Asian economies are ill prepared for upcoming carbon market regulation by the European Union that proposes a levy on imports of carbon-intensive goods and makes goods produced in countries with weaker carbon pricing mechanisms highly uncompetitive, industry sources and analysts told S&P Global Commodity Insights.
Few countries in Asia have imposed any form of carbon tax and only China, South Korea and Australia have established nationwide emission trading schemes to price carbon. Most exporters in these countries also lack broader awareness about the impacts of the EU's move, and are yet to establish uniform, stringent emission accounting and reporting practices, industry executives said.
EU's carbon border adjustment mechanism, or CBAM, could be implemented as early as 2023 when European companies have to start reporting emissions of imported goods, although they will not need to purchase CBAM certificates until 2026-2027. The Council of the European Union and the European Parliament are yet to decide on the timeline.
This gives Asian governments some breathing room to put in emissions accounting frameworks, but decarbonizing supply chains could still take years to accomplish, analysts said.
The EU's governmental agencies all feel CBAM is necessary to protect EU businesses against cheaper product imports from lower carbon pricing regimes and replace [EU's] free allocations of emissions allowances, Michael Evans, carbon market analyst with S&P Global, said.
"It therefore appears not to be a question of whether to implement such a mechanism, but when, and to what sectors/products," Evans said. "Scientists continue to forecast a medium-high likelihood that CBAM will be implemented by the EU, subject to World Trade Organization agreement."
Based on the EU Parliament's latest proposal, four of the top 10 CBAM-eligible regions that export CBAM-covered goods to Europe are Asian, led by China, its largest trading partner, and also includes India, South Korea, and Japan, according to Bixuan Wu, senior partner at law firm Hiways.
"What is the certainty that the CBAM legislation will be enacted? The answer is almost 100%. Regardless of the WTO consistency debate, CBAM's time has come," Wu said, referring to concerns that CBAM may violate WTO rules.