CBAM: European Union Carbon Border Adjustment Mechanism
Climate change is an urgent global issue that requires coordinated international efforts. The European Union (EU) has taken significant strides in addressing this challenge by introducing the Carbon Border Adjustment Mechanism (CBAM). This mechanism aims to ensure that the carbon emissions embedded in goods imported into the EU are accounted for, aligning the carbon price of imports with domestic production.
What is the Carbon Border Adjustment Mechanism (CBAM)?
The Carbon Border Adjustment Mechanism (CBAM) is a tool developed by the European Union to put a fair price on the carbon emissions generated during the production of carbon-intensive goods entering the EU. CBAM is designed to prevent carbon leakage, a phenomenon where companies relocate their carbon-intensive production to countries with less stringent climate policies, thereby undermining the EU's climate objectives. By ensuring that the carbon price of imports is equivalent to that of domestic products, CBAM encourages cleaner industrial production worldwide.
Phased Implementation of CBAM:
CBAM will be implemented in two key phases:
Transitional Phase (2023 - 2025):
On October 1, 2023, CBAM entered its transitional phase, which will last until the end of 2025. During this period, importers of goods covered by CBAM will be required to report greenhouse gas (GHG) emissions embedded in their imports. However, they will not be required to purchase or surrender CBAM certificates.
The goods initially covered by CBAM include cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. These sectors are at the highest risk of carbon leakage due to their carbon-intensive production processes.
The transitional phase serves as a pilot period, allowing stakeholders to collect valuable data on embedded emissions, refine the CBAM methodology, and prepare for the definitive regime.
Definitive Regime (from 2026):
Starting in 2026, the definitive regime of CBAM will be fully implemented. Importers will be required to purchase CBAM certificates corresponding to the emissions embedded in their imports. The price of these certificates will be based on the weekly average auction price of EU Emissions Trading System (ETS) allowances.
Importers who can demonstrate that a carbon price has already been paid during the production of the imported goods will be allowed to deduct the corresponding amount from their CBAM certificate obligations.
The European Commission will continuously review the CBAM's functioning and assess the feasibility of including additional goods and sectors under its scope by 2030.
Checklist for EU Importers
To help importers navigate the complexities of CBAM, the European Commission has provided a checklist outlining the essential steps for compliance:
Check Goods: Verify if the goods you import are listed in Annex I to the CBAM Regulation and contact the National CBAM Competent Authority (NCA) in your country.
Register: Register through your NCA for access to the CBAM Transitional Registry, where you will upload quarterly reports on emissions embedded in imported goods.
Ensure Awareness: Make sure your trading partners outside the EU are aware of the detailed guidance provided by the European Commission on the goods in scope and how to calculate embedded emissions.
Follow Training: Engage with the general and sector-specific training materials provided by the European Commission to prepare for the new reporting rules and tools.
Submit Reports: Submit your first quarterly CBAM report by January 31, 2024, covering your imports in the fourth quarter of 2023, and stay informed about the latest developments as we approach the definitive phase in 2026.
Impact on Global Trade:
The introduction of CBAM is expected to have a significant impact on global trade, particularly for countries that export carbon-intensive goods to the EU. Non-EU countries with less stringent climate policies may face increased costs for exporting to the EU, incentivizing them to adopt greener production methods. This global movement towards reducing carbon emissions will likely reshape international trade dynamics, with sustainability becoming a key factor in trade agreements and policies.
The Impact of Climate Change Issues on Trade for Indonesia:
Indonesia, as one of the world's largest emerging economies, may face minimal direct impact from CBAM in the short term. However, global policies like CBAM will likely spur international efforts to leverage non-tariff measures based on climate change, potentially influencing Indonesia's trade landscape in the long run. As global markets increasingly prioritize sustainability, Indonesia's exports to the EU could be affected by the need to align with stringent environmental standards.
