EU's Carbon Border Adjustment Mechanism and its impact on Vietnam's industry

Loc Huynh, associate (left) and Lieu Phan, senior partner

The EU has committed to reducing its net greenhouse gas emissions by at least 55 per cent (from 1990 levels) by 2030 as part of the Europe Climate Law. This commitment is a significant step towards achieving climate neutrality by 2050. As part of this effort, the EU adopted the Carbon Border Adjustment Mechanism (CBAM) in April 2023 as a key component of the European Green Deal and the "Fit for 55" package.

Specifically, the CBAM is designed to equalise the carbon price paid for foreign products with those produced within the EU. It will impose tariffs on emissions embedded in goods produced outside the EU Emission Trading System (ETS). This includes goods wholly made outside the EU and those having their last substantial production phase outside the EU.

The transitional period for CBAM began on October 1, 2023 and will continue until December 31, 2025. During this period, importers of goods must submit reports that include the carbon price due in the country of origin for the emissions. This primarily applies to goods with a high risk of carbon leakage, such as iron and steel, cement, aluminium, fertilisers, electricity, and hydrogen.

After the transitional period, importers will be required to acquire CBAM certificates corresponding to the carbon price applicable under EU rules. Non-EU producers can deduct costs if they have previously paid a carbon price on the emissions in the processing stage. The EU Commission is expected to develop secondary legislation before the end of the transitional period to design rules and processes to consider the effective carbon price paid abroad.

The CBAM will have significant implications for Vietnam's industry, particularly for exporters of goods subject to the mechanism.

Vietnamese exporters will need to comply with the reporting requirements during the transitional period and acquire CBAM certificates thereafter. This could increase costs and reduce profitability, as they may need to invest in emission reduction technologies or purchase emission certificates to comply with EU standards.

The CBAM is poised to have a significant impact on Vietnamese exporters, particularly those in the steel, cement, aluminium, and fertiliser sectors. This mechanism is designed to ensure that imported goods meet the same environmental standards as those produced within the EU, thereby creating a level playing field for domestic industries.

As a result, Vietnamese exporters will face several challenges as they navigate the CBAM.

Firstly, they will need to decide whether to invest in emission reduction technologies or purchase emission certificates to comply with the EU's environmental standards. Both options will increase costs and potentially reduce profitability. Additionally, as other countries, such as the United States, Canada, and Australia, are expected to implement similar carbon taxation mechanisms, Vietnamese exporters may face increased competition and further pressure to comply with international standards.

Furthermore, Vietnamese exporters will need to familiarise themselves with the procedures for declaring emission information to importing countries. This includes understanding the requirements of the CBAM and ensuring compliance with the EU's environmental regulations.

Moreover, the lack of a precise carbon pricing mechanism may pose challenges for Vietnamese companies in meeting international requirements. This could affect their competitiveness in the global market.

To overcome the challenges posed by the CBAM, Vietnamese companies must adopt appropriate strategies. Firstly, they should plan sustainable strategies to reduce emissions during production, given that the CBAM is under development.

However, Vietnamese companies have only three years to conduct these strategies before the EU imposes emission taxes.

Secondly, they should prepare their workforce with sufficient expertise to familiarise themselves with common standards, new procedures, and mechanisms of countries applying related policies.

Thirdly, they should actively participate in and support the Vietnam government’s policies related to building a domestic carbon trading market and a corresponding carbon pricing mechanism. If Vietnam establishes such procedures, they will become a crucial foundation for exported goods to be exempted from CBAM obligations to pay the carbon price adjustment.

Lastly, they should be highly cautious when negotiating export contracts concerning CBAM obligations to avoid misunderstandings that could lead to contract violations.

As Vietnam-based companies confront the challenges of the changing global landscape of carbon pricing, strategic planning, proactive adaptation, and active participation in policy development are inevitable. The next few years will be pivotal in determining the resilience and competitiveness of Vietnamese industries in the face of evolving environmental regulations on the international stage.

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