The EU’s Carbon Border Adjustment Mechanism, or CBAM, forms an important part of the bloc’s efforts to meet its net zero commitments and more generally, to transition the region to a green economy. In this context and as the first move to collect import duties on carbon-intensive products, the policy has attracted considerable interest.
On 1 October, 2023, the enforcement of the CBAM will enter a ‘transition period’. Initially, importers of goods in six product categories, namely cement, electricity, fertilizer, iron and steel, aluminium, and hydrogen, will be required to report the amount of goods being imported together with the quantity of carbon directly and indirectly associated with the production of these (i.e., their embedded emissions). The CBAM will be fully enforced from 1 January, 2026, at which point importers will need to purchase a CBAM certificate, the cost of which will be calculated based on an assessment of the quantity of imports and their embedded emissions.
Over the short term, because exports to the EU of the goods covered by the CBAM regulations do not represent a significant fraction of total sales, its introduction is expected to result in only limited impacts for Thai industry. Nevertheless, Thai manufacturers and exporters will still have to contend with problems arising from the measurement, verification and reporting of emissions, though this will be most pronounced for those exporting steel and aluminium goods since sales into the EU play a more important role for these than they do for other product categories. Moreover, because carbon emissions will represent an important source of costs for CBAM exports, Thai industry will need to respond by reducing its carbon intensity, and this will generate its own set of challenges. These problems can be expected to multiply as other countries or trading blocs introduce their own CBAM-type mechanisms. However, looked at from a different perspective, the need to confront and to surmount the difficulties posed by the introduction of the CBAM will help to force public sector bodies, private sector businesses, and the finance industry to adapt their operations and to accelerate the transition to a low-carbon economy and to move closer to meeting net zero commitments, which at present remains a distant prospect. Alongside this, the introduction of the CBAM will also help to catalyze the development of new low-carbon or carbon-reduction business opportunities.
The threat of climate change poses grave dangers to the world, and indeed, the impacts of rising temperatures are already becoming increasingly evident around the globe. In the absence of effective mitigation strategies, the severity of these impacts will only worsen, and so policies currently being implemented worldwide aim to curtail the release of greenhouse gases (the primary cause of climate change) and to move economies towards carbon neutrality and net zero emissions.
The EU is widely regarded as a world leader in the area of climate change mitigation and adaptation, and the bloc has led the way by establishing a target of reaching net zero emissions by 2050. As part of this, in July 2021, the European Commission laid out its ‘European Green Deal’, which aims to cut net emissions of greenhouse gases by at least 55% by 2030 relative to the 1990 baseline (the so-called ‘Fit for 55 Package’). The European Green Deal encompasses a range of different policies and measures1/, the most important of which include the following:
Asian nations have also been increasing their focus on environmental issues, and so governments across the region have been developing strategies to green their economies. In China, climate change was mentioned in a 5-year plan for the first time in the 14th National Economic and Social Development Plan (covering the years 2021 to 2025), and from 2021, an emissions trading scheme has been active in the country. It is hoped that this will help to cut emissions from the industrial sector. In 2022, the publication of new Green Bond Principles also set out the requirement that 100% of the use of proceeds (UoP) should be for green projects3/. Singapore’s Green Plan 2030 will drive national sustainable development by encouraging the use of clean energy, cutting the release of greenhouse gases from the transport sector, and establishing the country as a center of green finance in Asia4/. In South Korea, the Green New Deal is focused on increasing the share of renewables in the national energy mix, supporting the greening of the transport sector and developing the future automotive industry, and increasing investment in environmental innovation. South Korea hopes to reach carbon neutrality by 20505/. Japan’s Green Growth Strategy aims to drive change through three main channels: (i) In the energy sector, the government will support the use of hydrogen and ammonia as energy sources; (ii) in industry and transport, support will underpin the use of EVs and the recycling of carbon; and (iii) in offices and households, the focus will be on greater use of recycled goods. Japan also hopes to reach carbon neutrality by 20506/.
However, it is clear that Europe is the world leader when it comes to policies to address the threat of climate change, and the EU has long been at the forefront of efforts to deal with these dangers. The bloc has thus initiated a number of policies that have then been taken up elsewhere, including the Emissions Trading System, setting out a taxonomy of sustainable activities, and now introducing the Carbon Border Adjustment Mechanism (CBAM), which will come into force in October 2023. Indeed, the CBAM will likely prove to have wide reaching consequences on world trade, and because the EU is an important export market for Thai manufacturers, Thailand will not be spared these impacts. Moreover, the EU’s introduction of a border carbon tax can be expected to encourage other countries to do likewise, and this will then accelerate the rollout of environmentally friendly trade policies worldwide. This paper thus looks in detail at the CBAM, investigating the policy’s history, its details, its enforcement, its likely impacts, and its shortcomings. The paper concludes with a look at the opportunities and challenges that the CBAM will bring about, for Thailand and for other countries.
