Carbon border adjustment mechanism, carbon pricing, and within-sector shifts: A partial equilibrium approach to Vietnam's steel sector

Abstract

Carbon pricing has recently gained further momentum from the European Union (EU)'s plan for the Carbon Border Adjustment Mechanism (CBAM). The CBAM aims to align the greenhouse gas (GHG) emission costs in imported products with those within the EU. CBAM will affect foreign producers in targeted sectors, incentivising them to employ low-emission technology, and encouraging trading partners to implement carbon pricing akin to the EU's. Our study assesses the potential impact of the CBAM and Vietnam’s carbon pricing on the country's steel sector, using a multi-technology, multi-trade-partner partial equilibrium model. The results suggest that the CBAM could significantly reduce Vietnam's steel exports to the EU while it is not sufficient to significantly shift production from high-emission to low-emission steel production. However, CBAM may nudge Vietnam’s carbon pricing, which can drive a substantial transition from high-emission to low-emission production and accelerate the transition to clean energy, depending on the level of carbon price. Our study results provide important insights for energy and climate policy discussions in relation to carbon border adjustment mechanisms and carbon pricing.

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