Introduction
The European Union-Vietnam Free Trade Agreement (EVFTA), signed in August 2020, reduced or removed tariffs on 99% of goods Vietnam exports to the European Union (EU). However, with the EU’s introduction of the Carbon Border Adjustment Mechanism (CBAM) in 2023, Vietnamese exporters must comply with new environmental regulations in order to maintain their competitive advantage in Europe.
CBAM imposes carbon tariffs on imports from countries that do not regulate or poorly regulate their own carbon emissions. The objective is to help the EU achieve its own net-zero targets.
CBAM is being implemented in stages. The transitional or first phase began in October 2023 and applies to companies that manufacture products in six major categories: hydrogen, iron and steel, cement, aluminium, fertilizers, and electricity (HISCAFE). European companies importing HISCAFE into the EU must report carbon emissions associated with these products. Consequently, these European importers will require suppliers (Vietnamese exporters) to provide carbon emissions reports.
The second phase will commence in January 2026. During this phase, European companies importing HISCAFE will be required to purchase CBAM certificates. Each CBAM certificate represents one ton of carbon dioxide (CO₂) and is priced according to the carbon price of the EU Emissions Trading System (EU ETS). The amount of CBAM certificates required for each imported product will be calculated based on the excess of embedded-in-product greenhouse gas (GHG) emissions from the exporter compared to the EU’s allowable emissions for the same type of product. In case the emissions data is not available from the exporter, the national average intensity of the exporting country, or the worst-performing producer under the EU ETS for that product, will be used instead.
For example, a Vietnamese exporter ships 1,000 metric tons of cement to the EU, and reports its GHG emissions to be 0.75 tons of CO₂ per ton of cement. If the EU emissions allowance is 0.50 tons of CO₂ per ton of cement, and the EU ETS price for carbon is €100 per ton of CO₂, then for this shipment, the EU cement importer must purchase: (0.75 – 0.50) tons CO₂/ton of cement x 1,000 tons cement) = 250 CBAM certificates, with the total cost of €100/ton cement x 250 CBAM certificates = €25,000.
The third phase will begin in 2028. Carbon tariffs will be expanded to other products including oil, metal, lime, glass, ceramics, paper, acids and organic chemicals.
While EVFTA gives tariff reductions for Vietnamese exports, Chapter 13 of the EVFTA, Article 13.9 on trade and sustainable development, supports mechanisms such as CBAM to ensure that parties uphold their environmental obligations. Consequently, CBAM can quickly diminish these free trade advantages after applying the cost of carbon tariffs. Vietnamese exports will face a significant increase in prices and a reduction in competitiveness if they don’t match the EU environmental standards.
Scope of Emission Reporting
The Intergovernmental Panel on Climate Change (IPCC) defines three scopes for reporting GHG emissions: Scopes 1, 2 and 3.
Scope 1 covers direct emissions from owned or controlled sources. For instance, a manufacturing company operates a fleet of delivery trucks. The fuel combustion from the trucks as they transport goods generates CO₂ emissions. This is Scope 1 because the company owns and controls the trucks. Similarly, if the company operates machinery that burns natural gas or diesel fuel in its factories for energy, the emissions from this on-site fuel combustion will also be classified as Scope 1.
Scope 2 refers to certain indirect emissions from the consumption of purchased electricity, steam, air, heating, or cooling. These are emissions generated by energy providers but consumed by the reporting entity. For example, a retail company operates stores and offices. The electricity consumed in lighting, air conditioning, and running electronic equipment in these facilities generates indirect emissions. Although the company itself does not produce these emissions, it has a direct linkage to the power plants that generate the electricity. Similarly, if the company buys steam or heating from an external provider to heat its buildings, the company is the energy consumer of its external provider and so the emissions from producing that energy will also fall under Scope 2.
Scope 3 includes other indirect emissions elsewhere in the value chain, such as those related to the production of purchased raw materials, employees commuting and waste disposal. Scope 3 is often the most challenging to quantify. However, Scope 3 provides the most accountability of emissions throughout a product’s life cycle. For example, for a clothing manufacturer, Scope 3 emissions count emissions from growing cotton or producing synthetic fibres, fabric and other materials that the manufacturer buys. Transportation and distribution of these materials to factories also counts. These are upstream emissions. Further, emissions result from the energy used by consumers when washing and drying clothes, and the disposal of the clothes, whether through landfill, recycling, or incineration. These are downstream emissions. All these activities contribute significantly to the manufacturer’s overall carbon footprint, extending beyond the initial direct producer and are part of the broader value chain. Of course, allocating the cost through the value chain must be done appropriately and fairly.
Reporting emissions for HISCAFE products during the transitional phase
The transitional phase for the CBAM extends from 1 October 2023 to 31 December 2025. During this time, the MRV (Monitoring, Reporting, and Verification) rules will follow the Implementing Regulations (EU) 2023/1773 (“Implementing Regulations”).
EU importers of HISCAFE (“Importers”) must report the carbon content of their goods, as well as the carbon pricing mechanisms in the country of origin. They must report quarterly to the CBAM Transitional Registry, though verification of reported data is not yet mandatory. Nevertheless, operators and importers should strive to report as accurately as possible. If any verification of the data has been performed, this should be noted in the report submission.
Reporting Scope 1 and Scope 2 emissions is mandatory for all CBAM goods. Reporting Scope 3 emissions is currently not mandated but could be subject to future regulation as the system evolves.
