FEATURE: Vietnam prepares to add carbon to its list of market successes

26 Oct 2023

Quantum Commodity Intelligence – In the mid-to-late 1980s, Vietnam's Communist rulers came to the realisation that continuing to follow a strict centrally-planned economy would eventually lead to economic collapse and so they embarked on a series of reforms embracing a more market-orientated approach.

The move revitalised the country's economy, with production of one particular commodity, coffee, helping drive the growth and raising Vietnam's market share to about 20% in just 30 years from 0.1% previously. Now the country is eyeing being a major player in another commodity market, carbon, with plans for a compliance trading scheme later this decade and agreements already in place to take advantage of opportunities under Article 6 of the Paris Agreement.

The government has announced plans to pilot carbon trading between 2025 and 2027, with the following year earmarked for the start of the compliance scheme, as it looks at options to help meet its Paris goals and put the country on a path to net zero greenhouse gas (GHG) emissions by 2050. Carbon credits could also generate inward investment and generate revenue from international sales, but another major factor is concern over the EU's Carbon Border Adjustment Mechanism (CBAM), said Nguyen Thanh Nghiep, a partner at Hanoi-based law firm VTN and Partners.

The EU's CBAM, which started a trial period at the start of October, aims to address so-called 'carbon leakage' in the EU Emissions Trading Scheme (ETS), where companies covered by the system move production out of Europe to countries with less stringent GHG emissions restrictions. Goods imported into the EU should be covered by carbon pricing equivalent to that applicable to the same goods produced within the EU, under the ETS, levelling the playing field between local and external suppliers.

"Vietnam is concerned about being disadvantaged by CBAM, which could increase the cost of Vietnamese exports to the EU and put some industries at a disadvantage. This has led to calls for a more inclusive and balanced approach to carbon markets, with the inclusion of non-carbon intensive goods and services in the scope of carbon trade," Nguyen Thanh Nghiep told Quantum.

Vietnam-based multi-industry outfit CT Group also cited CBAM as a motivation for local companies to cut emissions when it launched a carbon credit subsidiary last month. The Carbon Credit Trading Platform ASEAN Joint Stock Company (CCTPA) will offer consultancy services to organisations and individuals on project development, registration and verification. It will also give advice on offset issuance and trading, and provide a blockchain-based platform to buy and sell offsets. "Currently, carbon credit projects in Vietnam are still quite new and have not received the attention of businesses (therefore) it is necessary to have a consulting unit to guide the inspection and registration process of carbon credits," CT Group said.

Huge opportunities

Cong Vu, head of ESG at Ho Chi Minh City-based investment management firm VinaCapital, told the Vietnam ESG Investor Conference 2023 in June a similar story. "Opportunities are huge, so many companies have very great opportunity to invest in carbon credits but we have some limitations," he said.

"Firstly, about knowledge and experience. Everyone knows about the potential of the carbon credit market but they do not know how to generate carbon credits for their business. Second, in human resources at the moment in Vietnam there are a very limited number of consultants who have deep knowledge of the carbon credit market and who can help companies. So now we need to hire international consultants to do that," he added.

Cong Vu is also leading a specialist unit at VinCapital – VinaCarbon Climate Impact Fund – that has been set up to invest in projects that generate carbon credits, as well as develop its own carbon schemes.

"Vietnam is one of the strategic countries for carbon credits … We have huge amounts of area for forestry projects. We have a huge coastline for blue carbon projects and so many farmers working on their farms who can be transitioned to low carbon agriculture. And the emissions of the country is pretty high right now (and so) that means that the potential for reductions is very high as well," he told the conference.

VTN's Nguyen Thanh Nghiep agreed forestry and agriculture offer big opportunities for the carbon market. Some 60% of the country's landmass is covered in forest and so offers opportunities for avoided deforestation and degradation (REDD+).

Agriculture is responsible for one third of the country's GHG emissions, and measures could be implemented to cut methane and nitrous oxide emissions to generate carbon credits. But he also suggested credits could be created from the renewable energy sector and industrial sectors, such as cement and steel, through energy efficiency and installation of lower-carbon technologies.

