CBAM and Indonesia: Turning Trade Pressure into an Industrial Decarbonization Opportunity
The EU Carbon Border Adjustment Mechanism (CBAM) is moving from a transitional reporting period (Oct 2023–Dec 2025) to full financial liability from 2026. That shift creates an immediate compliance and competitiveness test for exporters and an urgent prompt for Indonesia to accelerate decarbonisation in its most emissions-intensive industries.
What is CBAM?
CBAM applies a carbon price to imports equal to that on EU products, ensuring fair competition and requiring EU businesses to gather emissions data from suppliers.
This policy prevents carbon leakage by ensuring non-EU products compete on equal terms with EU products subject to carbon pricing, while also encouraging EU production to remain within the region rather than shift to countries without carbon schemes.
Until end-2025, CBAM requires emissions reporting only, with penalties for non-compliance. From 2026, exporters must either decarbonise or pay carbon costs linked to EU ETS prices. The message is clear that embodied carbon now matters to market access and competitiveness.
Why CBAM matters for Indonesia
Indonesia exports four of the six[1] CBAM-covered commodities to the EU, including sizeable iron & steel flows (USD 941.1M) and smaller amounts of aluminium (USD 70.3M), cement (USD 3.4M) and fertilisers (USD 135K) in 2024. This poses challenges as Indonesia’s production remains carbon-intensive—aluminium, fertilizer, and iron & steel have 45.5% to 89.9% higher emission intensities than EU thresholds. Full CBAM implementation could result in charges of at least USD 341 million, paid by EU importers. However, importers facing high CBAM costs may seek alternative markets which has complied with CBAM and reduce Indonesian export value. This will also reduce substantial income for domestic industries producing these commodities. Hence, decarbonization in these carbon-intensive and comply with CBAM are imperative.
Indonesia’s Decarbonization Options
Based on UNFCCC’s assessment of technology maturity assessment for iron & steel, cement, and chemicals industries, the technology readiness landscape possesses both immediate opportunities and long-term challenges.
Near-term, commercially available measures can deliver significant carbon intensity reductions, including improvements in energy efficiency, fuel switching to lower-carbon fuels, clinker substitution in cement, and increasing scrap use and EAF[2] routes where feasible for steel. These are pragmatic, cost-effective first steps that firms and policymakers can scale quickly.
Longer term options, including green hydrogen for DRI[3], large-scale CCUS[4], and fully electrolytic low-carbon routes, remain technically viable but limited at pilot state, early commercial, or capital intensive. Green hydrogen deployment and CCUS require major infrastructure development, secure CO₂ transport/storage solutions, and lower capital costs to be market competitive. Positioning Indonesian industry to adopt these technologies will require deliberate staging and public-private partnerships.
Bridging the Decarbonization gap
In response to CBAM implementation, domestic industrialization and mitigating climate crisis, Indonesia requires coordinated action across multiple fronts to bridge the gap between current emission intensity and competitive low-carbon production, such as:
- Expand and deepen carbon pricing coverage
Indonesia has piloted carbon pricing and sectoral ETS (notably in power), but coverage for industrial process emissions remains limited. Extending ETS coverage, improving MRV, and designing transitional support for exposed sectors will smooth the shift and help capture domestic value from emissions reductions. An expanded ETS can also generate new revenue—exporters that cut emissions below benchmarks could sell carbon certificates domestically or to international buyers. With Indonesia’s carbon market seeing growing transactions for low-carbon products and access to international markets, this could offset higher production costs from decarbonisation and preserve margins even for premium-priced exports.
- Leverage international partnerships and targeted technology transfer
Accelerate adoption of proven low-carbon processes and build technical skills and institutional capacity via joint ventures and bilateral demonstration projects. Indonesia offers a resource-rich production platforms and regional market access for technology providers to advance their technology.
- Deploy Blended Finance for Risk-Sharing
Structure funding that combines public funds, concessional loans, and private capital to de-risk high-CAPEX retrofits. This can be led by government through MDB[5]-backed credit lines and green bonds. In conclusion, CBAM is more than an EU trade instrument; it is a market signal that embodied climate mitigation. For Indonesia, a combination of concentrated industrial emissions and significant steel exports creates both exposures and opportunities. By bridging the decarbonisation gap, Indonesia can turn CBAM’s pressure into strategic advantages, protecting export markets’ competitiveness via producing low-carbon products and curbing climate crisis simultaneously.