What is the CBAM?
Although the EU has steadily intensified its efforts to reduce carbon emissions originating within member states, it has been less successful in implementing measures to address its reliance on external sources of carbon. It has thus become necessary to confront problems arising from ‘carbon leakage’, that is, the tendency of EU-based manufacturers to respond to tightening carbon regulations by shifting production to countries that operate weaker regulatory environments, or to replace EU-produced goods with carbon-intensive imports sourced from non-EU economies.
These are the problems that the Carbon Border Adjustment Mechanism (CBAM) is designed to solve, which it does by effectively imposing import duties that are scaled to reflect the greenhouse gases associated with the production of those imports. EU authorities therefore hope that the CBAM will prove to be an effective mechanism for fully capturing and reflecting the carbon costs of imports. This is because once the scheme is fully operational, importers will be required to purchase CBAM Certificates that will be priced at a level that reflects the costs of producing similar goods in the EU together with the associated carbon emissions, and by accounting more fully for the latter, the EU will be better able to meet its climate change goals.
Background to the CBAM
Over recent years, a number of different EU bodies have engaged in discussions over how best to regulate carbon emissions, and this resulted in the European Commission initially presenting its proposals for the CBAM in July 2021. This was followed in June 2022 by proposals from the European Parliament and the European Council for their versions of the CBAM, with the three approaches differing over details with regard to the product categories to be targeted by the new regulations, how greenhouse gases were to be measured, the timeframe for the introduction of these measures, and the geographical area within which the CBAM was to be enforced. Of the three proposals, that put forward by the European Parliament was the most comprehensive.
Trilogue negotiations between the three bodies were completed in December 2022, and the CBAM will begin implementation at a transitional stage in October 20238/.
Current status
Initially, the CBAM will apply to the cement, electricity generating, fertilizer, iron and steel, aluminium, and hydrogen industries, with the CBAM targeting the release of embedded emissions associated with the production of these goods. Embedded emissions are composed of (i) direct emissions connected to the manufacturing process (e.g., burning fuel to power machinery, or operating vehicles), and (ii) indirect emissions connected to the power used in industrial processes (e.g., for electricity), although indirect emissions will not be counted for imports of iron and steel, aluminium, and hydrogen. The CBAM will apply to all imports to the EU from non-EU countries, including Thailand, with the exception of those from countries that are in the EFTA (Iceland, Lichtenstein, Norway, and Switzerland).
Enforcement of the CBAM
Extending the CBAM beyond the EU: The US-CBAM
Other countries beyond the EU are also now developing similar policies to the CBAM as they look to better regulate the release of greenhouse gases. Thus, in the US, the Senate introduced the Clean Competition Act (CCA) in June 2022, or what might be called the US-CBAM. If passed, this would establish a carbon pricing mechanism that would apply to domestically produced goods as well as setting a carbon border adjustment mechanism to be used to adjust prices for energy-intensive imports.
At present, the CCA is still under review by the Senate, but if the bill becomes law, it would likely come into effect in 2026 and would initially apply to fertilizer, hydrogen, cement, iron and steel, fossil fuels, refinery products, petrochemicals, adipic acid, glass products, paper and pulp, and ethanol13/. The CCA will set out a mechanism for establishing carbon prices based on average emissions for different products. These will then be used as baselines within each industry, and imports that are responsible for emissions in excess of these will be charged duties at a proposed rate of around USD 55 per tonne of carbon. Significantly, this baseline will contract by 2.5% annually14/, and so as the cost of carbon ratchets up, producers will be encouraged to gradually tighten their emissions. Under the CCA, importers will be required to report their greenhouse gas emissions, the weight of their imports, and the electricity consumption related to these to the Environmental Protection Agency.
Like the EU’s CBAM, the US CCA is expected to exempt imports from least developed countries (LDCs).
Global-level impacts
While the EU clearly believes that introducing the CBAM will help to address problems with carbon leakage and so reduce overall greenhouse gas emissions, as well as institute a new source of income through the sale of CBAM certificates, some academics and researchers argue that the CBAM may distort international trade. Other criticisms of the CBAM focus on the fact that the mechanism will work to transfer responsibility for implementing mitigation strategies to developing countries, which are much less well placed to shoulder these responsibilities15/. This is mirrored in Dumitru et al (2021), who use a Computable General Equilibrium (CGE) model to analyze the global impacts of the CBAM, demonstrating that this will widen gaps in GDP and welfare provision between the developed and developing worlds16/. However, Beaufils et al (2023) show that the impacts of the CBAM will vary, with countries that are highly dependent on exports to the EU of carbon-intensive products being the most seriously affected. This group will include Russia, the UK, Mozambique, Turkey, South Korea, India, and China, and will most seriously affect many middle- and lower-income countries17/.
