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Navigating the Carbon Border Adjustment Mechanism (CBAM) and Its Impacts on Vietnam's Exports

Introduction:

The Carbon Border Adjustment Mechanism (CBAM) is a pivotal component of the European Union's (EU) strategy to achieve carbon neutrality by 2050. As the EU endeavors to become a carbon-neutral continent, concerns about potential "carbon leakage" prompt the implementation of the CBAM. This mechanism aims to prevent EU businesses from relocating carbon-intensive production activities to regions with less stringent environmental standards.

Purpose of CBAM:

The EU's ambition to balance carbon prices between domestically produced and imported products forms the foundation of the CBAM. By doing so, the EU aims to address the risk of carbon-intensive production migrating outside Europe, thereby safeguarding its climate neutrality goals. The EU envisions a Green Mechanism that employs a fair pricing system for carbon emissions during production, fostering cleaner industry practices in non-EU countries.

Mechanism Overview:

In essence, the CBAM imposes a carbon tax on all goods imported into EU markets, calculated based on the intensity of greenhouse gas emissions during the production process in the exporting country. Importers operating under the CBAM register with domestic authorities, obtaining CBAM certificates priced according to the European Union Emissions Trading System (EU ETS). These certificates serve as a means for importers to declare and offset the emissions content of their goods.

Importers' Responsibilities:

Importers within the EU declare the emissions content of imported goods and submit the corresponding number of credits annually. The CBAM allows emissions to be deducted if importers can prove that a carbon price was paid during the production of the imported goods.

Goods Classification:

Goods are classified into two categories—simple and complex—when calculating actual emission rates. Complex goods involve an assessment of emissions not only from the production process but also from input materials. Businesses must be cognizant that emissions are not limited to production but also encompass raw materials, necessitating detailed reporting on input chemistry.

Significance of the Levy:

The CBAM stands as a key pillar in European climate policies, playing a crucial role in encouraging trading partners, including Vietnam, to decarbonize their manufacturing sectors. This levy serves as a mechanism to align carbon prices, fostering global efforts to combat climate change.

Unveiling the Carbon Border Adjustment Mechanism (CBAM) - General Principles and Implementation Roadmap

General Principles of CBAM:

The Carbon Border Adjustment Mechanism (CBAM) is poised to reshape the landscape of international trade by introducing a carbon tax on select products. The scope of CBAM encompasses vital sectors such as Cement, Iron and Steel, Aluminum, Fertilizers, Electricity, and Hydrogen. Notably, CBAM's emissions scope extends beyond direct emissions, obligating the calculation of associated emissions, including "indirect emissions," such as electricity emissions used in product production.

To streamline CBAM's implementation, a singular central EU CBAM authority will assume responsibility for executing CBAM on behalf of local authorities in each EU Member State.

Timelines and Implementation Roadmap:

May 16, 2023: Regulation (EU) 2023/956, effective May 16, 2023, marks the official launch of CBAM.

October 1, 2023 - December 31, 2025 (Transition Period): Importers are mandated to adhere to reporting requirements outlined in Articles 33, 34, and 35 of Regulation (EU) 2023/956. Quarterly reports on greenhouse gas emissions for specified products must be submitted within 30 days of each quarter's end, with the initial reporting deadline on January 31, 2024. Sectors initially affected include iron and steel, aluminum, electricity, cement, fertilizer, and hydrogen, collectively responsible for 94% of the EU's industrial emissions. By end-2025, the European Commission may evaluate and potentially expand CBAM's scope.

January 1, 2026 - December 31, 2034 (Operational Phase): Importers in the EU must procure CBAM certificates for goods within the CBAM scope. Annually, by May 31, importers declare the quantity and emissions associated with imported goods from the previous year, simultaneously submitting CBAM certificates corresponding to greenhouse gas emissions. The EU will progressively phase out the free allocation of greenhouse gas emissions quotas during this period. Manufacturers and exporters can acquire CBAM certificates at prices determined by the weekly average of the EU Emissions Trading System (EU ETS) emissions, currently ranging between 80-100 EUR/ton of carbon equivalent.

January 1, 2034 (Full Operational Phase): CBAM enters full operation, with manufacturing and exporting entities no longer eligible for free CO2 emission quotas. Entities must pay 100% of CBAM fees, marking a pivotal shift in emissions regulation.

