China’s “carbon neutral clock” has been speeding up since pivoting from its original skepticism regarding developing countries’ obligations to reduce emissions, internationally declaring in 2020 its vision of bringing carbon emissions to a peak in 2030 and achieving carbon neutrality by 2060. As a developing economy that emits the largest amount of carbon in the world, China’s declaration of carbon neutrality ahead of Korea, the United States, and Japan was praised as a “historic event” adding momentum to the vision of carbon neutrality proposed by the EU, as well as certain doubts over the plausibility of this declaration. However, South Korea, which is highly dependent on China’s economy, experienced an unintended supply chain shock during the so-called “urea water crisis,” and has come to realize the potential ripple effects caused by China’s accelerated “carbon neutral clock.” This study began with the question of and concern over how China’s carbon neutrality policy will affect not only China but also Korea. Leaving for the future a quantitative impact analysis on the entire carbon neutrality policy accompanied by economic and social transformation, this study chose to analyze the impact of China’s carbon price policy, as the first among developing countries to start a national emissions trading system (ETS).

In Chapter 2, following a review of China’s carbon reduction strategy, the development process and characteristics of carbon price policy were analyzed. Aiming to meet its mid- to long-term growth target for 2035 (first stage goal of socialist modernization, doubling GDP from 2020), China has designated the target period for carbon emission peaking and achieving carbon neutrality. It plans to reduce carbon emission intensity (emission to GDP) rather than total carbon emission by 2030, the target year for carbon emission peaking, and its strategy is to reduce total carbon emission quickly by 2060 after reaching the mid- to long-term growth target in 2035. Accordingly, in the short term, it plans to control production in high-emission (i.e. high-pollution) industries to quickly reduce emissions. It is also expected to provide support for the development of energy-saving and low-carbon technologies and the increase of renewable energy facilities in the medium term, and to strongly promote carbon price policies in the long term. 

China’s current carbon price policy is the ETS, in line with which pilot projects have been implemented in eight regions since 2013 and a national ETS since 2021, with plans to integrate these in the future. The regional ETS, which has accumulated about 10 years of experience, applies paid and free quotas to various industries (differing by region), while the national ETS applies 100% free quotas only for the power generation sector. The Chinese government plans to expand the nationwide ETS to eight major high-emission industries (electric power, petrochemical, chemical industry, building materials, steel, nonferrous metals, paper, and aviation) by 2025. It is also expected to gradually promote the reduction of free quotas and increase the proportion of paid allocation by lowering the benchmark coefficient. The nationwide carbon market remains in the early stages of implementation, but is receiving positive response for establishing a transaction system, improving measurement, reporting, and verification (MRV) processes related to carbon data quality, and high carbon transaction prices compared to pilot projects (40-60 yuan/tCO2). However, problems such as lack of mid- to long-term plans, concentration of carbon transactions leading up to the closing date (i.e. market activity problems), and data manipulation by some companies have been exposed as limitations.

Chapter 3 examines the issues of the global carbon price system, and identifies discussions on China’s introduction of carbon taxes and responses to the EU’s Carbon Border Adjustment Mechanism (CBAM). In order to reduce greenhouse gas emissions, 68 regions around the world have introduced ETS (32 regions) and carbon taxes (36 regions) as of April 2022, and some regions have implemented carbon taxes as auxiliary measures in fields not included in ETS. Recent issues regarding the cross-border carbon price system include the introduction of CBAM by the EU, and the formation of international climate clubs. The EU’s introduction of CBAM is triggering discussions on the introduction of carbon pricing in several countries, and international climate clubs centered on advanced countries are negotiating tariff cuts on low-carbon items. Meanwhile, China supports the Paris Agreement system, which imposes differentiated responsibilities on developing countries, and is conducting research on carbon pricing (e.g. the establishment of a joint carbon credit market) and related standards through the Belt and Road Initiative.

China’s introduction of a carbon tax is likely to come after 2035, when strong carbon reduction targets are proposed, and the ETS system in itself is considered to be limited in achieving the reduction targets. In addition, fields that do not overlap with ETS are expected to be charged at a level similar to emission prices. However, some research institutes in China and researchers have raised the possibility of introducing a limited carbon tax for some industries, a scenario that cannot be completely excluded when preparing response measures to the EU CBAM.

China opposes the EU’s introduction of CBAM, characterizing it as a measure to expand the issue of climate change to trade barriers. However, it seems that it is preparing for active negotiations with the EU while analyzing CBAM regulations and their effects. First of all, the Chinese government has supplemented and developed its carbon trading system in response to the EU’s CBAM (internal response), based on which it intends to promote coordination and negotiations with the EU regarding CBAM (external response). In particular, in order to develop its domestic carbon transaction system, the government is ① expanding the scope of industries subject to the national ETS (including the scope of CBAM), ② strengthening the foundation for collecting carbon emission-related data, and strengthening punishment for violators, and is ③ promoting the swift establishment of unified and standardized carbon emission statistics and accounting systems. Meanwhile, on the external side, the Chinese government is trying to propose alternative approaches to reduce its differences in position with the EU. Noteworthy among these are negotiations on whether the Chinese government should be viewed as a taxable entity for carbon emissions produced by Chinese companies in CBAM-applied items.

