The upcoming months will be decisive for Vietnam’s Emission Trading Scheme. What’s on the plate?
In 2020, Vietnam decided to establish an emission trading scheme (ETS) and mandated that the Ministries of Finance (MOF) and Natural Resources and Environment (MONRE) implement it. Its pilot phase is set to start in 2025, and the system set to be fully operational in 2028.
Decree 06/2022/ND-CP specifies some details of the planned ETS including the requirement for Vietnam’s most emitting enterprises (as per this decision and list) to provide an account of their Greenhouse Gas emissions. Initially, the ETS will cover the same enterprises, which will receive an emission quota. If a facility exceeds their cap, it purchases additional allowances or offsets up to 10% by purchasing using carbon credits generated outside the compliance market, i.e. by projects of the so-called national crediting programme .
Several IKI projects support the concerned partner ministries in setting up the emission trading scheme, most notably the Energy Transition Partnership. At a recent exchange, the IKI implementers updated each other on the current state of preparation. The IKI-supported financial governance of the market mechanism of the ETS, the so-called Carbon Trading Exchange, is underway. In addition, carbon accounting training of enterprises commenced, preparing businesses for the requirements of the carbon market. With the ETS to pilot in 2025, attention shifts towards implementing the Carbon Trading Exchange Platform and the national carbon registry and emission allowance allocation to the facilities, all under MONRE jurisdiction.
In addition to IKI, Experts of Expertise France have been advising the ETS development in Vietnam. At a recent consultation meeting, they recommended setting additional ETS regulation well in advance to allow for plannable investments. In an ETS, the carbon price is determined by a number of factors, including:
- The method of emission allowance allocation to the facilities
- The temporal evolution of allocation (what determines the reduction over time),
- The share of free allocations
All three influence the effectiveness of the market, as the absolute number of emission allowances impacts the price (high demand leads to high prices), as does the initial price of allowances. For example, the EU-ETS provided allowances for free in the first eight years and distributed large amounts of allowances. Since then, it transitioned to auctioning more than 50% of allowances and reducing their number by 2.2%/year.
OECD data shows that auctioning significantly contributes to the effectiveness of the market. To reach the desired economic effects, companies need to invest in decarbonization technology, and thus, a carbon market needs to send a long-term price signal that these investments will pay off. Alongside market stability mechanisms, only transparent and long-term governance of allocation mechanisms can reach this. Some experts even propose to set minimum prices to ensure long-term sustainability.
With Decree 06, Vietnam has made a first step towards the carbon registry and allowance allocations by asking its most emitting enterprises to submit Greenhouse Gas Inventories. At this stage, sector ministries govern the methodologies for the GHG inventories of facilities while the provinces verify the results. Potentially, the data of the GHG inventories could eventually become the basis for distributing free emission allowances (see also (grandfathering vs benchmarking). However, given that data is only available from this year onwards and facilities may need some experience adjusting their reporting frameworks, it might be advisable to auction allowances immediately. In addition, auctions carry the advantage of generating income, which can be used for additional climate actions or mitigating negative social consequences from carbon trading.
A registry is usually an online database that holds accounts for each facility participating in the market and all emission allowances and carbon credits for offsets in Vietnam. It keeps track of all allowances and their ownership and checks if facilities surrender sufficient allowances to cover their emissions. Interestingly, many countries also maintain a register of emitted GHG emissions from facilities not part of the ETS, which is helpful for cross-checking. The governance of the national carbon registry is critical for ensuring market compliance, particularly ensuring that reported emissions are correct and verified. Vietnam may want to strengthen the facility’s GHG inventory procedures and verification mechanisms to ensure that all facilities in the ETS are ready for a functioning compliance mechanism. In addition, procedures for non compliance need to be set out to ensure that all market participants contribute to the overall decarbonisation goals.
The upcoming months will be decisive for Vietnam’s ETS. IKI projects will continue to advise the responsible bodies as core decisions are approaching, including the distribution of allowances and use of revenues, the national carbon registry, detailed guidance for carbon accounting, surrendering of allowances, and compliance questions.