Carbon pricing – simply put, the cost that businesses have to pay when emitting greenhouse gases. It is becoming more and more popular in the world. Currently, companies in more than 40 countries are having to bear this cost, through mechanisms such as Carbon Tax and Emissions Cap and Trading System (ETS). Some of these countries are planning to increase the carbon price. Meanwhile, 35 other countries are considering to start implementing carbon pricing (including Vietnam). This is an issue that any business leader needs to know and have a plan to adapt to in the future.
PwC’s research department has shown the percentage increase (%) in steel production costs in 05 countries in the scenarios. The first scenario simulates the time in 2026 when the Carbon Border Adjustment Mechanism (CBAM) is fully implemented in the EU. And the second scenario simulates the International Energy Agency (IEA) assumptions for the Net Zero scenario.
The results show that the cost of iron and steel production will increase by 2-3% in scenario 1 and by 7-15% in scenario 2. With the increase in production costs, the output price will certainly increase accordingly. This will affect the competitive advantage of goods in the market.
Besides, this trend is not only happening in the steel industry, but it will happen in a wide range of the economy, in all industries and fields that cause large greenhouse gas emissions.
In Vietnam, the ETS is expected to start pilot implementation from 2025 (or 2026) with the first 03 sectors: Iron and Steel, Cement and Thermal Power. Then, from 2028 onwards, it may expand its scope to 21 sub-sectors of the 05 major sectors listed in Decision 13/2024/QD-TTg, including: Energy, Transport, Construction, Industrial Processes and Agriculture, Forestry & Land Use.
In production and business activities, costs and prices increasing by a few percent will be a big problem that business owners need to adapt to and solve skillfully. Therefore, carbon prices will pose a new problem for business leaders in the above industries and fields to predict and prepare adaptation scenarios in the future.
This is also the reason why, during the appraisal process, many banks and investment funds ask companies about their ability to predict the impact and risk mitigation plans for carbon pricing costs. So, what should business owners prepare for these questions:
- Overview of greenhouse gas emissions: Leaders should proactively direct relevant departments to conduct greenhouse gas inventories to determine the current status of the company's emissions. Greenhouse gas data from emission sources is important information for business owners to assess the risks and impacts of carbon pricing on the company's future business operations.
- Understanding the regulations related to carbon markets: Because it is a new issue, it is especially important to have access to accurate information and understand the nature of the issue. The leadership and relevant departments need to review and understand the roadmap for implementing domestic and international carbon markets to determine the appropriate adaptation roadmap.
- Build a business adaptation plan: To “reduce the shock” of carbon prices having a strong impact on production costs, companies need to develop plans to reduce greenhouse gas emissions early. In addition, company leaders can also proactively implement an Internal Carbon Pricing Mechanism to gradually familiarize themselves with carbon pricing and help them better understand the impact of carbon prices on the competitive advantage of the goods produced by the company.
- Communicate early to value chain partners: Reducing emissions will require collaboration across the entire value chain of a business. Business leaders also need to discuss and seek opportunities for collaboration to reduce emissions with their partners and suppliers.
Carbon pricing will not only negatively impact businesses. Businesses that are proactive and early in the green transition will be able to reap the dual benefits of being proactive in controlling costs while also increasing the competitive advantage of low-emission goods, thereby opening up new markets.