This article is written by Nguyen Kieu Nhu and edited by Nguyen Thanh Nghiep
To establish and operate a domestic carbon market, it is necessary to issue a high-level legal document, similar to carbon market laws in the EU or South Korea, or as part of macro-level development plans, such as China’s Social and Economic Development Plan. Therefore, to build a foundation for Vietnam’s carbon market, detailed provisions on this market need to be incorporated into the current legislation on environmental protection, probably a decree on the Carbon Market in Vietnam[1]. New legislation should include regulations on the following issues:
- Quota allocation based on emission intensity and emission permit allocation
Vietnam’s Emissions Trading System (“ETS’’) should pilot new mechanisms for carbon quota allocation to ensure accurate and adequate distribution in the market, helping to stabilize emission permit prices. The carbon market regulatory agencies in Vietnam can refer to the intensity-based cap mechanism implemented in China’s ETS, and the permit allocation practices in the EU ETS.
- Mechanism for determining quotas based on emission intensity
This is a method for adjusting the allowable Greenhouse Gases (“GHG’’) emissions within an ETS. This method is based on GHG emission intensity, meaning the quota is determined by the amount of GHG per unit of product (e.g., tCO2 per ton of steel) or per GDP unit. To determine quotas based on emission intensity, the competent authority must carry out a process comprising the following steps:
First, it is necessary to consider the country’s relative emission limits. According to regulations, the total quota (national emission cap) is determined based on national GHG control targets. For Vietnam, the total quota will be set according to the goal of reducing GHG emissions by 43.5% by 2030 based on projected future economic growth under a “business as usual” scenario[2].
Next, it is essential to determine the proportion of total emissions covered by the ETS relative to the country’s total emissions, thus calculating the total emissions for sectors within the ETS. Finally, the competent authorities need to set emission quota coefficients for each sector within the ETS. Companies will be issued emission permits corresponding to the CO2 amount tied to one unit of their product. Once emission permits are allocated to companies, regulatory agencies need to monitor their emissions and adjust quotas as necessary to maintain appropriate levels. Since emission intensity-based quotas are predetermined based on GDP forecasts or per unit of product, if the GDP forecast proves inaccurate or companies experience significant production changes, the regulatory authority can adjust the quotas after allocation to correct discrepancies between forecasted and actual figures[3].
The advantage of the emission intensity-based quota mechanism lies in its flexibility for quota adjustment. Intensity-based quota allocation is favored in cases of high variability in output levels and future growth, which is typical for developing economies like Vietnam[4]. Furthermore, this mechanism incentivizes companies within the ETS to innovate and adopt technologies to reduce GHG emissions, as the emission permits granted are generally close to the companies’ annual emissions. However, the intensity-based quota mechanism also has certain drawbacks. Firstly, it is challenging to set an intensity-based emission cap. Given Vietnam’s economic growth rate, determining an intensity-based emission cap based on GDP projections is difficult and likely to diverge from actual conditions. Secondly, determining quotas based on emission intensity may increase the risk of quota shortages.
- Allocation of Emission Allowances
Lessons from the EU ETS show that free allocation of emission allowances offers certain advantages, such as reducing the immediate costs of purchasing permits for emitters, especially for small and medium-sized enterprises (“SMEs’’). In the initial years of Vietnam’s ETS, free allocation of allowances will likely have a positive impact on emitters participating in the system. Furthermore, free quota allocation can help prevent sudden spikes in allowance prices. However, in the long term, free allocation presents several limitations. Specifically, it may reduce incentives to cut emissions:[5]
First, free allocation may create market entry barriers
If existing emitters receive allowances for free while new entrants are required to pay for them, the free allocation could have a negative impact on market entry, ultimately reducing competition.
Second, historical allocation increases lobbying activities
When valuable emission allowances are allocated for free, it may incentivize large enterprises to lobby, exerting significant pressure on the government and potentially creating market imbalances.
Under an auction system for obtaining emission allowances, emitters would participate in bidding to acquire permits that authorize them to emit a certain amount of GHGs. Permits would be awarded to the emitters offering the highest bids, with the number of permits granted to each emitter depending on their demand and bid price. After receiving permits, emitters could trade them on the secondary market. Compared to free allocation, auctioning permits have several advantages, such as enabling governments to use revenue to address equity issues through tax reductions or other distributions for SMEs. Additionally, governments can reinvest auction revenue in developing and deploying clean technologies or providing financial support for climate mitigation and adaptation efforts in other countries. Requiring permits to be auctioned also encourages innovation within businesses to reduce GHG emissions.
The Vietnamese government may consider allocating permits for free during the initial phase of the domestic carbon market. However, it should assess a gradual shift to auctioning permits in the long term to meet Vietnam’s commitment to achieving net-zero emissions by 2050.
