NO.276NOVEMBERADB BRIEFS2023KEY POINTSEuropean Union Carbon BorderQuantitative analysessuggest that the value of theAdjustment Mechanism:EconomicCarbon Border AdjustmentMechanism(CBAM)interms of mitigating climateImpact and Implications for Asiachange is marginal.However,its impacts on trade patterns,competitiveness,and incomedistribution are far fromCyn-Young ParkYuya Yamamotonegligible,especially forDirector,Regional CooperationTrade Specialist,Regional Cooperationdeveloping economies.and Integration and Trade Divisionand Integration and Trade DivisionThe overall economic impactClimate Change and SustainableCCSDof the CBAM seems to belimited for Asian economies,Development Department (CCSD)ADBbut some economies faceAsian Development Bank (ADB)significant cost increases atMaria Anne Lorraine Doongthe sector level,such as IndiaConsultant,Regional Cooperationin the iron and steel sector,Georgia in fertilizer,andand Integration and Trade DivisionKazakhstan in aluminum.CCSDThe CBAM presents anADBopportunity for Asianeconomies to focus ondeveloping their carbonmarkets,while tacklingshortfalls in investmentsOVERVIEWrequired to developrenewable energy sources.The European Union (EU)aims to become the first climate-neutral economic blocCBAM-affected economiesby 2050,through the EU Green Deal.In 2021,the EU strengthened this commitmentcould consider responding byupgrading the value addedby adopting the"Fit for 55"package,which upholds an interim target of reducing netof their exports to avoid thegreenhouse gas emissions by at least 55%by 2030 from a 1990 baseline.This ambitioncarbon tariff.poses an increased risk of carbon leakage-where carbon-intensive industries shiftDiversification of exportproduction to economies with less stringent environmental regulations.markets,increasing theproductive capacity ofTo address potential carbon leakage,the EU Green Deal includes the Carbon Bordernon-CBAM sectors,andAdjustment Mechanism (CBAM),which imposes a carbon tariff on carbon-intensivebuilding statistical capacitiesproducts such as iron and steel,cement,fertilizers,aluminum,electricity,and hydrogen.may help mitigate the riskThese items were selected because they are highly susceptible to carbon leakage andexposure to CBAM in thecreate significant carbon emissions that nevertheless can be tracked (Simoes 2023).short term.The European Commission considers CBAM a"landmark tool"for putting a fair priceon carbon emissions generated during the production of identified goods (EuropeanCommission n.d.).The CBAM imposesa carbon price on imports of emissions-intensiveandtrade-exposed(EITE)goods to ensure they have a similar carbon price to domestic products.It also aims to prevent carbon leakage.CBAM prevents carbon leakage by"subjecting theNote:In this publication,$"refers to United States dollars.1SBN978-92-9270-487-2(print01SBN978-92-9270-488-9(electronic)ISSN 2218-2675 (electronic)Publication Stock No.BRF230561-2DO:http://dx.doi.org/10.22617/BRF230561-2ADBADB BRIEFS NO,276import of certain groups of products from third economies (non-EUembodied carbon payment per dollar of export to the EUand non-EFTA)to a carbon levy linked to the carbon price payable(the exporter's emission intensity multiplied by a $100 per tonunder the EU Emissions Trading System(ETS),supposing if the samecarbon price).Economies with a high score on the CBAM exposuregoods were produced within the EU,"according to Deloitte(2023).index are likely to be more affected than economies with a low score.Canada,the United States,and the United Kingdom are also exploringThe World Bank has also created a relative exposure index.This iscalculated by multiplying the same export share by the differenceThe CBAM regulation entered into force the day after itsbetween the exporter's emission intensity and the EU averagepublication in the EU's Official Journal on 16 May 2023.The EUemission intensity for the CBAM product,scaled by the assumedplans to implement the CBAM in two stages.First,the transitionalCBAM price of $100 perton of carbon (World Bank 2023).phase started on 1 October 2023.During this stage,importers ofA positive relative exposure index indicates that an economy hasCBAM goods are required to submit quarterly reports indicating:higher carbon-emission intensity than the EU average,and so(i)quantities of CBAM goods imported during the quarter,will likely have higher costs under CBAM.On the other hand,aspecified per economy of