By: Eugenia Bonifazi – Ricardo (Member of WSP), Nicolò Farnè – Ricardo (Member of WSP)
As the global economy moves towards a low-carbon future, trade policy is becoming an important tool of climate action. Measures such as the European Union’s Carbon Border Adjustment Mechanism (CBAM) shows that climate ambition is now extending beyond domestic targets and into international markets. For countries such as Indonesia, this creates both challenges and opportunities.
The Leveraging Industrial Decarbonisation Options in Indonesia by Anticipating International Carbon Tariffs, a project of theSoutheast Asia Energy Transition Partnership (ETP), examined how international carbon tariffs could affect Indonesia’s economy and industry. The findings are encouraging. Although EU CBAM and similar measures can create pressure for some sectors, their overall impact is likely to be marginal. More importantly, with the right response, they can become a driver for innovation, competitiveness, and long-term resilience.
A global shift, modest impacts
The modelling results suggest that even if CBAM-like policies are adopted more broadly by major economies such as the US, China and the EU, the impact on Indonesia’s overall economic trajectory would remain limited. Projected reductions in GDP are small, between 0.003% and 0.04% by 2050 and employment impacts are similarly modest, with losses offset by gains in emerging low-carbon sectors.
However, the regional level analysis shows unbalances between regions and sectors. Coal-dependent provinces face the strongest headwinds, with potential declines in both output and employment. Metal-producing regions also see moderate pressures, while provinces specialising in consumer goods, electronics, agriculture and transport equipment could benefit from shifting global demand.
Early and coordinated action can help Indonesia navigate the transition while positioning itself for new sectors.
Decarbonisation as a competitive strategy, not a burden
For Indonesian exporters of CBAM goods, i.e. iron and steel, aluminium, cement and fertilisers, the introduction of EU CBAM is a wake-up call. Many domestic producers operate at higher emissions intensities than EU benchmarks, meaning carbon-cost penalties may make the product less competitive and therefore erode market share. Thus, this challenge provides a clear incentive to adopt cleaner technologies, improve efficiency, and differentiate through low-carbon production.
Our assessment shows that energy efficiency is the most cost-effective abatement option across the four sectors, often generating savings rather than costs. Fuel switching and certain process changes, such as shifting to electric arc furnaces, offer additional medium-term opportunities. Instead, deeper decarbonisation through green hydrogen and carbon capture will become increasingly relevant as global markets evolve.
The investment required is substantial but achievable. To reach net-zero emissions by 2050, Indonesia will need approximately USD 46 billion in the iron and steel sector, USD 13 billion in aluminium, USD 6 billion in ammonia and fertilisers, and USD 11 billion in cement.
A smart enabling environment will determine success
Indonesia’s policymakers have a strategic window to shape a coherent response that protects domestic industry while accelerating the energy transition. There are multiple areas of interventions.
First, targeted support for energy and resource efficiency, along with fuel switching, can deliver fast, cost-effective emissions reductions. Second, a well-designed carbon pricing instrument, such as an Emission Trading System, can guide long-term investment while lowering CBAM liabilities for Indonesian exporters. Revenues from such a system could be recycled to finance the decarbonisation projects industry will need.
Strengthening monitoring, reporting and verification (MRV) systems is equally essential. As more global markets demand robust emissions data, Indonesian companies must be prepared to meet international standards.
Finally, demand-side measures such as green public procurement, carbon labelling, and incentives for low-carbon products, can help build domestic markets that reward sustainability, reinforcing the business case for investment.
