Sustainable development and climate change issues have led the world into the "net-zero game," where carbon pricing plays a crucial role in the rules of the game. The Ministry of Environment's announcement at the end of April 2024 regarding the drafts of the carbon fee-related sub-laws of the Climate Change Response Act (the “Climate Act”) has triggered a new wave of carbon anxiety. From a corporate compliance perspective, how should one interpret the impact and potential trends of carbon fee collection? It may be useful to clarify the following points first:

1. Who are subject to GHGI regulations?

Greenhouse gas inventory is the first step in reduction efforts. Under the framework of the Climate Act, according to the regulations on “Emission Sources Obligated to Measuring, Reporting and Verification of Its Emission by Entity," only specific processes of certain industries announced by the Ministry of Environment or entities with total annual emissions exceeding 25,000 metric tons of CO2 equivalent (CO2e) must conduct greenhouse gas inventories, registration, and verification (hereinafter “Greenhouse Gas Inventory” or “GHGI”). The scope of GHGI includes direct emissions (Scope 1) and energy indirect emissions (Scope 2) (Article 3, Paragraph 1 of the Greenhouse Gas Emission Inventory, Registration, and Verification Management Regulations). Simply put, under the Climate Act, the following enterprises must conduct GHGIs:

－ Specific processes of power, steel, oil refining, cement, semiconductor and panel industries;

－ In addition to the industries above, other entities with total annual emissions exceeding 25,000 metric tons of CO2e, which are divided into:

˙ Manufacturing industries whose total emission from Scope 1 and Scope 2 exceeds 25,000 metric tons;

˙ Non-manufacturing industries whose emission from Scope 1 exceeds 25,000 metric tons.

The boundaries for specific targets of GHGI are delineated by factory registration certificates or business registration numbers. These boundaries are mainly based on individual factory addresses, meaning that the unit of GHGI calculation is the “entire factory (or site).” This approach is not significantly different from the era of the Greenhouse Gas Reduction and Management Act.

2. All targets of GHGI need to pay carbon fees?

According to Article 3 of the current draft of Regulations on Carbon Fee Collection, targets of carbon fee collection are manufacturing and power industries subject to GHGI with a total annual carbon emission exceeding 25,000 metric tons from both Scope 1 and Scope 2. Power companies can apply for a deduction of emission amount for power sold to the outside, meaning the emissions related to power produced for consumption (Climate Change Response Act, Article 28, Paragraph 2). Therefore, the entities subject to GHGI under the Climate Change Response Act are not necessarily the targets of carbon fee collection. If an entity subject to GHGI is not a manufacturing industry, or if it is a manufacturing industry whose combined annual emissions from Scope 1 and Scope 2 does not exceed 25,000 metric tons, or if it is a power plant or power equipment whose annual carbon emissions after deducting power produced for consumption (such as internal power use) does not exceed 25,000 metric tons, such an entity is currently not within the scope of carbon fee collection.  

3. Are listed companies with GHGI disclosure obligations also subject to GHGI regulations under the Climate Act?

From the discussion above, it is clear that currently the Climate Act mainly uses individual factory sites as the targets for the regulation of emission sources. This is quite different from the scope of GHGI disclosure required by the Financial Supervisory Commission (FSC) of listed companies. In response to the global corporate ESG trend, the FSC released the "Pathway to Sustainable Development for Listed Companies” in 2022. It plans for all listed companies, including domestic and overseas subsidiaries filing consolidated financial statements, to complete their GHGIs by 2027 and to have them verified by 2029. This means that while listed companies are required by the FSC to gradually complete their GHGI, verification, and disclosure for their entire business groups, only individual sites with higher carbon emissions (those exceeding 25,000 metric tons) within their domestic business groups are subject to GHGI regulation under the Climate Act.

4. Possible future adjustments in carbon fee collection?

Article 28 of the Climate Act provides that the collection of carbon fees aims to “achieve the long-term national GHG emission reduction goal and periodic regulatory goals,” and the central competent authority may impose carbon fees “in stages.” Hence, it is known that, at the legislative level, the Climate Act does not restrict the collection of carbon fees to specific industries or processes, nor does it specify exemption thresholds or require that carbon emission sources be calculated solely on an entire factory (site) basis. In other words, the current carbon fee sub-laws appear to be a phased approach to avoid excessive impact to industries in the initial stages.

To achieve the legislative purpose of carbon fee collection, the Ministry of Environment has previously indicated plans to increase carbon fee rates and lower exemption thresholds in the future. As more listed companies disclose their GHGI information, the carbon fee system may undergo further adjustments, such as expanding the scope of regulated entities, modifying the organizational delineation for GHGI, and adjusting the basis for calculating carbon fees. These are also directions that align with the National Development Council's 2023 "Green Finance Key Strategic Action Plan," which promotes the integration of ESG-related information. Given that Taiwan’s long-term reduction goal (net-zero by 2050) and phased goal (e.g., the reduction goal for 2030), carbon fees serve as a "reduction tool." Even if certain enterprises are not currently subject to carbon fee collection, they may gradually be included in the future if their long-term carbon reduction efforts are insufficient. With potentially higher carbon fee rates at that time, failing to proactively reduce carbon emissions now in advance will result in heavier carbon fee burdens then. Therefore, it is crucial to take preemptive measures to reduce carbon emissions.

No outsiders in net-zero transition

The net-zero transition includes energy transition, social transition, and lifestyle transition. It is a new life movement where no one is an outsider. Increasingly diverse and stringent climate regulations will bring more climate-related legal risks to businesses. In addition to using the TCFD framework for internal inventory and related disclosures, companies may consult external legal professionals to analyze the application of domestic and international regulations and clarify ambiguities, which will help businesses identify and manage net-zero regulatory risks, incorporate such risks into overall decision-making considerations, and steadily achieve their corporate sustainability goals.

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