Over the years 2015 to 2019, Russia was the most important exporter to the EU of goods covered by the CBAM. Russia was followed in importance by China, the UK, and Turkey. From the EU’s point of view, imports of iron and steel and aluminium were the most important of the CBAM products, though Russia is also the source of a significant proportion of the sizable amount of fertilizer imported into the EU. Russia is thus expected to be the country most heavily affected by the CBAM, though among other exporters to the EU, 80% of the UK’s exports of CBAM goods are bound for the EU, while for Serbia and Mozambique, the equivalent figures are 78% and 76% respectively. Other major exporters to the EU for which exports of CBAM goods to the bloc account for more than 10% of sales include China, South Korea, and India. Overall, Mozambique is expected to be among the countries most heavily impacted by the enforcement of the CBAM since the EU is a major market for its domestic aluminium industry, and thus the country will need to shoulder higher export costs. However, the EU may offer financial assistance to LDCs struggling to reduce the carbon intensity of their industrial base19/, and this would then help to take some of the sting out of measures similar to the CBAM if or when these are introduced by other countries (e.g., the US). The impacts on Mozambique may well therefore be somewhat less severe than they initially appear to be.
In the case of Thailand, the EU is not a crucial market for exports of CBAM goods, and these account for only some 5% of sales. Thai exports of CBAM goods to the EU in fact have a similar profile to those of South Korea and India, that is, sales of iron and steel are the most important, followed by aluminium. The impacts of the CBAM on Thai industry will thus be limited, though a full analysis of this is given below.
In addition to the extent to which an industry relies on exports to the EU, other factors that will influence the impacts of the CBAM include the carbon intensity of manufacturing processes, the ability of importers to pass on higher costs to exporters, and the existence of and access to alternative markets for both importers and exporters. However, the costs associated with the CBAM could also be lessened if export-originating countries set a domestic price for carbon and introduce measures to tighten emissions.
Going forward, the move by the EU to introduce a CBAM has encouraged many other countries to consider developing their own equivalents. This is most evident in the US’s CCA, though in the UK, the government is also consulting on measures to reduce carbon leakage, including through the introduction of a proposed UK-CBAM and of mandatory product standards (MPS), which will help to create a regulatory environment best suited for the reduction of carbon emissions from industry20/. Other countries involved in this process include Canada, which is now officially consulting on its CBAM21/. What is sure to be a growing use of these measures will therefore have potentially significant impacts on global manufacturing and trade, and countries that are home to the least environmentally friendly industries will increasingly feel the pressure to bring these into line with emerging trends to green global production.
Macro-level impacts in Thailand
Although the initial enforcement of the CBAM, which begins in October 2023, will be restricted to a transition period during which importers will be required to report carbon emissions but not to purchase CBAM certificates, this will still impose additional costs on Thai manufacturers and exporters due to the required emissions checks and accompanying paperwork. In addition, over the long term, these costs will likely broaden, especially in the event that Thai players are not able to bring their production processes and operations into line with new global standards. The expected impacts of the CBAM on Thai industry are summarized below.
Negative impacts
1) Higher export costs: It is highly likely that the charges that the CBAM will put in place for the importing of high-emitting products will be passed on by importers to manufacturers and exporters, and so the mechanism will add to export costs for those selling into markets in the EU. These additional costs will come from both direct sources, that is for charges levied on excess emissions, and indirect sources, that is for measuring and reporting emissions and for paying for associated paperwork. Nevertheless, over the short term, the impacts of this on the Thai manufacturing sector are expected to be only slight because exports to the EU of goods covered by the CBAM regulations account for just 2.1% by value of all Thai exports to the bloc, and just 0.17% of all Thai exports in total. Among the CBAM goods exported to the EU, the most important for Thailand are iron and steel (1.5% of exports to the EU) and aluminium (0.4% of exports), while sales to EU customers of other CBAM goods are either very low or non-existent. Moreover, as a share of all exports from Thailand of CBAM goods, those going to the EU represent just 5.3% of the total, underlining the fact that at least for these product categories, the EU is not a major market. This thus puts Thailand in a very different position to countries such as the UK, Serbia, and Mozambique, which as described above, are much more exposed to the potential negative impacts of the CBAM.Positive impacts
Despite the slightly gloomy picture painted above, the rollout of the CBAM does not mean that the future is uniformly negative and threatening, and indeed, these changes may well represent an opportunity for Thai industry and business to profit from the accelerating shift to net zero policies. The potential positive impacts of the EU’s CBAM take two main forms, as described below.
