Currently, greenhouse gas inventory and compliance with emission regulations have become crucial factors for businesses looking to export to the EU market. The CBAM mechanism presents not only challenges but also opportunities for companies that know how to capitalize on and implement the correct processes. So, what is the CBAM mechanism? How can Vietnamese businesses adapt and maintain their competitive edge in the global market?

CONTENT:

1. What is the CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is a critical new policy of the European Union (EU) aimed at reducing "carbon leakage" and encouraging non-EU countries to lower their greenhouse gas emissions. CBAM is designed to impose a carbon tax on imported goods into the EU, based on the emissions generated during the production process in the exporting country.

1.1. Objectives of CBAM

• Preventing "carbon leakage": This occurs when companies move their production activities to countries with looser emission regulations to avoid paying carbon taxes in the EU.

• Encouraging global emission reductions: CBAM pressures exporting countries to adopt emission reduction measures or face a carbon tax when exporting to the EU.

• Protecting domestic industries: It maintains the competitiveness of EU industries that are subject to carbon fees under the Emission Trading System (ETS). This ensures that European businesses are not disadvantaged compared to international competitors who are not subject to stringent emission regulations.

1.2. Applicable entities

CBAM applies to six high-emission sectors, including:

• Cement

• Iron and steel

• Aluminum

• Fertilizers

• Electricity

• Hydrogen

Manufacturers in countries exporting to the EU will need to report the greenhouse gas emissions from their production processes and be subject to a corresponding carbon tax when exporting these products.

The scope of CBAM

2. How does the CBAM work?

Essentially, the European Union’s Carbon Border Adjustment Mechanism (CBAM) imposes a carbon tax on all goods imported into the EU. This tax is based on the level of greenhouse gas emissions produced during the manufacturing process in the exporting country.

In terms of its operation, importers of goods into the EU under CBAM must register with local regulatory authorities and purchase CBAM certificates. The price of these certificates will be adjusted based on the weekly emission allowance prices under the EU Emissions Trading System (EU ETS). Importers will declare the emissions associated with the imported goods and submit the corresponding number of certificates each year. If the importer can prove that a carbon tax has already been paid in the country of origin, the related emissions can be deducted from the total liability.

The Operation Mechanism of CBAM

→ See more: 6 Things You Need to Know About the Carbon Credit Market

The European Union (EU) classifies goods into two categories to determine actual emissions: simple goods and complex goods. For complex goods, the EU requires the inclusion of emissions from the input materials. This means that businesses must not only report the emissions generated during production but also provide detailed information about the emissions of the materials used. Therefore, companies need to understand that every element within their supply chain can impact the overall emissions of their product.

3. CBAM roll-out roadmap and key requirements
3.1. Transitional period (2023–2025)

From October 1, 2023, until the end of 2025, importers into the EU must report the quantity of goods affected by CBAM. During this transition period, no financial adjustments related to CBAM will be required. 

Initially, the mechanism will focus on industries with a high risk of "carbon leakage," including cement, iron and steel, aluminum, fertilizers, hydrogen, and electricity—sectors that account for 94% of the EU's industrial emissions.

By 2025, the European Commission will conduct an assessment and may expand CBAM to cover additional products and services, potentially including indirect emissions and related value chains.

3.2. Implementation period (2026–2034)

When CBAM becomes fully operational, importers of goods covered by the mechanism in the EU will be required to purchase CBAM certificates. By May 31 each year, they must report the amount of imported goods and the associated emissions for the previous year. Additionally, importers will need to submit the equivalent number of CBAM certificates for the reported greenhouse gas emissions. The EU will gradually phase out free emissions allowances, requiring businesses to prepare for these stricter demands.

3.3. Full implementation period (from 2034 onwards)

From 2034, CBAM will be fully operational, and businesses will be required to pay 100% of the CBAM fees.

CBAM roll-out roadmap

→ See more: Listed Companies and the Obligation to Disclose Greenhouse Gas Emissions

4. Impact of CBAM on Vietnam's exports

Currently, CBAM directly impacts four of Vietnam’s major industries: iron and steel, cement, fertilizers, and aluminum. Although these are not the country's strongest export sectors to the EU, the implementation of CBAM will increase export costs, thereby reducing competitiveness and affecting demand in the EU market.

Studies show that CBAM could have a significant impact on these sectors. The steel industry could see a 4% decrease in export value, leading to a 0.8% reduction in production output. Similarly, the aluminum industry might experience more than a 4% drop in export value and a 0.4% decline in production, while the impact on cement and fertilizers is expected to be minimal.

In the future, CBAM's scope could expand to include indirect emissions and other high-carbon industries. The EU has already identified 63 sectors and sub-sectors at high risk of carbon leakage for the 2021–2030 period, focusing on industries such as:

• Energy and minerals

• The production and processing of certain foodstuffs (e.g., sugar, starch, potatoes, tomatoes)

• The production of certain textile products

• Chemicals

• Construction

Moreover, as CBAM is implemented, other developed markets, such as the United States, Canada, and Japan, may introduce their own mechanisms to reduce greenhouse gas emissions from imported goods.

To address this EU regulation, experts recommend that Vietnam should opt to accept the CBAM mechanism and seek ways to minimize its positive impacts.

→ See more: Reducing Greenhouse Gas Emissions: The Journey from "Voluntary" to "Mandatory"

5. What are the solutions for export businesses?

• Businesses must closely monitor CBAM’s progress and proactively prepare response plans to mitigate its impact on production and export activities.

• Thoroughly study the greenhouse gas reporting requirements, develop internal processes, and establish systems for calculating emissions to comply with CBAM reporting.

• Assess the potential financial impact of CBAM on export activities, including its effects on product marketing and advertising strategies.

• Explore trade opportunities if products are more carbon-efficient and "greener" than the industry average or current competitors.

• Implement decarbonization policies and "green" manufacturing processes to reduce emissions throughout the production chain.

To ensure uninterrupted business operations and fully capitalize on global emission reduction trends, Vinacontrol offers greenhouse gas inventory consulting services, guiding companies in quantifying and reporting emissions in compliance with ISO 14064-1 standards. We support businesses in:

• Consulting and assisting with greenhouse gas emission and CBAM reports

• Advising on effective data management and collection strategies

• Offering tailored solutions for emission reductions

• Providing detailed guidance on information gathering and preparing greenhouse gas inventory reports independently

Vinacontrol is a trusted partner for many businesses in compiling greenhouse gas inventories and CBAM reports. 

→ See more: What is ISO 14064-1? Why should companies implement it?

With over 66 years of experience in the energy and environmental consulting sectors, Vinacontrol remains a reliable partner, guiding companies towards green transformation and sustainable development. Our services help businesses collect accurate and transparent data for greenhouse gas inventory reports and develop effective emission reduction strategies, enabling them to meet international standards, enhance operational efficiency, and contribute to environmental protection.

For best consultation and assistance, please contact our Hotline at 0243 943 3840 or chat with our specialists now!