For decades, trade disputes between developed and developing economies were driven by tariffs, subsidies and market access. Today, climate policy is becoming the new frontier of global trade friction.

As the EU moves toward full implementation of its Carbon Border Adjustment Mechanism (CBAM) — a policy that places a carbon price on imports based on the emissions generated during their production — exporters around the world are confronting a new reality: Access to the European market will increasingly depend not only on price and quality, but also on the carbon intensity of manufacturing. CBAM was introduced by the EU to prevent “carbon leakage,” in which companies shift production to countries with weaker climate regulations to avoid stricter environmental costs in Europe.

For countries like Indonesia, the implications are especially significant. The EU remains an important export destination for Indonesian industrial goods, including steel, aluminum and other carbon-intensive manufactured products. At the same time, Indonesia’s industrial sector still relies heavily on coal-powered energy, making many of its exports vulnerable to higher carbon costs under the EU system.

For exporters in these sectors, CBAM is no longer a distant Brussels regulation; it is becoming a market access requirement. The question is not whether Indonesian industry will adapt, but whether that adaptation will be orderly and cooperative, or chaotic and punitive.

That is why Brussels and Jakarta should immediately establish an EU–Indonesia CBAM Working Group — a formal platform that brings together government agencies, industry representatives, technical experts and exporters from both sides to coordinate compliance, share standards and prepare industries for the transition to carbon-based trade rules.

Without such coordination, the risks are substantial. Indonesian exporters could face rising compliance costs, declining competitiveness and gradual exclusion from one of the world’s largest markets. Europe, meanwhile, risks turning a climate policy designed to encourage global decarbonization into a source of geopolitical resentment and trade friction with emerging economies.

The case for a working group

A working group would help turn that potential friction into structured coordination. The benefits of such a working group would extend beyond avoiding trade disputes. If designed properly, it could become a practical mechanism to help Indonesia’s industry transition to a carbon-regulated global economy while ensuring that Europe’s climate agenda does not alienate key economic partners.

Its first priority should be solving the biggest practical challenge facing Indonesian exporters: readiness. For many firms, especially outside multinational supply chains, the main barrier is not the carbon price itself, but rather the technical complexity of compliance. Companies will need to calculate and report the emissions embedded in their products, provide verified production data and meet European reporting standards in order to continue exporting smoothly to the EU market once CBAM enters full implementation in 2026.

Emissions accounting, product-level data, accredited verification, default values and the treatment of indirect emissions are not minor bureaucratic details. They will increasingly determine which companies remain globally competitive and which struggle to access foreign markets.

Second, the working group could help ensure that decarbonization efforts in countries like Indonesia are not overlooked. Indonesian industries are already investing in cleaner production, carbon market development and renewable energy integration. But without structured coordination with European regulators, many of these efforts may not translate into lower compliance burdens under CBAM. A formal bilateral platform could help develop mutual understanding on reporting standards, carbon accounting methodologies and potential recognition mechanisms before disputes emerge.

But achieving these outcomes will require the working group to be designed as more than a narrow diplomatic forum. It should be industrial, not merely governmental. That means bringing together not only officials from Brussels and Jakarta, but also manufacturers, industry associations, financiers, technical experts and exporters themselves. Too often, trade dialogues remain confined to ministries while companies are left to navigate complex regulatory transitions alone. In the case of CBAM, that approach would almost certainly fail.

The group’s mission should therefore be practical and industry-focused: developing sector-specific road maps, expanding technical training, coordinating emissions verification systems, supporting smaller exporters and creating early-warning mechanisms for future regulatory changes as the EU gradually expands CBAM’s scope.

Balancing domestic reforms and international compliance

Skeptics argue that Indonesia should focus primarily on strengthening its own domestic carbon pricing system rather than building special coordination mechanisms with Europe. But this is a false choice.

Indonesia indeed needs stronger domestic climate governance and more credible carbon market reforms. Those efforts will be essential for the country’s long-term industrial competitiveness in a decarbonizing global economy. Yet domestic reform alone will not solve the immediate compliance pressures Indonesian exporters will face when CBAM enters full implementation.

Many companies do not have the luxury of waiting for ideal policy sequencing. They will soon need to comply with complex European reporting standards, emissions verification requirements and carbon accounting rules in order to maintain access to EU markets.

Some policymakers and business groups in both Europe and Indonesia also argue that existing trade dialogues, chambers of commerce and occasional industry seminars are already sufficient to manage the transition. Their assumption is that CBAM compliance will gradually evolve through market adaptation, as companies learn to adjust over time without the need for a dedicated bilateral mechanism. But that underestimates the scale and speed of the transformation now underway.

CBAM is not simply another technical trade regulation involving product labeling or customs procedures. It directly links market access to carbon emissions, industrial energy systems and climate governance. That means the transition will affect not only exporters, but also investment decisions, manufacturing competitiveness and long-term industrial strategy.

Occasional consultations and fragmented business forums are unlikely to provide the level of coordination required for such a structural shift. Without a more institutionalized framework, misunderstandings over compliance standards and uneven readiness across industries could quickly escalate into wider trade tensions.

Coordination matters more than ever

History offers several warnings about what happens when major regulatory or environmental standards are introduced without sufficient coordination between developed and developing economies. European restrictions on palm oil linked to deforestation, for example, triggered years of political backlash in Indonesia and Malaysia, where policymakers viewed the measures as discriminatory trade barriers rather than cooperative climate policy. The lesson is clear: When global rules are imposed without meaningful adjustment mechanisms or institutional dialogue, they often harden into geopolitical grievances.

CBAM risks creating a similar dynamic if countries like Indonesia are left to navigate complex compliance requirements alone. But if Europe and Indonesia instead build structured coordination early — through technical cooperation, industrial transition planning and regular dialogue — the mechanism could evolve into something more constructive: a framework that supports decarbonization while preserving trust between advanced and emerging economies.

Europe says CBAM is designed to prevent carbon leakage, not erect green trade walls. Establishing an EU–Indonesia CBAM Working Group would be the clearest way to prove it. Because by 2026, carbon policy will no longer sit at the margins of trade. It will be trade.

[Kaitlyn Diana edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.