Industry-level impacts in Thailand
Clearly, the impacts of the CBAM will differ across the economy depending on a broad set of variables including the size of an industry’s export sector, its reliance on exports to the EU, the structure of its manufacturing supply chains, and its carbon intensity and the quantity of greenhouse gas emissions for which it is responsible. In the following, a comparative analysis of these impacts is therefore given for industries targeted by the CBAM. It is hoped that this will present a clearer picture of how the introduction of the CBAM will affect these various industries.
The introduction of the CBAM will have the most serious consequences for the iron and steel industry (including downstream steel products). This will be because compared to other CBAM goods, at 6.3% of sales, Thai iron and steel exports are more heavily dependent on markets in the EU. In addition, the industry is also very carbon intensive, and after plastics and aluminium production, it has the highest per unit emissions of greenhouse gases. Next in line will be the aluminium industry, which will be the second most seriously affected part of the Thai economy. Although the EU is a less important market for aluminium producers than it is for exporters of iron and steel goods, the industry is more carbon intensive and so the marginal costs associated with imports are likely to be higher. However, examination of the forward and backward linkage indices shows that the aluminium industry is less heavily integrated with other parts of the economy than is the iron and steel industry, which indicates that for the aluminium manufacturers, enforcing the CBAM will have fewer impacts on either upstream or downstream supply chains. Within Thailand, other industries targeted by the CBAM will be largely unaffected by its introduction because either exports to the EU are low and represent only a small proportion of overall sales (as is the case for cement and fertilizer) or there are no exports to the EU at all (as is the case for electricity and hydrogen production).
Despite the relatively mild impacts that are forecast, worries persist that in the future, any widening of the scope of the CBAM may have more far-reaching consequences for Thai industry, especially if the rules on imports are expanded to include chemicals and plastics. This was in fact suggested in discussions in the European Parliament but the proposal was later dropped. The inclusion of plastic products and polymers in the CBAM measures would be particularly troubling for Thailand since compared to iron and steel, exports of these to the EU are more substantial, and accounts for a larger proportion of total sales to the bloc. These goods are also strongly associated with a high level of direct and indirect greenhouse gas emissions, and so the industry is keeping a close eye on developments.
Details on the industries expected to be most heavily affected by the CBAM, the likely consequences of this, and ways in which they might reduce their greenhouse gas emissions are detailed below.
The iron and steel industry is a major consumer of energy, with upstream production of pig iron or iron inputs generally relying on one of two methods. (i) Primary production involves the processing and melting of iron ore in blast furnaces, which is then transformed into pig iron in basic oxygen furnaces. Each of these stages entails the release of significant quantities of carbon, and typically, primary processing of iron ore is responsible for the release of 2.3 tonnes of carbon for every 1 tonne of iron that is produced27/. However, this type of processing is not carried out in Thailand. (ii) Secondary production involves the smelting of scrap and the direct rolling of steel in electric arc furnaces, which also leads to the indirect release of a large quantity of greenhouse gases. Midstream parts of the iron industry convert iron into steel, outputting semi-finished steel products, which then passes through additional downstream processes to be turned into finished products such as sheet steel or steel bar.
In addition to raw iron and steel, the goods covered by the CBAM include products made from these (e.g., nails, nuts and bolts, containers, packaging, etc.) and for Thai exporters, these comprise the most important category of goods sold into the EU; in 2022, 69,000 tonnes of these were shipped from Thailand to buyers in Europe. These were followed in importance by rolled stainless steel products, of which 26,000 tonnes were sold to the bloc. In terms of the greenhouse gas emissions connected to lifecycle production and use (i.e., a product’s emission factor), galvanized steel (used to prevent rusting) is the worst offender, and so it is evident that a high proportion of the steel products exported to the EU from Thailand carry with them heavy per-unit carbon costs.
However, efforts are underway to shift businesses towards green steelmaking and thus to reduce the greenhouse gas emissions of the iron and steel industry. One example of this is the development of hydrogen-based steelmaking, which should be commercially feasible by 203029/, and indeed the Chief Executive Officer and founder of Singapore’s Meranti Steel, a driving force in the move to sustainable steel production, estimates that global demand for green steel will reach 41 million tonnes by 2025 and 235 million tonnes by 2040. Likewise, demand for low-polluting products is forecast to jump from 1% of total demand for flat steel products to 26%30/. This type of transformation of the market may be possible over the long term, but in the short term, manufacturers will need to cut direct emissions of greenhouse gases from primary production processes through the use of carbon capture and storage technologies (CCS), while problems with excessive indirect emissions can be addressed through increased energy efficiency and the switch to renewable sources of energy.