CBAM IMPLEMENTTION ROAD MAP

The Impacts of CBAM on Vietnam's Exports and Recommendations for Mitigation

The Carbon Border Adjustment Mechanism (CBAM) is currently directly impacting four key industries in Vietnam: iron and steel, cement, fertilizer, and aluminum. Although these industries do not represent strong export sectors to the EU, the short-term prognosis for overall exports from Vietnam to the EU is not severe. Nevertheless, the fundamental application of CBAM is poised to increase the prices of exported goods, potentially diminishing the competitiveness of Vietnamese exports and consequently impacting demand in the EU market.

To comprehensively assess the effects of CBAM on Vietnam, experts conducted research and surveys across four pivotal areas with substantial exports to the EU market: aluminum, steel, cement, and fertilizer. While the macroeconomic impact of CBAM may not be considerable, the individual product lines and businesses are expected to face a notable decrease in export value, intensifying pressure on enterprises.

Specifically, the steel sector anticipates a roughly 4% reduction in export value, leading to a decrease in output of around 0.8%, coupled with the adverse effects of reduced competitiveness. The aluminum industry is also expected to see a decline of more than 4% in export value, resulting in a decrease of approximately 0.4% in output. Conversely, the impact on the cement and fertilizer industry is projected to be negligible.

In the longer term, the CBAM scope might expand to encompass indirect emissions and other sectors dealing with carbon-intensive products. The EU has identified 63 industries and sub-sectors at high risk of carbon leakage between 2021 and 2030, focusing on areas such as: Energy and minerals, food production and processing, textiles, chemistry, and construction.

Additionally, the adoption of CBAM could trigger a chain reaction as other developed markets like the United States, Canada, and Japan introduce their mechanisms to curb greenhouse gas emissions upon import. The United States is currently developing the Clean Competition Act (CCA), expected to apply after 2023, covering 25 fields such as petroleum, natural gas, fertilizer, iron and steel, and glass paper. The proposed carbon price is $55/tonne CO2, with annual adjustments based on U.S. baseline emissions.

To navigate these regulatory challenges, experts recommend that Vietnam adopts the CBAM Mechanism while concurrently exploring strategies to minimize its adverse impacts. Proactively responding to this EU regulation is crucial for sustaining and enhancing Vietnam's global competitiveness in these key industries.

Strategies to Mitigate the Negative Impact of CBAM: Recommendations for Action

For Regulators and Policymakers:

Establish Detailed Regulations: Vietnam should develop comprehensive and specific regulations to guide businesses in navigating CBAM, outlining a clear roadmap for accessing and complying with CBAM requirements.

Implement Carbon Pricing Mechanism: Create a robust carbon pricing mechanism and a carbon credit market in Vietnam. This mechanism will serve as the foundation for exporters to engage with EU buyers, facilitate trade negotiations related to CBAM, and allocate part of the tax revenue for activities aimed at reducing Vietnam's carbon emissions.

Proactive Dialogue with the EU: Engage in proactive dialogues with the EU to seek clarification on CBAM regulations, covered items and sectors, as well as available incentives and exemptions.

Tax Incentives: Offer tax incentive packages or credits to support businesses in transitioning to greener production technologies.

For Export Businesses:

* Monitor CBAM Progress: Keep a vigilant eye on the developments of CBAM and proactively devise response plans to minimize the impact on production and export activities.

* Understand Reporting Requirements: Carefully study the reporting requirements for greenhouse gas emissions, develop internal processes, and implement emission calculation systems tailored for CBAM reporting.

* Assess Financial Impact: Evaluate the potential financial implications of CBAM on export activities, including its impact on product advertising and marketing strategies.

* Identify Commercial Opportunities: Explore commercial opportunities by positioning products as lower carbon and more environmentally friendly compared to industry averages and competitors.

* Implement Decarbonization Policies: Apply decarbonization policies and adopt greener production processes and methods to reduce emissions throughout the entire production process.

* By implementing these strategies, Vietnam can navigate the challenges posed by CBAM effectively, ensuring the sustainability and competitiveness of its export industries in alignment with global environmental standards.

Truong Thi Quynh Van
Department of Information and Trade Promotion - VIOIT

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