For example, in July, South Korean company SK E&S, a division of Korea's second largest conglomerate SK, opened an office in Ho Chi Minh City with the aim of managing and developing renewables projects and creating carbon credits in the country.

SK E&S said projects would be developed through joint ventures with local companies, with one already established called Solwind Energy set up with Gia Lai Electricity, a subsidiary of Vietnamese conglomerate TTC. The JV plans a rooftop solar facility in Tay Ninh, southeastern Vietnam, and a 756MW onshore wind plant near the border with Laos.

Carbon market experience

However, Vietnam is not quite the complete 'newbie' to carbon with the country having been active in the Kyoto Protocol's Clean Development Mechanism from the mid-2000s, and projects registered in the voluntary market, including under US-based Verra's Verified Carbon Standard and the Switzerland-based Gold Standard.

It also has also been working with Japan since 2013 as part of a bilateral agreement under the latter's Joint Crediting Mechanism, whereby Japan finances emission reduction projects in developing countries in exchange for carbon credits. In total, over 300 carbon projects have been registered, of which about 150 have been granted more than 40 million carbon credits for sale on the global market, according to the country's Department of Climate Change.

But a potential gamechanger on carbon trading for Vietnam is Article 6 of the Paris Agreement. Under Article 6, countries can take advantage of either country-to-country (Article 6.2) or project-based (Article 6.4) emissions trading to help meet their nationally determined contributions, which are country-level carbon plans required under the Paris climate agreement. And the country is already active in developing these opportunities with recent announcements about link-ups with South Korea and Singapore, for example. A letter of intent (LoI) was signed with Singapore in August to continue collaborating on Article 6, building on a memorandum of understanding (MoU) between the two countries inked in October last year.

In late September, South Korea announced it was investing KRW27.0 billion ($20.1 million) in three projects in Vietnam and one in Uzbekistan under Article 6.2. One project involves a brick factory in Vietnam improving the efficiency of its coal kiln process to cut emissions by 975,609 tonnes of carbon dioxide equivalent (tCO2e) a year, with 12,222tCO2e a year for the Korean government. The other two Vietnam projects are a 7MW rooftop solar installation at TTC industrial park in Tay Ninh Province from which the South Koreans will receive 7,420tCO2e a year out of the 8,302tCO2e to be reduced, and a waste refrigerant recovery, recycling and re-supply project that will deliver 30,000tCO2e in reductions, with 2,198tCO2e going to the South Korean government. The projects build on an MoU signed between the two countries' governments in June.

Avoided deforestation

South Korea has also expressed an interest to work with Vietnam on the development of REDD+ projects. Korea Forest Service Minister Sung-Hyun Nam said during a meeting in June in Hanoi with Vietnam's Minister of Agriculture and Rural Development Le Minh Hoan that South Korea is implementing several REDD+ projects in Asian countries. In the future, Nam said he would like to see cooperation between the two countries on similar REDD+ projects in Vietnam.

Vietnam is no stranger to working on avoided deforestation, having earlier this year received $41.2 million from the World Bank's Forest Carbon Partnership Facility (FCPF) as part of an up to $51.2 million Emission Reductions Payment Agreement in place between the government of Vietnam and the FCPF's Carbon Fund since 2020. Under the terms of the agreement, Vietnam is expected to reduce 10.3 million tCO2e emissions by the end of 2024 from six North Central Region provinces (Thanh Hoa, Nghe An, Ha Tinh, Quang Binh, Quang Tri and Thua Thien Hue), through forest protection and improved land management activities.

There is also a potential carbon credit deal in the offing between Vietnam and the Leaf Coalition, a New York-based public-private initiative set up in 2021 to buy large volumes of carbon credits from jurisdictions around the world.

A LoI was signed between the country's Ministry of Agriculture and Rural Development (MARD) and the coalition in October 2021. In June this year, MARD submitted a formal request for Vietnam Forest Protection and Development Fund (VNFF), a government agency, to be the preferred financial institution for transactions with Leaf, which is now in the process of assessing VNFF's suitability for the role.