In its initial production, aluminium is the most energy hungry of all non-ferrous metals due to the large quantities of electricity that this process consumes (this is thus an indirect source of greenhouse gases). As with iron, there are two methods for manufacturing aluminium. (i) Aluminium can be produced from bauxite, which is smelted to produce alumina powder, and an electrical process is then used to transform this into aluminium. However, because Thailand has no bauxite mines, this process is not employed domestically. (ii) aluminium may also be made from scrap, and because this uses only 5% of the electricity of producing aluminium from bauxite31/, this is a popular route to take. The emission factor for the second technique is thus significantly lower than for the first, and so producing aluminium from scrap will have an important role to play in reducing industry emissions.
In 2022, the most important category of aluminium exports from Thailand to the EU was aluminium foil, a midstream product for which sales totaled 9,900 tonnes. This was followed in importance by ‘other’ downstream aluminium products (2,400 tonnes). Nevertheless, when the CBAM is first enforced, although it will apply to downstream aluminium goods, indirect emissions will not be counted when calculating the total embedded emissions of aluminium, iron, and steel products. Over the short term, costs will therefore not rise substantially.
Over the longer term, a transition to the production of ‘green aluminium’ will play an important part in reducing the industry’s release of greenhouse gases. This is because green aluminium is produced from alternative energy (often from hydroelectric power) and so the manufacturing process typically produces less than 4 tonnes of carbon for every 1 tonne of aluminium, or less than a quarter of the average 16.6 tonnes of carbon released per tonne of aluminium when standard production processes are used. Moreover, output is rising, and this is expected to jump by 10% in 2023 alone. Among other beneficiaries of this will be the auto industry since aluminium is widely used in the manufacture of auto parts (e.g., for the production of bumpers) and so using green aluminium will help to reduce the carbon intensity of downstream goods such as this32/.
Although at present, plastic products have not been included within the scope of the CBAM rules, this was in fact proposed by the European Parliament, and because plastics are both the most important of the potential CBAM goods exported from Thailand to Europe and the most carbon intensive, any move to expand the mechanism to cover these would have substantial consequences for Thai industry. The impacts of such a move would be amplified by the fact that the plastic industry is tightly linked to many other parts of the economy, including the manufacture of packaging, construction materials, automobiles, electronics, electrical goods, and medical devices. Some of the plastics that are most widely used include polyethylene (PE)33/, which is used in the manufacture of products such as bags, bottles, buckets, and film, and polyvinyl chloride (PVC), which is used in construction and domestic settings (e.g., for water pipes and connections, and cabling).
Plastics production begins with the refining of crude oil or the distillation of natural gas, and the outcome of these processes is then separated into basic chemicals including ethylene, propylene, styrene and phenol. These are used as precursors in the production of plastic resins. Following this, the plastic products themselves are manufactured by melting plastic pellets and then using processes such as blowing, injection molding, pressing, rolling, and so on to form the plastic into the desired shape. Almost all of the greenhouse gases associated with the production of plastics is released as carbon dioxide that comes from the fossil fuel-derived power used to isolate the basic chemicals. Embodied emissions are thus mostly direct, though plastic production also consumes a significant amount of electricity and this is therefore a sizeable additional source of indirect emissions.
A consideration of the emission factor of different plastics shows that among those most widely used in Thailand, polycarbonates used in the auto and medical devices industries and high-density polyethylene (HDPE) have the highest per unit greenhouse gas emissions. In 2022, a major share of Thai exports to the EU of plastics came from sales of high- and low-density polyethylene (HDPE and LDPE) and of plastic bags and packaging also manufactured from polyethylene. Thai manufacturers and exporters are thus exposed to a significant risk that in the future, the high carbon emissions that these products are responsible for will translate into higher costs.
A number of different routes may be taken to reduce emissions from the production of plastics, including the use of catalysts to cut the amount of energy used in the manufacturing process, and taking advantage of carbon capture, utilization, and storage (CCUS) technologies. In addition, it will be possible to cut carbon emissions by substituting regular plastics with alternatives, including recycled plastics manufactured from waste products and bioplastics made from natural products. The latter includes renewable resources and agricultural products (e.g., cellulose fiber, collagen, flour, and bean proteins), and because bioplastics are biodegradable, they are regarded as more environmentally friendly than regular oil-based plastics. These also offer the advantage of being able to be used in roles as varied as food packaging and medical applications (e.g., as artificial skin)34/.
