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Asean countries ambivalent about EU CBAM

A cassava farm in Thailand, which is among the Asean countries that fear negative effects if the CBAM’s scope is extended to include all products and services, and all indirect emissions from upstream value chains. (Photo: Valeria Mongelli/Bloomberg)
A cassava farm in Thailand, which is among the Asean countries that fear negative effects if the CBAM’s scope is extended to include all products and services, and all indirect emissions from upstream value chains. (Photo: Valeria Mongelli/Bloomberg)

The European bloc’s largest trading partners in south-east Asia are concerned the carbon border adjustment mechanism could dent both their exports and overall GDP, but some see merit in the scheme

The EU’s carbon border adjustment mechanism, which imposes a carbon levy on imports from jurisdictions with more lax climate policies, has met with some concern by the Association of Southeast Asian Nations economies, which form Europe’s third-largest trading partner after the US and China. However, some believe the initiative will ultimately help to accelerate the green transition in the area.

The CBAM is forecast initially to have a limited impact on exports originating from Asean countries. Within the initial scope, Singapore and Vietnam have been the biggest exporters of the affected products to the EU, accounting for just over 10 per cent of each economy’s total exports of these commodities between 2019 and 2022, according to data by the Asean+3 Macroeconomic Research Office. Based on calculations by Amro, under the CBAM’s initial coverage, exports to the EU could decline by an estimated 0.12 per cent for Asean economies in 2030. 

However, Amro senior economist Marthe Hinojales says: “The CBAM could have a substantial negative impact on Asean exports if its scope is extended to include all products and services and all indirect emissions from upstream value chains.”

Model simulations suggest that under such an extreme-case scenario, the CBAM would result in about a 10 per cent decline in Asean exports to the EU and shave 0.2 per cent off Asean’s gross domestic product in 2030. The calculations show that Vietnam, Thailand, Malaysia and Indonesia will feel the greatest impact.

According to Irina Akentjeva, partner at law firm Herbert Smith Freehills, the EU’s scheme is bound to reach beyond its initial scope. “The expectation is that the EU CBAM will continue to expand to other sectors and products,” she says, making its impact more widely and intensely felt.

“The response from south-east Asia has generally been muted,” Akentjeva says. “But the EU CBAM is likely to be met with resistance from both Malaysia and Indonesia, who may see such mechanisms as discriminatory.”

In June, Indonesia’s co-ordinating economic affairs minister, Airlangga Hartarto, and Malaysia’s deputy prime minister, Fadillah Yusof, jointly visited the EU to raise objections to its anti-deforestation rules. The regulation would affect exports to the EU of palm oil and other agricultural products produced in Indonesia and Malaysia.

“Given these tensions, the EU CBAM is likely to similarly be viewed in a negative light,” Akentjeva says.

Green influence

Amro says empirical research illustrates that the current stage of global carbon pricing systems have negligible effects on competitiveness and carbon leakages, both of which underpin the rationale behind CBAM policies. 

“CBAM is a relatively easy concept in theory. However, when it comes to understanding the implementation details, you quickly get into complex and difficult technicalities,” says Stefano De Clara, head of secretariat at the International Carbon Action Partnership. 

Implementation details include the scope of application, the methodology for calculating embedded emissions, assessing equivalency with existing carbon pricing systems, and the alignment with international trade agreements, among others.

So far, the main impact of the EU CBAM has been to encourage Asean to accelerate its green policies.

“While the predominant response to CBAM in Vietnam to date has been a bit of a shrug, it does incentivise the government to create a system that mirrors the EU initiative,” says Leif Schneider, chair of the legal sector committee at the European Chamber of Commerce in Vietnam.

“Offshore regulations such as the EU CBAM endorse developing countries like Vietnam to step up their game to stay competitive on the global stage, to make an unequivocal commitment to certain sustainability standards and put them in writing,” he adds.

 

A service from the Financial Times