EU takes the lead in ESG trend, poised to collect carbon border tax on imports... Thailand to feel impact over the next 2-3 years (Current Issue No.3288)

Climate change is an urgent matter that is being prioritized on a global scale, prompting businesses to embrace the environmental, social and governance (ESG) approach in their operations. This has set off a new wave of trade-related pressures that will challenge the competitiveness of Thai products in the global market. The European Union (EU) has enforced environment-related trade measures ahead of other nations, including collection of carbon tax from domestic businesses, reduction of plastic use, and the most recent measure of a carbon border tax on imports which will be effective just within a year from now (2023). Additionally, the United States is considering a similar measure. Thus, Thai operators should prepare for both direct and indirect environmental measures coming from Thailand’s trading partners. KResearch has summarized impacts of the measures on three product categories, as follows:

1.    Goods with production processes that generate high levels of carbon emissions: This product category will be the first group to come under scrutiny. Fortunately, Thailand does not produce a large amount of these products, so the potential direct impacts are minimal. This category of goods will most likely contend with the EU’s carbon border adjustment mechanism (CBAM) which will come into effect one year from now, and apply to five key products, namely cement, electricity, fertilizer, iron and steel and aluminum. CBAM has sparked interest around the world, leading many other countries to consider adopting similar measures. Therefore, Thai operators must also be ready to face such challenges in other markets and the potential that these measures may extend to other products that would further affect other domestic industries.

2.    Plastic products and raw materials thereof: As the use of these products  has started to be curtailed, with plastic containers and single-use plastics (SUPs) among the first group to be eliminated. Thai operators who use plastic as a component of their containers should seek alternative materials. Since July 3, 2021. the EU has banned the use of SUPs, which are comprised of 10 types of plastic products including the plastic rods of cotton swab, plastic spoons/forks/knives/plates/straws, balloons and their sticks, plastic containers, plastic drinking cups, plastic drink containers, cigarette butts, plastic bags, plastic packets and wrappers, and moist towelette and sanitary products. The United States is in the process of imposing the same ban, as well as introducing a tax collection scheme on manufacturers to limit plastic use and import of plastic pellets, which are inputs of SUPs.

3.    Food products: Carbon tax levied on food products remains controversial as it affects a wide range of consumers and manufacturers. Since Thailand is a major exporter of ingredients and processed foods, preparedness of the agricultural product supply chain is essential. Domestic manufacturers should take into consideration the environmental impacts through reduction of carbon emission across all channels. Even though the EU has yet to collect tax on food imports, many member states have collected value-added tax (VAT) on meat products as livestock-based farming releases a higher volume of carbon dioxide than that of fruits and vegetables, as well as health and eco-friendly foods. Hence, it is possible that a carbon border tax on food imports may be imposed in the forthcoming period.

Both the EU and the United States’ upcoming plans have prompted countries worldwide to move towards production processes and consumption patterns that would cut down on carbon emissions in the near future, making this an issue that will undoubtedly affect Thai exporters sooner or later. Though international environmental measures may not affect Thailand’s 2022 exports, indirect impacts will be gradually felt due to the strict measures to be implemented by trading partners that require Thai manufacturers to adopt environmentally-conscious production processes. KResearch is of the view that, for the next one to two years, the EU and United States’ CBAM and plastic reduction plans will have relatively little impact on Thailand, possibly shaving 0.9 percent of Thai exports to the global market. However, if other countries were to begin imposing similar measures, Thai products would encounter heightened competition. In the upcoming period, the imposition of environmental measures on other product categories including foods, agricultural goods and industrial goods will prove to be another hindrance for Thai exports. For this reason, Thai operators will need to start adjusting their production processes throughout the supply chain, taking into account the environment issues, carbon emission reduction, and traceability to ensure that Thai products meet the demands under the ESG trend.