbon border levy

Measures likely to reduce the tax paid at the EU’s door under its CBAM legislation

China is gradually reforming and expanding sectoral coverage of its national carbon market, aiming to establish acquittal for carbon pricing and trade. Last week, Beijing’s Ministry of Ecology and Environment issued draft rules that prevent participants in its mandatory national Emissions Trading System (ETS) using future carbon allowances and increase restrictions on companies’ use of past years’ unused allowances. China intends to tighten the supply of carbon allowances, increasing the carbon price. The scheme, so far only applicable to power plants, may expand to manufacturing. Over its three-year life, the ETS has been ineffective in reducing emissions due to the leniency in distributing allowances. Beijing has also revived its voluntary carbon offset market. In the leadup to the relaunch, the central government increased scrutiny on its verification process for carbon credits.

The tightening of China’s carbon rules is an attempt to reduce the tax exporters will pay to the EU under the bloc’s Carbon Border Adjustment Mechanism (CBAM). The CBAM aims to reduce carbon emissions in imports and protect the EU’s domestic industry by imposing a tariff on products in critical industries by equalising the carbon price paid in a product’s source location and the EU’s carbon price. This includes iron, steel, aluminium and hydrogen, among others. It is currently in its transitional phase, with the full version set to be implemented at the beginning of 2026. China’s carbon market reforms need to go much further to reduce levies under the CBAM. The EU’s carbon price is around 10 times higher at €100 (US$109) per tonne. Determination of emission allowances in China is far less stringent than the EU.

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Japan’s push to lead Asia’s decarbonisation efforts prompts ASEAN to dust off power grid proposal

There are numerous challenges to efforts to realise the ASEAN’ Power Grid

Japan has ramped up commitments to Asia’s decarbonisation drive, through efforts to revitalise ASEAN’s Power Grid (APG) proposal – conceived initially in 1997. Japan pledged US$10 billion to Asia’s decarbonisation drive in 2021 and launched the Asian Zero Emission Community (AZEC), along with 11 partner countries, in 2023. Japan intends to support the APG under the umbrella of the AZEC through initially funding two projects in Indonesia. The two projects are specifically, a study into inter-island power grids being led by Kansai Electric Power and a project to supply renewable energy to remote islands using specialised generation and transmission control technology led by Kyudenko. The APG intends to create an ASEAN-wide grid through connecting currently disparate national and regional grids. Aside from progress exporting Laos’ abundant hydropower to neighbouring countries, the APG has largely remained inchoate.

APG will continue to face several challenges despite Japan’s proposed investment. Firstly, ASEAN’s 10 member states are at different stages of their domestic grid development. For example, while Singapore’s grid is fully developed, transmission gaps in countries like Vietnam have led to persistent blackouts. There is growing recognition that domestic grid stability needs to be addressed before transboundary connections are constructed. Stumping up the estimated US$10 billion annually to 2030 to develop the APG will be challenging. National electricity distribution monopolies like EVN in Vietnam and PLN in Indonesia, which have carriage over the transmission build-out, suffer from poor financial health – in part because of subsidies in electricity supply and politically-driven supply contracts. It is not clear where the funding to build cross-border networks will come from. The success of the APG will also be contingent on China’s support. China controls the upper reaches of the Mekong River and has prioritised water flows for its own agricultural and electricity needs – seemingly at the expense of Chinese invested projects in Laos. 

US inserts itself into African mining deals to secure critical mineral supply chains

Efforts aims to minimise Chinese involvement

Washington is increasingly intervening on mining deals in Africa, as it tries to curb Chinese participation in critical mineral supply chains. Last year, the US attempted to mediate a deal in which Switzerland’s Mercuria would purchase the vast majority of Kazakhstan’s Eurasian Resources Group’s copper-cobalt mines in the DRC. The parties could not agree on a price, however Mercuria was just one of several companies the US had on its list of potential buyers. Crucial to any deal involving Eurasian Resources Group’s cobalt mines in the DRC is Washington’s sanctions on Israeli billionaire Dan Gertler who owns stakes in many of the mines. In the past few months, the US also pressured DRC state-owned Gécamines to reevaluate the sale of the UAE’s Chemaf, which leases permits to some of Gécamines’ projects, to Chinese state-owned defence manufacturer Norinco. Last week, Gécamines announced it has vetoed the deal with Norinco. The US has also committed over US$1 billion towards the Lobito corridor – an infrastructure project that eases the export of critical minerals from Angola, the DRC and Zambia.

