The Impact of EU’s Carbon Border Adjustment Mechanism (CBAM) on Indonesian Exporters: Legal and Compliance Challenges

The author: Dedi Supriadi, S.H.,M.M. (International Trade lawyer)

The global trade architecture is currently undergoing its most significant reconfiguration since the establishment of the World Trade Organization (WTO). This shift is defined by the convergence of climate policy and commercial regulation, specifically through the implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM). As of January 1, 2026, the mechanism has entered its definitive phase, fundamentally altering the legal and operational landscape for Indonesian exporters of carbon-intensive commodities. This report analyzes the multifaceted impacts of CBAM on the Indonesian industrial sector, evaluating the legal friction within the multilateral trading system, the technical hurdles of compliance, and the strategic regulatory response formulated by the Indonesian government.

The Geopolitical and Regulatory Genesis of CBAM

The Carbon Border Adjustment Mechanism was established under Regulation (EU) 2023/956, serving as a cornerstone of the European Green Deal. The regulation’s primary objective is to mitigate the risk of carbon leakage, which occurs when EU-based industries relocate production to jurisdictions with less stringent environmental regulations to evade the costs associated with the EU Emissions Trading System (ETS). By imposing a carbon fee on imported goods that mirrors the carbon price paid by domestic EU producers, CBAM aims to equalize the competitive landscape and incentivize global decarbonization.

The mechanism focuses on six high-emission sectors: iron and steel, aluminium, cement, fertilisers, electricity, and hydrogen. These sectors are characterized by significant greenhouse gas (GHG) intensity and high trade exposure, making them most susceptible to carbon leakage. For Indonesia, a nation whose industrial strategy relies heavily on the export of primary and semi-processed mineral products, the implementation of CBAM represents a transformative challenge to its traditional comparative advantages.

The Evolution of the EU Emissions Trading System

To understand CBAM, one must understand the EU ETS, which has functioned as the EU’s primary tool for reducing industrial emissions since 2005. Historically, the EU provided free emission allowances to sectors at risk of carbon leakage to maintain their global competitiveness. However, the EU’s increased climate ambition, articulated in the “Fit for 55” package, necessitates the gradual phase-out of these free allowances between 2026 and 2034. CBAM is designed to replace these free subsidies, ensuring that importers face the same carbon costs as EU producers who must now purchase an increasing share of their allowances at auction.

Phase-Out Schedule of Free ETS Allowances and CBAM Phase-In	Year	Percentage of Embedded Emissions Covered by CBAM
Transitional Phase	2023–2025	0% (Reporting only)
Definitive Phase Commencement	2026	2.5% – 10% (Initial ramp-up)
Progressive Increase	2027–2033	Incremental annual increases
Full Implementation	2034	100%

The financial impact of this transition is significant. As free allowances diminish, the effective carbon price at the border rises. The price of CBAM certificates is directly linked to the weekly or quarterly average of EU ETS allowance prices. In early 2026, these prices have fluctuated between €80 and €100 per tonne of CO2e, with market analysts projecting levels exceeding €120 by the end of the decade.

The Definitive Phase: A Paradigm Shift in 2026

The transition from the transitional phase (October 2023 – December 2025) to the definitive phase on January 1, 2026, marks the move from passive reporting to active financial liability. During the transitional period, Indonesian exporters and their EU-based importers were only required to submit quarterly reports detailing the quantity of goods and their embedded emissions. As of 2026, several new legal and operational requirements have come into force that fundamentally change the nature of Indonesia-EU trade.

The Authorized CBAM Declarant Status

The most immediate legal requirement in the definitive phase is the mandate for importers to obtain the status of an “Authorized CBAM Declarant”. Only these authorized entities are permitted to import CBAM-covered goods into the EU. Indonesian exporters must ensure their EU partners have secured this status to avoid shipments being blocked at the border.

In October 2025, the EU introduced an “Omnibus” simplification package aimed at reducing the administrative burden on small and medium enterprises (SMEs). This package introduced a de minimis threshold of 50 tonnes of net mass per importer per calendar year. Importers whose total annual volume of CBAM goods (excluding electricity and hydrogen) remains below this threshold are exempt from most CBAM obligations. While this provides relief for small-scale Indonesian exporters, the high-volume trade in steel and aluminium ensures that most major Indonesian industrial players remain fully within the regulation’s scope.

