My Take | Developing Asia faces moment of truth on outpricing dirty fuels
- The EU’s carbon tariff scheme could boost green energy transition, but also impose cost burdens on small manufacturers and developing economies, analysts say
- While some Asian nations have made efforts towards decarbonisation, the lack of global cooperation risks undermining the security of the energy system
Energy-hungry Asia has been caught in the crosshairs of global supply risks, as the Israel-Gaza and Russia-Ukraine conflicts have loomed over oil-rich regions.
The volatile backdrop has exposed Asia’s vulnerability to imports and underscored the need for its renewables push, with oil hovering around US$90 a barrel. But it also begs another question: will developing Asian nations impose a price on dirty energy?
Time is running out for the region – which currently accounts for half of global greenhouse gas emissions with its reliance on coal-fired power – to answer the question because of global warming and changing trade winds.
Last month, the European Union rolled out the first phase of a system to impose carbon emission tariffs on imported steel, cement and other goods – provoking disquiet among key trading partners, including in Asia.
In the initial phase of the Carbon Border Adjustment Mechanism (CBAM), importers into the EU will have to report the greenhouse gas emissions generated during the production of iron and steel, aluminium, electricity, fertilisers and hydrogen. Companies failing to do so face fines.
From 2026, importers will have to purchase certificates to cover these emissions to put foreign producers on level with European companies who need to buy permits from the EU carbon market when they pollute. The EU says the point of the exercise is to also nudge other countries into setting their own carbon price.
There is a good chance that the fees will lead to inflation in products that are made with fossil fuels less appealing. Other jurisdictions such as Australia and the US are also considering frameworks similar to the CBAM, according to a Moody’s report.
If implemented widely, it will increase costs for carbon-intensive sectors, likely nudging a greater switching to green energy, analysts say. The move, however, has ignited concerns that it will impose a crushing cost burden on small manufacturers and developing economies.