The carbon neutralizer for Asia
Sitting at the intersection where major shipping and aviation routes from East to West converge, Singapore has long held the position of a strategic trading hub. With an extensive network of trade agreements and the title of the world's second most globally connected economy, the city-state is a gateway to the Asian market.
For surrounding Southeast Asian markets abundant in natural resources, Singapore serves as a key logistics hub for the trade of commodities with the West. Imports of goods from the ASEAN states to those in the European Union saw a new all-time high in 2021, hitting €136 billion (US$143 billion) for the first time.
However, trade relations between ASEAN and the EU are likely to be impacted by divergent approaches to environmental, social, and corporate governance (ESG).
When it comes to sustainability, the EU is taking a leading role in enforcing standards. By 2026, a major piece of trade policy is set to shape all future imports entering the bloc: the Carbon Border Adjustment Mechanism (CBAM), which addresses the practice known as "carbon leakage" carried out by EU companies that outsource operations to non-EU countries to take advantage of lax sustainability standards.
On the face of it, the CBAM is an ambitious climate measure that has the power to raise the bar for national sustainability initiatives, but it has also faced criticism for being "protectionist and discriminatory toward emerging countries." This means that Asian exporters will need to transform their approach to carbon management to stay competitive in the future.
As Singapore continues to further its ambition to be a leader in the fields of carbon trading and green finance, how can it capitalize on its existing position as a key trading and logistics hub in the region to become the central provider for trusted, accredited, carbon-neutral trade entering the EU?
New rules of engagement Described as having been designed in compliance with World Trade Organization (WTO) rules, the CBAM stipulates that EU importers need to pay a tariff in the form of carbon certificates that correspond to the carbon price that would have been paid had these goods been produced within the EU under its carbon pricing rules.
Because of the adjustments required, the CBAM will be phased in gradually and will begin by targeting imports that have historically seen a high risk of carbon leakage, such as iron, steel, aluminum and electricity.
This naturally poses a big challenge for importers looking to engage in business with the EU, because it imposes an additional layer of complexity and cost to transactions with the bloc. For Asian producers based in home markets with less developed climate policies, there arises the additional burden to show that the firm has incurred a cost at a "comparable carbon price" for the local production of their goods.
CBAM will also result in greater reporting requirements for both importers and exporters, which will now be held accountable for documenting their carbon emissions. As it stands, the state of carbon reporting is a very manual process that relies on traditional tools such as Excel, even when reporting emissions to the United Nations.
Without uniform standards on how these data are collected and what software is used, human errors and lack of trust in reporting processes could give ground for EU trade officials to claim that carbon emissions have not been "adequately" offset in the market(s) where a particular good was produced.
Singapore is already home to more than 70 organizations that provide carbon services - the highest concentration of service providers in Southeast Asia. As an early mover in the sustainability arena, Singapore was also the first country in the region to introduce a carbon tax, which accounts for about 80% of its total emissions.
The current tax of S$5 (US$3.60) per metric ton of emissions is set to increase to between S$50 and S$80 per ton according to Singapore's 2030 Green Plan.