EU carbon rules hurt Asean exporters but could benefit them later: ADB

Some deride the EU policy as a trade barrier, while others say it may force origin countries to move faster toward more sustainable production practices.

Vincent Fabian Thomas

Vincent Fabian Thomas

The Jakarta Post


Steam evaporates at the site of Supreme Energy’s Muara Laboh Geothermal Power project in a photograph taken on Nov. 20, 2017. (ADB/ADB)

April 3, 2023

JAKARTA – ASEAN countries, especially Malaysia and Indonesia, are bracing for measures aimed at keeping some of their export goods out of the European Union unless manufacturers can prove their products’ environmental credentials.

Some deride the EU policy as a trade barrier, while others say it may force origin countries to move faster toward more sustainable production practices.

The policy, known as the Carbon Border Adjustment Mechanism (CBAM), is set to take effect gradually, starting in 2026.

The EU argues it aimed to prevent “carbon leakage”, or domestic industries moving overseas to evade costly emission standards, and thereby ensure a level playing field to keep EU products competitive.

Noncompliant goods shipped to the EU will be subject to a special tax. Initially, the policy only targets cement, electricity, fertilizers (such as nitric acid, ammonia and potassium), as well as iron, steel and aluminum products.

Among ASEAN member states, Indonesia and Malaysia would be the two most-heavily impacted by the import restrictions due to their considerable exports of iron, steel and aluminum to the EU, according to Singapore-based think tank ISEAS–Yusof Ishak Institute.

Malaysian Minister of International Trade and Industry YB Tengku Zafrul Aziz told The Jakarta Post on March 20 he deemed the policy unfair, arguing European countries could not expect ASEAN countries to follow their transition timeline.

He said the policy would force companies to invest more to meet environmental, social and governance (ESG) standards, which only big companies had the resources for.

“There is a price to compliance. So, it will take time. Smaller companies […] will do it with more difficulty,” Zafrul said during an interview.

“I’m worried about the EU’s new CBAM rule, [the preparation for] which will [begin] this year,” he later added.

Read also: Minister says planned EU carbon tax could ‘disrupt world trade’

Similarly, the head of the Indonesian Trade Ministry’s policy agency, Kasan Muhri, told the Post on Thursday the agency expected the policy to result in a decline in exports, especially for iron and steel.

For now, the government sees no threat beyond the metal products, as the country does not ship any of the other commodities listed under the CBAM.

He said Indonesia was well prepared to anticipate further development of the policy, including its possible expansion to other goods.

He explained the country had taken various steps toward reducing carbon emission, such as the implementation of carbon trading and slightly raising its nationally determined contribution (NDCs) to reduce emissions under the Paris Agreement.

Read also: 99 coal plants to kick off carbon trading in Indonesia

Ramesh Subramaniam, director general for Southeast Asia at the Asian Development Bank (ADB), told the Post on Thursday the policy may have a significant impact on ASEAN economies, many of which still rely on fossil fuels as a primary energy source.

“There will be significant gains given we’re truly looking at the benefits to be had by changing the fuel mix,” he said in an interview on the sidelines of the Southeast Asia Development Symposium (SEADS) 2023: Imagining a Net-Zero ASEAN held in Bali.

He cited studies showing ASEAN countries could achieve a net gain of US$240 billion per year just by decommissioning coal-fired power plants by 2030 and using more renewable energy, adding those benefits would be delayed the longer the transition was postponed.

“Just addressing the energy part of it, you achieve savings,” he said.

ADB’s assessment on Indonesia, Thailand, Cambodia, Vietnam and Philippines was very promising, he said, in regard to how these countries were pursuing their NDC targets, including by engaging in energy transition mechanisms to retire coal-fired power plants ahead of schedule.

Yet he admitted achieving the desired progress required more investment, whether public or private, and would take time.

“We are actually quite comfortable in the way countries [are positioned], but there is a lot of work ahead, and clearly capacity awareness needs to be increased,” he said.

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