The European Union will start applying the Carbon Border Adjustment Mechanism as a transition from October 2023 and will be a permanent system from 2026 onward. It would initially apply to certain sectors that are particularly carbon-intensive and are at the most significant risk of carbon leakage such as cement, iron and steel, aluminium, fertilisers, electricity, and
hydrogen.
Starting October 2023, Malaysian exporters to the EU are required to report GHG emissions, and companies exporting to the EU are required to buy carbon certificates. Exports of Malaysian SMEs are mainly contributed by the manufacturing and services sectors.
According to investment house MIDF, the implementation of EU’s CBAM could impose significant compliance costs. Based on the available information, the house opines that it could impose significant compliance costs, even for large enterprises. There could certainly be an impact of the EU’s CBAM to Malaysian exporters, particularly those that are heavily reliant on exports to the EU and those that produce carbon intensive products. While there are some surveys and reports that indicate Malaysian companies’ efforts to address sustainability issues, the government is also developing carbon pricing and emission reduction frameworks to support these efforts. It seems likely that some Malaysian companies may face challenges in adapting to the CBAM, however, it is worth noting that these government efforts could mitigate these impacts and ultimately help prepare businesses for the transition to a low-carbon economy as the CBAM phase-in period approaches in 2026.
In terms of SMEs, with the manufacturing sector dominating SME exports, it is likely that the CBAM could impact these
exporters. Although there is no available data published on the amount of SME exports to the EU, the impact could be
relatively small. In the meantime, government efforts such as the i-ESG framework developed by MITI would act as a guide
for SMEs in the manufacturing sector in understanding and adapting to the CBAM progressively. MIDF believes that it may also be beneficial for SMEs to explore strategies to reduce their carbon footprint and enhance their sustainability efforts, especially if more countries follow suit in implementing a cross border carbon tax. Subsequently, if the scope of the CBAM is expanded to cover more sectors in the future, SMEs could be significantly affected and need assistance to meet these obligations.
Additionally, companies in the supply chain that support these exporters may also experience the impact of the CBAM. This includes suppliers of raw materials, components, and services to carbon-intensive industries. These companies may face increased scrutiny and requirements from their customers to reduce carbon emissions and meet sustainability standards, hence, it is crucial for them to proactively assess their carbon footprint, adopt sustainable practices, and implement measures to reduce emissions
