EU's carbon scheme — how will it affect trade with ASEAN?

The European Commission on July 14 adopted a long-planned proposal for a Carbon Border Adjustment Mechanism (CBAM), a de facto levy on imported products that do not conform to the EU's own rules on carbon emissions.  

As Brussels rushes ahead with its climate action, it is concerned that European companies could relocate their carbon-intensive production abroad to take advantage of lax environmental standards in some countries. The bloc is also worried about industries abroad adapting less slowly than the EU to more environmental-friendly energy use.

But foreign governments have accused the EU of protectionism with this scheme, which is expected to begin in 2023.

It is a "unilateral measure to extend the climate change issue to the trade sector. It violates [World Trade Organization] principles," Liu Youbin, a spokesman for China's Ministry of Ecology and Environment, said at a press briefing on July 26.

Different opinions from Asia

Perceptions are far from homogeneous across Asia, said Christian Hübner of Germany's Konrad Adenauer Foundation (KAS), which this year published a survey of expert opinion from eight Asian countries, including Indonesia, Singapore and Thailand.

Singapore doesn't oppose the CBAM "if it is fair and compliant with international rules and agreements," Hübner said, based on his earlier research, but Indonesian stakeholders are heavily influenced by the ongoing issues with palm oil trade.

Malaysia and Indonesia have accused the EU of protectionism with its plan to phase out imports of palm oil, which Brussels says is for environmental reasons. Both Southeast Asian states, the world's two largest palm-oil producers, have vowed to fight the issue at the World Trade Organization (WTO).

"Those who have to make additional payments for carbon certificates to export their goods to the EU will probably oppose the CBAM," Hübner stressed.

ASEAN concerns over CBAM

Concerns have been expressed that potential additional levies on exports to the EU from the 10-member Association of Southeast Asian Nations (ASEAN) bloc will result in a decrease in trade if the cost of imported goods becomes uncompetitive.

Alicia García-Herrero, a senior fellow at the European think tank Bruegel, said that in the short term there will only be a limited impact on trade.

Under the currently planned pilot stage between 2023 and 2025, the CBAM will only apply to iron, steel, aluminum, cement, fertilizers and electricity imports. None of these sectors is key to EU-ASEAN trade.

In a United Nations Conference on Trade and Development report published in July 2019, Malaysia was the only Southeast Asian country ranked in the top 20 of exporters of these products to the EU.

Nevertheless, they accounted for less than $1 billion (€840 million) of Malaysia's $23 billion worth of exports to the EU that year.

As per the EU's plan, levies will not be collected under CBAM until 2026. During the trial period between 2023 and 2026, European importers will only have to collect data and information.

What is CBAM and what is its goal?

The CBAM system will create a levy, called "carbon certificates," paid for by European importers of goods from outside the bloc.

"EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules," the Commission explained in a recent statement.

Currently in the EU, producers have to pay similar levies if they emit more carbon dioxide or other greenhouse gases than is permissible under the law.

However, the CBAM will exert considerably more demands on importers and exporters to collect documentation, especially in countries where such data on carbon emissions are more difficult to collect.

This is the reason why payments won't begin until 2026.

Through the system, non-EU countries will also be pressured to develop their own carbon pricing mechanisms.

According to a European Commission statement, the CBAM "also aims to encourage industry outside the EU and our international partners to take steps in the same direction."

Under the proposed scheme, European producers could avoid paying the levy if the non-EU producer shows they have already paid a comparable carbon price in the country where they are based.

But analysts who spoke to DW warned that it is by no means certain that the EU's actions will result in positive changes to how Southeast Asian governments engage in climate policy, especially as the likes of Vietnam and Cambodia have seen considerable investments in coal-fired power plants in recent years.

Bureaucratic problems

Bureaucratic problems will likely be more acute for Southeast Asia's less-developed states and in those countries that have not yet introduced their own carbon pricing mechanisms, such as Indonesia.

Even in a country like Singapore — which analysts reckon can easily adapt to the EU's system — a carbon pricing act requiring factories to pay a tax if they emit carbon dioxide above a certain threshold was only introduced in January 2019.

And the city-state still lacks its own emissions trading system, which allows companies to trade emissions certificates.

Another potentially contentious issue, said Hübner, is over how the EU spends the revenue generated from the CBAM mechanism — whether this money will be spent by Brussels on climate protection in the countries from which it's collecting the levies or will it simply go into EU coffers.

Brussels faces a tough task of explaining a rather complicated system to foreign governments which may question the EU's motives. Fortunately, it has nearly five years to do so before the system goes live.