CBAM Operational Deadlines (2026–2027)	Event
January 1, 2026	Entry into force of the definitive regime
March 31, 2026	Deadline for filing authorization requests for existing importers
September 30, 2026	Deadline for the first simplified annual CBAM declaration
February 1, 2027	Central platform launch for CBAM certificate sales
May 31, 2027	Deadline for the full annual CBAM declaration and certificate surrender

Financial Settlement and Certificate Surrender

Unlike the transitional phase, the definitive regime requires the purchase and surrender of CBAM certificates to cover the total embedded emissions of imported goods. Each certificate corresponds to one tonne of CO2e. While the first certificate purchases for the 2026 compliance year will not take place until February 1, 2027, companies must maintain adequate liquidity and track their emissions in real-time throughout 2026.

The pricing of these certificates is determined by the formula:

Pcert=n1i=1∑nPETS,i

where PETS,i represents the auction price of EU ETS allowances. In 2026, this price is calculated as a quarterly average, but it will transition to a weekly average from 2027 onwards to ensure closer alignment with market volatility.

Indonesian Sectoral Vulnerabilities and Economic Impacts

Indonesia’s exposure to CBAM is concentrated in its primary metals and fertiliser industries. In 2023, Indonesia exported steel valued at USD 726.84 million, aluminium at USD 29.17 million, and fertilisers at USD 0.29 million to the EU. While these volumes represent a relatively small share of Indonesia’s total global exports, the EU market is strategically vital for high-value-added products and long-term trade partnerships.

The Iron and Steel Sector

The Indonesian iron and steel industry is the most affected sector, accounting for 98% of the total volume of CBAM-covered goods entering the EU in the first week of 2026. The sector’s vulnerability is multifaceted, stemming from its carbon-intensive production processes and its precarious position in global supply chains.

Using the Revealed Symmetric Comparative Advantage (RSCA) index, research indicates that the Indonesian iron and steel sector has fluctuated between periods of comparative advantage and disadvantage. While it achieved a positive RSCA of 0.2001 in 2021, its average performance over the 2017–2021 period was negative (-0.1644). The Export Product Dynamic (EPD) method further classifies the sector in a “lost opportunity” position, indicating that Indonesia is failing to fully capitalize on growing global demand in the face of rising regulatory barriers in the EU.

RSCA Performance for Indonesian CBAM Sectors (2017–2021)	2017	2018	2019	2020	2021	Average
Iron and Steel	-0.5993	-0.3117	0.0245	-0.1356	0.2001	-0.1644
Fertilizers	-0.9850	-0.9894	-0.9801	-0.9646	-0.9917	-0.9822

The primary challenge for Indonesian steel is its reliance on coal-fired power and blast furnace-basic oxygen furnace (BF-BOF) processes. In contrast, producers using scrap-based electric arc furnace (EAF) routes or hydrogen-ready direct reduced iron (DRI) technologies will face significantly lower CBAM charges.

The Prohibitive Cost of Default Values

A critical risk for Indonesian exporters is the application of “default values”. If an exporter cannot provide verified data on the actual embedded emissions of their goods, the EU applies default values set at extremely high levels—often the 10% worst-performing installations in the exporting country or globally.

For Indonesian hot-rolled coil (HRC), these default values can result in carbon charges of €200 to €600 per tonne of steel. Given that the base price of Indonesian steel is often competitive, such a surcharge effectively erases its market viability. Furthermore, the EU has introduced annual mark-ups for these default values—10% in 2026, 20% in 2027, and 30% from 2028—to further penalize non-compliance with reporting actual emissions.

Technical Compliance and the MRV Challenge

The transition to the definitive phase requires a sophisticated Monitoring, Reporting, and Verification (MRV) framework that operates at the production installation level. Indonesian firms must move beyond corporate-level sustainability reporting to granular, technical data collection that meets EU standards.

Installation-Level Calculation Methodologies

CBAM requires emissions to be calculated using EU-prescribed methodologies that define system boundaries, emission sources, and calculation formulas. This includes:

Direct Emissions: GHG emitted during the production process (e.g., from the combustion of fuels or chemical reactions).
Indirect Emissions: Emissions from the production of electricity consumed during the manufacturing process.

