Our approach

Climate Energy Finance (CEF) identifies a regulated, progressively rising carbon price in international trade across Asia as the critical policy instrument to unlock global green commodity opportunities. This report investigates a pathway towards the joint development of a regional carbon border adjustment mechanism (CBAM) to strengthen domestic carbon pricing in economically advanced, industry-intensive economies. CEF conducted research on the current landscape of domestic carbon pricing across East Asian and Pacific regions, examining opportunities to enhance collaboration with the European Union (EU) and the UK.

Report on a page

CEF calls for coordinated government intervention to correct the persistent market failure of unpriced emissions in fossil fuel-intensive commodity processing. To achieve net zero, the report advocates for an Asian CBAM supported by four policy pillars: a progressively rising domestic carbon price, CBAMs to level the playing field for imported goods, strategic market-based incentives to scale clean commodity production, and international collaboration to distribute costs among governments and taxpayers.

Overview for policymakers

A carbon price in international trade is the most effective measure to drive the transition to a decarbonised global economy. CEF calls for an initial focus on the joint development of a regional CBAM by Australia, China, South Korea, Singapore, and Japan. This initiative targets the steel, aluminium, and cement value chains, which account for 15% of global greenhouse gas emissions. A CBAM provides the solution to carbon leakage, where high-emitting industries move offshore to jurisdictions with less rigorous or absent carbon pricing.

Key recommendations for Australia

As Australia prepares to bid for hosting COP31 in late 2026, it is brilliantly placed to champion regional carbon pricing. Australia must leverage its transition from a petrostate to a clean energy superpower by using its abundant natural endowment of critical minerals and renewable energy resources. The Australian government has already driven momentum through the reformed Safeguard Mechanism, and CEF supports a complementary investigation into an Asian CBAM to strengthen this framework.

Executive summary

Climate change is described as the greatest market failure the world has seen, with climate-related catastrophes resulting in losses of US$320bn in 2024. Labour hours lost to heat exposure were equivalent to an estimated US$835bn in potential income losses in 2023. Global energy transition investment surged to US$2.1 trillion in 2024, yet capital flows into clean industries fell 43% to US$28bn, accounting for just 1.3% of global investment. As of 2024, only seven carbon pricing instruments covered less than 1% of global emissions at or above the inflation-adjusted minimum level of US$63/tCO2-e.

Why a price on carbon is needed

Studies show that countries with carbon prices yield a 2 percentage point reduction in emissions relative to those without. However, momentum is undermined by fossil fuel subsidies, with explicit subsidies reaching US$1,275bn in 2022. Key emission metrics for critical sectors include scope 1-2 emissions of 2.8 Bn tCO2-e for steel and 1.12 Bn tCO2-e for aluminium. Addressing the “grey discount” caused by unpriced environmental impacts requires internalising the social cost of production through a progressively rising carbon price.

Carbon pricing mechanisms

Direct carbon pricing includes carbon taxes and emissions trading schemes (ETS), which currently cover ~24% of global emissions. ETSs are typically structured as cap-and-trade or baseline-and-credit mechanisms. Governments can distribute allowances via grandparenting, benchmarking, or auctions, the latter of which generates revenues for climate mitigation policies. In 2023, carbon pricing revenues exceeded US$104bn for the first time.

EU ETS and CBAM: the benchmark

Established in 2005, the EU ETS helped reduce emissions from electricity and industry by 47% through 2023 while generating over €200bn in auction revenues. The EU is now phasing in the world’s first CBAM for cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen. From 2026, importers must purchase certificates based on weekly average EU ETS prices, with a full phase-out of free allocations for domestic industry scheduled by 2034.

Carbon pricing in Australia and economically advanced East Asia

China’s national ETS operates as a cap-and-trade mechanism covering the power sector and will expand to cement, steel, and aluminium in 2025. This expansion will cover ~8,000 Mt CO2-e, or 65% of national emissions. South Korea’s K-ETS covers ~89% of domestic emissions, while Japan’s GX-ETS is expected to transition to a compliance mechanism from 2026. Australia’s Safeguard Mechanism covers 219 facilities with a combined emissions profile of 136 Mt CO2-e, requiring baseline reductions of 4.9% per annum from 2023 to 2030.

The case for expanding the scope for CBAM to developing Asia

Compliance carbon markets are emerging in developing economies to comply with international requirements. India adopted the legal basis for a Carbon Credit Trading Scheme (CCTS) in 2022, which will initially cover nine industrial sectors. Vietnam plans to launch a pilot ETS by June 2025. Singapore raised its carbon tax to S$25/t-CO2-e in 2024, with projections to reach S$50-80 by 2030.

Building towards an Asian CBAM

An Asian CBAM would address the inadequacy of free emissions allowances and provide a pathway to manage carbon leakage. CEF advocates for a regional commitment between Australia, China, South Korea, Singapore, and Japan to develop a harmonised CBAM. Success depends on the interoperability of monitoring, reporting, and verification (MRV) systems and standardising emissions accounting across borders. This framework would accelerate the transition to deeply decarbonised industrial projects required to achieve the collective duty to reach net zero.