- Developing a national and sectoral MRV System
One of the key foundations for the success of a carbon market is the MRV (Measurement, Reporting, and Verification) system. This multi-step process measures emission reductions achieved from specific emission reduction activities or projects. Of the four countries studied, the EU and South Korea possess effective MRV systems with high compliance rates, while the United States’ MRV system is regarded as incomplete, facing issues such as fraud, manipulation, and carbon leakage.
To ensure transparency, accuracy, and ease of comparison for information on emission reductions, a hierarchical structure within the MRV system is essential. In Vietnam, the MRV system is to be organized at the national and sectoral levels, aligning with UNFCCC regulations. Specific solutions are recommended for each level:
(a) At the National Level:
- Consistency and Flexibility
The entire MRV system, from the national level down to the sectoral level, should maintain consistency and flexibility. Administrative, technical, and sectoral agencies at all levels must interact and coordinate to verify the effectiveness of mitigation actions and the support received[6], as well as ensure the quality of emissions monitoring. This system will monitor the impact of both domestic and international support on emission reductions.
- Establishing Organizational Structures and Operational Mechanisms
A clear framework should define the functions and responsibilities of government and local agencies in measurement, reporting, and verification activities. These activities are interlinked; measurement is a prerequisite for reporting and verification. Responsibilities in the MRV system should be designated as follows: (i) the highest authority; (ii) the MRV regulatory agency; (iii) the coordinating agency; and (iv) the implementation agency for specific MRV activities.[7]
- Top-Down Approach for the National MRV System
The national MRV system should be developed using a top-down approach based on national mitigation targets. This approach uses default emission factors provided by the Intergovernmental Panel on Climate Change (IPCC) and activity data based on national fuel consumption statistics, ensuring relatively accurate and easily consolidated data[8]. This method should be codified in national legal documents such as government decrees and Prime Ministerial decisions.
(b) At the Sectoral Level:
- Developing Clear and Practical MRV Procedures
Detailed and practical MRV procedures should be developed for the national level and individual sectors/fields: energy, industrial processes, agriculture, LULUCF (land use, land-use change, and forestry), and waste. Specifically, given Vietnam’s strength in forest carbon, the MRV system for the forestry sector should be a priority.
- Bottom-Up Approach for Sectoral MRV
The sectoral MRV system will use a bottom-up approach, less dependent on centralized data collection. This approach also employs IPCC default emission factors, but the total emissions are estimated by identifying emission sources within production facilities in specific sectors and geographic regions. This method enables tracking of fuel consumption and GHG emissions at each emitting facility, reflecting the specific emission characteristics of particular geographic areas. Sectoral MRV systems will guide measurement at the project or sectoral level. A tiered approach also allows for better cross-referencing of GHG data.
- Developing MRV Frameworks by Ministries and Agencies
Ministries and agencies should establish MRV frameworks in their jurisdictions based on guidelines for NAMAs (Nationally Appropriate Mitigation Actions) funded domestically. This will help management bodies track and assess climate change mitigation efforts and impacts to provide essential information at the national level.
The national MRV system will serve as the central national authority responsible for compiling international reports. Ministries and sectors should develop organizational structures based on the scope and scale of GHG mitigation actions within their respective fields. However, this solution does not fully address the technical expertise of personnel or the coordination and distribution of national resources.
[1] Mai Kim Lien et al. (2020). Carbon credit trading market: International experience and policies for Vietnam. Journal of Hydrometeorology, No. 719, pp. 76 – 86[2] Decision No. 896/QD-TTg of the Prime Minister on Approval of the National Strategy on Climate Change for the period up to 2050[3] Yingying Zeng, Stefan E. Weishaar, Oscar Couwenberg. (2016). Absolute vs. Intensity-based Caps for Carbon Emissions Target Setting: An Obstacle to Linking the EU ETS to a Chinese National ETS?. page. 11. Access at: https://ceepr.mit.edu/wp-content/uploads/2021/09/2016-008.pdf[4] IEA. (2020). Implementing Effective Emissions Trading Systems: Lessons from international experiences. page. 25. Access at: https://www.iea.org/reports/implementing[5] Hepburn, C., Grubb, M., Neuhoff, K., Matthes, F. C., & Tse, M. (2006). Auctioning of EU ETS phase II allowances: how and why? Climate Policy, 6(1), page. 137–160. https://doi.org/10.3763/cpol.2006.0608.[6] Yvonne Pang et al. MRV measurement, reporting, verification – How to build national MRV systems. GIZ, 45. Access at: https://transparency-partnership.net/system/files/document/mrv-tool-4-2.pptx__0.pdf[7] Pham Thanh Long et al. (2019). Developing a monitoring, reporting and verification (MRV) process for national-level climate change adaptation activities in Vietnam. Journal of Hydrometeorology, No. 707, page. 25het[8] Tran Do Bao Trung, Tran Do Bao My. (2021). Calculating the potential for greenhouse gas emission reduction and evaluating the co-benefits of carbon credits of greenhouse gas emission reduction solutions in the public transport sector in Hanoi. Journal of Climate Change Science, No. 20, page. 2.
