Implications of the EU’s Carbon Border Adjustment Mechanism (CBAM) for ASEAN: An Argument for More Ambitious Carbon Pricing

This policy brief examines the implications for ASEAN Member States (AMS) of the European Union’s Carbon Border Adjustment Mechanism (CBAM) and suggests an overall direction for responses. The EU’s CBAM aims to minimize carbon leakage and the loss of the EU’s trade competitiveness due to its more ambitious climate mitigation policies, particularly the end of free allowances for the Emissions Trading Scheme (ETS). The trial phase began in October 2023. Key elements of CBAM remain undecided, especially what countries need to do to avoid the adjustment. Concerns have been raised that it might significantly harm ASEAN economies’ macroeconomic performance and trade competitiveness. This policy brief argues that these fears are exaggerated, since the CBAM’s initial scope is limited to a few sectors which account for a very small amount of ASEAN exports to the EU. However, CBAM’s scope may be expanded in the future to other EU-ETS sectors, and ASEAN’s other major trading partners may adopt similar border adjustment measures, enhancing the importance of responding to them. Therefore, this paper concludes that CBAM provides a good opportunity for the AMS to strengthen their own carbon pricing, industrial decarbonization technology, and other climate mitigation measures. AMS could request the EU to enable other climate mitigation measures besides just carbon pricing to also qualify to offset the border adjustment, such as introducing more advanced industrial decarbonization technology, increasing renewable energy and energy efficiency, expanding public transportation, etc. AMS could also request the EU to simplify the reporting and compliance procedures and provide assistance for developing CBAM reporting and compliance mechanisms, and possibly AMS’s own CBAM process. A review of the global research on the trade and economic impacts of carbon pricing in general suggests that they may not be very significant. Moreover, any trade competitiveness gaps will recede as more of ASEAN’s major trading partners adopt higher levels of carbon pricing and their own border adjustment mechanisms. AMS concerned about effects of carbon pricing or other climate measures on trade competitiveness could consider adopting their own CBAM and other compensation measures, possibly coordinated at the regional level, such as at the EU-ASEAN regional dialogue. Joining the Climate Club launched at COP28 would enable AMS to have an early voice in developing international standards for border adjustment mechanisms.