Exports from Thailand to the EU of other goods covered by the CBAM regulations (i.e., cement and fertilizer) are very limited and so the associated greenhouse gas emissions are likewise negligible. In the case of cement, emissions come mainly from heating limestone to produce clinker and so emission reduction efforts are focused on replacing clinker and promoting the use of hydraulic cement in place of Portland cement. For fertilizers, greenhouse gases are produced mainly during the splitting of hydrogen from methane, which is then combined with atmospheric nitrogen to produce ammonia (i.e., nitrogen fertilizer). However, Thailand is an importer of fertilizer and with only minimal exports, the environmental consequences of Thai production are very limited.
Table 6 below summarizes details on the primary activities of industries targeted by the CBAM, how these are responsible for greenhouse gas emissions, and how these emissions may be reduced.
Having looked at the likely impacts of the CBAM, it is natural to then ask ‘How prepared is Thai industry for this?’, though any answer to this question must take into account not just the impacts of the EU’s CBAM but also the likely future introduction of similar mechanisms by other countries. Consideration of the structure of the CBAM shows that the costs that will arise from it will be strongly influenced by how players respond to three particular challenges.
Challenge 1: Measuring carbon emissions
The most important variable influencing the costs arising from the introduction of the CBAM is the extent of embedded greenhouse gas emissions associated with particular products because this will determine the cost of CBAM certificates. Thailand has already begun work on the development of systems for the measurement of greenhouse gas emissions, and these may now be adapted for use in measuring CBAM embedded emissions. This includes the ‘carbon footprint of product’ (CFP) mark, which has been designed to reflect an assessment of a product’s complete lifecycle emissions, from sourcing inputs and raw materials, through production, distribution and use, to end of lifecycle disposal. This will then help to communicate to consumers that particular products are (or are not) environmentally friendly. Manufacturers are able to request certification from the Thailand Greenhouse Gas Management Organization (TGO), though producers are responsible for calculating the carbon footprint of products, which they may do themselves or they may contract out to a consultant. These assessments are then subject to verification by certified individuals or organizations and, following this, confirmation and certification by the TGO36/.
It is important at this stage to be clear about how far the CFP and the CBAM’s definitions of embedded emissions overlap, and comparing how these two procedures assess the greenhouse gas emissions associated with particular products, clear differences emerge. Thus, CBAM embedded emissions measure only those direct and indirect (i.e., from electricity use) emissions that result from the production process itself38/, and so the total lifecycle assessment of greenhouse gas emissions required under the CFP is much wider than the CBAM assessment of embedded emissions.
The CFP doubtless marks a positive start for Thailand since in addition to preparing the way for measuring and verifying carbon emissions, the CFP has also been included in the list of recognized marks in the Thai Rating of Energy and Environmental Sustainability (TREES), a green building assessment, and in the Thai Green Card list, which is used to measure products’ environmental friendliness and which is gaining popularity among consumers. However, the costs of measuring and verifying emissions and then of registering with the CFP are significant39/, and worse, registration is valid for only two years, at which point the verification and registration process needs to be repeated. This may be one reason why registrations are at present somewhat limited.
As of 13 June, 2023, a total of 7,122 products produced by 820 companies had been registered for the CFP mark, though of this total, only 2,872 products from 268 companies still had an active registration. With 1,986 products, construction materials (including steel and cement) were the most heavily represented in the historical total, followed by food and drink products. Interestingly, comparing on the one hand goods that are currently or that are likely to be covered by the CBAM regulations and, on the other those that are outside the scope of the regulations, the former are more heavily represented in CFP registrations than the latter. This is especially the case for construction materials, plastics, chemicals, petroleum products, and petrochemicals. Nevertheless, as a share of all businesses active in particular industries, those registered with the CFP represent only a very small fraction of the total. At 4.8%, this share is highest for producers of construction materials, falling to 2.7% for producers of aluminium, and around just 1.0% for manufacturers of plastics. It is therefore reasonable to conclude that many manufacturers are not yet prepared for official testing and verification of their greenhouse gas emissions.
In addition to differences between how the Thai and EU systems measure emissions, an additional issue involves the standards, systems and personnel involved in verification processes. The EU has specified that independent auditors verifying greenhouse gas emissions must be registered either with the EU ETS or with the national accreditation bodies of individual member states. The Thailand Greenhouse Gas Management Organization (TGO) and the Thai Industrial Standards Institute (TSI) are jointly developing Thailand’s measurement and verification systems in line with the standards established by the EU, and it is hoped that this will result in the creation of a digital platform that can be used to calculate embedded emissions as defined by the CBAM. Alongside this, personnel with expertise in measuring and verifying emissions are also being trained in how to follow these standards, and in the near future, there is likely to be significant demand for these skills. The development of these native Thai systems for measurement, reporting and verification will help to reduce the costs faced by exporters, with the additional advantage that rather than divert funds to overseas organizations, any such expenditure will remain within Thai borders.
