Vietnamese exporters advised to take note of new EU carbon rules

Europe’s Carbon Border Adjustment Mechanism (CBAM) is set to take effect in October, and Vietnamese exporters need to take a proactive approach to the mechanism to boost shipments to the EU, experts have said.

The CBAM, which will be rolled out over a three-year transition period, will essentially levy a border tax on certain carbon-intensive imports into the EU.

The mechanism will apply within the EU but its effects will be felt beyond its borders, even in Vietnam, Dutch consul general Daniel Stork in Ho Chi Minh City told an environmental, social and governance (ESG) conference held in the city last week.

The mechanism is a real game changer in the way companies operate throughout their global supply chain as it will impose ESG social and governance rules for imports to the EU, according to experts.

The EU rules the CBAM will initially apply on imports of certain goods with precursors for carbon intensive production at the most significant risk of carbon leaks, such as cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. With this enlarged scope, the CBAM will eventually, when fully phased in, capture more than 50% of the emissions in sectors covered by the EU Emissions Trading System, often referred to as the ETS.

“We’re working with the Vietnamese government and international partners present here” in order to support Vietnam’s export-driven economy, said the Dutch consul general.

The Netherlands is the largest European investor in Vietnam. Kees van Baar, Dutch Ambassador to Hanoi, told local media this February that Dutch firms, with their investments and innovative and sustainable operations, have been making contributions to Vietnam’s progress.

Baar added his country is investing in ESG capacity building for Vietnamese companies. In the framework of the Green Economy Forum and Exhibition 2022 in HCMC held by EuroCham, the Dutch embassy organised ESG workshops. It will continue to do so in the context of the ‘Ready to Export’ program which is being implemented by the Dutch Business Association in Vietnam (under the EuroCham roof) and the Vietnam Trade Promotion Agency (Vietrade) under the Ministry of Industry and Trade.

At a recent green practices meeting in Vietnam, Sirpa Jarvenpaa, director of the Southeast Asia Energy Transition Partnership, said the CBAM is one of the key tools for the EU to move towards its net-zero carbon emission goal by 2050. She warned that the mechanism sets a price on carbon emissions associated with imports of certain goods into the EU, which would directly affect Vietnamese exporters because the EU is one of Vietnam’s key markets.

Vietnam also has a net-zero carbon emission by 2050. The country and the International Partnership Group (IPG) signed the Just Energy Transition Partnership (JETP) for Vietnam agreement in December 2022, with $15.5 billion on the table for the nation’s clean energy transition.

The added pressure from the CBAM may help JETP initiatives become more effective and efficient, though Vietnam’s path to green growth will be challenging, according to experts.

The country does not have a carbon pricing mechanism or carbon credit market. A carbon pricing mechanism would help reduce carbon emissions while serving as a foundation for trade negotiations with the EU in relation to the CBAM on imported goods. At the same time, part of the tax exporters would have to pay to the EU would stay in the country and be used towards reducing Vietnam’s carbon emissions, according to Asia Briefing, an Asia-focused business publication by Dezan Shira & Associates, a foreign direct investment consultancy firm.

Talks should be opened with the EU to clarify regulations and minimize the negative impacts on Vietnam’s businesses and manufacturing industry, the publication added.