CBAM European Union: Impact and Adaptation Strategies for Indonesian Exports

Starting from October 1, 2023, the European Union has begun implementing the Carbon Border Adjustment Mechanism (CBAM).

Starting from October 1, 2023, the European Union has begun implementing the Carbon Border Adjustment Mechanism (CBAM). This policy is the realization of the CBAM proposal approved on June 18, 2023, following its submission to the European Parliament and the European Council since July 17, 2021.

The  Carbon  Border  Adjustment  Mechanism  becomes  an  European  Union  instrument  to determine the tariff for carbon issued during the production process of imported goods that enter the European Union, while goods affected by CBAM policy are indicated goods that have a high level  of  carbon  emissions  in  the  production  process  and vulnerable to carbon leakage. The implementation of CBAM will begin with the transnational period from October 1, 2023 – 2024. During this transition, imported products affected by CBAM include cement, steel, iron, aluminum, fertilizer, electricity, and hydrogen.

CBAM is part of the European Union’s efforts to reduce Greenhouse gas (GHG) in realizing an ambitious target, Net Zero Emission in 2050. CBAM, which is classified in the carbon trading mechanism in the European Union, allows carbon emissions in its area to be balanced with efforts to reduce greenhouse gas emissions elsewhere , thus achieving overall carbon emission balance. CBAM is also a form of anticipation of the European Union to the risk of the carbon leakage. Reporting from UNCTAD (2021) carbon leakage occurs when European Union companies  move  their  production  places  to  places with more loose emissions or conditions where imported products from countries with “loose carbon” policies replace original European Union products.

The  mechanism  of  CBAM  requires importers of covered commodities to register with their national authorities and purchase CBAM certificates when importing products from outside the EU. The certificate prices are calculated based on the weekly average auction price of EU ETS allowances, expressed in €/ton of CO2 emitted. EU importers must report embedded emissions in their imports and submit the corresponding certificates annually.

Although it may initially seem to impose additional burdens on importers rather than exporting countries, the EU has further regulations stating that if an exporting country or the place of production has implemented climate change mitigation efforts equivalent to or imposes costs on carbon  emissions  comparable  to  those  in  the  EU,  EU  importers  are  no  longer  required  to purchase CBAM certificates. This regulation encourages EU importers to seek alternative exporters  from  countries  that  meet  EU-equivalent  standards  on  carbon emission reductions, potentially  leading  to  a  loss  of  export  markets  for  companies from countries that have not implemented stringent carbon reduction policies like the EU’s. Consequently, these companies may be forced to lower their selling prices to alleviate the burden on importing companies.

Impact of CBAM on Indonesia

Discussing the impact of CBAM on Indonesian export products, it is undoubtedly challenging news as Indonesia may need to reduce selling prices or purchase CBAM certificates based on market prices in the European Union.

However, the impact may not be significantly felt since the European Union is not Indonesia’s primary  export  market  for  commodities  covered  by  CBAM  such  as  cement,  steel,  iron, fertilizers, electricity, aluminum, and hydrogen. For instance, in the case of iron and steel commodities, from 2012 to 2022, the European Union did not even rank among the top 10 destination countries for Indonesian exports. China, with exports reaching 8,330,300 tons valued at US$18.97 billion, was the top destination for iron and steel exports, followed by Taiwan with 1.31  million  tons  valued  at  US$2.19  billion,  and  India  with 589.1 thousand tons valued at US$1.31 billion.

Nevertheless, the Indonesian government and companies should not consider themselves entirely safe. According to the official EU website, the implementation of CBAM on products like iron, steel, aluminum, fertilizers, cement, and hydrogen is just the beginning of the “transition” phase of  CBAM  from  2023  to  2026.  This  suggests  the  possibility  of  additional  products  or commodities being subjected to CBAM in the coming years.

Indonesia should be concerned about its key export products facing risks from CBAM. One significant example is palm oil, considering that Spain, Italy, and the Netherlands, EU member states, are among Indonesia’s top 10 destinations for palm oil exports. Palm oil is a product that could face risks from CBAM in the future, especially given the European Parliament’s resolution on Palm Oil and Deforestation of Rainforests on April 4, 2017, which implicates the palm oil

industry in significant deforestation due to plantation expansion into rainforests.  In addition, the European Union also accused oil palm plantations as one of the main sources of causing forest and land fires where the burning of the land was intended for the opening of oil palm plantations. Burning forest and peatlands in addition to damaging biodiversity also contributes carbon gas emissions to climate change.

Moreover, qualifying for CBAM exemptions is challenging for Indonesia, as the country does not have stringent carbon regulations. For instance, the carbon tax under the Harmonization of Tax Regulations Law (UU HPP) is only Rp. 30,000 per ton of carbon. Additionally, conventional and environmentally unfriendly production methods are still prevalent in Indonesia.

Therefore, CBAM should motivate the Indonesian government to reduce greenhouse gas emissions and uphold its commitments under the National Determined Contributions (NDC) to the   UNFCCC.   Domestic   companies   should   gradually   transition   away   from   coal-based ironmaking processes, which are high-carbon-intensive. The government should also prioritize addressing deforestation issues, expanding and optimizing forest management as carbon sinks, including mangrove forests, which have the potential to be significant natural carbon sinks and climate change mitigation measures but are often overlooked. Concrete efforts are needed to facilitate  a  comprehensive  and  sustainable  shift  to  renewable  energy,  enabling  Indonesia to achieve net-zero emissions targets and combat climate change.

With this example of effort, Indonesia can give a good impression of the commitment of climate change  mitigation  and of course provide a positive view from other countries. Furthermore, Indonesia   certainly   gets   absolute   benefits   both   directly  and  indirectly  like  a  healthier environment to the many market potentials for Indonesian products.

Sylvana Annisa
Sylvana Annisa
Third-year student majoring in International Relations at Andalas University in Indonesia.