What is the Carbon Border Adjustment Mechanism (CBAM)?

The Carbon Border Adjustment Mechanism (CBAM) is an EU tool designed to fairly price carbon emissions in the production of high-carbon goods imported into the EU, while also encouraging cleaner industrial production in countries outside the EU.

Simply put, CBAM is a European Union (EU) policy aimed at controlling greenhouse gas emissions from imported goods, contributing to climate change mitigation, and creating a level playing field for industries. CBAM is established to prevent high-carbon production activities from moving outside the EU, thus maintaining competitiveness for domestic companies already facing carbon fees under the EU Emissions Trading System (EU ETS).

Starting from October 1, 2023, in the transition phase, and fully implemented by 2026, CBAM requires importers of goods into the EU to report the carbon emissions in the products and purchase corresponding emission certificates if the emissions exceed EU standards. The main products affected include cement, steel, aluminum, fertilizers, hydrogen, and electricity.

CBAM not only encourages companies to shift to greener production technologies but also creates financial pressure on companies that fail to meet greenhouse gas standards, while potentially opening up export opportunities for compliant businesses.

The Phases of CBAM

The Carbon Border Adjustment Mechanism (CBAM) is divided into three main phases:

  1. Transition Phase (2023 – 2025): Starting from October 1, 2023, importers into the EU must report quarterly the volume of goods imported and their associated greenhouse gas emissions but do not need to make any payments. The first reporting period will end on January 31, 2024. Products affected in this phase include cement, steel, aluminum, fertilizers, hydrogen, and electricity, which account for 94% of the EU’s industrial emissions.
  2. Transition Phase (2023 – 2025): Starting from October 1, 2023, importers into the EU must report quarterly the volume of goods imported and their associated greenhouse gas emissions but do not need to make any payments. The first reporting period will end on January 31, 2024. Products affected in this phase include cement, steel, aluminum, fertilizers, hydrogen, and electricity, which account for 94% of the EU’s industrial emissions.
  3. Full Implementation Phase (from 2034): CBAM will be fully implemented, with no more free CO2 allowances, and importers will have to bear 100% of the CBAM fees.

Compliance with these phases is crucial for exporting businesses, especially from Vietnam, to ensure competitiveness and effectively respond to the challenges of this new regulation.

How to Export Goods to the EU Market under CBAM?

To export goods to the EU under the Carbon Border Adjustment Mechanism (CBAM), Vietnamese businesses need to take several important steps. Starting from October 1, 2023, exporters must begin reporting greenhouse gas emissions related to their exported goods, including steel, cement, and fertilizers.

When goods are imported into the EU, the importer must purchase CBAM certificates corresponding to the emissions generated during the production of the goods. The price of these certificates will be based on the carbon credit price of the EU Emissions Trading System (EU ETS). Therefore, Vietnamese businesses need to have a detailed tracking and reporting system for their emissions to determine the number of certificates to be purchased.

It is important that businesses also enhance their understanding of emission factors and invest in greener production technologies to reduce emissions. This not only ensures compliance with CBAM but also increases competitiveness in the EU market. Finally, the government and regulatory agencies need to support businesses in adjusting policies and providing specific guidance on CBAM requirements.

How to Buy CBAM Certificates?

Importers will need to register with domestic authorities and purchase CBAM certificates corresponding to the emissions exceeding EU standards. The price of the certificates will be calculated based on the weekly carbon credit price of the EU Emissions Trading System (EU ETS). During the transition phase, importers do not need to make financial adjustments but must report in full detail the volume and emission levels.

After the transition phase, from 2026 onwards, purchasing CBAM certificates will become mandatory, and the importer will need to submit certificates corresponding to the greenhouse gas emissions in the product. Therefore, understanding the regulations and setting up an accurate reporting system is crucial for businesses to effectively participate in this market.

The Impact of CBAM on Vietnam

The EU's Carbon Border Adjustment Mechanism (CBAM) is expected to have significant impacts on Vietnam’s exports, particularly in high-emission industries such as steel, aluminum, cement, and fertilizers. The implementation of CBAM, starting from October 1, 2023, requires Vietnamese exporters to prove the carbon emissions in their products, which could lead to higher costs and reduced competitiveness in the EU market. It is forecasted that the export value of Vietnam's steel industry may decrease by about 4%, while production is estimated to decline by 0.8% due to the pressure from CBAM.