Unlocking the carbon exchange - The role of the carbon credit market in achieving sustainable development goals and combating climate change

Net Zero in Vietnam

At the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) in Glasgow in 2021, Vietnam announced its target to achieve net zero emissions (Net Zero) by 2050. This is the premise for Vietnam to reaffirm its determination to join hands with the world in the fight against climate change at COP28 taking place in Dubai in December 2023. In fact, forming a carbon market is implementing the Net Zero commitment using economic tools to manage businesses' greenhouse gas emissions.

Motivation emerged from policy

Aiming to improve the legal framework on reducing greenhouse gas emissions, protecting the environment, and responding to climate change, Vietnam has issued many decrees and decisions related to this issue, notably Decree No. 06/2022/ND-CP. Accordingly, from now until 2027, the Government intends to complete regulations and policies so that by 2028, Vietnam can officially launch its first Carbon Trading platform.

According to the Environmental Protection Law 2020, a carbon market is a market formed from carbon credit exchange transactions. This is the mechanism to create resources to promote the reduction of greenhouse gas emissions and the transition to a carbon-neutral economy.

Carbon market at a glance

Carbon market classification

In the carbon market, there are two main types of goods: greenhouse gas emission quotas and carbon credits. The United Nations Environment Programme points out that markets can be classified into two types: mandatory markets and voluntary markets. For mandatory markets, there is an annual compliance obligation to monitor carbon emissions and provide the exact amount of carbon credits relative to actual emissions, and there are penalties for non-compliance. In contrast, the voluntary market is for companies that aim to offset their carbon emissions without a compliance or punishment mechanism.

Carbon markets’ subgroups can also be divided into closed markets and open markets. The closed market only allows carbon credits to be created specifically to meet the requirements of those markets, while the open market allows carbon credits to be created from projects that offset or reduce carbon emissions. Carbon credit trading can take place bilaterally or on an online trading platform, such as Carbon Trade Exchange (CTX) or CORSIA. For some trading platforms like CORSIA, carbon credits must meet certain conditions.

Conditions for unlocking the Carbon market in Vietnam

According to estimates, Vietnam requires up to 473 billion USD to address climate change and achieve the committed Net Zero goal. Therefore, revenue from carbon credits will be crucial for sustainable development and the objectives of green finance projects. Participating in the carbon market increases compatibility with regional and world markets, creating competitive advantages for Vietnamese products, while fostering the exchange of experience, knowledge and expertise between Vietnam and the world. 

At the meeting "Project on establishing a carbon credit market in Vietnam" on 8 January, 2024, Deputy Minister of Finance Le Tan Can stated that the carbon credit market in Vietnam needs to be developed in accordance with practical realities. He emphasised that this aligns with the country's development direction, international commitment to reducing greenhouse gas emissions and the global trend of developing the global carbon credit market, while also leverage the natural resources. the power of domestic economic sectors in greenhouse gas reduction activities.

Moreover, Vietnam became the first country in the East Asia-Pacific region to receive a payment of 51.5 million USD from the World Bank based on its emissions reduction achievements. This success brings Vietnam closer to the carbon credit market, facilitating  the implementation of its climate commitments, including the Net Zero target by 2050. This marks the beginning of the potential forest carbon credits sales.

Joining the carbon market increases compatibility with regional and world markets, creating competitive advantages for Vietnamese products, while sharing experience, knowledge and expertise between Vietnam and the world.

Price and currency differences between different markets are challenges that should be addressed by introducing an internal carbon market. The price of carbon credits is set by the economic and regulatory environment surrounding them, so carbon credit prices cannot be compared across different jurisdictions. In terms of international cooperation, the EU launched the Carbon Border Adjustment Mechanism (CBAM), imposing carbon taxes on some imported products outside the bloc. This has raised concerns about the disparity in credit prices. The carbon price of the Chinese ETS market currently fluctuates at 8 USD/ton, while the price in the EU is 10 times higher at about 110 USD/ton. In a domestic carbon market, the selling price will depend on the country's specific policy regulations.

For the Vietnamese market, creating a domestic market would provide businesses with easier access to the same unit of money at a lower cost. Movement around the carbon market would enable businesses to trade and increase revenue to reinvest in green technology.

However, the establishment of a domestic carbon market also requires attention to several challenges. In particular, the lack of uniform and widely accepted principles for calculating carbon allowances mean that companies must choose from a wide variety of possibilities without clear guidance. Investment, transaction, and operational decisions can be delayed or hindered due to a lack of clear accounting treatment. Notably, without careful consideration, the introduction of new reporting requirements to facilitate border carbon adjustments (or other mandatory reporting or certification measures) could increases administrative and transaction costs. This can unintentionally limit participation in global markets, especially for smaller or less sophisticated businesses. This risk can be mitigated by streamlining and harmonising reporting requirements, helping to reduce costs and avoid imposing unintended trade barriers.

Additionally, national carbon markets may face significant challenges in data reliability. In the Chinese market, data management issues have hindered the expansion of carbon market to other areas, according to Caijing, a financial magazine in China.

Vietnamese businesses still face significant obstacles in forming and trading carbon credits. The biggest challenge is verifying carbon credit formation. After submitting an application to register under the carbon credit trading mechanism, businesses will need third-party verification. However, verifying these carbon credits is expensive and methodologically complex. Technical limitations lead to a very low number of carbon credits formed in Vietnam, especially for projects related to forest carbon credits. Accepting investment and spending a large amount of capital has also made many businesses hesitant.

Unlock the Carbon trading platform: Recommended Practices

Overall, any change in carbon prices could significantly affect a manufacturer's cost profile and its competitive position. Indeed, a PwC model estimates that full implementation of CBAM alone would increase the carbon cost for many goods by a factor of five or more.

Accordingly, PwC has identified four practices that can help business leaders prepare for the anticipated movement in carbon costs to unlock the potential of the carbon trading platform.

* Note: All data in the article are based on secondary research results from the PwC’s team and PwC's published analysis.

Authors

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Do Nhat Bang

Associate, Risk Services, PwC Vietnam

+84 24 3946 2246

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PwC is the leading provider globally and in Vietnam in terms of advisory services on sustainability and the integration of Environmental, Social and Governance (ESG) considerations into corporate governance. PwC has been supporting leading businesses in Vietnam to assess sustainability practices, prepare sustainability reports in line with international reporting standards, and incorporate sustainability into the overall business strategy. See further information here.

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