Why Taiwan Is Pursuing an ETS Now: Climate Targets, an Export-Led Industrial Base, and Supply-Chain Pressure
Taiwan is moving with a “dual-track” approach: a carbon fee already in force, and an ETS as a potential next step to accelerate the transition and make carbon pricing more market-based. The practical point is that the fee and an ETS are not pure alternatives: the fee can act as a launch ramp, while the ETS is what creates scarcity and enables price discovery.
Climate targets are tightening along a pathway toward net-zero by 2050, with interim milestones that increase the focus on reductions in the 2030–2035 window. For companies and investors, this translates into one simple takeaway: expect the implicit cost of CO₂ in business cases to rise, even when the cost actually paid today still looks manageable. A shadow price starts to show up in CAPEX, in energy contracts, and in supplier negotiations.
The pressure is also industrial and commercial: export sectors—often energy-intensive or highly technology-intensive—need a carbon-pricing framework that is recognizable to global counterparties. In practice, verified and comparable emissions data matter more and more, because they are what helps defend margins when a buyer asks for evidence on footprint and compliance.
The carbon fee already provides an initial price signal, with a standard rate announced in the order of magnitude of NT$300/tCO₂e. It is a useful anchor for budgeting, for assessing investments, and for setting contractual clauses linked to carbon cost. But precisely because it can be low compared with mature ETSs, the incentive grows to move to a system that can reveal a more efficient and more credible price over time.
The question that matters, if the ETS is the destination, is this: which architecture choices (cap, allocation, auctions, anti-leakage protections) will actually determine impacts on margins, investment, and competitiveness?
Market Architecture: Cap, Free Allocation vs Auctions, and Managing Carbon Leakage Risk
A credible cap is the number-one condition for an ETS that works. If the cap trajectory is not clearly declining and consistent with 2030–2035 targets, the market prices “abundance,” not scarcity. Investors see this immediately: less visibility on the cap means more uncertainty on the forward curve, and therefore more difficulty in valuing abatement projects such as efficiency, fuel switching, or CCS.
Allocation is the real battleground between competitiveness and market integrity. Sectors most exposed to international trade tend to push for free allocation based on efficiency benchmarks or output-based logic, to reduce CO₂ cost pass-through into final prices. Auctions, by contrast, increase public revenues and make the cost of compliance more transparent, but they raise the immediate cost for companies and become politically sensitive in export supply chains.
Carbon leakage has already entered the debate in the carbon-fee phase, with the identification of “high carbon leakage risk” sectors and the possibility of reductions that result in paying only a fraction of the standard rate. In an ETS, the same protection concept typically translates into free allocation and benchmarks, often with conditions such as reduction plans. The risk to avoid is over-allocation, because it kills the price and creates a market that does not steer investment.
Anti-windfall-profit rules become essential when there is free allocation. If a company receives free allowances and still manages to pass the CO₂ cost downstream, it can generate rents that undermine the system’s legitimacy. That is why mechanisms such as activity-level adjustments, benchmark updates, clawbacks, and requirements to invest in decarbonization matter. These are also elements that show up in ESG due diligence and in buyer requirements across supply chains.
An ETS can have a well-designed cap and still fail if it does not trade. The bridge to the next phase is liquidity: how to build it, reduce volatility, and enable price discovery without creating a thin, easily manipulated market?
Liquidity and Price Formation: How to Avoid an Illiquid ETS and Which Tools Can Help (Market Makers, Banking/Borrowing, MSR)
The main early risk is a “thin market” ETS. If covered entities are few, or if most allowances are free and held back as a precaution, volumes stay low. The result is practical and painful: wide spreads, noisy pricing, difficulty hedging and budgeting, and supply contracts where carbon cost becomes an endless argument because there is no robust reference price.
Financial participation and the role of a market maker can make the difference. Allowing intermediaries such as banks, brokers, and trading houses to operate—under clear rules on reporting, position limits, and manipulation prevention—tends to support volumes and price continuity. For corporates, more counterparties means better execution and more useful instruments, from spot to forwards.
Banking is a key tool to stabilize expectations and incentivize early reductions. If I can carry forward unused allowances, I have an economic reason to invest earlier and monetize the benefit over time. Borrowing can help against short-term shocks, but it must be handled cautiously because it can shift risk into the future and create vulnerabilities if someone cannot pay back.
A Market Stability Reserve-type mechanism, or in any case “MSR-like,” helps reduce boom-bust cycles. The idea is simple: automatic rules that move allowances between auction and reserve based on surplus or shortage. For investors, this reduces regulatory tail risk and makes the price curve more predictable, because the market does not rely only on discretionary interventions.
If the domestic market remains small or too volatile, the next topic becomes unavoidable: linking to other ETSs or using ITMOs under Article 6. But how can this be done without importing low quality or losing regulatory control?
