On 01 October 2023, the European Union (“EU”) began testing the Carbon Border Adjustment Mechanism (“CBAM”), which will create some barriers for Vietnam’s manufacturing and export industries. Accordingly, when the CBAM takes effect in 2026, all products imported into the EU that emit carbon dioxide will be subject to a carbon tax.
In this article, BLawyers Vietnam would like to present 04 notes on CBAM when businesses from non-EU countries want to bring goods into the EU market.
1. What is CBAM?
CBAM is a policy on import tax (also known as carbon tax) issued by the EU based on the carbon footprint of the products during manufacture. The carbon footprint of each imported product (goods or services) will be calculated based on the total amount of greenhouse gases (“GHGs”) generated at every stage of manufacture of that product.
CBAM is currently being piloted by the EU starting from 01 October 2023. This mechanism will officially take effect in 2026 and be fully operational in 2034.
(i) Objectives of CBAM
CBAM has been issued with the following objectives:
- To create a balance in carbon prices between domestic products and imported products in the EU: CBAM will levy a carbon tax on all items imported into the EU market depending on the intensity of GHG emissions released during the manufacturing process in the home nation.
- CBAM will contribute to reducing the risk of carbon leakage: Carbon leakage occurs when companies based in the EU transfer high-carbon production technology to countries with less stringent climate policies than the EU, or when EU products are replaced by more carbon-intensive imports.
(ii) Scope of the CBAM application
EU enterprises importing products from non-EU countries (“Importers”) must all be regulated by CBAM, specifically:
- From 01 October 2023 to 31 December 2025: Applies to Importers of goods such as cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.
- From January 2026 onwards: Applies to all Importers of any type of goods included in the EU Emissions Trading System (“EU-ETS”).
2. Subjects applying carbon tax according to CBAM
According to CBAM, the imported items into the EU that must be taxed for carbon are as follows:
(i) From 01 October 2023 to 31 December 2025: Imported products with a high risk of carbon leakage include cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen.
CBAM directly affects 04 main industries of Vietnam including iron and steel, cement, fertilizers, and aluminum. Among these, iron and steel are the most affected goods.
(ii) From January 2026 onwards: The EU will gradually add some other products in addition to the above 06 products and by 2034 it will apply to all imported products included in the EU-ETS.
3. Carbon tax obligations in accordance with the CBAM
(i) From 01 October 2023 to 31 December 2025
Importers of 06 items, which include cement, iron, steel, aluminum, fertilizers, power, and hydrogen, are exempt from paying carbon tax but must submit the following information:
- The quantity of each type of product;
- The total amount of GHG emissions, including both direct and indirect emissions corresponding to the quantity of products imported in the previous quarter;
- Any carbon tax payable in the home country for the total amount of GHG emissions.
(ii) From January 2026 onwards
The Importer must fulfill the reporting obligation and return the number of CBAM certificates corresponding to the amount of GHGs in the product.
CBAM certificates (also known as a carbon tax) are certificates issued by CBAM calculated based on the average weekly auction price of EU-ETS allowances represented in €/ton CO2 emitted.
If the Importer can prove that they have paid carbon credits during the production process of products in the importing country, then the corresponding amount will be deducted from the carbon tax payable.
4. Carbon tax rate in the EU
Carbon tax is a type of environmental tax levied on the carbon content of fuels, with the aim of pricing emissions, and limiting and reducing the profitability of over-exploitation, use, and overconsumption of energy.
Some EU member countries apply a carbon tax on domestic products with the tax rates as follows:
(i) Ireland: 28 USD/ton CO2 in 2010;
(ii) Switzerland: 99 USD/ton CO2 in 2008;
(iii) France: 49 USD/ton CO2 in 2014; and
(iv) Spain: 16 USD/ton CO2 in 2014.
Currently, the EU has not officially announced the carbon tax rate on imported products implemented under the CBAM.
To summarize, to calculate the carbon tax upon importation into EU countries, Vietnam-based export businesses must properly prepare for the production plan and reduce GHG emissions during the manufacturing process. This approach will enable them to meet the stipulations of the CBAM in forthcoming years.
The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at email@example.com. BLawyers Vietnam would love to hear from you.
Date: 31 October 2023
Writers: Minh Truong and Chi Huynh