CBAM may hinder EVFTA advantages for steel industry

As the EU's Carbon Border Adjustment Mechanism (CBAM) takes effect on October 1, 2023, steel manufacturers are still confused about how to meet the new requirements.

20/09/2023 12:40

Nghiem Xuan Da, chairman of the Vietnam Steel Association (VSA), said, "The CBAM is the latest challenge for Vietnam's steel industry amidst an already tough business climate as it tries to increase exports to Europe under the EU-Vietnam Free Trade Agreement (EVFTA)."

The CBAM is the EU's landmark attempt to put a fair price on carbon emissions produced from carbon-intensive goods entering the EU. It aims to encourage cleaner industrial production in non-EU countries.

According to the VSA, Vietnamese steel exports to the EU have been on a positive trajectory thanks to the implementation of the EVFTA in August 2020, along with the recent shortfall in steel supply to the EU. Steel exports in the first six months of 2023 reached 1.36 million tonnes, with export turnover reaching about $1 billion, an increase of 1.5 times compared to the same period in 2022.

In response to the new policy, Posco Yamato Vina Steel (Py Vina), under South Korea's Posco Group, is researching a new advanced technique using hydrogen to produce steel. Py Vina is aiming for a 50 per cent reduction in carbon emissions by 2040, and to be carbon-neutral by 2050.

Net-zero production is an important condition for steel manufacturers to access the EU market. However, this is not an easy process. "Some foreign financial institutions can offer loans with preferential interest rates for businesses to switch to carbon-free production. However, it is not the right time to make large investments," said Le Khac Giang, deputy head of the Production Department at NatSteelVina.

"Currently, we are gradually reducing emissions through energy-saving measures and applying technology to improve productivity," Giang added. "Further reductions in emissions and progress towards net-zero goals require major technological breakthroughs. This process requires huge investments at a time when the steel industry is facing many difficulties."

Emissions are an ongoing challenge for Vietnam's iron and steel industry, which is home to about 300 small and medium-sized enterprises. According to a survey by the Energy Efficiency and Sustainable Development Department under the MoIT, to produce 10 million tonnes of steel, large factories such as Formosa or Hoa Phat emit about 21 million tonnes of carbon.

Emission intensity at factories using electric-arc furnace (EAF) technology in Vietnam is also 1.5–2 times higher than the global average. This can be attributed to the large proportion of fossil fuels being used in electricity production. It is estimated that industry-wide emissions will reach about 122.5 million tonnes of carbon in 2025 and about 133 million tonnes of carbon in 2030, accounting for 17 per cent of the country's total emissions.

Le Huyen Nga, head of the Division for Supporting Industries at the MoIT's Industry Agency, said, "Once CBAM takes effect, importers in the EU must receive satisfactory carbon-emission data from exporters and report it to the relevant EU agencies. These procedures may become an import barrier for Vietnamese firms unless the mechanism becomes a driving force that motivates domestic steel firms to innovate their production processes."

Nga stressed the importance of Vietnamese producers remaining competitive in the global market, saying, "According to estimates by the World Trade Organisation, Vietnam's steel industry is likely to reduce in export value by about 4 per cent following the impact of the CBAM. This shrinking demand will lead to a decrease in output of about 0.8 per cent, along with the associated adverse impact on market competitiveness."

"Steel manufacturers should pay close attention to the different declaration processes and closely monitor developments in CBAM implementation, so they have the opportunity to devise a response," she added.

Nga encourages businesses to proactively seek information and expand their network by participating in relevant cooperation mechanisms under the EVFTA. They can consult the Domestic Consulting Group within the framework of Chapter 13 - Trade and Sustainable Development, and seek support from the relevant state management agencies when declaring information and completing procedures for exporting to the EU.

According to the decision of the European Commission, the CBAM will begin implementing the transition period from October 1, 2023, to December 31, 2025. This will initially apply only to selected products from the most carbon-intensive heavy industries. This includes iron, steel, cement, aluminium, fertiliser, electricity, and hydrogen. To facilitate smooth deployment, EU importers will not have to make financial adjustments during this time.                                                                       Once fully implemented in 2026, importers of goods covered by the CBAM in the EU will need to purchase a CBAM certificate. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances, expressed in €/tonne of CO2 emitted.

By Hai Van (