Challenge 2: Using domestic carbon pricing to reduce the costs connected with the CBAM
The CBAM regulations specify that if an importer can show that the cost of goods brought into the EU already includes payments relating to the release of carbon during the production process, these can be set against the fee for the CBAM certificate that importers need to buy. Thus, if the originating country has introduced an effective carbon pricing mechanism that operates in line with the EU principles, this can help to cut costs arising from the introduction of the CBAM.
At present, Thailand’s market for carbon credits takes the form of the Thailand Voluntary Emission Reduction Program (or T-VER), though this remains somewhat small. Carbon prices thus averaged just THB 108/tonne of CO2 in 2022, and relative to the total approved issuance of carbon credits, sales are still low. This is partly a result of the fact that participation in the market remains voluntary and so the incentives encouraging businesses to participate are weak. In addition, understanding of how carbon markets work and what benefits they offer is not yet widespread, while the costs of registering with the T-VER and of requesting carbon credits, as well as of measuring, assessing, and verifying emissions can be substantial40/. Nevertheless, given the need to reach carbon neutrality, the Thai market for carbon credits has potential for rapid growth on both its demand and supply sides, and when the market has improved in terms of both quantity and quality, this may help to reduce the costs faced by Thai exporters when purchasing CBAM certificates. In light of these clear potential benefits, agencies involved in the development of these areas should accelerate negotiations with the EU to bring the T-VER program, or other domestic carbon pricing mechanisms in the future, into line with the requirements imposed by the CBAM.
Challenge 3: Transitioning to a low-carbon economy
In addition to short-term efforts to cut the costs required to meet the CBAM standards by improving measurement and verification systems and developing domestic carbon pricing mechanisms, as described above, over the longer term, it will be more important to cut greenhouse gas emissions connected to economic activity. This will then accelerate the transition to a low-carbon economy, which would necessarily be the most efficient way of cutting embedded emissions.
The next issue to address is therefore considering where Thailand currently stands with regard to the goal of becoming a low-carbon economy. Thailand’s ‘Long-Term Low Greenhouse Gas Emission Development Strategy (Amended Version)’, produced by the Office of Natural Resources and Environmental Policy and Planning (part of the Ministry of Natural Resources and Environment) was submitted to the United Nations Framework Convention on Climate Change (UNFCCC)48/ in 2022. This estimates that to reach net zero emissions, Thailand’s emissions should be no more than 120 MtCO2e by 2065, which allowing for sequestration by forests would result in zero net emissions. Unfortunately, as of 2019, Thailand’s total emissions came to 373 MtCO2e, or more than triple the target and because the country remains so far from achieving its goals, efforts in that direction will doubtless need to be accelerated. However, as things stand, Thailand lacks the explicit regulatory framework required to drive the transition to a low-carbon economy, though efforts have been made to draft a climate change bill. If the latter is passed in the near future, this would certainly help to increase pressure across all parts of the economy, pushing stakeholders to step up their efforts to control carbon emissions and to jointly bring the net zero goal much closer to fruition49/.
Given the tendency of different sectors to generate different levels of greenhouse gas emissions, Thailand’s long-term strategy for addressing these issues focuses on cutting emissions from industries affected by the CBAM directly, that is, the energy sector and carbon-intensive industrial processes. This strategy therefore involves exploiting alternative energy sources, greater use of EVs, and intensified research and development of related technologies, such as carbon capture and storage, and these measures will then help to reduce both direct and indirect emissions, as the CBAM intends. In addition, measures unique to particular industries are also being pursued, so for example, cement producers are developing alternatives to clinker. However, such alternatives have yet to emerge in the iron and steel and aluminium industries, partly because in these areas, emissions largely originate from the electricity and fossil fuels used in production, and these are already accounted for in the energy sector.
Thailand’s strong focus on cutting carbon emissions through action involving the energy sector carries with it a significant reliance on technology, and although low-carbon or ‘green’ technologies are showing increased potential to assist in reducing greenhouse gas emissions, greater research and development is needed before these will achieve widespread adoption. Moreover, the costs associated with many of these innovations (e.g., CCS and hydrogen-based power) remain significant, although with regard to the former, PTT Exploration and Production began researching the feasibility of using CCS in Thailand in 2021, and the company estimates that it will be possible to begin commercial CCS operations in the Arthit gas field in 202650/.
