Vietnam’s Carbon Market: Progress Report

Vietnam is making significant progress towards creating a carbon trading market, aiming to fulfill its COP26 commitments to reduce emissions and leverage the economic benefits associated with carbon markets. Here’s an overview of Vietnam’s efforts in establishing its own market.

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During COP26, Vietnam made a commitment to attain net-zero carbon emissions by 2050, with a carbon market being touted as one of the most efficient strategies to achieve this objective.

Carbon markets raise the cost of carbon emissions, resulting in increased business expenses. This should motivate companies to reduce their environmental impact to improve bottom-line growth.

Further, carbon trading can generate economic advantages for the national economy. The global carbon credits market exceeded US$909 billion last year, with permits exchanged for 12.5 billion tons of carbon.

Yet, despite the potential financial gains from carbon trading, only the province of Quang Nam in Vietnam has so far pursued this opportunity.

This may be about to change, as the push to develop a domestic carbon market starts to get traction.

Vietnam’s carbon credit market plan

From 2015 to 2020, Vietnam was a part of the Partnership for Market Readiness (PMR). This was a program supported by the World Bank and designed to help establish legal frameworks and pilot markets for carbon that could be integrated with international carbon markets.

This was followed, on December 21, 2021, by Decision No.2157/QD-TTg, which established a National Steering Committee charged with ensuring that Vietnam meets the commitment it made at COP26. This marked Vietnam’s first legislated step toward realizing its ambitious goal.

This was further supplemented by Decision No. 01/2022/QD-TTg, which mandated a list of sectors and facilities that must conduct greenhouse gas inventories, including energy, transportation, construction, industrial processes, and agriculture-forestry.

Most recently, Decree 06/2022/ND-CP dated January 7, 2022 provided clear regulations for the development of Vietnam’s carbon market. It specifies two key periods:

• 2023-2027: Developing regulations on carbon credit management, quota exchange activities and carbon credit; developing regulations on the operation of carbon credit trading floors; piloting implementation of the mechanism of exchange and clearing of carbon credit from 2025.
• 2028: Officially operating a carbon credit trading floor; connecting the domestic carbon market with others in Asia and the global market.

Thus, from 2028, if factories and businesses cannot reduce their carbon output, they will have to purchase carbon credits to offset their emissions. Failure to do so may see those firms hit with administrative fines.

Vietnam’s carbon market participation so far

Vietnam has indirectly participated in carbon credit trading activities through several schemes and projects, such as the Clean Development Mechanism (CDM) adopted under the Kyoto Protocol and the European Union Emissions Trading Scheme (EU-ETS).

The CDM project allows developing countries like Vietnam to earn saleable certified emissions reduction (CER) credits in order to meet Kyoto reduction targets. As of June 2020, Vietnam ranked 4th in the number of CDM Executive Board projects in the world with 257 projects accounting for 140 million tons of carbon dioxide.

Vietnam has also taken part in this field through the Joint Crediting Mechanism (JCM) with Japan and the Program on Reducing Emissions Through Reducing Deforestation and Degradation (REDD+).

Since the implementation of JCM in 2013, Vietnam has been producing ten million tons of carbon dioxide credits per year for Japan through 28 projects. Vietnam ranks 4th in the number of credits among the participating countries and this also gives it the opportunity to access Japanese energy-saving and emissions-reducing technologies.

With regard to REDD+, Vietnam was the first country in the Asia-Pacific region to be recognized as eligible for payments for emissions reduction efforts in 2018.

Benefits of a carbon credit market for Vietnam

Reducing emissions and deforestation

Tropical deforestation represents 11 percent of human-caused greenhouse gas emissions. Meanwhile, protecting and restoring tropical forests could account for up to 30 percent of the emissions reductions needed to stave off global warming.

A mature tree over 30 meters tall can absorb and store about 22 kg of carbon dioxide a year. Under the REDD+ scheme one ton of carbon dioxide equals one carbon credit, or 1 carbon credit for every 41 mature trees.

As a country with almost 15 million hectares of forest, Vietnam’s forestry sector can play an important role in not only reducing greenhouse gas emissions but also generating revenue from the market for carbon credits.

Revenue from forest carbon credits could prove to be very profitable for Vietnam. However, this will require finding ways to protect these areas and to reduce deforestation. Planting more trees to increase forest acreage could be one way to offset the impacts of deforestation.

Economic benefits for forest-based communities

Lots of Vietnamese agricultural firms from large corporations to smaller startups have also expressed an interest in a carbon credit market. Sokfarm, for example, is looking to sell carbon credits from coconut trees. This may have the added benefit of reducing hardships and mitigating risks posed by climate change for farmers.

Quang Nam is the first locality in Vietnam licensed by the government to carry out a pilot project for developing forest carbon credits.

Quang Nam’s natural forest area is 466 hectares. If one cubic meter of forest trees is equal to 1.1 tons of carbon, after the pilot phase this project could help Quang Nam earn up to US$5 million per year at a selling price of US$5/ton carbon dioxide equivalent (CO2e).

However, despite billions of dollars spent on carbon removal, the profit from selling carbon credits is still not high enough to persuade a critical mass of owners to discontinue clearing forests.

This is due to increasing demand for wooden furniture in both domestic and global markets and higher prices as a result – in the first 11 months of 2022, wood and wooden products exports of Vietnam were worth an estimated US$14.6 billion, increasing 9 percent over the same period in 2021.

Creating advantages for export activity and FDI

With a boom in demand in Asia for carbon credits following COP26, the voluntary carbon market is opening export opportunities for Vietnamese carbon capture companies.

For instance, Singapore chose to develop a voluntary market allowing domestic businesses to purchase international carbon credits to offset taxable emissions. This plan should help Singapore become a major regional carbon services and trading hub in the region.

This may provide opportunities for Vietnamese firms to create high quality carbon credits and sell them to enterprises in Singapore to help them cover their carbon offset obligations.

A domestic carbon market may also boost exports in major markets like the EU and the US, while also helping Vietnamese products avoid emissions-based import taxes.

The EU’s Carbon Border Adjustment Mechanism (CBAM) is a prime example of this tax. It enforces a tariff on carbon-intensive imports, leveling the playing field for EU firms that adhere to emissions trading regulations.

While this strategy is still in its nascent stage, cross-border emissions-based trade barriers like this are predicted to gain popularity in the future.

Prospects in Vietnam’s future carbon market

Creating a carbon credit market in Vietnam will be highly beneficial for the carbon capture industry and, more crucially, the environment.

By reducing greenhouse gas emissions, a successful carbon trading market will aid Vietnam in fulfilling its COP26 commitments while enabling individuals and businesses to profit from selling credits overseas.

Despite the absence of a carbon market in Vietnam at present, the groundwork is being laid, and carbon emissions management is steadily advancing towards this goal.

The move is not only necessary for Vietnam to achieve its climate commitments but also to ensure seamless international trade.

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