The European Union (EU) has implemented the Carbon Border Adjustment Mechanism (CBAM) to address the issue of carbon leakage and ensure fair competition for EU producers. While the EU’s Emissions Trading System (ETS) has been successful in reducing greenhouse gas (GHG) emissions, the unintended consequence of carbon-intensive activities shifting outside the EU poses challenges to global emission reduction efforts.
The main objective of CBAM is to support global emission reduction efforts and maintain fair competition for EU producers. As a result, ASEAN economies, with a particular focus on Malaysia, need to take proactive measures to reduce carbon emissions, adopt renewable energy sources, and implement sustainable practices. By embracing these strategies, they can navigate the challenges posed by CBAM and contribute to a greener and more sustainable future.
Impact on Malaysia’s Exporters
The Carbon Border Adjustment Mechanism (CBAM) significantly affects exporters from ASEAN countries, especially Malaysia and Indonesia, which heavily rely on fossil fuels. CBAM’s import restrictions can impact industries like iron, steel, and aluminum, as goods not meeting EU emission standards may face a special tax.
The Malaysian Minister of International Trade and Industry, Tengku Zafrul Aziz, criticized CBAM, stating that ASEAN countries require a different transition timeline than Europe. Smaller companies might struggle to meet the environmental, social, and governance (ESG) standards imposed by CBAM, as compliance may require substantial investments.
However, CBAM also presents opportunities for economic growth and sustainability. By embracing renewable energy sources and investing in infrastructure, ASEAN countries can mitigate CBAM’s challenges and access global markets that prioritize eco-friendly products.
The Malaysian government is actively developing the Long-Term Low Emissions Development Strategy (LT-LEDS) and plans to introduce legislative and carbon pricing frameworks. A national carbon accounting framework will ensure a consistent approach to assess GHG emissions and enable the setting of emission reduction targets at various levels, from entities to sectors and the entire nation.
Companies in Malaysia should take proactive measures to prepare for both International and national regulations and frameworks to mitigate risks. This includes implementation of carbon emissions management, investing in technologies and practices that reduce carbon emissions, such as adopting renewable energy sources and implementing energy-efficient processes. Conducting thorough assessments of their supply chains to identify potential areas of improvement in emissions reduction will also be essential.
Implementation Process
On May 10, 2023, the CBAM Regulation was signed by co-legislators and officially came into force on May 16, 2023, following its publication in the Official Journal of the EU. The implementation of CBAM will begin in a transitional phase on October 1, 2023, with the first reporting period for importers ending on January 31, 2024.
Initially, CBAM will be applied to imports of specific goods and precursors that have a high carbon footprint and pose a significant risk of carbon leakage. These include cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.
To ensure a smooth and gradual transition, CBAM will be phased in over time, providing a careful and predictable process for both EU and non-EU businesses, as well as public authorities. During this phase, importers of goods within the scope of the new rules will only need to report the greenhouse gas emissions (GHG) associated with their imports, including both direct and indirect emissions, without making any financial payments or adjustments.
Once the permanent system comes into effect on January 1, 2026, importers will be required to declare the quantity of goods imported into the EU during the previous year and their embedded GHG emissions annually. They will then need to surrender a corresponding number of CBAM certificates. The price of these certificates will be calculated based on the weekly average auction price of EU ETS allowances, expressed in euros per metric ton of CO2 emitted. The phasing-out of free allocation under the EU ETS will align with the phasing-in of CBAM, taking place between 2026 and 2034.
Conclusion
The CBAM policy has attracted varied opinions, with some labeling it as a trade barrier and others seeing it as an incentive for origin countries to adopt sustainable practices. Exporters from Malaysia and other ASEAN countries must prepare for its impacts and seize opportunities for sustainable development. By embracing carbon accounting and reporting practices, renewable energy sources and investing in capacity building, exporters can seize opportunities while addressing the challenges posed by the CBAM, ultimately paving the way for a greener future.