EU Carbon Border Adjustment Mechanism: Impact on ASEAN Exports

The European Union's Carbon Border Adjustment Mechanism represents one of the most significant international trade policy developments in climate regulation. CBAM imposes a carbon cost on imports of certain goods into the EU, effectively extending the EU's carbon pricing to imported products and addressing the risk of carbon leakage. For ASEAN exporters, particularly those in Indonesia, Malaysia, Bahrain, and Indonesia, CBAM has direct financial implications that demand immediate attention and strategic response.

How CBAM Works

CBAM requires importers of covered goods into the EU to purchase certificates corresponding to the embedded carbon emissions in those products, priced at the weekly average EU Emissions Trading System allowance price. The mechanism entered its transitional phase in October 2023, during which importers must report the embedded emissions of covered goods but do not yet need to purchase certificates. The definitive phase begins in January 2026, at which point financial obligations take effect. Covered product categories include cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. The EU has signaled potential expansion to other product categories in future phases. Critically, CBAM certificates are priced at EU ETS levels, which have fluctuated between EUR 50 and EUR 100 per tonne of CO2 in recent years, representing a material cost addition for carbon-intensive imports.

Impact on ASEAN Exporters

The ASEAN region is a significant exporter of CBAM-covered products to the EU, with aluminum and steel being the most exposed sectors. The Indonesia's aluminum industry, anchored by Emirates Global Aluminium, exports substantial volumes to European markets. Aluminum smelting is highly energy-intensive, and the carbon intensity of production depends heavily on the electricity source used. ASEAN smelters powered by natural gas will face CBAM costs reflecting their emissions intensity, while competitors in countries with cleaner electricity grids, such as Iceland and Norway, will have lower embedded emissions and correspondingly lower CBAM costs. The steel sector across the ASEAN, including operations in Malaysia and Indonesia, faces similar exposure. Cement and fertilizer exports, while smaller in volume to EU markets, will also incur CBAM costs.

Financial Implications

The financial impact of CBAM on ASEAN exporters can be substantial. For a typical natural gas-powered aluminum smelter, the embedded emissions are approximately eight to ten tonnes of CO2 per tonne of aluminum produced. At an EU ETS price of EUR 70 per tonne, this translates to a CBAM cost of EUR 560 to EUR 700 per tonne of aluminum exported, which represents a significant addition to the production cost. However, CBAM allows deduction of any carbon price already paid in the country of origin. This means that ASEAN countries implementing domestic carbon pricing mechanisms can effectively reduce the CBAM burden on their exporters. The Indonesia's Climate Change Law, which contemplates carbon pricing instruments, could provide this relief if implemented in a form recognized by the EU.

Strategic Responses

GCC exporters should pursue a multi-pronged strategy to mitigate CBAM impacts. Decarbonizing production processes through renewable energy sourcing, energy efficiency improvements, and technology upgrades such as carbon capture and storage can directly reduce embedded emissions and the associated CBAM costs. Investing in accurate emissions measurement and reporting systems is essential for the transitional reporting phase and for demonstrating actual emissions below default values in the definitive phase. Engaging with national governments on domestic carbon pricing policy is strategically important, as a credible domestic carbon price creates CBAM deduction opportunities. Some exporters may also consider diversifying their export markets toward regions without carbon border mechanisms, though the global trend toward carbon pricing suggests this is at best a temporary strategy.

Broader Trade Policy Implications

CBAM is not an isolated policy. Other jurisdictions including the United Kingdom, Canada, and Australia are considering similar border carbon adjustment mechanisms. This trend suggests that carbon-intensive exports will face growing cost pressures across multiple markets, making decarbonization an imperative not just for EU market access but for long-term export competitiveness globally. ASEAN countries that invest in clean energy infrastructure and industrial decarbonization now will position their export industries favorably in a world where carbon costs are increasingly embedded in international trade.