The Carbon Border Adjustment Mechanism (CBAM), touted as the EU’s “landmark tool” to combat carbon leakage, underwent another round of public consultations, this time on the reporting obligations that importers will have to adhere to. The consultations closed in July, with a total of 187 feedback received by the Commission, demonstrating the wide interest from companies and governments across the world in the CBAM’s implementation. The CBAM entered into an 18-month transitional phase from 1 October 2023 until the end of 2025.
To recap, the CBAM is a tool which aims to mitigate carbon leakage – which occurs when companies based in the EU move carbon-intensive production abroad to take advantage of laxer standards, or when EU products are replaced by more carbon-intensive imports that are cheaper as they are not subject to the EU ETS. The CBAM subject certain goods (iron/steel, cement, fertilisers, aluminums, hydrogen and electricity) that are imported from outside the EU to an additional levy (or “tax”).
The CBAM entered into an 18-month transitional phase from 1 October 2023 until the end of 2025. During the transitional phase, traders have to report on the emissions embedded in their imports subject to the mechanism without paying any levies, so as to help the EU Commission collect data that will help fine-tune the shape of CBAM before it becomes operational in 2026. Importers will however still be subjected to fines for failing to report during the transition period. Before the end of the transition period, the European Commission will also assess whether to extend the scope of the law to other goods like plastics.
For developing countries with significant exports to the EU, the CBAM could be a challenge as it effectively makes their goods to the EU more expensive. Some developing countries have regarded the EU’s CBAM as a protectionist measure, which raises the question whether the law will be compliant with WTO rules. To that end, WTO Deputy Director-General Jean-Marie Paugam had at a recent public hearing underlined that multilateral trade rules are not barriers to the adoption of ambitious environmental policies, provided that they do not discriminate between WTO members and are not disguised protectionism, but also stressed that the first best solution for addressing the issue of carbon “leakage” is a global agreement on carbon pricing. Whether or not the CBAM is WTO-compliant will depend on the safeguards the EU will implement after the transitional period, and compliance will be decided on a case-by-case basis subject to the intricate details of the final law.
According to Singapore-based ISEAS–Yusof Ishak Institute, Indonesia and Malaysia are likely to be the two most strongly impacted ASEAN countries by the import restrictions due to their considerable exports of iron, steel, and aluminium to the EU. The head of the Indonesian Trade Ministry’s policy agency, Kasan Muhri, expects the policy to result in a decline in exports, especially for iron and steel while Malaysian Minister of International Trade and Industry YB Tengku Zafrul Aziz has also voiced concerns about the proposed law, arguing that European countries cannot expect ASEAN countries to follow their transition timeline. He added that only large businesses would have the resources necessary for complying with the standards mapped out by the CBAM, leaving smaller businesses, which drive broad economic development, at a disadvantage.
As Vietnam and Thailand are major exporters of plastics, businesses from those two countries would also be affected in the case of an inclusion of plastics into the scope of covered goods. Likewise, exports of chemicals from Singapore may also be affected if the scope is extended to chemicals used in plastics manufacturing.
ASEAN companies exporting to the EU who could be affected by the CBAM are advised to understand their obligations under this law, and to seek advice from ASEANcham-EU if necessary.