MOENV: Carbon Fee Aims to Reduce Emissions and Promotes Industry Transformation by Referencing International Practices

On April 29 of this year, the Ministry of Environment (MOENV) announced the draft of 3 supplementary regulations for the collection of the carbon fee. Civic groups are concerned about the implementation timeline and accompanying measures for the carbon fee. The MOENV reiterated that accelerating the implementation of the carbon fee is a current policy priority. Under the existing legal framework, the MOENV has referenced the carbon pricing experiences of the EU, Singapore, and South Korea to develop a carbon fee system and various tools to promote diverse emission reductions. The MOENV emphasized that the primary purpose of the carbon fee is to accelerate emission reductions and facilitate industry transformation, not to increase national fiscal revenue. The MOENV explicitly requires industries to submit concrete emission reduction plans when drafting relevant supplementary systems. The MOENV elaborates as follows:

1. Planning Reduction Targets According to the Taiwan's Pathway to Emission Reduction in 2030
The MOENV explained that 2 types of designated reduction targets are currently being planned for industries to follow. The first type, based on the spirit of the Science-Based Targets Initiatives (SBTi), aims for a 42% reduction from the baseline year 2021 to the target year 2030. The second type involves setting technical benchmark reduction rates using the baseline average emissions from 2019 to 2023. Different benchmark values are set for various emission types (e.g., direct emissions and indirect GHG emissions from electricity use) to achieve the national contribution target for 2030. For instance, the benchmark for fixed fuel combustion is set using the top 25% of unit heat value emissions across various industries (e.g., steel, cement, petrochemical, textile, paper, and other industries) to calculate the required reductions by 2030. The MOENV estimates that with the introduction of the carbon fee, paired with voluntary emission reduction plans and designated targets, assuming all subjects submit voluntary emission reduction plans and achieve the technical benchmark reduction rates, the estimated reduction compared to the baseline year (2019-2023, 5-year average emissions) could exceed 24%. This reduction will help Taiwan achieve its 2030 national contribution target.

2. Starting with Carbon Reduction to Accelerate Low-Carbon Industry Transformation
The MOENV mentioned that steps are frequently taken to prevent carbon leakage and to balance industry transition by offering free emission allowances or tax exemptions. This is based on international carbon pricing mechanisms used in the EU, South Korea, and Singapore. In contrast, the newly announced draft of Taiwan's carbon fee collection method is more strict.

In the EU, companies in high carbon leakage risk industries that meet emission benchmarks can receive 100% of their emission credits without conditions. In Taiwan, companies must submit voluntary emission reduction plans with specific targets for approval before being eligible for adjustments under the Carbon Leakage Exposure Factor. Even with this mechanism, companies still have to pay a certain proportion of the carbon fee and cannot be exempted from payment obligations. Taiwan's phased adjustment of emission quantities (0.2, 0.4, 0.6) aligns with the international gradual tightening of free allowance phase-out. Therefore, Taiwan's carbon fee mechanism does not excessively discount high carbon leakage risk companies. This system design is fundamentally aimed at reducing emissions, contrary to claims that it diminishes the authority of the Carbon Fee Review Committee.

3. Efficiently Utilize Reduction Credits to Drive Diverse Domestic Reductions in GHG Emissions
The MOENV highlighted that in order to encourage major emitters to lead in reducing emissions compared to minor emitters, and to prioritize keeping funds within the country for emission reduction efforts, the deduction ratio for using voluntary emission reduction projects and carbon offset projects from the carbon fee emission quantity is set at 1.2. However, the deduction limit for reduction credits cannot exceed 10% of the carbon fee emission quantity. In addition, only subjects not at high risk of carbon leakage can use foreign reduction credits to offset the carbon fee emission quantity, with a deduction limit of 5%. The source and quality of foreign reduction credits will also be governed by guidelines referencing the Paris Agreement, with additional criteria set for approval.

4. Conducting Annual Tracking and Auditing of Voluntary Emission Reduction Plans
The MOENV emphasized that annual audits of the implementation progress will be conducted to review the effectiveness of the voluntary emission reduction plans submitted by carbon fee subjects. Businesses must submit an implementation progress report of their voluntary emission reduction plans for the previous year by April 30 each year. Those meeting the progress requirements can apply preferential rates for that year. If the central competent authority finds that a business has not implemented the approved plan as required, it will recover the difference between the general rate and the preferential rate for that year and mandate improvements within a specified period. Failure to make improvements within the deadline will result in the revocation of the approved voluntary emission reduction plan. Without an approved plan, the business will have to pay the carbon fee at the general rate and will not be eligible for the carbon leakage risk coefficient.