origin per production site;(ii)embeddednegative relative exposure index shows that an economy has lowerdirect and,if applicable,indirect greenhouse gas emissions;andemission intensity than the EU average.For example,if Georgia has(iii)the carbon price due in the economy of origin,if applicable.an aggregate relative CBAM exposure index score of 0.0464,thenthe additional cost will be $4.64 per ton of carbon dioxide (CO,)In the second stage of the CBAM,from 1January 2026,the fullemitted.The index also includes the aggregate CBAM exposure indexscope of regulation will take effect,with price adjustments onwhich results from multiplying the exports of all covered sectors ofim ported products.Importers will need to:(i)obtain authorizationthe productsto the EU by the sum of the total embodied carbonto import CBAM goods,(ii)declare the quantity of CBAM goodspayments (the assumed price multiplied by the exporter's emissionimported into the EU in the preceding year along with theirintensity of all covered sectors of the product),divided by the sum ofembedded greenhouse gas emissions,and (ii)surrender CBAMthe economy's total value of exports of CBAM products to the world.certificates to cover the declared emissions (Deloitte 2023)Asian Exposure by EconomyThe CBAM will be phased in alongside the phasing out of freeFigure la shows that,among the accounted economies,ADB's regionalallowances under the revised ETS.The mechanism will initiallymembers are not among the top CBAM product exporters to theinclude six selected industries:cement,aluminum,fertilizers,EU as a share of their total CBAM-affected products exported toelectricity,iron and steel,and hydrogen,in addition to somethe world.Exporters of CBAM products to the EU are dominated byprecursors and a few downstream products.Under certaineconomies in Africa,the Middle East,and Europe.Asian economiesconditions,indirect emissions will be included.are predominantly at the middle to the tail end of the graph,led byGeorgia with 34.80%,Cambodia with 19.18%,and India with18.92%.ASIA'S EXPOSURE TO THE CBAMFigure 1b presents the exports of CBAM-affected products tothe EU as a percentage of the gross domestic product (GDP)ofThe introduction of the CBAM has significant economic implications57 economies.Economies in Africa show a high share of CBAMfor trade and investment,especially in developing economies.Aproducts in their GDP,with Mozambique (6.9%)as the top exporter.United Nations Conference on Trade and Development (UNCTADThe exports of CBAM products are not very economically significant2021)study found that the CBAM could altertrade patterns ineven for the largest regional exporter such as Georgia(0.3%).favor of economies with relatively carbon-efficient productionand suppress exports from developing economies with carbon-Georgia has the highest aggregate relative CBAM exposure index,intensive industries.Economies with EITEproducts as a large sharewith ascore of 0.0464.India comes next with 0.0303,followed byof exports will be particularly exposed.Also,risks in adapting to theKazakhstan with 0.0051,Viet Nam at 0.0043,and Hong Kong,ChinaCBAM would increase in economies reliant on the EU as an exportat 0.0033,as in Figure 1c.This suggestsadditional costs from CBAMmarket and in economies lacking the capacity to track and reportimplementation will be $4.64 per ton of CO,emissions for Georgiaproduction-related carbonemissions.Economies that struggle toand $3.03 for India.For most Asian economies,the additional costsadjust to a low-carbon paradigm may also be at higher risk of impact.are less than $1 per ton of CO emissions.Risks can be tracked based on the exposure and vulnerability ofeconomies to the CBAM.The World Bank has developed theAsian Exposure by SectorCBAM Exposure Index to help economies make policy decisions.While Asia's overall exposure to the CBAM seems limited,The index gauges the potential for CBAMto impact exportsthe impact could be significant for certain sectors and for someof carbon-intensive goods for the six selected industries.It iseconomies.The region's sector exposures are shown in Figures 2calculated by multiplying the export share of each economy by theto 5.Data shows the exports of CBAM products.2The World Bank database does not have data on all ADB regional members.Presented data are only those availableIron and steel;fertilizer;cement;and aluminum;no dataon hydrogen;no data on ADB's regional members for electricity