The potential effects of the implementation of the carbon border adjustment mechanism - the case of Indonesia

Abstract

The Carbon Border Adjustment Mechanism (CBAM) is one of the European Union's most ambitious climate-related trade initiatives, designed to reshape global industrial competitiveness well beyond Europe's borders. Despite its significance, empirical evidence on its economic impacts, particularly on partner countries such as Indonesia, remains limited. This study aims to address two objectives: first, to examine the potential effects of CBAM tariffs on the Gross Domestic Product (GDP) of EU trading partners; and second, to assess their implications for trade flows, sectoral adjustment, investment, and employment in Indonesia. Employing a Computable General Equilibrium (CGE) framework with the Global Trade Analysis Project Recursive Dynamic (GTAP-RD) model, the analysis provides evidence-based insights into how CBAM may reverberate through the Indonesian economy. The results show that while aggregate effects on partner countries' GDP are negligible, sectoral and distributional consequences are much more pronounced. In Indonesia, carbon-intensive industries, particularly iron and steel, face considerable adjustment pressures through declining labor demand and structural reallocation, whereas other sectors remain relatively resilient. This suggests that CBAM functions less as a macroeconomic shock than as a catalyst, exposing the vulnerability of specific industries to low-carbon trade regimes. These findings enrich ongoing policy debates by demonstrating that modest aggregate outcomes can mask substantial sectoral disruptions. For the EU, the study clarifies CBAM's external ramifications, while for Indonesia, it underscores the urgency of adaptive strategies, from technological upgrading to labor market policies, to transform potential risks into opportunities for sustainable industrial development.