To calculate Scope 1 emissions, reporters first identify all direct sources of emissions, including fuel used in generators and vehicles, and then measure the fuel quantity (FQty) from each source. The next step is to use standardized emissions factors (EF) to calculate the amount of emissions from each source following the formula: Emissions (tons of CO₂e) = FQty (litres of gasoline) × EF (kg CO₂e per litre of gasoline)/1000.
To calculate Scope 2 emissions, reporters must identify the sources of purchased energy, such as electricity, and gather data on the total energy consumption (EC) over the reporting period, often from electricity bills. The next step is to calculate emissions from electricity following the formula: Emissions (tons of CO₂e) = EC (kilowatt-hours kWh) × EF (kgCO₂e/kWh)/1000. The EF value for electricity is published by the Directorate of Climate Change of the Ministry of Natural Resources and Environment. For example, the EF value for 2022 is 0,6766 tCO2/MWh.
Structure of a CBAM report
The structure of the report is given in the Implementing Regulations.
The Header section includes fundamental administrative details such as the report issue date, report ID, and the reporting period and year. It also contains the total quantity of goods imported and the total emissions associated with those goods. Additionally, it provides the identity and contact details of key stakeholders, including the reporting declarant, representative, importer, and competent authority (if applicable). The approval process for submitting the report is also captured here.
The CBAM Goods Imported section covers a detailed description of the goods including procedures for imported goods, quantities of imported goods and associated emissions. Any supporting documentation must be uploaded to the Registry.
The CBAM Goods Emissions section focuses on emissions-related details. It provides information about the exporter, including its name, location, and contact details. It also describes the goods produced, specifying the reporting methodology used. It further outlines the direct, indirect, and total embedded emissions from the exporter’s facility.
Lastly, the report must include the carbon price in the country of origin, in euros per ton of CO₂. To ensure similar treatment among companies in the EU ETS and in other countries, if an exporter has already contributed to carbon pricing in its home country, it may receive a reduction in the carbon tariffs when exporting goods to the EU from 2026 onwards. In Vietnam, the current carbon price is US$3 to US$5 per ton of CO₂ in the voluntary market, but the carbon pricing framework is still under development.
The CBAM report must be submitted to EU authorities as part of the import clearance process to comply with CBAM regulations associated with imported goods.
Support and resources for Vietnamese Exporters
The motivation of CBAM is to mandate businesses to renovate their production processes to reduce emissions and comply with environmental regulations. Therefore, Vietnamese exporters must implement effective measures to lower their carbon emissions.
General measures to reduce emissions include using electricity, avoiding waste, increasing regular inspections and maintenance of electrical equipment to ensure efficient power transmission, and installing inverters and harmonic filters.
There are also solutions for each type of goods. For manufacturing iron and steel, use hydrogen to replace carbon in the iron ore reduction process, or capture CO2 emissions directly from factories and store CO2 underground at storage sites. For aluminium, increase the recovery and recycling of used aluminium. For cement, use natural mineral additives such as laterite, or use industrial by-products and waste as additives, such as fly ash and slag, to replace clinker in cement.
To start to act, businesses may need financial support from various sources, including government assistance, financial institutions, and foreign investment. Green finance provides access to funding with favourable terms for projects that aim to reduce a negative environmental impact.
The government should implement a range of incentives to facilitate this transition, including a ready carbon pricing framework, low interest rates and tax breaks to act as incentives to adopt clean technologies, and incentives for transitioning to renewable energy sources like solar, wind, and biomass. Moreover, money is needed to develop human resources in the environmental sector through training and development programs. Collaborations with universities and vocational training institutes or, say, a Green Technology Center in Vietnam, can equip workers with the necessary skills to implement sustainable practices
Much carbon management software has been used to improve emissions tracking and reporting. Some are SAP EHS Management – emissions tracking and environmental compliance, Enablon – Sustainability software for carbon monitoring, CarbonChain – Real-time emissions tracking for high-carbon sectors, Sphera – manages carbon footprints and compliance, GreenSoft – local platform for SMEs to monitor emissions.
Companies can start by seeking advice from experts who offer both technical expertise and practical insights. Legal advisors can help companies stay up-to-date with evolving regulations and ensure compliance. Environmental consultants can identify effective emission reduction strategies and sustainable practices. Carbon exchange platforms facilitate the purchase and trade of verified carbon credits, while certification organizations verify that these credits meet recognized standards, thereby enhancing credibility. Finally, financial institutions can provide financing solutions and advice on managing financial risks associated with sustainability projects.
Conclusion
EU Importers face new challenges due to CBAM. This is, however, an opportunity for businesses to innovate and enhance their production processes to meet EU environmental standards.
Businesses should seek support to prepare a qualified CBAM report, which requires accurately detailing the carbon content of imported goods and providing necessary documentation. This report must comply with the requirements set out by the EU, ensuring transparency and accountability for emissions associated with their products. Engaging with experts can help streamline the reporting process and minimize the risk of penalties for non-compliance.
Finally, businesses may explore opportunities for green finance to support the transition process. The objective is primarily to ease business’s financial burden of meeting CBAM requirements, but supporting the transition process also positions those businesses as leaders in sustainability, enhancing their competitiveness in the EU market. Collaborating with banks and financial institutions that specialize in green finance can open doors to valuable resources and expertise in transforming business.
