The Carbon Border Adjustment Mechanism (CBAM) – one of the milestones of the EU Green Deal – entered into force in October 2023 and since then, the ripple effects of the CBAM are being felt across the world, most notably in Asia.
EU-Asia trade is one of the world’s oldest and most longstanding relationships in the world, harking back to the days of the Silk Road. Today, around 41% of EU’s imports come from Asia. Given the significance of the EU-Asia trade relationship, businesses exporting to Europe have understandably expressed concerns about what the implementation of the CBAM entails. The competitiveness of goods imported from Asian countries, the potential risk of supply chain disruptions if goods get stopped at the border, and administrative burdens are among some of these concerns.
Overview of the CBAM
A key measure in the EU Fit for 55 Package, the CBAM is designed to support the EU’s transition to a low-carbon economy by addressing carbon leakage.
The first phase of the CBAM rollout focuses on upstream energy-intensive sectors such as iron and steel, cement, fertilizers, aluminum and electricity. Companies are currently required to report direct and indirect emissions (Scope 1 and 2). Indications that in the longer term, these requirements will be expanded to include carbon footprint across the value chain.
“The EU’s implementation of CBAM indicates that regulatory scrutiny of corporate accountability now extends beyond geographical boundaries. For Asian businesses with links to European markets, the ability to credibly measure, track and disclose the carbon footprint of their operations builds business resilience and opens doors to new opportunities.”, says Joe Phelan, Executive Director, Asia Pacific at WBCSD.
Business resilience within the EU regulatory landscape
Any business wondering what the CBAM means for them should view this development from the broader business operating environment. The EU has introduced a range of legislation and guidelines aimed at advancing corporate accountability on climate and sustainability, such as the Corporate Sustainability Due Diligence Directive, the EU Deforestation Regulation, and the Corporate Sustainability Reporting Directive (CSRD), to name a few. Like the CBAM, these measures all address business accountability of activities beyond European boundaries.
The CBAM is just one piece of the bigger range of measures that are defining the operational landscape for businesses operating in Europe. Understanding carbon accounting and putting it in place within the business operational and accounting frameworks would best prepare businesses to maintain resilience as the regulatory landscape in Europe continues to evolve.
“We see global regulation like the European Union’s Carbon Border Adjustment Mechanism (CBAM) and other proposed ways of monitoring the emissions flows around the world as a tipping point for organizational investment into carbon accounting. This is just the beginning – the scope of regulations and reporting requirements will only increase, and the need for reliable, complete, and auditable data, based on actual figures rather than averages, will become ever more critical.”, says Susanna Hasenoehrl, Head of Sustainability for Asia Pacific and Japan for SAP,
Carbon accounting is a must-have strategy
Having a robust carbon accounting process is crucial for businesses to stay ahead of the evolving regulatory landscape in Europe. This is especially crucial for Asia-based manufacturers or suppliers to European companies because their carbon emissions contribute to the latter’s Scope 3 emissions.
A key global coalition that businesses can turn to is PACT (the Partnership for Carbon Transparency). Established by WBCSD, PACT aims to address Scope 3 emissions, which is one of the biggest decarbonization challenges today.
“Many businesses struggle to fully understand value chain emissions (Scope 3). This hinders targeted decarbonization action as accurate and granular data is fundamental for companies in recognizing abatement potential, setting accurate net zero targets, and identifying where to intervene in their value chains to maximize decarbonization impact.”, says Nicolas Duvoisin, Senior Associate, Climate Transparency at WBCSD.
By standardizing how GHG emissions are calculated and exchanged for products, PACT ensures that every company has access to granular, comparable and consistent data from its suppliers. This enables companies to make carbon-informed business decisions, builds confidence around the accuracy of their Scope 3 disclosures, and drives accountability around the decarbonization of value chains.
PACT’s ecosystem of over 150 business, standard setters and policy makers have helped enhance the functioning of the existing carbon accounting system by
developing missing product-level carbon accounting and data sharing methodological guidelines, the Pathfinder Framework, and
creating an open technology infrastructure to facilitate data exchange across value chain actors, irrespective of their technology solutions, the Pathfinder Network.
These building blocks are now being implemented by over 900 companies to improve the Scope 3 data they access and share, with the objective of increasing transparency and, ultimately, demystifying the topic of Scope 3.
Acceleration of carbon accounting
The requirements of the CBAM will give lower-carbon suppliers and businesses outside of the EU region a competitive edge. It also incentivizes businesses in Asia to innovate and transform their businesses.
Beyond regulation, carbon accounting also opens doors to new opportunities. In Asia, countries such as India, Thailand, Singapore, Vietnam and China have taken steps to encourage the development of carbon markets, which will further expand the potential of carbon accounting in supporting the development of sustainable finance.
“Calculating carbon footprints, integrating with core financial and operational data, and securely sharing across supply chains can only happen with a single, unified source of truth for sustainability data. Businesses in Asia Pacific and Japan should be planning and implementing strategic changes to how they account for carbon businesses today, to future-proof their organizations – and the planet – for tomorrow.”, added Hasenoehrl.