Beyond forestry, Vietnam joined the Just Energy Transition Partnership (JETP) at the end of last year, under which it will receive $15.5 billion of public and private finance from a group of donor countries, including Japan, US, UK and EU. JETP, which was established at COP26 in Glasgow in 2021, aims to help Vietnam meet its net zero 2050 goal by transitioning away from fossil fuels to clean energy. Some of the terms of the agreement, include a goal to peak power sector emissions at 170 million tCO2e in 2030 and have a 45% share of renewable energy by the end of the decade.

The Vietnamese government estimates that its forests alone could deliver 40 million carbon credits a year, based on 70 million tCO2e absorbed and the sector's emissions of 30 million tCO2e, according to a speech by Deputy Agriculture and Rural Development Minister Nguyen Quoc Tri in June. VTN's Nguyen Thanh Nghiep said that added to this is the potential for a further 17 million tCO2e a year from other sectors, giving the country the potential to generate 57 million credits annually. However, with Vietnam having its own GHG goals under the Paris agreement, how many carbon credits it actually makes available to the global market is uncertain.

"The government could potentially limit the volume of carbon credits that can be exported out of the country, either directly or through regulations or policies," said Nguyen Thanh Nghiep. "This is because there may be concerns about meeting its own commitments under the Paris Agreement, and ensuring that the carbon markets in the country are functioning effectively and delivering the environmental benefits they are intended to," he said.

Economic benefits

But the government will also weigh up the financial and economic benefits from selling carbon credits. "This will likely be a complex and ongoing process, and will require careful consideration and consultation with various stakeholders," he added.

Talks are already underway between the government and the private sector on pilot projects, according to a government official. Thuy Thanh, who is director of the Vietnam economic forum and CEO of the office of the 'Private Sector Committee', told the June conference that after COP 26 lots of companies and business associations contacted her with concerns about the country's commitments.

In response, the government started to look at the green transition in detail last year and, what she called, "early discussions" with industry sectors on pilot projects have been taking place, ahead of her producing a report to the Prime Minister Phạm Minh Chính on projects that have most potential. The provision of recommendations to the PM is one of the responsibilities of the Private Sector Committee, which is also responsible for assessing implementation of policies and regulations relevant to private sector.
"These pilot projects are a crucial step in the development of the carbon market in Vietnam and are expected to be tied in with the government's plans for a national pilot market by 2025," said Nguyen Thanh Nghiep.

"(They) are designed to test the feasibility and effectiveness of the carbon market, and to identify any issues or challenges that need to be addressed before a full-scale carbon market can be implemented. They will also provide an opportunity for private companies to become familiar with the carbon market and its potential benefits," he said.

The government's plans for a pilot carbon market by 2025 are "likely to be contingent on the success of these early pilot projects and the implementation of the necessary infrastructure and regulatory framework", he added.

Nguyen Thanh Nghiep also feels that work needs to be done on educating and training stakeholders. "One of the key challenges in Vietnam is the lack of understanding of carbon markets among industry participants, policymakers, and the general public. Education and training can help to build awareness of the benefits of carbon markets and the technical aspects of how they operate," he said.

Infrastructure

In addition, the country needs to build the infrastructure needed for a successful carbon market, such as a registry and monitoring, reporting, and verification (MRV) systems. "This infrastructure will need to be developed in collaboration with international experts and institutions to ensure that it meets international standards and is transparent and accessible to all stakeholders," Nguyen Thanh Nghiep said.

"A successful carbon market in Vietnam will also require a system of incentives to encourage participation from both buyers and sellers. This could include tax incentives, subsidies, or other financial rewards for companies and individuals who participate in the market," he added.

VinaCapital's Cong Vu said he has organised several workshops with important industry sectors, such as forestry, paper, steel, and coffee on what are the challenges and opportunities from carbon trading. The government should do more to promote the voluntary carbon market ahead of the compliance market later in the decade, he told the June conference.

"The compliance market is not in place until 2028 … (but) we cannot wait and need to work on the voluntary market. The government should have some special mechanism to the voluntary market until we have a compliance market."

Photo credit: Joseph Lancaster