“Greener” with carbon credits

DNHN - Experts from the School of Business, RMIT University Vietnam, emphasized that establishing a mandatory carbon credit trading platform is crucial for the national environmental strategy.

Dr. Pham Nguyen Anh Huy (Senior Lecturer in Finance) and Dr. Samuel Buertey (Acting Deputy Head of Accounting and Law Department)** proposed strategies for managing the emerging carbon credit market in Vietnam and utilizing profits from carbon credit trading to promote environmental sustainability.

The carbon market is a specialized financial market where carbon credits can be bought and sold. A carbon credit is a permit or quota that allows the owner/buyer to emit a certain amount of carbon or other greenhouse gases (typically equivalent to one ton) into the environment. The carbon market includes both mandatory and voluntary types.

Dr. Huy stated that to implement the National Strategy on Green Growth for the period 2021-2030 and commit to net-zero emissions by 2050, Vietnam needs to establish a mandatory carbon credit trading platform.

"A mandatory carbon credit trading platform rewards companies that genuinely strive to reduce emissions by allowing them to sell surplus credits while encouraging non-compliant units to invest more in environmentally friendly equipment and production processes," he said.

Dr. Huy proposed that Vietnam follow the European Union Emissions Trading System (EU ETS) model to manage and regulate carbon credits on the mandatory trading platform.

"EU ETS operates based on the 'cap and trade' principle, where each company has a certain allowable emission limit. If emissions exceed the limit, the company must purchase additional emission allowances on the market, with the price determined by the market. For example, in the initial phase of the EU ETS, most emission allowances were free, but companies were fined 40 euros per ton for non-compliance. Free allowances will gradually reduce in subsequent phases, and companies will eventually have to auction for these allowances," he explained.

Dr. Huy highlighted some key points that the Vietnamese government needs to consider:

The necessary infrastructure for the carbon credit trading platform must implement a measurement, reporting, and verification (MRV) process for emissions at both company and equipment levels. The trading platform must handle a large transaction volume, even though the pilot phase may have lower volumes. The government should consider integrating emerging technologies such as blockchain and AI to reduce costs and enhance transparency and accuracy in the MRV process. These technologies also enable Vietnam to expand and integrate with carbon markets of other countries and regions such as the EU, China, and the United States.

Prices should be determined by the market without government intervention, meaning it must be a free market.

The Vietnamese government should consider appropriate penalties for non-compliant companies and limit fines that could cause businesses to cease operations.

Dr. Huy noted that during the pilot phase, if Vietnam follows the EU ETS model with free carbon credits initially, it could lead to an oversupply of carbon credits due to inaccurate greenhouse gas emission estimates by participating companies.

"Oversupply can significantly reduce trading prices, leading to an inefficient market where carbon credit prices may drop to zero, and companies may not be penalized for excessive emissions because they can buy free carbon credits."

He pointed out that Vietnam faces pressure from countries and regions that have implemented carbon taxes, such as the Carbon Border Adjustment Mechanism (CBAM). The CBAM will negatively impact industries such as steel, cement, fertilizer, and aluminum by taxing carbon imports into the EU in these sectors. However, CBAM will not apply if Vietnam has an ETS that meets EU standards.

"The Vietnamese government needs to use emerging technologies like blockchain and AI to enhance MRV processes and reduce greenhouse gas emission estimation errors during the pilot phase of the carbon credit trading platform. This can also expedite the launch of the carbon credit trading platform and minimize the impact of international carbon taxes on domestic companies," Dr. Huy said.

Dr. Samuel Buertey also proposed a strategy for using the profits from carbon credit sales to enhance environmental sustainability in Vietnam.

"Revenue generated from carbon credit sales can be smartly allocated to different industries to promote environmental conservation and support Vietnam's transition to more environmentally friendly practices," he said.

With vast forest resources, Vietnam can allocate a portion of the profits to continue funding sustainable forest management activities. Enhancing forestry management and oversight institutions while investing in reforestation and afforestation projects will ensure the protection of forests from conversion for agricultural, industrial, and urban purposes.

Additionally, the government can create more incentives for farmers and communities dependent on forest resources, encouraging them to conserve and plant forests. A portion of the carbon credit sales profit can be invested in renewable energy projects to reduce Vietnam's reliance on fossil fuels by 40% and lower greenhouse gas emissions.

Supporting research and development (R&D) of emission reduction technologies or enhancing carbon capture is a worthwhile investment. Although carbon capture, utilization, and storage (CCUS) technology is still in its infancy, especially in developing countries, the government can establish a special fund to support R&D activities in CCUS technology. This investment will foster innovation and provide long-term solutions to environmental challenges.

Dr. Buertey also shared optimal practices from other countries that Vietnam can adopt to improve its carbon credit management strategy.

Vietnam must establish a robust legal framework defining the rules and guidelines for carbon credit trading and enforcement. The EU ETS, known for its exemplary legal framework, can serve as a model for Vietnam. Vietnam can adopt similar stringent regulations to ensure market integrity and compliance. Transparent and strong reporting requirements can be enforced as a strategy to build trust and reduce uncertainty in the carbon credit trading platform. Regularly publishing market data, including emission reports and auction results, will help mitigate market risks.

Although carbon credit prices should be determined by the market, Vietnam can implement rule-based market stabilization strategies to address excessive price volatility and discourage low-carbon investment. The Korean Emissions Trading Scheme (K-ETS) uses a Market Stability Reserve (MSR) to manage the supply of emission allowances, and the state of California in the United States uses price floors and ceilings to stabilize prices. These examples provide useful references for how Vietnam can limit market volatility. Another strategy that Vietnam should consider in the medium to long term is linking with other regional and global carbon markets. Since 2020, the EU has linked its ETS with Switzerland, making the market more flexible and efficient. Vietnam should consider a similar approach to enhance liquidity and provide more trading options for businesses.

"With careful and solid measures, the Vietnamese government can promote the nascent carbon credit market and enhance sustainability," Dr. Huy concluded.

Minh Ngoc (RMIT)