Immediate impact will be on products exported to the EU: RMIT expert

The EU’s Carbon Border Adjustment Mechanism (CBAM) applies to six industries: iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen, of which the first four are industries that Vietnam has the capacity to export in, writes Phan Minh Hoa, RMIT associate lecturer of economics.

Carbon tax on imported goods is a new policy tool first implemented by the European Union (EU). Under the CBAM, the EU will levy a carbon tax on imports based on the intensity of greenhouse gas emissions during production in the exporting country. The CBAM came into force on October 1, 2023 with a transitional phase, and will take full effect from January 2026.

Besides the EU, the UK government has also announced plans to officially implement a UK CBAM by 2027. The U.S. has been considering a carbon tax on imported goods for the past decade, and discussions have heated up again in response to the developments in the EU. Japan also plans to introduce a carbon levy on fossil fuel importers such as energy companies, oil refineries, and steel manufacturers starting from the 2028-2029 fiscal year.

Carbon border tax as a policy tool will attract more support in developed countries where environmental standards are more stringent. It will help their producers compete with exporters from developing countries where looser environmental standards apply. In international trade, this border tax will increase the prices of imported goods and impact supply chains.

How Vietnamese businesses can respond to carbon tax

Exporters need to raise their awareness of the carbon tax requirements and impacts on their industries, while also considering the costs of compliance.

For Vietnam, the immediate impact will be on products exported to the EU. Currently, the EU CBAM applies to six industries: iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen, of which the first four are industries that Vietnam has the capacity to export in. Businesses not currently subject to a CBAM, but are at high risk will need to monitor relevant policy updates published by the EU as well as other countries.

It is necessary to plan for an early response, review existing supply chains, and convert to green production, for instance by using solar energy and wind energy (which Vietnam has a lot of untapped potential for). Businesses should also strictly control their emissions and develop emissions reports, prepare adequate data and share information with the government to develop Vietnam's national emissions data system and get ready for any greenhouse gas reporting requirements.

In addition, exporters need to cooperate with importers, suppliers and the government. No business is an island when it comes to transforming production. When companies work together to reduce emissions and strive for a carbon neutral future, they will gain more competitive advantages and new opportunities.

Companies should also actively share their views with the government to develop policies, such as in carbon pricing and renewable energy promotion, and participate in capacity building training programs.

Support needed from policies

As we dig deeper into the realm of government policies, there are two approaches to carbon tax. The first way is to protest and join other countries (especially developing countries) in pressuring the EU into negotiations to find solutions that are more beneficial to us. Many of the EU's major partners, such as China, Russia, South Africa, India, Brazil and some developing countries, have voiced concerns that environmental policies could become trade barriers that go against the World Trade Organization principles. However, this involves complex processes. It also depends on many factors and affects the prospects of trade relations.

The second approach, which is better for the long term, is to accept and find ways to minimize the negative impacts. While navigating foreign affairs, Vietnam should actively participate in dialogues with partners such as the EU to negotiate for possible exemptions and preferential treatment for developing countries, and leverage technical support from developed countries to adapt to the new rules. Vietnam also needs to strengthen cooperation with other exporting countries to strengthen its position in negotiations.

In terms of domestic policies, Vietnam has levied an excise tax, an environmental protection tax and environmental protection fees for mining since 2011. We need to update these policies, build and promulgate a carbon tax, and develop the domestic carbon credit market so that businesses can trade and create a source of revenue to encourage businesses to “produce green”.

The government needs to provide incentives for businesses to make new investments in research and development of innovative eco-friendly technologies, while encouraging investments in renewable energy and fuel efficiency. Carbon tax revenues need to be properly allocated to fund the environmental protection efforts of businesses and society.

To help businesses raise their awareness, the government can build a centralized unit to coordinate between ministries and agencies, provide specific information to guide businesses in complying with new regulations, and offer training to advance business capacity and social awareness of carbon tax.

Despite the short-term challenges, a carbon tax on imported goods will create a stronger impetus for Vietnamese businesses and policymakers to innovate and meet Vietnam's net zero emissions goal by 2050.