What is CBAM?
- The Carbon Border Adjustment Mechanism (CBAM) is used by the European Union to equalize carbon prices between domestic and imported products. This prevents the risk that EU businesses can move carbon-intensive production activities abroad to take advantage of lax standards or “carbon leakage” by transferring emissions outside Europe.
- CBAM is a policy that imposes a carbon tax on goods imported into the EU, based on the greenhouse gas emissions produced during production in the exporting country. Importers need to register with the regulator and purchase CBAM certificates, whose price is based on the price of emission credits from the EU Emissions Trading System (EU ETS). If importers can prove that they have paid a carbon tax in the country of origin, they can claim a corresponding emission credit.
- The EU divides goods into two categories: simple and complex, with the latter requiring emissions from raw materials to be included. This is part of the EU’s climate policy to encourage trading partners to reduce the carbon footprint of their production. Upon full implementation in 2026, importers of goods covered by CBAM in the EU will need to purchase CBAM certificates. The price of the certificates will be calculated based on the weekly average auction price of EU ETS allowances expressed in €/tCO2 emitted.
OBSTACLES OF VIETNAM’S ECONOMY
1. Restrictions on exports to the EU market
The EU CBAM is estimated to reduce Vietnam’s exports of iron, steel, cement, fertilizer, and aluminum by up to USD 100 million. Essentially, by raising prices, the EU CBAM is likely to lead to lower demand in the EU market for these goods. Iron and steel will be the most affected, followed by aluminum, based on Vietnam’s current export volumes. In the long term, the scope of the EU CBAM could be expanded to include indirect emissions and other sectors, potentially negating the benefits of the EU-Vietnam Free Trade Agreement (EVFTA) depending on the carbon price imposed.
2. Difficulties in the manufacturing industry
The implementation of EU CBAM requires Vietnamese exporters to apply solutions to reduce GHG emissions during the production process, but reducing emissions and meeting the criteria to avoid carbon tax is a challenge for businesses due to limitations in upgrading equipment, and machinery and sourcing sustainable raw materials. Furthermore, Vietnamese businesses are largely unaware of European green standards and EU CBAM, which risks putting them at a disadvantage in the European market.
PATH TO SUSTAINABILITY
EU CBAM is an opportunity to accelerate Vietnam’s net-zero commitment by 2050. EU CBAM does not apply to imports from countries with ETSs that meet EU standards. Therefore, there is an additional incentive for Vietnam to quickly establish a carbon pricing system. The application of the EU CBAM could also encourage investment in innovative low-carbon, energy-efficient and renewable technologies. In this regard, Vietnam has a huge potential for solar and wind energy development, 46 times higher than its current capacity. Grid upgrades are needed to take advantage of this energy source, including high-voltage underground cables. Reforms to the electricity market, such as allowing direct electricity trading, would promote renewable energy and reduce the burden on the government.
The implementation of CBAM underscores the urgent need for businesses to adopt sustainable practices. Our sustainability consulting services are designed to empower manufacturers to not only meet regulatory requirements but also gain a competitive edge. Through the acquisition and utilization of green certifications like IREC and Carbon Credits, we can help businesses demonstrate their commitment to environmental stewardship, attract sustainability-conscious consumers, and access new markets.
Sources:
PetroVietnam,. 2024. Tác động của EU CBAM đối với Việt Nam.
Tạp chí Công Thương,. 2024. Cơ chế CBAM của EU và khuyến nghị cho Việt Nam.
