Vietnam Poised to Harness the Power of Carbon Markets

Vietnam's Carbon Market Takes Shape
In the lead-up to the 2021 United Nations Climate Change Conference (COP26), Vietnam made a bold commitment to achieve net-zero carbon emissions by 2050. The creation of a domestic carbon market has emerged as a crucial strategy to realize this ambitious goal.

Vietnam's journey towards a carbon market began in 2015 when it joined the Partnership for Market Readiness (PMR), a World Bank-supported program aimed at helping developing countries establish legal frameworks and pilot carbon trading systems. This laid the foundation for the country's subsequent legislative actions.

In December 2021, the Vietnamese government took a significant step forward by establishing a National Steering Committee to oversee the implementation of its COP26 commitments.

This was followed by a mandate requiring a range of sectors, including energy, transportation, construction, and agriculture-forestry, to conduct greenhouse gas inventories.

The regulatory framework for Vietnam's carbon market was further solidified in January 2022 with the introduction of Decree 06/2022/ND-CP. This decree outlines a two-phase approach for the development of the country's carbon trading system.

In the first phase, from 2023 to 2027, the focus will be on developing regulations governing the management of carbon credits, quota exchange activities, and the operation of carbon credit trading floors.

During this period, the mechanism for exchanging and clearing carbon credits will also be piloted, starting from 2025.

The second phase, set to commence in 2028, will see the official launch of a carbon credit trading floor, as well as the integration of the domestic market with regional and global counterparts. This integration will allow for broader participation and greater market liquidity.

Once the carbon market is fully operational, factories and businesses that exceed their carbon emission allowances will be required to purchase additional credits to offset their excess emissions.

Failure to comply with these regulations may result in administrative fines, providing a strong incentive for companies to actively manage and reduce their carbon footprint.

Indirect Participation and Early Successes

While the establishment of a robust domestic carbon market is still a work in progress, Vietnam has already gained valuable experience through its indirect participation in various international carbon trading schemes.

Through the Clean Development Mechanism (CDM) under the Kyoto Protocol, Vietnam has earned certified emissions reduction (CER) credits, ranking fourth globally in terms of the number of CDM projects with 257 projects accounting for 140 million tons of carbon dioxide.

Vietnam has also been involved in the Joint Crediting Mechanism (JCM) with Japan, producing an average of 10 million tons of carbon dioxide credits per year through 28 projects. This collaboration has given Vietnam access to Japanese energy-saving and emissions-reducing technologies.

Furthermore, Vietnam was the first country in the Asia-Pacific region to be recognized as eligible for payments for emissions reduction efforts under the REDD+ (Reducing Emissions from Deforestation and Forest Degradation) program.

These early forays into carbon trading have provided valuable lessons and laid the groundwork for the development of Vietnam's own carbon market.

Unlocking the Potential of Forestry Carbon

With its vast forest resources, Vietnam is poised to capitalize on the opportunities presented by forestry-based carbon projects. Calculations suggest that Vietnam's forests have the potential to absorb nearly 70 million tons of carbon dioxide annually.

The province of Quang Nam has already taken the lead in this regard, becoming the first locality in Vietnam to be licensed by the government to pilot a forest carbon credit project. The project, which covers a natural forest area of 466 hectares, could generate up to $5 million per year for Quang Nam if the credits are sold at $5 per ton of carbon dioxide equivalent.

Dr. To Xuan Phuc, Executive Director of the Forest Products Trade Policy Program at Forest Trends Organization, emphasizes the importance of determining carbon rights, benefits, and equitable benefit-sharing mechanisms to maximize the effectiveness of these forestry carbon projects.

"Determining carbon rights, benefits and sharing benefits from carbon plays an important role. Maximizing efficiency needs to put people and communities - those living closest to the forest - at the center of benefit from the sale of carbon credits in the future," Phuc said.

The Vietnamese government is also negotiating with the Emissions Reduction Alliance (LEAF) to potentially mobilize additional financial resources through forest protection activities in the Central Highlands and South Central regions.

Opportunities for Export and Foreign Investment

The development of a domestic carbon market in Vietnam is not only expected to drive emissions reductions but also create new economic opportunities, both domestically and internationally.

The voluntary carbon market in Asia is booming, with Singapore emerging as a regional hub for carbon services and trading. This presents an opportunity for Vietnamese carbon capture companies to export their high-quality credits to Singaporean businesses seeking to offset their emissions.

Moreover, the implementation of carbon-related trade barriers, such as the European Union's Carbon Border Adjustment Mechanism (CBAM), could provide a competitive advantage for Vietnamese exports.

By actively participating in carbon markets, Vietnamese companies can ensure their products meet international emissions standards, avoiding potential tariffs and gaining better access to global markets.

The prospect of a thriving carbon market in Vietnam is also attracting the attention of foreign investors. According to Dr. To Xuan Phuc, the interest from both domestic and international investors in forestry carbon projects is already high, although the government currently lacks specific policies to guide such investments.

Overcoming Challenges and Unlocking the Full Potential

Despite the progress made, Vietnam faces several challenges in the development of its carbon market. These include the need for a comprehensive legal framework, stronger international cooperation, and increased awareness among businesses and the public.

To address these challenges, the Vietnamese government has taken steps to promote sustainable development and green growth. The country has issued strategic initiatives, such as a development plan for carbon pricing instruments, including a market for compliance-based carbon credits.

Deputy Foreign Minister of Vietnam Nguyen Minh Vu emphasized the government's commitment to green transformation, stating that it is a new driving force for sustainable growth and a key strategy for the country to establish its position in the global green value chain.

The Organisation for Economic Co-operation and Development (OECD) has expressed its support for Vietnam's efforts, recognizing the country's potential to create a vibrant, effective, and high-quality carbon market.

As Vietnam continues to navigate the complexities of establishing its carbon market, the potential benefits are substantial. A well-functioning carbon trading system could not only drive emissions reductions and help Vietnam meet its climate goals but also unlock new revenue streams, create economic opportunities for forest-based communities, and position the country as a leader in the global green transition.