How carbon pricing can help ramp up EU-Asean climate cooperation

SOUTH-EAST Asian countries are important EU trading partners and are exposed to the European Union’s new Carbon Border Adjustment Mechanism (CBAM) to some extent – particularly Vietnam’s, Malaysia’s and Thailand’s iron and steel sectors. That is why the EU understands the region’s strong interest in the mechanism. We want to ensure the fullest transparency in its design, and feedback from industry on the ground will be critical to this.

The introduction of CBAM will add to carbon pricing’s growing reputation as a climate change mitigation tool that gets results. The mechanism complements the EU’s pioneering Emissions Trading System (ETS), in place since 2005, which has helped reduce emissions from power and industry plants by 37 per cent. The EU is also now extending the ETS to other activities such as aviation, maritime transport, road transport and building heating.

We know that Thailand, Malaysia, Indonesia and Vietnam are considering carbon pricing systems of their own, while Singapore has already introduced a carbon tax for certain industrial sectors. The EU welcomes and encourages these initiatives.

It’s my privilege to visit Singapore this week to exchange notes with national and Asean authorities to get the ball rolling on our cooperation in this area. We want to hear feedback and concerns of authorities and industry in the region to help increase our mutual understanding, look for synergies and simplifications between our systems, and see how we can lower CBAM reporting burdens for the Asean companies concerned.

The new CBAM has two goals: to prevent so-called “carbon leakage”, or the relocation of production outside EU borders to countries with lower environmental standards, and to encourage industry worldwide to embrace greener technologies. Designed to be compatible with World Trade Organization rules, CBAM is not about trade protection, but about protecting EU and global climate ambitions, as determined at the UN Conference of Parties (COP).

CBAM took effect in the EU as of Oct 1 this year, and its two-and-a-half-year transitional phase will last until the end of 2025. During this period, EU importers of CBAM goods (steel and iron, aluminium, cement, and fertilisers, as well as hydrogen and electricity) sourced in non-EU countries will only need to provide certain information on the carbon intensity of their products. But we can already pass an important message to firms in the Asean region: the burden imposed on them will be no heavier than that of EU producers.

The European Commission has provided extensive sector-specific guidance for industry on how CBAM will work during the transitional phase. We are also engaging with non-EU businesses so that they understand their role in supplying EU partners with relevant data on the greenhouse gas emissions being expended during production.

In mid-2025 we will draw the lessons of this period and use the information gathered to refine the mechanism’s methodologies and the definitive regime before the entry into force in 2026.

At that time, EU importers will begin buying and surrendering “CBAM certificates” based on the embedded emissions of their imports. We will also look at the possible extension of CBAM’s scope to a limited number of additional sectors at risk of carbon leakage which are also covered by the EU ETS.

CBAM will never cover more than a small fraction of our trade with the Asean region, and any effective carbon price or tax paid in individual countries can be deducted from the CBAM payment.

We will continue our cooperation with Asean countries in this field, alongside our participation in the dedicated OECD Inclusive Forum on Carbon Mitigation Approaches and the G7 Climate Club. At the same time, the EU will continue to support international partners, including in the Asean region, in their decarbonisation efforts through, for example, the Global Gateway and the Green Team Europe initiatives.

After all, we all have the same goals when it comes to climate change. As the CBAM takes effect and carbon pricing grows in profile internationally, we want to work with our international partners to make sure we can all learn and reap the benefits.

The writer is director-general for taxation and customs union at the European Commission