The efforts aim to check China’s dominance of critical mineral supply chains. China controls around 60 percent of global critical mineral production and 85 percent of processing capacity. Africa is home to vast deposits of critical minerals, which are needed to manufacture emerging technologies such as EVs and wind turbines. More specifically, the efforts aim to challenge China’s more efficient approach to procuring critical minerals. Beijing is able to direct its state-owned enterprises to invest in critical minerals irrespective of fluctuating commodity prices. Conversely, the US doesn’t have any state-owned mining companies or even a ministry of mining. The fact that the US is making such rare interventions demonstrates the high priority it has placed on securing critical minerals. 

European utility companies reduce renewable buildout targets

Aging grid infrastructure a major issue

Major EU utility companies are cutting back their investments into new renewable projects, amid a downturn in market conditions. Norway’s state-owned Statkraft, the largest European renewable energy utility, announced that it has reduced its onshore wind, solar and battery storage capacity target from 2.5-3GW per year from 2025 and 4GW per year from 2030 to just 2-2.5GW per year from 2026. In May, Portugal’s EDP stated that it had cut its investment plan from €19 billion (US$20.6 billion) in 2024-26 to €17 billion (US$18.4 billion) in the period. France’s Engie has delayed its target to build 4GW of hydrogen capacity from 2030 to 2035. These moves come amid the EU’s looming target to increase renewable capacity by 42.5 percent by 2030 and cut carbon emissions by 55 percent by the same year.

Utility companies are facing increasing challenges in building new renewable capacity, while at the same, the incentives to invest in renewables are declining. One of the biggest issues is the state of Europe’s grid infrastructure. Over half of the continent’s grid infrastructure is projected to be near the end of its lifespan by 2030. At the same time, it is projected that the continent will experience a 60 percent increase in energy use between now and 2030. These factors have contributed to long delays in grid connection times. While the EU moves forward on the issue, its Action Plan for Grids, released late last year, projects that the bloc will require a €584 billion (US$633 billion) to pay for the upgrades. Simultaneously, lower electricity prices have damaged the investment case in new energy capacity. Prices, currently hovering just over €100/MWh (US$108/MWh) are at levels seen prior to the war in Ukraine. Additionally, currently high interest rates (around 5 percent) are only a few points lower than typical returns on renewables projects (around 7 to 9 percent).

India, Japan and the US attempt to reduce China’s stranglehold on the API market

These countries are unlikely to beat China on cost

India, Japan, and the US are making efforts to dilute China’s foothold in active pharmaceutical ingredients (APIs). APIs are the biologically active component in drugs that produce the intended therapeutic effects. India, which is the third largest API producer globally, is at the forefront of efforts to build a more diversified supply chain. Its Production Linked Incentives (PLI) scheme provides subsidies for companies investing in new API manufacturing facilities. In 2022, the US passed the Protection of our Pharmaceutical Supply Chain from China Act which has stipulated that by 2024, restrictions would be imposed on drugs with APIs made in China. For its part, Japan’s health ministry will provide roughly US$341 million to domestic API manufacturing

These efforts are all aimed at responding to China’s 40 percent share of the API market – a figure which is higher for some key medicines. The concentration of API supply chains in China has been a particular concern since the pandemic. In the mid-1990s, 90 percent of all APIs were made in the US, EU and Japan. Production was ultimately outsourced to avoid the significant chemical pollution entailed in the manufacturing process. China’s looser environmental standards, lower production costs, and cheaper raw materials made it an ideal location for API production.

Diversification from China for APIs will be costly. India has been heralded as a potential alternative. It has a well-developed pharmaceutical industry and produces 20 percent of global generic drug demand. However, India not only imports 70 percent of its APIs from China, but also produces APIs at a cost that is 20 percent higher. The corollary of this is that without steep subsidies, supply chain interventions risk inflating the cost of essential drugs. China’s cost competitiveness will make it an indispensable player in pharmaceutical supply chains for the foreseeable future.