Viet Nam proposes to retain 50% of carbon credits in international trading

The proposal was presented at a conference earlier this week that summarized the research titled "Assessing the Impact of the Greenhouse Gas Emissions Trading Scheme and Carbon Credits in Viet Nam." The conference was jointly organized by the Department of Climate Change and the Southeast Asia Energy Transition Partnership (ETP).

Carbon market serves national emission reduction goals

The Emissions Trading Scheme (ETS), which is frequently referred to as the compliant carbon market, is demonstrating its efficacy in assisting nations in achieving their GHG emission reduction objectives in accordance with the Paris Agreement on climate change, as evidenced by the global trend. The World Bank's annual report indicates that the number of global ETS systems will increase from 25 in 2020 to 37 by 2025. Consequently, the percentage of global GHG emissions that are regulated by ETS has consistently increased from approximately 8% to 23%. In 2024, revenue increased from USD 25 billion in 2020 to USD 69.1 billion.

Mr. Nguyen Tuan Quang, the Deputy Director General of the Department of Climate Change, observed that this not only confirms the upward trend in carbon prices but also demonstrates the effectiveness of policy.

Viet Nam has been utilizing carbon market tools to achieve its emission reduction goals under the Nationally Determined Contributions (NDC), with the goal of achieving Net Zero emissions by 2050. The 2020 Law on Environmental Protection was the first to mandate the "organization and development of the carbon market". In light of this, the Government issued Decree No. 06 and has since continued to amend and supplement it with Decree No. 119. This legislation establishes a precise roadmap for the development of the carbon market, with a pilot phase that will conclude at the end of 2028 and an official operation that will commence in 2029. The objective is to pilot a carbon exchange platform as early as 2025.

The Government has tasked the Ministry of Agriculture and Environment with leading the formulation of a Decree on the international transfer of mitigated GHG emission results and carbon credits, as well as a Decree on forest carbon absorption and storage, to operationalize the market efficiently. The Ministry of Finance is responsible for developing a Decree regarding the domestic carbon exchange platform.

Measuring the effects of different policy options is essential for identifying strategies to reduce risks and optimize the benefits for the economy and businesses. As a result, the technical assistance financed by the United Nations Office for Project Services (UNOPS) through ETP was guided by this. During the pilot phase, the research identified management options for the ETS, such as defining its scope, setting the total limit, allocating allowances to individual facilities, and exploring the use of carbon credits as offsets.

Approximately 200 businesses in the thermal power, steel, and cement sectors will be the first to engage in emissions allowance trading during the market's pilot phase, which will run from now until 2028. Viet Nam is aiming for a high double-digit economic growth rate in the years ahead. High growth results in a greater demand for production and fossil fuel consumption, which in turn leads to increased emissions. Consequently, the expert team recommends that the carbon market should include initial flexible mechanisms to enable businesses to acclimate to the new technology and progressively transition.

According to Mr. Ho Cong Hoa, a member of the research team, the emissions trading scheme generally alleviates the financial burden on enterprises. To ensure compliance with the annual state-issued allowances, businesses are required to invest in emission reduction measures in full in the absence of an ETS. Businesses can alleviate the burden of compliance costs by selecting the most advantageous alternative from a variety of alternatives, including purchasing allowances from others, purchasing carbon credits to mitigate their allowance, or investing in their own reduction measures, with the implementation of an ETS.

The carbon market's ultimate objective is to compel substantial emitters to invest directly in emission reduction technology. Encouraging technological transformation necessitates a progressive decrease in the allowable offset ratio. Countries conduct rigorous market operations monitoring during the pilot phase to ensure that they make timely adjustments, such as regulating the domestic credit reserve ratio, imposing a price floor/ceiling, or conducting credit auctions. This is consistent with international experience. This guarantees that the carbon price more accurately represents the costs and damages associated with the environment.

Modifying the retained credit ratio on a roadmap

The market for trading mitigated GHG emission results between countries under Article 6 of the Paris Agreement is progressively expanding, according to experts. Viet Nam can mobilize international resources for sustainable business activities and production. It is important to note that emission reduction results will be tallied toward the NDC of another nation once they have exited Viet Nam's territory. This raises the possibility that domestic businesses may not have an adequate number of carbon credits to mitigate their national allowances or to comply with international emission reduction mechanisms (e.g., CORSIA, CBAM) if an excessive number of carbon credits are sold internationally. The most alarming aspect is that the remaining credits may not be sufficient to achieve the national NDC objectives.

Ms. Nguyen Hong Loan, the head of the research team and Climate Policy Expert at GreenCIC (Green Climate Creation Co., Ltd.), stated that the policy recommendations suggest that the managing agency consider the implementation of an integrated management roadmap across stages to ensure consistency between the domestic carbon market and leverage benefits from international credit transactions.

Viet Nam should prioritize economic feasibility and market stability during the pilot market phase (2025–2028). Businesses will have the ability to mitigate a maximum of 30% of their allowance with credits. Viet Nam will retain 50% of the total credits for international transactions in order to achieve its overarching national objectives. This method establishes the requisite adaptability to foster market confidence while safeguarding unconditional NDC targets with domestic resources.

The domestic offset limit will progressively decrease to 20% in the phase following 2028, after market regulations have been finalized. Emission allowances will be adjusted to align with conditional NDC targets supported by international cooperation. To mitigate the danger of overselling, international carbon credit trading will guarantee a retention ratio of at least 50% of the credits.

The carbon market will progress toward complete compatibility with Viet Nam's most ambitious climate objectives, which include the Just Energy Transition Partnership - JETP Declaration and conditional NDC targets, beginning in 2030. Businesses will be required to reduce emissions from their production activities directly, as the offset limit will significantly decrease to 10%. The credit retention ratio from international commerce will be reduced to 30% to guarantee that there are sufficient credits to meet national objectives. Revenue generated from credit transfers will be strategically reinvested in sectors that are challenging to mitigate (hard-to-abate sectors) to facilitate a fair transition process.

To achieve the Net Zero target, Viet Nam will be able to balance short-term economic feasibility with long-term environmental goals and international credibility by progressively tightening the offset limit and adjusting the retention rate on a roadmap.

The Department of Climate Change and the Ministry of Agriculture and Environment anticipate finalizing the legal framework for the carbon market and establishing the requisite conditions for the forthcoming market pilot operation by the end of September 2025. The final report will serve as a scientific and practical foundation for these efforts.

Viet Nam committed to reducing total GHG emissions by 15.8% compared to the Business-as-Usual (BAU) scenario by 2030 using domestic resources (the unconditional target) in its updated Nationally Determined Contribution (NDC) in 2022. If the international community provides the country with complete cooperation and support in the areas of finance, technology, and capacity development (the conditional target), this estimate could rise to 43.5%.