CBAM reform can power Asia’s low-carbon future

CBAM reform can power Asia’s low-carbon future

As the global push towards net-zero emissions accelerates, carbon border adjustment mechanisms (CBAMs) are becoming key tools for governments to align trade with climate action. But without thoughtful reform, these measures risk deepening global inequalities.

The EU CBAM — launched in October 2023 and set for full enforcement in 2026 — charges importers based on the carbon content of certain goods like aluminium, cement, fertiliser, and iron and steel. The goal is to encourage cleaner production practices abroad and prevent ‘carbon leakage’ — emission-intensive industries relocating to countries with weaker climate rules.

Countries like Australia, Canada, the United Kingdom and the United States are exploring similar carbon border adjustments. As these mechanisms gain traction, they are reshaping global trade and posing complex challenges for developing nations. Exporters from developing countries with higher embedded-carbon products like India and Indonesia may become less competitive than counterparts like Japan and South Korea.

To ensure CBAMs become bridges rather than barriers, an upgraded framework is needed. A 2025 study suggests an equitable solution — CBAM-Plus. This model proposes redirecting CBAM revenue back to developing countries, enabling them to invest in renewable energy, climate-resilient infrastructure and phase out coal power in alignment with their development needs.

The reform is both fair and strategic. India and Vietnam, Asia’s second and third largest exporters of CBAM-covered goods to the European Union, exported approximately US$6.4 billion and US$3 billion worth of those products respectively in 2023. India’s share of CBAM exports to the EU accounted for 24 per cent of its total CBAM exports, while Vietnam’s share was 20 per cent.

For carbon-intensive industries in the Global South, CBAMs impose a compliance cost. But CBAM-Plus offers a powerful opportunity for these economies to modernise and lead in low-carbon production. By linking aid and carbon revenue, funds can be recycled to assist development. Channelling CBAM proceeds to the paying countries would support local green investments and capacity-building in alignment with CBAM objectives.

CBAM-Plus would also create partnerships that provide access to clean technologies and support joint innovation and technology transfer. And it would help develop globally consistent standards for measuring emissions, reducing administrative burdens, and promoting transparency.

Linking CBAM to domestic carbon pricing can also help countries reduce their exposure to border charges. Since CBAM payments reflect the difference between the EU’s carbon price and that of the exporting country, adopting national carbon pricing systems like carbon taxes or emissions trading can keep more value at home.

To mitigate CBAM impacts, China has expanded its domestic carbon market and is proactively developing carbon footprint accounting standards for batteries, solar photovoltaic products, and electric vehicles. India and Indonesia have also introduced carbon markets that capture CBAM-covered products and Vietnam plans to launch a national carbon market by 2029.

This approach has broader benefits. Domestic pricing creates new revenue streams, supports a green industrial transformation and sends a strong signal to private investors. Combined with CBAM-Plus, it can trigger a virtuous cycle of policy innovation, competitiveness, and climate ambition.

Still, domestic carbon pricing may be politically unpopular due to concerns about its potential negative impacts on the economy and export competitiveness.

To address this, governments must clearly communicate the benefits of domestic carbon pricing, which include retaining revenues within the local economy, making exports more climate-friendly, and improving international market access. For example, if steel manufactured in Vietnam is subject to a carbon price while steel from Indonesia is not, some may fear that Vietnamese steel will become more expensive and less competitive. But under CBAM-Plus, Vietnamese steel would be better positioned to access the EU market, while the carbon price would be collected and retained within Vietnam rather than being paid under the EU’s CBAM.

Recycling CBAM revenues to developing nations may incite resistance in wealthier countries. Critics could argue that developing countries might not use the returned revenues effectively for mitigation or question why developed countries should provide financial support in the first instance.

To address these concerns, CBAM-Plus proposes a phased model to return a portion of revenues, build trust, and scale up as results emerge. A gradual introduction grants industries time to adapt, while mitigating potential economic disruption and fostering political acceptability.

Climate action in developing countries benefits everyone. Recognising this, EU and G7 support for developing nations has expanded through mechanisms like Just Energy Transition Partnerships. CBAM-Plus could channel revenue in a way that reinforces and expands the impact of these existing platforms.

The stakes are high. Without reform, CBAM could be seen as protectionism in green wrapping. But the CBAM-Plus framework can drive real emissions cuts while building trust, fairness, and resilience across borders.

CBAMs could go beyond tariffs to become tools for inclusive climate progress. By aligning carbon pricing with development finance, CBAM-Plus offers a pragmatic and equitable pathway that ensures no country is left behind in the race to net-zero.

Thang Nam Do is Fellow at the Crawford School of Public Policy and the Institute for Climate, Energy and Disaster Solutions, The Australian National University.

https://doi.org/10.59425/eabc.1756591200

East Asia Forum