Linkage and Article 6: When It Makes Sense to Link to Other ETSs or Use ITMOs Without Losing Integrity and Regulatory Sovereignty
Linkage is attractive because it increases liquidity and improves price formation. Linking—even partially—to a larger ETS can reduce volatility and make carbon risk more tradable. The downside is that external shocks are imported too: cap changes, reforms, or macro dynamics that move prices in another market and transmit them into the domestic one. For cyclical sectors, this is a material consideration.
The non-negotiable prerequisite is equivalence in MRV and enforcement. If registries, anti-fraud controls, penalties, and data quality are not comparable, linkage creates quality arbitrage. This is the classic hot-air problem: units that are formally valid but environmentally weak, which depress the price and damage credibility. Global buyers, when they accept CO₂ costs in long-term contracts, ask for auditability and environmental integrity, not just a number.
ITMOs under Article 6 can be useful during a transition, but they must not become a shortcut. If used, they require corresponding adjustments and strong criteria on additionality and quantitative limits; otherwise, the ETS risks turning into a disguised offsetting system, with little domestic reduction and a lot of accounting.
A typical guardrail is a limit on credit use. In discussions during the carbon-fee phase, an order of magnitude of limited thresholds has emerged, up to around ~5% in some setups. For a CFO, this is an operational fact: the “valve” exists, but it is small, so the strategy cannot be based primarily on credits.
All of this, however, works only if the domestic system is credible. So the question becomes: which MRV requirements, controls, and penalties make the ETS bankable for financing and supply-chain programs as well?
MRV, Compliance, and Penalties: What Makes an ETS Credible and What Changes for Those Who Must Report Emissions
MRV is financial infrastructure, not bureaucracy. Emissions boundaries, methodologies, emission factors, accredited verifiers, and data management determine trust in the “ton of CO₂” being traded. If MRV is robust, the risk of disputes over carbon-cost pass-through in B2B contracts also decreases, because the calculation bases are verifiable.
Timelines and operating burdens matter more than the political debate. In the carbon-fee phase, a preparation period was envisaged with a focus on reporting before full monetization. For industrial operators, this means concrete projects: metering, integration with ERP and the ESG data layer, audit trails, and internal procedures to manage verifications and inspections.
The compliance cycle requires internal governance and tools. An ETS implies a registry, surrender rules, cancellations, and anti-double-counting measures. Companies must define trading mandates, position limits, risk controls, and clear responsibilities across sustainability, finance, and procurement. Investors, on the other side, look at transparency and the quality of market governance, because they affect liquidity and manipulation risk.
Penalties must be a real deterrent. If the fine is perceived as an economic alternative to buying allowances, the price embeds a regulatory “discount” and the market loses credibility. Effective enforcement and publication of non-compliance support the price because they reduce the incentive not to comply.
When MRV and compliance become solid, the effect does not remain domestic. It shows up in regional prices, offset demand, and decarbonization strategies across Asian and global supply chains.
Practical Impacts for Europe and for Credit Buyers: Signals on CO₂ Prices, Offset Demand, and Decarbonization Strategies in Asia
The carbon-fee price signal is useful, but it may not be enough to drive deep abatement. If an ETS starts with a tighter cap, it is realistic to expect a higher and more volatile price than the fee anchor. This immediately feeds into three areas: carbon indexation clauses in contracts, CAPEX decisions, and negotiations over who absorbs the CO₂ cost along the supply chain.
Global supply chains will ask for more evidence, not more statements. In practice: verifiable PCF and LCA, proof of compliance with carbon pricing, and credible reduction plans. Those who cannot demonstrate data and trajectory risk margin compression, because the buyer will use carbon cost as negotiating leverage, or shift volumes toward more “auditable” suppliers.
Offset demand tends to become more selective and more compliance-grade when credits are allowed only within limits and under strict criteria. This pushes toward instruments with solid registries, audits, reversal-risk management, and long-term contracts—often forward or OTC—to manage price and availability. For credit buyers, the consequence is clear: less room for opportunistic spot purchases, more work on quality and delivery risk.
B2B strategies in Asia will shift toward familiar industrial levers, because these are what reduce exposure to the ETS price: PPAs and renewable procurement, energy efficiency, fuel switching, and CCUS in hard-to-abate sectors. A credible ETS also becomes a benchmark for calculating MACC and investment priorities across sites and production lines.
For investors, the risks and opportunities are fairly legible. The main risks are regulatory (cap and allocation), liquidity-related (thin market and volatility), and compatibility with linkage and Article 6. The opportunities sit where the system needs “infrastructure”: MRV and data management, exchange and clearing, compliance advisory, and project finance for industrial decarbonization.
