This article first appeared in Forum, The Edge Malaysia Weekly on February 21, 2022 - February 27, 2022

The efforts to fight climate change and its disastrous consequences are not relenting. For instance, as a result of the 2021 United Nations Climate Change Conference (COP26), 46 countries signed the Global Coal to Clean Energy Transition Statement, committing to transition away from unabated coal power generation by 2030 for “major economies” and a global transition by 2040. 

The European Union is actively implementing the Climate Law it adopted back in 2021, which sets a binding objective for the EU to reach climate neutrality by 2050 and an ambitious 2030 climate target of at least 55% reduction of net emissions of greenhouse gases as compared to 1990. Malaysia is doing its part as well and has, of late, stepped up its efforts. 

Last year, the government pledged to become carbon neutral by 2050 and updated its Nationally Determined Contribution (NDC), stating its intention to unconditionally reduce economy-wide carbon intensity of 45% by 2030 compared with 2005 levels. It is now mulling a Climate Change Act and is well on the way to creating a domestic emission trading scheme. 

Malaysia also endorsed the Glasgow Leaders’ Declaration on Forests and Land Use, which champions halting and reversing deforestation, as well as the Global Methane Pledge, which sets a collective goal to reduce global methane emissions by 30% before 2030.

The bad news, however, is that these efforts are falling short of our goals. 

One reason is that national policies are too many, too diverse and lack overall coordination. As a result, with the current NDCs, the average scenarios after modelling put us on track for an increase of 2.5°C of global temperatures by the end of the century compared with pre-industrial levels, an extremely dangerous trajectory well above the Paris Agreement’s target of limiting it to 1.5°C. 

According to the Intergovernmental Panel on Climate Change, on our current trajectory, the planet could be looking at a sea level rise of about 0.7m by 2100, endangering millions living in the coastal areas. In Malaysia, 70% of the total population live in coastal zones.

The EU is looking at ways to remedy this lack of coordination by preventing the unintended consequences of its own policies. This is why it is pushing for the adoption by 2023 of a new instrument, the Carbon Border Adjustment Mechanism (CBAM). First, the basic rationale is to ensure that the EU’s ambitious climate policies, including the implementation since 2005 of a EU Emissions Trading Scheme, do not encourage “carbon leakage”. If nothing is done, there is risk of “direct carbon leakage”: carbon-intensive industries may be tempted to shift their production to countries that have not yet adopted the same level of commitment as the EU.

“Carbon leakage” may also happen indirectly as the diminishing consumption of fossil fuels in climatically ambitious countries might be overcompensated by a growing consumption in countries with less rigorous standards. Either way, “carbon leakage” would undermine the efficiency of climate policies at a global level, because some countries will pollute more in order to produce the goods needed and consumed in countries with rigorous standards such as the EU member states. 

Second, if it is true that, to quote the French president, Emmanuel Macron, “climate change adds further injustice to an already unfair world”, then we should be wary of adding further injustice while fighting climate change. This is the basis for the recognition of the principle of differentiated responsibility in the Paris Agreement. By the same token, carbon leakage would create unfairness and should therefore be stemmed. We should deny any competitive advantage for industries to pollute elsewhere and not let populations in other parts of the world be exposed to more risk. Those spill-overs are not acceptable. 

The CBAM is not a trade measure, but a climate change-related measure. It was designed to be compliant with World Trade Organization (WTO) rules. It will be non-discriminatory and will ensure the same level of carbon pricing is applied to European and non-European firms, irrespective of the country of origin of their production.

The CBAM system will work as follows: EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, EU importers will deduct the price already paid by a non-EU producer for the carbon used in the production of the imported goods.

To provide businesses and other countries with legal certainty and stability, the Carbon Border Adjustment Mechanism will be phased in gradually and will initially apply only to a selected number of goods at high risk of carbon leakage: iron and steel, cement, fertiliser, aluminium and electricity generation. 

A simplified CBAM system, where importers will have to report emissions embedded in their goods without paying a financial adjustment, will apply as from 2023 for selected products with the objective of facilitating a smooth rollout and to ease dialogue with third countries. Once the definitive system becomes fully operational in 2026, EU importers will have to declare annually the quantity of goods and the amount of embedded emissions in the total goods they imported into the EU in the preceding year, and surrender the corresponding amount of CBAM certificates.

During the drafting of this proposal, the EU decided to engage in extensive bilateral consultations with public authorities in EU and non-EU countries, business associations, individual companies and non-governmental organisations. Targeted consultations were also undertaken with senior managers and associations from the basic materials sectors, manufacturers, NGOs and policymakers. Dialogue with third countries will continue to take place in multilateral fora and bilateral relations. 

For that reason, the EU is eager to engage with the Malaysian authorities and stakeholders. As CBAM aims to encourage cleaner production processes, the EU also stands ready to work with low- and middle-­income countries towards the decarbonisation of their manufacturing industries. The Union will also support less developed countries with the necessary technical assistance.

How will Malaysia benefit from this mechanism? The CBAM will make sure that European companies will not dump their “dirty” products in Malaysia. It will help to decrease the national carbon intensity in Malaysia by reducing the number of domestic and foreign companies that would consider polluting locally before exporting to the EU. Since the EU is the fourth largest trading partner of Malaysia, this mechanism will serve as a powerful incentive for the private sector in Malaysia to accelerate its green transition. The CBAM will also serve to reinforce the environmental policies of the Malaysian authorities such as the implementation by the end of the year of a Voluntary Carbon Market.

France is pushing for the adoption of the CBAM during its presidency of the EU. We are keen for the Malaysian public and private stakeholders to join forces with us.

H E Roland Galharague is the Ambassador of France to Malaysia. This column is part of a series coordinated by Climate Governance Malaysia, the national chapter of the World Economic Forum’s Climate Governance Initiative (CGI). The CGI is an effort to support boards of directors in discharging their duty of care as long-term stewards of the companies they oversee, specifically to ensure that climate risks and opportunities are adequately addressed.

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