CBAM and Indonesia’s Condition
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a central element of the EU Green Deal, designed to curb carbon emissions and prevent carbon leakage by applying a carbon levy on imports based on their embedded emissions. CBAM is set for the first phase of implementation in January 2026, following a transitional period starting in October 2023.
For this first phase, the mechanism will focus on 6 high-emission goods such as steel, aluminium, cement, fertilisers, and electricity. In 2023, Indonesia exported three out of these six sectors to the EU: steel (valued at USD 726.84 million), aluminum (USD 29.17 million), and fertilisers (USD 0.29 million). Although this export value is relatively small compared to Indonesia’s total global exports for each of these goods (Table 1), Indonesia will still be directly affected by CBAM. Furthermore, despite the small direct value, Indonesia should still monitor its overall export performance related to the EU due to potential indirect impacts (Badan Kebijakan Perdagangan, 2024).
Table 1. Export performance of the three good subjected to CBAM from Indonesia (Badan Kebijakan Perdagangan, 2024)
Based on the table above, the implementation of the CBAM regulation is expected to negatively impact Indonesia’s export performance. In particular, the export values of Iron and Steel, Aluminium, and Fertilisers. Therefore, Indonesian companies exporting CBAM-regulated goods should start familiarising themselves with the CBAM requirements to avoid potential losses in these export markets.
What to watch out for?
During the first phase of CBAM implementation, exporters are primarily obligated to report the embedded emissions of their products without incurring financial charges. However, the mechanism is set to become gradually operational and financially impactful over time. The initial reporting requirement, representing a mere fraction of the ultimate scope, will progressively escalate. The percentage of embedded emissions for which declarants are financially accountable is slated to increase incrementally, starting from a low initial amount and reaching full accountability—100% of the emissions—by 2034, as depicted in Figure 1. This gradual increase provides a critical, albeit limited, window for Indonesian businesses to prepare.
Figure 1. CBAM and ETS allowances (Adapted from: EU Parliament, 2022)
This looming financial implication necessitates that Indonesian exporters become acutely aware of the CBAM regulation, understand its reporting requirements, and, most importantly, proactively design and implement a robust decarbonisation strategy.
For exporters impacted by CBAM, decarbonisation strategies are essential to reduce the carbon footprint of their goods, thereby minimising the financial burden of the CBAM levy. Alternatively, businesses must seek innovative solutions to maintain the cost competitiveness of their products in the EU market, even under the new regulatory regime. This might involve optimising production processes, investing in renewable energy sources, or exploring alternative, lower-carbon supply chains. The choice for Indonesian exporters is clear: adapt and decarbonise, or face increasing competitive disadvantages in one of the world’s largest export markets.
References
Badan Kebijakan Perdagangan. 2024. Merespon EUDR Guna Pertahankan Posisi Ekspor Minyak Kelapa Sawit Indonesia di Pasar Internasional
EU Parliament (Press Release). 2022. Climate change: Deal on a more ambitious Emissions Trading System (ETS).
