How the EU Carbon Border Adjustment Mechanism Impacts Vietnam

Vietnam may face export challenges due to the impact of the EU Carbon Border Adjustment Mechanism (CBAM). However, this could also motivate Vietnam to hasten the pace of change towards achieving its carbon neutrality goals by establishing uniform standards and domestic obligations for affected industries.

The EU Carbon Border Adjustment Mechanism (CBAM) was legislated by the European Parliament on April 18, 2023. The CBAM, which will be implemented during a three-year transition period, between October this year and January 2026, will essentially levy a Carbon Border Tax (CBT) on certain carbon-intensive imports into the EU.

This concerns some developing economies, as it could harm enterprise competitiveness. Vietnam, Europe’s third-largest export market, may be impacted greatly. CBAM could force Vietnamese enterprises to adjust their production processes, which may be costly, but it could also help the country reach its net-zero commitment sooner.

What is CBAM?

The EU’s Carbon Border Adjustment Mechanism or CBAM is an integral part of the EU’s larger ‘Fit for 55’ program.

This program aims to place a price on carbon released during the manufacture of carbon-intensive commodities entering the EU. It is also intended to stimulate cleaner industrial output in non-EU countries.

By placing a carbon price on specific imports into the EU from countries that do not have a carbon tax at an EU-approved level, the EU can also ensure the competitiveness of European manufacturers.

The EU hopes the CBAM will inspire other countries to implement national carbon pricing systems that link to the EU’s emissions trading scheme (ETS) in a bid to avoid CBAM payments.

When will CBAM come into force?

The CBAM transition period will begin on October 1, 2023. From this time, the CBAM will initially apply only to selected products from the most carbon-intensive heavy industries. This includes iron, steel, cement, aluminum, fertilizer, electricity, and hydrogen.

Note that the CBAM’s scope might also be expanded to include a greater range of products and services in the future.

CBAM is expected to be permanent from January 1, 2026. At this time, importers must disclose the volume of commodities included in the CBAM scheme imported into the EU in the previous year, as well as their greenhouse gas emissions (GHGs). If they do not meet the criteria for a CBAM exemption, they must then pay tax on the attached GHGs.

It is expected that, by 2034, CBAM will be fully operational. The progressive implementation of the CBAM is timed to coincide with the phase-out of free allowance allocations under the EU’s ETS to aid in the decarbonization of EU industries.

CBAM impact on Vietnam

Vietnam’s exports to the EU market

CBAM has a direct impact on the four main industries of Vietnam, namely iron and steel, cement, fertilizer, and aluminum.

It is estimated that CBAM will reduce the export turnover to the EU of these industries by up to US$100 million

The CBT would essentially increase prices, thereby reducing the competitiveness of Vietnamese exports, and subsequently demand in the EU market. Iron and steel are the most affected items, followed by aluminum based on Vietnam’s export volume to the EU market.

Between 2017 and 2021, the EU accounted for 12 percent of Vietnamese total steel exports, equivalent to US$1.1 billion per year, followed by aluminum accounting for US$48 million. In 2022, the EU’s iron and steel import turnover from Vietnam reached US$2.1 billion, while the figure for aluminum was US$65.18 million.

However, Vietnam’s overall exports to the EU will not suffer as severely in the short term as those of other developing countries such as India. This is because Vietnamese items subjected to the CBT account for only a small proportion of Vietnam’s total exports to Europe.

In the long run, however, the scope of the CBAM could be extended to cover indirect emissions and other sectors and carbon-intensive products. Depending on the price put on the carbon produced by products imported into the EU, this may negate the benefits of the European-Vietnam Free Trade Agreement.

Furthermore, after the CBAM is enacted, a chain reaction could occur as other markets, such as the United States, Japan, and Korea, introduce their own mechanisms to reduce GHGs on imports.

Vietnam’s manufacturing industry

The CBAM requires Vietnamese exporters to adopt solutions to minimize greenhouse gas emissions during manufacturing. However, businesses face challenges in reducing emissions and meeting criteria to avoid the carbon tax.

Moreover, the awareness of Vietnam’s enterprises in general regarding the European green standard and CBAM is quite limited.

According to a survey in 2022, only 11 percent of companies understood the CBAM’s content, while 53 percent were unaware of the mechanism

Vietnam’s carbon-neutral goal

The CBAM legislation is an opportunity to accelerate Vietnam’s net-zero by-2050 commitment.

The CBAM is not applicable to imports from countries with an ETS that meets EU standards. Therefore, there is an added incentive for Vietnam to quickly set up a carbon pricing system.

The adoption of the CBAM may also incentivize investment in low-carbon, energy-efficient and renewable technologies. In this respect, Vietnam can take advantage of an abundance of natural renewable energy resources to decarbonize the electricity sector, and subsequently reduce GHGs of the wider economy.

Notably, Vietnam and the International Partnership Group (IPG) signed the Just Energy Transition Partnership (JETP) agreement last year, with US$15.5 billion on the table for Vietnam’s clean energy transition.

The added motivation from the CBAM may help these initiatives to be more effective and their implementation to be smoother.

See also: Progress Report: Vietnam’s Carbon Market

Mitigating the impact of the CBAM

For legislators

• The Vietnamese government needs to have a detailed and specific roadmap and documents to guide businesses to approach CBAM proactively. Tax incentives or credit incentive packages can be effective solutions to support businesses to convert to cleaner production technology.
• A carbon pricing mechanism and Vietnam’s carbon credit market need to be established. A carbon pricing mechanism would not only reduce carbon emissions in the production process but may also serve as a foundation for trade negotiations with the EU in relation to the CBAM on imported goods. At the same time, part of the tax exporters would have paid to the EU will stay in the country and can be put toward reducing Vietnam’s carbon emissions.
• A dialogue should be opened with the EU to clarify regulations and minimize the negative impacts on Vietnamese businesses and the manufacturing industry.

For businesses

• Businesses must closely monitor the CBAM’s progress and prepare a proactive response plan that minimizes the impact on their export activities and production.
• Companies that produce items taxed by the EU should assess the carbon emissions in the production process and adjust their emissions to levels permitted by the EU.
• Businesses should work closely with the government to adopt decarbonization policies, such as pricing carbon and promoting the use of renewable energy. This will assist firms in reducing emissions throughout the manufacturing process.

Conclusion

The EU Carbon Border Adjustment Mechanism legislation in general, and the carbon border tax, in particular, will be a challenge for developing countries like Vietnam. It is clear that the CBAM will be an obstacle for Vietnamese exporters in the medium term, and that export turnover may decrease as a result.

Nonetheless, looking at the bright side, this may be a motivating factor for businesses to gradually control the amount of carbon they release and switch to using renewable energy in their production lines.

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