Asian exports could potentially face a higher cost burden as the EU is preparing to launch a new regulation pertaining to imported carbon-intensive commodities later this year, experts say.
As part of the EU's schemes to achieve climate neutrality by 2050, also referred to as the EU Green Deal, the Carbon Border Adjustment Mechanism (CBAM) is set to be the world's first trade-related mechanism aimed at reducing carbon leakage through the imposition of a border tariff.
The CBAM, which will take effect in a transitional phase on Oct 1 this year, initially applies to imports of certain goods and selected precursors whose production is carbon intensive and at the most significant risk of carbon leakage, namely cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.
The policy will require all exporters of CBAM commodities to start reporting on emissions from the fourth quarter of this year. Once the permanent system enters into force in January 2026, importers will need to annually declare the quantity of goods imported into the EU in the preceding year and their embedded greenhouse gas. They will then surrender the corresponding number of CBAM certificates.
According to the ESG rating company Sustainable Fitch, part of credit rating agency Fitch Group, CBAM will increase the supply chain costs of covered commodities, which will be passed on to downstream sectors and consumers.
"Manufacturers in developing countries may not be able to immediately afford the costs required by the stipulation, making it difficult to comply with CBAM rules," said Jingwei Jia, an analyst at Sustainable Fitch.
As a result, major industrial producers in Asia-Pacific might be encouraged to only export products that meet EU environmental standards or to avoid the carbon tariff entirely by turning to alternative markets, Ms Jingwei noted.
After the imposition of CBAM, the prices of Chinese exports to the EU, especially iron, steel and aluminium, are expected to rise from 2026, according to research from the Energy Foundation, E3G and Sandbag. Nonetheless, the impact could be limited, as CBAM only covers a small range of commodities, accounting for 1.8% of China's overall exports.
Meanwhile, Southeast Asia will not immediately feel the impact of CBAM, as it is applicable only to six sectors which are not key trades with the EU. According to Eurostat, 90% of Southeast Asian exports of manufactured goods to the EU fall outside the stipulated categories.
In 2021, Southeast Asia's exports to the bloc were worth €136 billion, whereas Thailand is ranked as the 19th largest regional exporter, with a trading value amounting to €22 billion, according to Sustainable Fitch.
"Nonetheless, the CBAM could include a larger range of sectors and imported products in the future, prompting Asian regulators to adjust or develop domestic environmental regulations and technologies to address carbon emissions," it added.
Sustainable Fitch pointed out that within the region, Thailand and Indonesia have been more apprehensive about the policy, due to the anticipated negative impact on local industries' competitiveness.
"We expect APAC [Asia-Pacific] exporters to embed long-term consideration in advancing clean technologies to minimise carbon costs, while momentum may also rise for more carbon trading schemes across the region," said Ms Jingwei.