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Posted on 16 Jul 2025

Message from the Secretary General: The Necessity for CBAM in A Carbon Pricing World

Introduction

The European Union's Carbon Border Adjustment Mechanism (CBAM) represents a pivotal initiative aimed at aligning international trade with the EU's climate objectives. This article delves into the rationale behind CBAM, its current scope and implementation status, challenges leading to its postponed full implementation, global adoption trends, and implications for the ASEAN region.

Rationale Behind CBAM

CBAM is designed to address "carbon leakage," where companies might relocate production to countries with less stringent climate policies, undermining the EU's emissions reduction effort. By imposing a carbon price on imports equivalent to that borne by EU producers under the Emissions Trading System (ETS), CBAM ensures a level playing field and incentivizes global emission reduction.

Scope and Implementation Timeline (Initial Plan)

The covered sectors initially target high-emission industries, including cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. CBAM will be implemented in stages:

• Transitional Phase (2023–2025), where importers report embedded emissions without financial obligations.
• Full Implementation (Starting 2026): Importers must purchase CBAM certificates corresponding to the carbon price difference between the EU and the exporting county.

In simplicity, the mechanisms required from importers are:

1. Register: Obtain authorization as CBAM registered businesses.
2. Report Emissions: Annually declare the embedded emissions in imported goods.
3. Surrender Certificates: Purchase and surrender CBAM certificates equivalent to the reported emissions, adjusted for any carbon price already paid in the country of origin

Challenges and Postponement to 2027

However, the European Commission (EC) faced implementation challenges such as:

• Data Collection: Importers face difficulties in obtaining accurate emissions data from foreign producers, many of whom lack robust monitoring systems.
• Administrative Burden: The complexity of compliance, especially for small and medium-sized enterprises (SMEs), has raised concerns about increased bureaucracy.
• Trade Relations: Some trading partners view CBAM as a protectionist measure, potentially leading to trade disputes.

As such, the EC has proposed to:

• Delayed Certificate Sale: Postponing the start of CBAM certificate sales to February 1, 2027.
• Exemptions for SME: Introducing thresholds to exempt smaller importers, reducing the number of affected companies.

Global Adoption of CBAM-like Mechanisms

Inspired by the EU's initiative, several countries are exploring or implementing similar measures[1], including United Kingdom[2], United States[3], Canada[4] and Australia[5].

Conversely, countries like India and China and others have expressed concerns, viewing CBAM as potentially discriminatory and contemplating challenges at the World Trade Organisation[6][7].

Implications for ASEAN and Recommendations

Current Status in ASEAN

ASEAN member states exhibit varied progress in carbon pricing:

• Singapore: Implemented a carbon tax in 2019, set to increase over time.
• Indonesia and Vietnam: Developing emissions trading systems.
• Malaysia: Carbon tax on the energy and iron & steel sector has been announced. Potentially a Malaysia CBAM is also being considered to avoid carbon leakage.
• ASEAN countries have varying net zero goals, which makes CBAM even more important to level the playing field within (Malaysia, Singapore, Vietnam net zero is 2050 while, it is 2060 for Indonesia and 2065 for Thailand)

However, the region lacks a cohesive strategy, leading to potential vulnerabilities when carbon pricing mechanisms are introduced, all the more without a CBAM.

Strategic Recommendations

1. Regional Harmonisation: ASEAN should work towards aligning carbon pricing mechanisms and CBAM to ensure consistency and reduce trade barriers.

1. Capacity Building: Invest in developing robust emissions monitoring and reporting systems to facilitate compliance with international standards.

1. Engagement with EU: Proactively engage in dialogues with the EU to understand CBAM requirements and negotiate favourable terms and to ensure interoperability with the EU ETS and CBAM systems.

1. Support for SMEs: Provide technical and financial assistance to SMEs to help them adapt to new carbon pricing regimes.

1. Public Awareness: Educate stakeholders about the implications of CBAM and the importance of transitioning to low-carbon practices.

In conclusion, while the EU's CBAM aims to promote global emission reductions, its implementation poses challenges and necessitates proactive measures from trading partners. For ASEAN, embracing coordinated carbon pricing strategies and engaging constructively with the EU will be crucial in navigating the evolving landscape of international trade and climate policy.

 

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[1] International Institute for Sustainable Development - IISD (8 Oct 2024), “Global Cooperation on Border Carbon Measures – Where should we start?“, <https://www.iisd.org/articles/policy-analysis/global-cooperation-border-carbon-measures-where-should-we-start>

Source:SEAISI