In Chapter 4, the effect of China’s carbon price policy on changes in China’s industrial production and cost was analyzed using a computable general equilibrium (CGE) model and interindustry analysis. In particular, in this study, the carbon price by industry required for this impact analysis was not regarded as an exogenous variable, but the carbon emission cost burden rate by industry was estimated and applied to each model by reflecting China’s ETS policy and reality. The results of this analysis estimate the burden rate of carbon emission costs by industry according to China’s carbon price policy at 0.03 to 3.28% (average between 2026 and 2030), and the resulting increase rate of producer prices (production costs) by industry was 0.22 to 2.0%. It is noteworthy that although the carbon emission cost burden ratio was applied only to industries subject to the Chinese carbon price policy, overall production costs increased for the Chinese industry. In addition, some industries showed a higher rate of increase in production costs than those with a high rate of emission cost burden, even though they had very little (e.g. metallic products processing) or no (e.g. electrical equipment, machinery and equipment, construction) emission cost burden. As described above, it is relatively unlikely that China’s ETS will be strongly promoted during the analysis period, so the growth rate of production costs by industry was relatively low. However, the relationship between industries where costs rise, and the extent of this increase, have great implications. It should also be noted that the cost of production in the entire Chinese industry may further increase due to the cost spent in promoting non-market-based carbon reduction policies, which are the key policies of the analysis period. According to the results of our CGE model analysis, most of the industries subject to the Chinese carbon price policy showed a slight decrease in industrial production in the long run, while production increased in industries to which the policy was not  applied. Through this, the study confirms the possibility that China’s carbon price policy will change China’s industrial structure in a more eco-friendly direction. The analysis result of this CGE model can be understood as a long-term result that combines various factors such as China’s economic and industrial structure, input factors, new technologies, and changes in trade and investment.

In Chapter 5, the impact of China’s carbon price policy on changes in economic relations between Korea and China was analyzed in terms of Korea’s export competitiveness, Korea’s imports from China, and investment in China. Korea’s export competitiveness was analyzed by the CGE model by dividing it into conditions where only China’s carbon price policy is implemented (Scenario 1), only the EU’s CBAM is implemented (Scenario 2), and China’s carbon price policy and EU CBAM are applied at the same time (Scenario 3). The results of the analysis indicate that Korea’s export competitiveness to China’s eco-friendly (non-polluting) market gradually weakens as China’s carbon price policy reduces production in high-pollution industries and increases competitiveness in non-polluting industries in China. However, in relevant industries, Korea’s exports to the world increase in a manner similar to China, and there appears to exist a complementary relationship between Korea and China in the global market related to non-polluting industries. When only CBAM was implemented (Scenario 2), Korea’s exports to the EU increased slightly overall, while China’s exports to the EU showed different levels of increase or decline by industry. When China’s carbon price policy and EU’s CBAM were applied simultaneously (Scenario 3), Korea’s exports to the world increased in most industries, while China’s exports to the world increased in non-polluting industries.

The impact of China’s carbon price policy on Korea’s imports and investments in China was calculated based on the premise that the increase in China’s production costs by industry is 100% transferred to consumer prices and export prices, as was demonstrated in Chapter 4. In this case, due to China’s carbon price policy, industries with high growth rates of import prices (= production cost growth rate) to China and high dependence on imports to China included metal processing products, machinery and equipment, non-metallic minerals, automobiles, and primary metals. In particular, in the case of the machinery and equipment, automobile industries, the growth rate of imports to China over the past five years was also high, making the impact of China’s carbon price policy more visible. Chemical products (16.1%), Korea’s second-largest industry in imports from China, and wood and paper, textiles and leather did not show a high rate of increase in import prices. However, all of these industries are highly dependent on imports from China. In addition, especially in the chemical industry, imports from China have also sharply increased, indicating some influence is unavoidable. Meanwhile, computers and electronics (33.8%), Korea’s no. 1 industry in imports from China, are unlikely to have a significant impact because the growth rate of import prices to China is relatively low, as is dependence on imports from China. However, when analyzing detailed items (six-unit HS codes), Korea’s total number of imported items from China in 2021 was 5,470. Among them, 78 items were 100% dependent on imports, 390 items 90% or more, and 975 items 70% or more, demonstrating the importance of managing detailed items that are highly dependent on imports for each industry.

When it comes to Korea’s investment in China, the industries that will be most affected by the rise in production costs due to China’s carbon price policy are electrical equipment and automobiles. In addition, the computer and electronics, chemical, non-metallic minerals, and mining industries are expected to be relatively greatly impacted. In particular, electrical equipment is Korea’s second-largest industry of investment in China, and is recently showing rapid growth. In addition, although it is an industry to which the carbon price policy does not apply, the growth rate of production costs is increasing on par with the power generation industry, which has the largest rate of carbon emission cost burden. Because of this, the impact is expected to be the greatest. Along with computers and electronics, which account for the highest proportion of Korea’s investment in China (39.1%), the automobile industry has a relatively low direct impact on rising production costs due to carbon price policies, but is expected to be greatly affected indirectly. For this reason, caution is needed in that if the regulatory intensity for other industries grows higher, the increase in production costs may be further expanded through indirect effects. However, in the computer and electronics industries, which account for the highest proportion of Korea’s investment, import, and export to China, there is a possibility that China’s influence may be offset in that dependence on exports and imports to China may also be lowered if Korea’s investment destinations change due to the reorganization of the global supply chain, expanding role of new production bases such as ASEAN, and reshoring policies by major countries in the future.

Chapter 6 summarizes the above analyses and presents the conclusions and implications of this study. First of all, these conclusions were presented in the areas of: ① China’s carbon price policy causing industrial production and cost changes, ② changes in Korea’s export competitiveness due to China’s carbon price policy, ③ China’s carbon price policy and Korea’s import and investment in China, ④ China’s carbon reduction strategy and supply chain risk from China, ⑤ the conditions and timing of China’s introduction of carbon tax, and ⑥ China’s response to CBAM. Finally, implications for the Korean government and companies (industry) were presented in terms of: ① responding to import supply chain risks related to China’s carbon reduction policy, ② seeking cooperation with China, and ③ responding to the EU CBAM.