An upcoming EU carbon border tax will have disparate impacts across Asia, but will likely set the tone for increased scrutiny going forward.
Carbon dioxide emissions from manufacturing have a major impact on global warming. To help tackle that, the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will come into force in October, will tax goods — such as cement, iron and steel, and fertilizers — that require carbon-intensive production at a higher rate.
Those goods deemed at risk of “carbon leakage,” where businesses transfer production to other countries with more lax emission rules, will aso face greater scrutiny.
The mechanism, which will be rolled out incrementally, will initially require reporting of greenhouse gas emissions embedded in imports, without a requirement to make financial payments or adjustments. But on Jan. 1, 2026, a permanent system that includes financial implications will come into force.
For Asia, the EU’s move poses a particular threat. The region’s emerging markets and developing economies, excluding China, saw a greater rise in emissions than any other region in 2022, with coal-fired power generation driving most of that increase, according to the International Energy Agency.
On top of that, few countries in Asia, which is home to a number of large production bases, have established carbon taxes. Some experts argue that the EU rules may negatively impact lower income countries, where a green transformation may be more difficult to achieve, but Asian Development Bank Principal Economist Jong Woo Kang said this would be “modest compared with those in Africa, the Middle East and non-EU European economies, mainly due to relatively smaller export exposure to the EU in those industries.”
Nam-Ake Lekfuangfu, a partner in the Sustainability Practice at Baker McKenzie in Bangkok, said that companies in Asia subjected to the tariff will have to adapt by reducing production costs or finding new ways to manage their tax payment in order to remain competitive.
“While CBAM will result in the increased production costs for some companies that are not yet prepared, some manufacturers which are already using or moving to low-carbon technologies will have greater opportunities to compete,” Lekfuangfu said.
For Japan, the impact is likely to be limited at this point, particularly during the transition period with its lack of financial burden, said King & Wood Mallesons partner Yoshiki Tsurumaki.
“Japanese entities have a set period to comply. Further, the application of CBAM is limited to a few products, such as cement and steel, and the exportation of those items from Japan is extremely small,” said Tsurumaki.
India and China, meanwhile, are both exporters of goods that fall under the scope of the mechanism — and officials in both markets have expressed resistance to CBAM.
This month, India’s joint secretary in the Department of Commerce called CBAM a challenge because it would “cover five to six sectors which are key to Indian industry and supply chains,” local media reported.
And Indian think tank the Global Trade Research Initiative released a report on CBAM this month titled the “EU’s Climate Trojan Horse to Obstruct Imports,” which argued that high duties will pose “a significant challenge for India’s metal sector ... (and) will increase costs resulting in the loss of billions of dollars of exports.”
While China’s cement exports to the EU are relatively small, its steel and aluminum product exports accounted for around 8% and 9% of the sector’s total in 2019, a report by GIZ China, Adelphi and Tsinghua University found. However, China’s exposure due to its high iron and steel exports may be alleviated somewhat by domestic carbon pricing structures, said a separate report by Chatham House.
There has also been some concern at an official level. In 2021, Liu Youbin, a spokesman of the Ministry of Ecology and Environment said CBAM “violates (World Trade Organization) principles ... and (will) seriously undermine mutual trust in the global community and the prospects for economic growth.”
Earlier this month, China reportedly asked the EU to justify CBAM at the WTO, raising speculation that it may legally challenge its implementation. For its part, the EU maintains that it does not violate the global trade body’s principles.
Still, China is bracing for CBAM’s impact, with a Ministry of Commerce paper released in March saying the government and enterprises should plan how to respond to the incoming changes as early as possible.
While companies in Asia are having to examine ways to respond to and comply with the EU requirements, Kang, who noted that few Asian economies themselves had adopted carbon pricing mechanisms, doesn’t expect to see similar emissions measures in Asia anytime soon.
But due to “the distortive nature of unilateral adjustment measures,” Kang expects to see calls for a global approach to become stronger, “to more effectively reduce carbon emissions and contain potential cross-border carbon leakages.”
“An international framework on cross-border carbon measures or a global carbon pricing mechanism could be considered first-best solutions to address existing deficiencies in unilateral approaches,” Kang said.
While the EU may be the first to implement CBAM, experts say pressure to meet environmental targets and adopt more sustainable business practices will continue to grow.
“Companies should start preparing and adjusting their operation to be more sustainable now rather than waiting until there is any mandatory measure before starting to do something," Lekfuangfu said. "The operational adjustment takes time and cannot be done overnight, so it is better to start now.”
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.