While it is certainly true that the private sector will have a central role to play in determining the success or otherwise of the transition to the low-carbon economy, many other stakeholders will also play their part in supporting this process and in ensuring that the transformation of the economy is as smooth and painless as possible. It is interesting to note that in 2022, the United Nations Global Compact–Accenture CEO Study sought the opinions of more than 2,600 executives in 128 countries52/, and the survey revealed that 52% of CEOs saw the government as having the greatest influence over issues relating to sustainability. Moreover, 21% of CEOs surveyed believed that the banking sector also had an important role to play in this area, with the proportion up from just 6% in 2021. This survey therefore underlines the importance of stakeholders such as the public sector and the financial industry in helping to bring about these changes.
Among these, the government will have a central influence in setting the direction of change, in facilitating this change, and in ensuring that industry follows its lead. In this regard, one of the Thai government’s most important strategies has been the 30@30 policy, which aims to ensure that by 2030, 30% of autos coming off Thai production lines are zero emission vehicles (ZEVs). To help bring this about and to encourage increased domestic production and use of EVs, the government has made changes to the tax system and provided other assistance to industry. Because EV production is linked with many other parts of the economy, it is also hoped that an increase in the former will help to accelerate the green transformation in other parts of the economy. With regard to industry overall, the Board of Investment (BOI) rolled out its ‘Smart and Sustainable Industry’ policy at the start of 2023. This has the goal of encouraging the private sector to increase investment in industrial sustainability53/, for example through increased energy efficiency, greater use of alternative energy, reduced industrial impacts on the environment, and more rapid adoption of international sustainability standards54/. In the first quarter of 2023, the policy attracted 60 applications with a combined value of THB 3.33 billion. This reflects the widespread acceptance of these measures, and providing funding by the government now represents a valuable opportunity for increasing the sustainability of the Thai manufacturing sector55/.
Because the transition to the green economy will carry with it a heavy price tag, a crucial role will be played by sustainable finance, since this will help to allocate capital efficiently. In Thailand, the issuance of sustainability bonds has undergone rapid growth, and as of the first quarter of 2023, these had a value of THB 550 billion, up around five-fold from their 2020 value of THB 110 billion. The majority of these are for financing related to projects that aim to cut greenhouse gas emissions56/. However, the development of the market for green finance involves both opportunities and threats. With regard to the former, this development will help to boost demand for green finance products, though with regard to the latter, it can be difficult to distinguish between worthwhile projects and those that represent less good value. To help address these problems, the Thailand Taxonomy has been created. This has the goal of establishing standards for classifying economic activities that are connected with the environment and for assessing their sustainability and environmental impacts.
Given, as described above, the problems arising from the implementation of the CBAM, the roles played by stakeholders in transitioning to the green economy, and the interconnections between these and how this will play out in determining how successful the country will be in meeting the challenges posed by the enforcement of the CBAM, it is clear that stakeholders will need to work hard to coordinate their efforts. However, if they are successful in this, this will then reduce the severity of the impacts associated with the new EU policies, and may even help to turn a crisis into an opportunity.
The EU’s announcement of the introduction of the CBAM is further evidence of the rising international will to seriously confront climate change and to begin the transition to a low-carbon society. Although Thailand has set a target of reaching net zero emissions that is 15 years behind that of the EU, the country cannot avoid the need to adjust to this changing reality and to follow the lead set by countries at the forefront of the movement to manage problems with carbon emissions. As stated above, initially, the CBAM will come into effect for a transition period lasting somewhat longer than 2 years, but following this, the regulations will then be fully enforced. The impacts on Thai industry that can be expected over these two periods are described below.
Although in the eyes of the EU, these new measures may play the role of the hero in the drama of reaching net zero, given the likely impacts of the CBAM on their domestic industry and the wider economy, other countries could be forgiven for wondering if instead they would do better to regard the policy as the villain of the piece. The resolution of this question will, though, depend on the context in which individual countries find themselves, and for Thailand, the CBAM may in fact play a role in opening up new opportunities.
In conclusion, although a superficial assessment of the CBAM might conclude that this will only generate problems and difficulties for manufacturers and exporters, a deeper look at these issues shows clearly that the introduction of these measures signals the start of a more serious attempt to push forward with the move to a green economy. This is no easy task, and so it is perhaps inevitable that this will bring with it both challenges and opportunities, but with effort and intelligence, the business and finance sectors will be able to maximize the latter and minimize the former.
Alexandra Dumitru, Barbara Kölbl, Maartje Wijffelaars. (2021). “The Carbon Border Adjustment Mechanism explained”. Retrieved from https://www.rabobank.com/knowledge/d011297275-the-carbon-border-adjustment-mechanism-explained