Accelerating the transition to net zero in industry

Taiwan faces significant challenges in reaching its 2050 net zero emissions goal, including a lack of clear delivery plans, setting carbon emission prices too low, and the slow pace of preparations by the private sector.

By Jason Wang, Raoul Kubitschek, and James McCatherin

Ensuring a transition to net zero will require swift action and effective implementation measures by the government, such as introducing trading prices that stimulate investments to mitigate CO₂ emissions and an effective system to set the right path to net zero by 2050. For their part, companies must prepare themselves to meet the demands of a rapidly changing global marketplace where decarbonization and sustainability are becoming increasingly important.

Taiwan’s Climate Change Response Act (氣候變遷因應法) was passed by the Legislative Yuan on 10 January 2023, effectively replacing the Greenhouse Gas Reduction and Management Act (溫室氣體減量及管理法), bringing the original 2050 target of a 50% decrease from 2005 levels (268 million tons CO₂) to an official goal of net zero emissions. Taiwan is the 18th country in the world to introduce a legally binding goal, bringing it in line with other leading countries. Lowering the target from 50% to 0% is a significant achievement for Taiwan.

The act finally introduces carbon pricing rules as well as the concept of just transition. Key provisions of the act are as follows:

Climate Change Response Act highlights

1. The government will publish a “National Climate Change Action Guidelines” and update them every four years.
2. Taiwan will create a Greenhouse Gas management fund (溫室氣體管理基金) to support CO₂ reduction efforts. Funding will come from fees imposed on companies emitting over 25,000 tons of CO₂ in the years from 2024-2025. According to the Environmental Protection Administration’s (EPA) voluntary reporting database, there were 287 companies that met the criteria.
3. The act includes a section dedicated to adapting to climate change. The government is required to evaluate climate risks, improve its governance to prevent climate change, establish green finance systems, and support research & development for innovative technology as well as invest in climate education.
4. The concept of a ‘just transition’ has been incorporated into the act. All government departments must consider the principles of the just transition in their action plans to support people affected by the shift towards net zero emissions.

A challenging goal

Taiwan announced its 2050 net zero pathway policy in March 2022 and published its 12 key strategies for transitioning to net zero. To support the transition the government will earmark existing funds to steer them towards net zero and increase them by around 30% to around NT$900 billion (about US$30 billion) from 2023-2030. This budget includes investments by state-owned companies.

While the necessary groundwork has been laid this year with the act, achieving net zero emissions by 2050 will pose significant challenge for Taiwan. According to the EPA, the country's carbon emissions reached 263 million CO²e in 2020, making it the world’s 22nd largest emitter. In 2021 according to the AQAL Group and International Energy Association Taiwan ranked a staggering 9^th globally in terms of emissions per capita. The industrial sector remains the largest source of emissions, accounting for 59% of the total in 2020. Given that Taiwan is heavily dependent on exports, accounting for a 58% share of GDP in 2021, global carbon import tariffs or measures could potentially have a significant impact on the global competitiveness of Taiwanese companies.

The current draft of Taiwan's carbon emission pricing is set at only NT$100 (around €3.08) per ton of CO₂, significantly lower than current carbon pricing of €98.01 and €117.30 per ton in the European Union and Sweden, respectively and even lower than the €8.21 set by China. The High-Level Commission on Carbon Prices Report (2017) by the World Bank has indicated that to be effective in mitigating climate change, carbon prices should reach US$50-100 per ton of CO₂ by 2030. As it stands, the lack of a clear net zero delivery plan and a low carbon price pose significant challenges to the success of Taiwan’s 2050 net-zero goal, with few incentives for emitters to reduce CO₂.

Figure 1. Historic trend of Taiwan’s indirect Carbon Emissions
Source: Taiwan 2022 National Greenhouse Gas Inventory Report, EPA

Furthermore, there are many countries or trade blocs that are currently deciding or exploring the possibility of implementing carbon border adjustment mechanisms on imports. As an export nation Taiwan needs to take note. Over 150 countries are announcing plans to reach net zero emissions by 2050. They are deploying different tools such as the implementation of emission trading schemes (ETS), carbon pricing mechanisms, and support systems for innovative decarbonization technologies such as Carbon Capture & Storage (CCS) or green hydrogen and others. For Taiwan, some of these regulations become especially impactful as those export markets introduce regulations to prevent carbon leakage, which happens when companies move their carbon-intensive production to countries with less stringent climate policies, or when domestic products are replaced by more carbon-intensive imports from overseas. The following are examples that have the potential to have a wide ranging impact on Taiwan’s business environment:

• EU Carbon Border Adjustment Mechanism (CBAM)

On 13 December 2022, the European Council and Parliament reached a political agreement to implement the Carbon Border Adjustment Mechanism (CBAM). CBAM will initially be applied to the import of carbon-intensive and high-risk goods and selected precursors, such as cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. CBAM’s transitional phase will start from 1 October 2023; and from 1 January 2026, importers will be required to declare annually the emission quantity embedded in goods imported into the EU based on the previous year.
 

• European Supply Chain Act

The European Supply Chain Act mandates that EU companies must meticulously manage the social and environmental impacts across their entire global value chain, encompassing their own operations, direct and indirect suppliers as well as the products and services they offer. The draft was approved by the European Council in December 2022, and the next step involves the European Parliament agreeing on final details, which is projected to take place in May 2023. Several member states have already adopted similar rules. For example, in Germany, large companies are already required to implement similar regulations.
 

• Clean Competition Act (CCA), United States

The CCA proposes to implement a carbon border adjustment on imports of energy-intensive products, while encouraging decarbonization of domestic manufacturing. If passed by the US House and Senate, the adjustment would be applicable to energy-intensive industries, including fossil fuels, refined petroleum products, petrochemicals, fertilizers, hydrogen, adipic acid, cement, iron, and steel, aluminium, glass, pulp and paper, and ethanol, effective from 2024, while, starting from 2026, the scope will be broadened to cover finished goods that contain a minimum of 500 pounds of the specified energy-intensive primary products. The coverage threshold will be reduced to 100 pounds in 2028.