Emerging Asia at risk from EU’s protectionist carbon border tax

The EU tax shifts the carbon burden to the commodity-rich emerging economies least responsible for today’s climate crisis while fattening its Covid-19 relief fund
Singapore, as a leading regional carbon services hub, offers some solutions but Asia as a whole needs to find pragmatic ways to defend against climate inequality

Bo Bai

Published: 3:30pm, 3 Jul, 2022

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The European Parliament recently passed several landmark proposals as part of the European Union’s Fit for 55 climate master plan. The vote was timely as continental Europe confronts a record-breaking early summer heatwave, pointing to the all-too-real effects of human-induced climate change.

One key piece of climate policy on the table was the carbon border adjustment mechanism (CBAM) which holds exporters accountable for the direct and embedded emissions of their goods as they enter the EU.

Coming into effect in January 2023, the so-called carbon border tax covers industries and commodities including iron and steel, refineries, cement and fertilisers, and was recently expanded to include organic chemicals, plastics, hydrogen and ammonia.

Though a tool to encourage climate action, the CBAM raises critical questions about emissions accountability. Crucially, it points to growing trade and climate protectionism that will critically disadvantage emerging economies in the Global South. Developing nations, in Asia especially, should take note.

The divide between industrialised and post-industrialised nations versus developing nations cannot be overstated. The United States has emitted more carbon than any other country and is responsible for 25 per cent of all historical emissions, followed by the EU and the UK, which are collectively responsible for 22 per cent.

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However, instead of taxing the largest cumulative emitters, the CBAM shifts the liability and places a new financial and administrative burden on commodity-rich emerging economies, which are least responsible for today’s climate crisis.

The Commonwealth Secretariat found that South and Southeast Asian economies are significantly exposed to potential CBAM charges due to their reliance on EU trade. In 2019, 80 per cent of CBAM-related exports from South and Southeast Asia alone were attributed to India.

Another market to watch is Malaysia – it exported 24 per cent of its aluminium output to the bloc – a share only likely to rise amid commodity shortages and supply chain disruptions on the continent.

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Indonesia, which ordinarily supplies 335,000 tonnes of crude palm oil to the EU every month on average, is already working on a carbon tax framework, potentially enabling it to partially avoid some of the CBAM charges and retain potential tax revenues.

After all, the CBAM is expected to generate €1 billion (US$1.05 billion) in annual revenue, all of which will be directed towards the European Commission’s €800 billion “Next Generation EU” Covid-19 relief fund – rather than supporting green projects in developing countries that are core to accelerating the global green transition.

As governments and businesses around the world wrestle with the impact of climate change, policies need to take into account the needs and realities of developing nations.

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With CBAM’s introduction just around the corner, the region needs pragmatic solutions. Within the Asia-Pacific market, Singapore is playing a leading role in supporting emerging economies to remain competitive and CBAM-compliant.

As the first in the region to introduce its own carbon tax in 2019, Singapore is also home to the highest concentration of carbon services in Southeast Asia, pointing to its credibility, expertise and strategic position as a carbon services and trading hub.

Imagine this: as goods from the region pass through Singapore’s ports, the country can offer services that enable Asean producers to certify and offset the carbon footprint of their goods before entering the EU.

This could be done according to international standards such as the ISO 14097. To ensure that this is recognised by EU regulators, it could be certified by leading European certification firms such as the British Standards Institution.

Stacks of containers sit at the Tanjong Pagar terminal port in Singapore on June 17. Photo: AFP

By providing the seal of approval that marks exports as carbon neutral throughout the entire supply chain, Singapore could enable producers, especially in countries lacking their own carbon tax schemes, to minimise the tariffs imposed on them once their products enter the EU.

By offering a private-sector solution deployed at scale, Singapore can help to empower fellow Asian governments to strengthen their commitments in the lead-up to 2030, while helping Asian producers mitigate the challenges posed by CBAM.

The CBAM, while striving to accelerate change, fails to take into account that we can only achieve net zero carbon if we work together in a fair way. The EU should rightfully recognise the meaningful work being done in Singapore to enable reputable and reliable carbon verification.

As it stands, the EU’s latest initiative only exacerbates growing inequality in the global green transition. Rather than leaning towards veiled protectionism and replicating structural and economic inequalities in climate policy, the world deserves something better and Asia is primed to lead the way.

Dr Bo Bai is executive chairman and co-founder of Metaverse Green Exchange