Vietnam Faces Major Challenges from the EU’s CBAM

The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), a groundbreaking environmental policy tool, is creating a new “playing field” for exporting countries, including Vietnam. With a transitional period that began on October 1, 2023, and full implementation scheduled for 2026, CBAM presents significant challenges but also opens up opportunities for Vietnam’s economy as it strives toward sustainable development.

What is the Carbon Border Adjustment Mechanism (CBAM)?

The EU is working to achieve its ambitious goal of becoming a carbon-neutral continent by 2050. However, the EU is concerned that its companies might move high-carbon production activities abroad to take advantage of laxer standards. This is known as “carbon leakage,” where emissions are transferred outside of Europe, seriously undermining the EU’s and the world’s climate neutrality ambitions.

To prevent this risk, the EU has decided to equalize carbon prices between domestic and imported products through the CBAM. The EU also believes that a green mechanism for imported goods from outside the bloc, through a system that fairly prices the carbon emitted during production, will encourage cleaner industry in non-EU countries.

In essence, the EU’s Carbon Border Adjustment Mechanism (CBAM) will impose a carbon tax on all goods imported into the EU market based on the intensity of greenhouse gas emissions during the production process in the country of origin.

Specifically, under the CBAM, importers of goods into the EU must register with a national authority and purchase CBAM certificates. The price of these certificates is based on the weekly carbon allowance price of the EU Emissions Trading System (EU ETS). EU importers must declare the emissions embedded in their imported goods and surrender the corresponding number of certificates each year. If an importer can prove that a carbon price has already been paid during the production of the imported goods, the corresponding emissions can be deducted.

The EU classifies goods into two categories for calculating actual emissions: simple goods and complex goods. Complex goods will also account for the emissions from their raw materials. Therefore, businesses must be aware that emissions are not calculated simply based on the production process, but also from the raw materials, meaning businesses must report detailed information about their input goods.

This tax is a crucial pillar of Europe’s climate policies and is one of the mechanisms the EU uses to encourage its trading partners to decarbonize their manufacturing sectors.

“The EU is the first trading bloc in the world to tax imported goods based on their carbon emissions. We have been discussing this for more than 20 years. This is a historic climate agreement,” said Pascal Canfin, Chair of the European Parliament’s Environment Committee.

Previously, in 2005, the EU began taxing carbon emissions. Since then, companies in industrial sectors within the EU have been required to pay for every ton of carbon they emit into the environment. The carbon tax is considered one of the most effective solutions to regulate annual carbon emissions in line with the 2015 Paris Agreement on climate change, which many nations have signed.

According to the EU, the purpose of CBAM is to prevent “carbon leakage”—a situation where companies move high-carbon production activities abroad to take advantage of more relaxed environmental policies. This mechanism will tax imported goods into the EU based on the greenhouse gas emissions intensity during their production process.

Pascal Canfin, Chair of the European Parliament’s Environment Committee, stated: “The EU is the first trading bloc in the world to tax imported goods based on their carbon emissions. We have been discussing this for more than 20 years. This is a historic climate agreement.”

The Most Affected Countries According to experts

The first countries to be affected by the CBAM are the EU’s top five trading partners in Asia: China, Russia, Japan, South Korea, and India.

Vietnam is the 11th-largest partner for goods imported into the EU. While most of Vietnam’s current exports are not in the initial scope, the range of products could be expanded to include many more in the future.

Despite aiming to combat climate change, the CBAM will add significant costs to Vietnam’s export goods, especially if the mechanism is expanded to other sectors in the future.

Impact on Vietnam’s Industries

CBAM will apply to product groups at the highest risk of carbon leakage, including cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. Although Vietnam is the EU’s 11th largest trading partner, most of its current exports are not on this list. However, the scope of CBAM could be expanded to many other products and services in the future.

According to research by experts, Vietnam’s steel and aluminum sectors are at the highest risk of being affected. Specifically, steel exports could see a value decrease of about 4%, leading to a production decline of 0.8%. The aluminum sector also faces a risk of a more than 4% drop in export value and a 0.4% decrease in production.

Ms. Sirpa Helena Jarvenpaa, Director of the Southeast Asia Energy Transition Partnership Fund, commented: “CBAM could create many difficulties for countries that export goods to the EU market, including Vietnam.”

Challenges and Solutions for Vietnam

The biggest challenge for Vietnamese businesses is the need to be transparent and accurately report carbon emissions, not only from their production processes but also from their raw materials. This requires a robust and costly data management system. Ms. Nguyen Thi Hong Loan, an expert on the impact of CBAM, stated: “Currently, Vietnamese businesses can only provide emissions information from their production and processing stages, while CBAM requires emissions data for the entire supply chain, including raw materials.”

However, CBAM also provides a strong incentive for Vietnamese businesses to transition to green production. To cope, experts recommend that Vietnam accept this mechanism and find ways to minimize its negative impact.

At the Government level, experts suggest the need to:

• Promptly issue specific guidelines for businesses to prepare for and adapt to CBAM.
• Improve the policy framework for decarbonization, such as phasing out coal power and promoting renewable energy and energy efficiency.
• Most importantly, consider implementing a domestic carbon pricing mechanism (such as a carbon tax or carbon market) to retain a portion of the tax that businesses would otherwise have to pay to the EU, instead of letting this money flow out of the country.
• Engage in constructive dialogue with the EU and negotiate favorable terms for Vietnam.

At the business level, experts advise manufacturers in high-risk sectors to:

• Invest in cleaner production technologies to reduce carbon emissions.
• Establish a system for reporting and controlling emissions throughout the entire production chain.
• Cooperate closely with EU import partners to provide full emissions data.

CBAM is not just a trade barrier but also a “test” of Vietnam’s commitment to sustainable development goals. Proactively adapting to this mechanism will help Vietnam enhance its position in the international market while realizing its stated climate objectives.

Source: trungtamwto.vn and compiled from the internet.