Despite the mobility restrictions to contain the spread of COVID-19, the annual growth rate of carbon dioxide concentration in the atmosphere decreased only slightly.

To tackle dangerous climate change, 190 countries, including Indonesia and the European Union, joined the Paris Agreement, a legally binding international treaty on climate change. Parties to this agreement are committed to limiting global warming to well below 2 degrees Celsius, preferably not more than 1.5 degrees Celsius.

Nevertheless, time to stop the climate crisis is running out, the United Nations has warned. The latest Intergovernmental Panel on Climate Change report said that global warming is likely to reach or exceed 1.5 degrees Celsius in the next 20 years. Unless immediate and massive action is taken, the goals of the Paris Agreement will be beyond reach.

One of the key instruments taken by many governments to reduce emissions is putting a price on carbon or so-called carbon pricing. According to the World Bank, 64 carbon-pricing instruments are in operation. This year, the carbon-pricing instruments in operation, carbon taxes and emissions-trading schemes (ETS) cover 21.5 percent of global emissions.

The EU is taking the lead on global action to combat climate change and its impacts. It launched the world’s first international ETS back in 2005. The EU ETS has successfully reduced emissions by about 35 percent between 2005 and 2019. Getting more ambitious, the EU has now put in place a plan to cut emissions further and aims to become the world’s first climate-neutral continent by 2050.

In July of this year, the European Commission published a long-awaited proposal for a carbon border adjustment mechanism (CBAM) as part of the European Green Deal. If implemented, imports of carbon-intensive products, i.e., cement, iron and steel, aluminum, fertilizers and electricity, will be subject to a carbon import levy. By doing so, the EU will address the risk of carbon leakage. The proposed CBAM will also ensure a level playing field between goods produced in the EU and imported goods from third countries with relaxed climate policies.

The EU CBAM scheme proposal itself is contentious. The EU has argued that it is compatible with World Trade Organization law due to its nondiscriminatory implementation. However, there have been concerns this will create more trade barriers that are discriminatory in nature due to the large gap of sustainable energy resources and technology between advanced economies and developing countries and least developed countries (LDCs).

In July 2021, the UN Conference on Trade and Development (UNCTAD) released a report assessing how the EU CBAM may affect developing countries and LDCs. The report predicted that the EU CBAM would limit market access to imported goods of LDCs since these goods were produced with high carbon emission processes and must endure higher added tariffs than competitors with more eco-friendly technologically advanced production processes. In this report, UNCTAD also predicted that the EU CBAM would potentially increase poverty rates in LDCs.

Indonesia needs to be alert to the possibility that its major exports could also be subject to the EU CBAM and similar regulations in place in other countries. Indeed, Canada has emulated the EU’s approach and launched consultations on border carbon adjustments on Aug. 5. This action could trigger other advanced economic countries to follow suit.

As a party to the Paris Agreement, Indonesia also has implemented various policies to support its climate change agenda. Further, the government is currently finalizing regulations on carbon pricing to reduce national emissions, to be implemented next year.

Consequently, Indonesian industry needs to transform its production processes to become more sustainable, eco-friendly and socially responsible. A balance between three aspects of sustainability, i.e. profits, people and planet is required. This new paradigm should be introduced and familiarized as our new way of life.

In sum, Indonesia should take a number of strategic actions in response to its trading partners’ intensified moves to address climate change.

First, all stakeholders in Indonesia should be actively engaged in the development of other countries’ new measures. They have to utilize any opportunity and channel to provide feedback on the proposed regulations to mitigate unnecessary obstacles to Indonesia’s exports.

Further, divergent climate change policies among countries may create trade friction. There is a growing fear of a rise in disguised protectionist measures in the name of climate change. To lessen such negative impacts, Indonesia and other WTO members need to reconcile and develop solutions to address such issues. Among these is mutual recognition of the rough equivalency of domestic carbon restrictions, in the form of tax or other types of measures, for border tax adjustment. It needs to be negotiated through bilateral, regional and multilateral frameworks.

Lastly, Indonesia as a big country should be more robust in the fight against climate change. Indeed, last July, Indonesia submitted to the United Nations Framework Convention on Climate Change (UNFCCC) an updated nationally determined contribution (NDC) and a long-term strategy on low carbon and climate resilience by 2050 prior to the climate conference (COP26) in Glasgow, which will take place in the next few weeks.

Several improvements to the existing NDC are presented. Undoubtedly, necessary acceleration to reduce emissions is crucial, and this can be done by including the process of implementing the proposed carbon-pricing policy in the country.

It will contribute to a smooth flow of trade between Indonesia and its trading partners. Above all, it will help to save our earth.

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Both writers work as investigation and trade defense analysts at the Trade Ministry. The views expressed are personal.

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