The economic impacts of the European Union’s Carbon Border Adjustment Mechanism on developing countries: the case of Vietnam

Abstract

PurposeThis paper aims to assess the economic impacts of the European Union’s Carbon Border Adjustment Mechanism (CBAM) on Vietnam.Design/methodology/approachWe constructed a general equilibrium model to assess the economic impacts of the CBAM on the macroeconomic indicators of Vietnam. We also constructed a generic partial equilibrium model to provide a zoomed-in view of the impact on each group of CBAM-targeted commodities, which is not possible in the general equilibrium model. Both the general equilibrium and the partial equilibrium models were calibrated with publicly available data and a high number of value sets of hyperparameters to estimate the variations of the estimated impacts.FindingsThe results suggest that the current form of the EU’s CBAM is unlikely to produce substantial effects on the overall economy of Vietnam, mainly because the commodities affected by it represent a small portion of Vietnam’s exports. However, at the sectoral level, the CBAM can reduce production outputs and export values of steel, aluminium, and cement.Social implicationsThe CBAM by itself may not lead to significant decreases in greenhouse gas emissions, but it could provide a rationale for implementing carbon pricing strategies, which might result in more significant economic effects and help in reducing greenhouse gas emissions. This highlights the necessity of supplementary policies to tackle global climate change.Originality/valueWe constructed economic models to evaluate the impacts of the European Union’s Carbon Border Adjustment Mechanism on Vietnam, both at the macroeconomic level and zooming in on directly impacted groups of commodities.