For electricity emissions, the EU updated its methodology in late 2025 to be more sensitive to a country’s energy mix. Initially, the rules only considered fossil-fuel-generated electricity. The 2026 approach now accounts for the average grid intensity, including renewable sources, and recognizes specific Power Purchase Agreements (PPAs) for low-carbon electricity. This change encourages Indonesian producers to invest in captive renewable energy or advocate for a cleaner national grid.

Verification and Accreditation Rules

All actual emissions data submitted in an annual CBAM declaration must be verified by an accredited third-party verifier. On November 20, 2025, the European Commission published a delegated regulation detailing the requirements for the accreditation and mutual recognition of these verifiers. The regulation mandates that verifiers be legal entities with specialized technical competence in the covered sectors.

For Indonesian exporters, the lack of locally accredited verifiers with EU recognition presents a significant bottleneck. Companies may be forced to hire international firms at a higher cost, or risk having their data rejected by National Competent Authorities (NCAs) in the EU.

Legal Conflict and the WTO Labyrinth

The implementation of CBAM is a subject of intense legal debate at the World Trade Organization (WTO), where Indonesia has been a proactive challenger of EU trade-related climate policies. The mechanism tests the boundaries of the General Agreement on Tariffs and Trade (GATT) 1994, particularly regarding non-discrimination and environmental exceptions.

Potential GATT Violations

Legal scholars and trade analysts have identified several areas where CBAM may conflict with WTO rules:

Article I: Most-Favored-Nation (MFN) Treatment: MFN requires that any advantage granted to one member must be granted to all. CBAM’s individual assessment of countries based on their climate standards—and the potential for different “equivalency” treatments for carbon prices paid abroad—could be construed as discriminatory.
Article III: National Treatment: This rule prohibits treating imported products less favorably than “like” domestic products. If EU producers continue to benefit from free allowances while importers are charged the full CBAM fee, it could violate the national treatment principle.
Article II: Tariff Bindings: CBAM could be seen as an “other duty or charge” on imports in excess of the ceiling rates agreed upon by the EU.

The Article XX Defense

The EU justifies CBAM under the environmental exceptions of GATT Article XX. Specifically, the EU argues that the measure is “necessary to protect human, animal or plant life or health” (Article XX(b)) and relates to the “conservation of exhaustible natural resources” (Article XX(g)). To prevail, the EU must demonstrate that CBAM is the least trade-restrictive measure available to prevent carbon leakage and that it is not a “disguised restriction on international trade”.

Indonesia has already secured significant legal victories against the EU, such as the DS616 ruling in October 2025, where a WTO panel found the EU’s anti-subsidy duties on Indonesian cold-rolled stainless steel to be in violation of the SCM Agreement. While the EU may appeal these decisions into the “appellate black hole” caused by the paralysis of the WTO Appellate Body, these rulings provide Indonesia with strategic leverage in ongoing negotiations.

Indonesia’s Regulatory Counter-Strategy: PR 110/2025

Faced with the reality of CBAM, the Indonesian government has moved to internalize carbon pricing to ensure that carbon revenue remains within the domestic economy rather than being captured by the EU treasury. This strategy is formalized in Presidential Regulation No. 110 of 2025 (PR 110/2025) concerning the Implementation of Carbon Economic Value (CEV).

The Dual-Registry System: SRN-PPI and SRUK

PR 110/2025 replaces the previous PR 98/2021 and introduces a more robust governance framework for carbon units. A key innovation is the dual-registry system:

SRN-PPI (National Climate Change Control Registry System): Serves as the master registry for all climate mitigation and adaptation actions related to Indonesia’s Nationally Determined Contribution (NDC).
SRUK (Carbon Unit Registry System): Focuses specifically on the registration and administration of carbon units traded under the CEV framework.

This system is designed to provide the transparency and accountability required to prevent double-counting of emission reductions, a major concern for international buyers and regulators.

Carbon Tax and Emissions Trading (ETS)

PR 110/2025 mandates an Emission Trading System for “Regulated Installations” (initially focused on the power and high-emission industrial sectors). Entities that exceed their assigned emission quotas are subject to a carbon tax. This creates a domestic “carbon price paid” that can be deducted from the CBAM certificates an importer must surrender in the EU.

However, the effectiveness of this deduction depends on the “equivalency” of the carbon prices. As of 2026, the price of carbon in Indonesia’s domestic market remains significantly lower than the EU ETS price. The Indonesian government is targeting mid-2026 for the launch of a full-scale carbon market to harmonize these values and attract international investment.