Indonesia's Commitment to Reducing GHG Emissions:
Indonesia has demonstrated a strong commitment to addressing climate change and reducing greenhouse gas (GHG) emissions. Implementing the Paris Agreement is in line with the mandate of the 1945 Constitution, particularly Article 28H number 1, which emphasizes the right to a good and healthy environment.
In 2021, Indonesia ratified Presidential Regulation Number 98 concerning the Implementation of Carbon Economic Value (Nilai Ekonomi Karbon/NEK). This regulation aims to achieve the nationally determined contribution (NDC) targets and control GHG emissions in national development. At the 2021 UN Climate Change Conference in Glasgow, Indonesia's President underscored the country's rapid contribution to global Net-Zero Emissions and the importance of a transparent, inclusive, and fair carbon economy.
Regulatory Framework for NEK Implementation in Indonesia:
The implementation of the NEK under Presidential Regulation No. 98/2021 involves various ministries, institutions, regional governments, business actors, and communities. The regulation outlines the procedures for carbon trading, emission offsets, carbon levies, performance-based payments, and other mechanisms based on the development of science, technology, and sectoral capacity.
Key Tools for Climate Change Policy Control in Indonesia:
NDC Strategies and Roadmaps: Indonesia has developed strategies and roadmaps for both climate change mitigation and adaptation, aiming to achieve its NDC targets by 2030.
SIGN-SMART: The Greenhouse Gas Inventory System that tracks GHG emissions.
SRN (Sistem Registri Nasional): The National Registry System that records climate change mitigation actions, adaptation actions, and the implementation of NEK.
ProKlim: The Climate Village Program that promotes community-based climate action.
SISREDD+: The Safeguard Information System for REDD+ (Reducing Emissions from Deforestation and Forest Degradation).
Target NDC Indonesia untuk Tahun 2030
Indonesia's NDC Target for 2030: Indonesia has set a target to reduce GHG emissions by 29% - 41% by 2030 through collective mitigation efforts at national and subnational levels. Key sectors involved in this effort include:
Forestry Sector: Managed by the Ministry of Environment and Forestry (KLHK) in collaboration with provincial and private sectors.
Energy Sector: Managed by the Ministry of Energy and Mineral Resources, Transportation, and Industry, with involvement from provincial and private sectors.
Waste Sector: Managed by KLHK, the Ministry of Public Works and Public Housing (PUPR), and the Ministry of Industry, with participation from regional governments and the private sector.
Agricultural Sector: Managed by the Ministry of Agriculture, with support from regional governments and the private sector.
Industrial Processes and Product Use (IPPU) Sector: Managed by the Ministry of Industry in collaboration with the private sector.
SPE-GRK (Greenhouse Gas Emission Reduction System):
To support the European Green Deal, Indonesia has developed the Greenhouse Gas Emission Reduction System (SPE-GRK). This system provides proof of emission reductions by businesses and activities, validated through a Monitoring, Reporting, and Verification (MRV) process, and recorded in the SRN. The SPE can serve as the basis for carbon labels, sustainability reports, and access to environmentally friendly financing.
SRN (Sistem Registri Nasional) and ONE DATA:
The SRN is mandated by Presidential Regulation No. 98/2021 to ensure the accurate recording of climate change mitigation and adaptation actions, NEK implementation, and climate change resources. The SRN also helps avoid double counting of mitigation actions and provides data for further policy considerations. The ONE DATA initiative ensures the availability of national, sectoral, and sub-sectoral data on GHG emissions and climate resilience.
Conclusion:
The EU's Carbon Border Adjustment Mechanism (CBAM) represents a significant step towards global climate action by ensuring that the carbon emissions embedded in imported goods are fairly priced. While the impact on Indonesia may be minimal initially, the global shift towards sustainability will likely influence Indonesia's trade dynamics and encourage stronger climate commitments. Indonesia's proactive approach to reducing GHG emissions, as demonstrated by its regulatory framework and international commitments, positions the country as a key player in the global effort to combat climate change.
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