Asian exporters must brace for EU tariffs on high-carbon imports – ADB

Nurluqman Suratman

26-Feb-2024

SINGAPORE (ICIS)–Asian economies, particularly those in the central and western regions, will face strong hits from the EU’s import charges on carbon-intensive products, the Asian Development Bank (ADB) said on Monday.

Scheduled to be implemented in 2026, the EU’s Carbon Border Adjustment Mechanism (CBAM) will introduce import fees on items such as steel, cement, and electricity, which will be calculated based on the carbon dioxide (CO2) emissions generated during their production.

The purpose of these charges is to prevent “carbon leakage,” which occurs when companies relocate production from nations with strict environmental regulations or high carbon costs to those with more lenient policies or lower costs.

The fragmented nature of carbon pricing initiatives in terms of sectors and regions covered, including CBAM, can only partially limit carbon leakage,” ADB chief economist Albert Park said.

Initially targeting carbon-intensive products, the EU sees CBAM as a tool to align global carbon prices and accelerate emission reductions worldwide.

“To significantly reduce carbon emissions globally, while also making sure climate efforts are more effective and sustainable, carbon pricing initiatives need to be extended to other regions outside the EU, especially Asia,” Park added.

Given the expected distributional impacts, especially on developing economies in Asia, proper incentive mechanisms are necessary to encourage widespread adoption of carbon pricing, according to the ADB.

ADB estimates that CBAM might reduce carbon leakage by around half compared with an Emissions Trading System (ETS) scheme with a similar carbon price.

CBAM is meant to complement the EU’s ETS, with sectors covered by the ETS eventually to be covered by CBAM as well.

The CBAM will first be implemented for imports of specific products and their key components that are vulnerable to carbon leakage, including cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen.

“While the EU’s ETS and CBAM may have a limited direct impact on emissions – reducing emissions globally by around 1.3% at €100 per metric ton of CO2 and by 2.2% at €200 per metric ton of CO2 – it could significantly affect exports to the EU,” the ADB said.

“At the same time, reductions in EU production from CBAM could spread to many sectors, such as computer, electric and optical equipment, and motor vehicles and parts within the EU through industrial input–output linkages,” it said.

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