Specifically, European companies that import products that are highly carbon-intensive in their production will have to buy carbon credits to cover the value of the carbon dioxide emissions that they embody. These products include iron, steel, cement, fertilizers, aluminum and electricity.

The production of the industrial goods in this list currently collectively accounts for around 13 percent of global emissions, while energy, which includes electricity, accounts for around 73 percent of global emissions.

Concurrently, early December saw the European Union (EU) pass similar laws relating to commodity suppliers in palm oil, cattle, soy, coffee, cocoa, timber and rubber having to prove their products are not derived from land subject to deforestation.

There is no denying that these policies are likely to be challenging for large exporters of these products to Europe, including Indonesia, which could see demand for their exports fall.

The EU is one of Indonesia’s important trading partners. The total trade between Indonesia and the EU was recorded at US$33.2 billion in 2022. During the period, Indonesia’s exports to the EU reached $21.5 billion, while Indonesia's imports from the EU stood at $11.7 billion.

But the reality is that this is the direction of travel for policy. While this will be challenging in the short run, there are also clear long-run opportunities. This policy change helps to better align the price signals that encourage a faster energy transition, which should help to mobilize investment that is needed to make it happen.

The main objective is to limit the use of fossil fuels and impact of deforestation and thus lower carbon dioxide emissions.

The necessary reaction is to be clear-eyed about these policy changes and for countries to adapt and work out what are the opportunities. It also offers the potential to markets like Indonesia to demonstrate the strides they’re making in areas like deforestation and other sustainable practices which can be a differentiator to other countries.

A year on after the overturn of commodity markets, due to Russia’s invasion of Ukraine, food price inflation remains high around the world, despite having reduced from historic peaks in 2022. Food prices are susceptible to war as both countries are significant global commodity exporting nations. HSBC Global Research predicts that the super-squeeze in commodity markets is set to keep global commodity prices at levels that are well above their historical averages, which is a positive for large commodity exporting nations.

As a critical exporter of commodities, elevated global commodity prices have resulted in some benefits for Indonesia such as strong commodity exports which have helped bolster the economy. The condition also played a part in Indonesia outperforming its peers in terms of trade performance. According to Statistics Indonesia (BPS), in 2022, Indonesia’s exports rose by 26 percent to $292 billion with the EU being one of the major trading partners for exports, including commodities.

At the same time, commodity-driven deforestation can have a major impact on the environment, local communities, and climate change. Food and land-use systems account for around a third of all greenhouse gas emissions and it is land-use change, such as clearing forests to make way for farms, that drives these emissions. Consequently, environmental, and climate-change developments are emerging as structural factors influencing global commodity markets.

The ongoing due diligence in the EU presents Indonesia with an opportunity to formulate more deliberate and detailed definitions of criteria for sustainable development of the commodities sector. Due diligence will be critical to support the country’s net zero commitment by 2060 and, importantly, to help maintain export competitiveness while meeting the world’s stringent demands.

An EU-Indonesia Comprehensive Economic Partnership (CEPA), is currently being discussed and hopefully will be signed this year. It has the potential to transform what looks like a potential export blocker into an opportunity to strengthen trade and disclosure between the two parties.

Indonesia’s Green Taxonomy 1.0 launched by the Financial Services Authority (OJK) in 2022 is one of the first policy attempts to encourage the private sector to prioritize green investments and further incentivize businesses to comply with environment, social and governance (ESG)-related regulations that can otherwise become barriers to access sustainable finance. The taxonomy can eventually help the commodities sector to access sustainable financing to help their companies integrate ESG practices and standards into their supply chain, which allows them to access EU market.

Manufacturing, also a key driver of the Indonesian economy, comprises many sectors that depend on carbon-intensive processes and pose serious environmental risks. Some of the largest emitting sectors within Indonesia’s manufacturing industry that are impacted by the latest round of EU climate tariffs include iron and steel, among others.

Currently, complexity and cost factors prevent the industry from decarbonizing more quickly. Nevertheless, a starting point for companies is to identify and develop facility specific roadmaps for a net zero emissions future. Instead of investing in coal-based equipment, they can deploy low carbon technologies that can replace or be applied to existing assets– including energy efficiency improvements, carbon capture and storage (CCS), and biomass or green hydrogen.

A significant amount of capital is required as part of the decarbonization process, across industries, and the financial sector will be key to enabling this. The role of banks is to actively engage with borrowers within the industry and support their efforts. The part includes developing financing and investment solutions to enable even the most heavy-emitting sectors to progressively decarbonize, while maintaining a stable economy and the resilience of sectors that are fundamental to a nation’s growth.

Moreover, Islamic finance itself has its roots in not causing harm and promoting a values-based economy. As such, it can ensure that more financial resources are mobilized sustainably.

No one said the energy transition would be easy, but although there will be costs, there will also be substantial opportunities, particularly for those countries able to move fastest to embrace them. With Indonesia’s ambition to become a carbon neutral nation by 2060, rigorous global climate policies such as the ones that the EU has announced provide an opportunity for the country to adapt its sustainability framework across key industries and reinforce the progress it has made in integrating sustainable business practices.

This will be crucial to elevate Indonesia’s competitiveness in the global arena and will also fuel the country’s long-term sustainable growth.

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The writer is president director of HSBC Indonesia.