Global Courant 2023-05-05 13:38:41
The EU plans to implement the world’s first carbon limit adjustment mechanism (CBAM) from October 2023.
During the transition period, the scheme will require importers to report the carbon embedded in their imported goods. From 2026, additional taxes will be levied on imported goods to bridge the gap between the EU carbon price and the price in exporting countries.
The CBAM will initially focus on iron and steel, cement, aluminium, fertilizer, electricity and hydrogen. The CBAM is expected to have a significant impact on emissions-intensive economies as Vietnam exports to the EU. It has the potential to cause a decline of approximately US$100 million in export sales from the affected sectors of the country.
The Vietnamese steel sector is estimated at most affected by the CBAM of the EU in its present form. A ton of steel exported to the EU can incur an additional cost of around $80, or 10% of the export price.
The export value of steel could fall by as much as 3.7%. Other sectors affected are aluminum and cement. Exporting companies will also have to bear the additional administrative costs of monitoring, reporting and verifying the emissions embedded in their exported products.
The CBAM will therefore hinder Vietnam’s export competitiveness. The CBAM of the EU evolves with uncertainties. Its impact could quickly increase if embedded emission limits extend to the whole value chain of production inputs. The effects will also increase further if other countries such as the United Kingdom, Canada and Japan are following in the footsteps of the EU and applying their own CBAMs.
Early preparation for the CBAM is therefore important. Vietnam is the 11th largest exporter to the EU. To expand its exports and fully exploit the potential benefits of its trade agreements with the EU, Vietnam will have to mitigate the consequences of the CBAM. This can largely be achieved by reducing the emission intensity of Vietnam’s exported products.
Vietnamese workers on motorcycles leave the grounds of Taiwan’s Formosa steel mill in central Ha Tinh province. Photo: AFP/Hoang Dinh Nam
Since the CBAM sectors consume large amounts of electricity, decarbonising the electricity sector will significantly contribute to emission reductions in these sectors. Fortunately, Vietnam has tremendous potential to harness solar and wind energy to facilitate the decarbonisation of electricity. The combined potential of solar and wind energy is about 46 times higher than the country’s installed capacity in 2022.
Vietnam could focus on increasing solar and wind energy penetration. Upgrading grid systems quickly is important to remove current barriers to renewable energy uptake, including the curtailment of solar and wind yields due to limited grid capacity.
If built, a South-North domestic high-voltage DC submarine cable could help with grid management and ensure that the cheapest electricity generation opportunities are used.
Electricity market reform, including permitting direct power purchase agreementswould enable industries to purchase solar and wind power directly from independent renewable energy producers. The market would then play a greater role in promoting renewable energy sources, reducing the burden on governments to maintain energy security.
Other measures to boost adoption of renewables include setting ambitious solar and wind targets in the upcoming Eighth National Energy Development Master Plan.
Institutional regulations for licensing and rental offshore wind energy projects would unleash this significant potential source of renewable energy, of which Vietnam has the greatest potential in Southeast Asia. Improving energy efficiency through technological innovation and industrial good practice could also help to achieve this goal.
Phasing out unreduced coal flow would also help reduce emissions. Imposing one carbon price CBAM certificate payments would decrease. Carbon pricing could allow the revenues to be reused in the Vietnamese economy and used to support initiatives such as technology renovation to improve energy efficiency and promote adoption of renewables.
CBAM-covered Vietnamese companies will benefit from eventually switching production inputs from fossil fuels to renewable energy sources such as green hydrogen and from adopting carbon capture, utilization and storage technologies. But these technologies are currently in their infancy and are not yet cost competitive.
In the short term, Vietnam will need to strengthen its monitoring, reporting and verification capabilities and engage in a constructive dialogue with the EU to find CBAM favorable conditions.
Installations of solar panels and a wind turbine at the Phu Lac wind farm in the southern Vietnamese province of Binh Thuan. Photo: AFP/Manan Vatsayana
Accelerating the transition to renewable energy would not only help mitigate the effects of the CBAM, but would also contribute to achieving the country’s ambitious target of reaching its electricity emissions by 2030, a pledge Vietnam made in the Partnership for a just energy transition in December 2022.
Other benefits of the energy transition include contributions to Vietnam’s climate obligationsincluding reaching net zero emissions by 2050, reducing local air pollution and developing one domestic renewable energy industry.
By boosting the use of renewable energy, Vietnam can build a strong foundation for pursuing green and sustainable growth.
Thang Nam Do is a Fellow in the Zero-Carbon Energy for the Asia-Pacific Grand Challenge Program at the Crawford School of Public Policy and the Institute for Climate, Energy and Disaster Solutions, The Australian National University.
This article was originally published by East Asia Forum and has been republished under a Creative Commons license.
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