Features of Indonesian PR 110/2025	Regulatory Provision
Registries	SRN-PPI (NDC level) and SRUK (CEV level)
Trading Type	Mandatory ETS (Regulated Installations) and Voluntary Offsets
International Trade	Allowed with Ministerial Authorization and Corresponding Adjustments
Transitional Window	One year from Oct 2025 to conform untransacted units to new regime
Carbon Units	Recognized SPE-GRK (national) and international standards (Verra, Gold Standard)

The IEU-CEPA and the Future of Standards-Based Trade

The implementation of CBAM has fundamentally changed the tone of the Indonesia–European Union Comprehensive Economic Partnership Agreement (IEU-CEPA) negotiations. With the agreement signed in September 2025 and set for entry into force in 2027, the focus has shifted from simple tariff elimination to industrial capability and regulatory alignment.

Standards as the New Competitiveness

The Indonesian Ministry of Trade (Kemendag) has shifted its strategy to prioritize sustainability and traceability. The IEU-CEPA provides a platform for Indonesia to seek a “low risk” classification under EU sustainability regulations, which would simplify compliance for Indonesian exporters. Indonesia is also seeking mutual recognition of its certification bodies to reduce the administrative friction of CBAM.

Indonesia is looking to the precedent set by Vietnam’s EVFTA, which catalyzed domestic policy reforms to meet EU standards and resulted in a 47% trade increase over five years. By aligning its domestic carbon pricing and MRV systems with international standards, Indonesia hopes to not only satisfy CBAM but to position itself as a “green bridge” for international trade.

Strategic Recommendations for the Indonesian Private Sector

For Indonesian industrial players, the definitive phase of CBAM requires a proactive, multi-departmental response. The mechanism is no longer a future threat but a present operational reality.

Operational and Data Governance

Exporters must immediately implement robust data systems to track emissions at the installation level. This involves:

Supply Chain Mapping: Identifying the carbon footprint of all precursor materials (e.g., coke, iron ore, and scrap metal).
External Verification: Securing early engagement with accredited verifiers to ensure that 2026 data is ready for the first annual declaration in early 2027.
Authorised Declarant Coordination: Working closely with EU importers to ensure all necessary customs authorizations are in place before the March 31, 2026 derogation deadline.

Financial and Investment Strategy

Given the rising cost of carbon, Indonesian firms must integrate carbon pricing into their capital budgeting. Strategic investments in decarbonization technology—such as renewable energy generation and improved process efficiency—are essential to maintaining cost competitiveness in the EU market. Companies should also explore Internal Carbon Pricing (ICP) to model the financial impact of different carbon price scenarios on their bottom line.

Strategic Priorities for Indonesian Exporters (2026+)	Recommendation
Legal/Admin	Verify Authorized Declarant status of EU buyers by Q1 2026
Technical	Migrate from corporate to installation-level MRV
Supply Chain	Conduct supplier surveys for precursor emissions data
Financial	Hedge against ETS price volatility and forecast certificate costs
Structural	Shift energy mix toward renewables to lower indirect emission factors

Conclusion: Synthesizing the Path Forward

The entry of the EU Carbon Border Adjustment Mechanism into its definitive phase on January 1, 2026, marks the end of the voluntary era for carbon reporting in international trade. For Indonesian exporters, this transition presents a formidable array of legal and compliance challenges, from the prohibitive cost of default emission values to the complexities of EU-accredited verification.

However, CBAM also serves as a critical catalyst for the maturation of Indonesia’s industrial and regulatory systems. The government’s response through Presidential Regulation No. 110 of 2025 and the push for a national carbon market demonstrate a strategic commitment to aligning Indonesia with the new standards of global trade. The “lost opportunity” status currently facing the iron and steel sector can only be reversed through a combination of domestic policy reform, technical upgrading at the installation level, and sophisticated trade diplomacy within the IEU-CEPA framework.

Ultimately, the impact of CBAM on Indonesia will depend on the speed of adaptation. Those firms that view the regulation not merely as a tax, but as a framework for redefining industrial competitiveness in a carbon-constrained world, will be best positioned to thrive in the shifting landscape of 21st-century commerce. The future of Indonesia-EU trade will no longer be determined by who can produce the most at the lowest base cost, but by who can produce the most while emitting the least.

sources used in the report: