Carbon Pricing in Vietnam

To reduce greenhouse gas (GHG) emissions in the most cost-effective manner, many countries and territories worldwide have been implementing carbon pricing instruments. Aligned with this trend, Vietnam is also in the process of enhancing its capacity to develop market-based instruments, facilitating the formation of a carbon market.

I. Carbon Pricing

Carbon pricing, as defined by the World Bank, is a tool that accounts for the external costs of GHG emissions – the costs borne by the public, such as crop damage, healthcare expenses due to heatwaves and droughts, property losses from floods and rising sea levels, and links them to their sources through a price, typically in the form of a price per ton of carbon dioxide (CO2) emitted.

By placing a price on carbon (an economic signal), the economic burden associated with the damage caused by GHG emissions (externalities) is transferred to the emitting entities (market actors) responsible for it.

Emitting entities gain the flexibility to decide how, where, and when to reduce emissions at the lowest overall cost.

Carbon pricing as an economic tool:

• Efficiency: Reflects the true social and environmental costs of emitting processes and activities (establishing an optimal emission level for society).

• Effectiveness: Minimizes the overall cost of achieving emission reduction targets.

1. Emission Reduction: Pricing is a powerful tool to drive a range of behavioral responses aimed at reducing energy consumption and transitioning to low-carbon fuels/processes.

According to several studies conducted in various countries, carbon pricing instruments, particularly Emission Trading Systems (ETS), have proven effective in reducing carbon emissions.

• EU ETS: Has helped reduce emissions from the power and industrial sectors by 37.3% compared to 2005 levels.

• China ETS: A 2.7% reduction in emissions compared to the baseline was recorded at power plants within China's pilot ETS regions. Furthermore, the pilot programs helped reduce PM 2.5 fine dust by 6.7%.

• California ETS: From 2013 to 2019, the California ETS achieved a total emission reduction of 6.4%.

However, the carbon price needs to be set at an appropriate level to have a significant impact on emission reduction. The higher the carbon price, the greater the impact on emission reduction.

2. Investment in Clean Energy: Expectations of rising prices encourage innovation and deployment of low-carbon technologies.

3. Finance: Pricing generates revenue for the budget, which can be used for various socio-economic objectives.

• Governments can generate additional revenue from implementing carbon pricing. In 2022, revenue from ETS and carbon taxes reached approximately USD 95 billion globally, with ETS revenue accounting for 69% of the total revenue.

• Revenue generated from carbon pricing can be allocated for specific purposes (e.g., green projects), transferred directly to vulnerable households or businesses, or used to cut taxes and add to the national general budget.

• Using revenue from carbon pricing to support communities helps strengthen support for ETS or carbon tax policies and reduce political tension.

4. Co-benefits: Improved air quality, reduced public healthcare costs, avoidance of illnesses and hospitalizations related to air pollution, creation of green jobs, reduced obligations for carbon border adjustments (e.g., EU's CBAM), and better GHG data quality for policy planning.

III. Carbon Price management

1. Should the carbon price be high or low?

- The carbon price must be high enough to encourage low-carbon plans and investments – while making fossil assets less profitable.

- If the goal is achieved, the carbon price should be as low as possible – that's the whole purpose of ETS.

- The carbon price should not be too high, to limit distributional impacts. The carbon price should not be too high, as it would be detrimental to political acceptance.

- The carbon price level is not relevant, the carbon price should only aim to achieve environmental goals. The price only needs to do what it needs to do.

2. Determining the Floor Price

- In ETS auctions, allowances are not sold if the settlement price is lower than the floor price. Unsold allowances are canceled – that is, the cap is reduced.

- Allowances can be traded lower in the secondary market – but only for a short time. Only traded if there is significant auction activity.

- Alternative: the regulator buys back allowances if the market price falls below a certain level.

Other similar options:

• Auction reserve price (to avoid collusion and fraud).

• Top-up fee/refund fee (part of the floor price).

3. Determining the Ceiling Price

- The regulator commits to selling unlimited allowances at a certain price level. Logically, the market price cannot exceed this price level.

- When the ceiling price is reached, the emission cap is no longer effective – the regulator will issue the necessary number of allowances to meet demand.

- Alternative: a fixed price can be paid instead of surrendered allowances (e.g., NZ$ 25 ceiling price in New Zealand).

- The combination of floor and ceiling prices forms a price range (or 'price corridor').

IV. Promoting the Development of the Carbon Market in Vietnam

To develop the carbon market in Vietnam, the following key solutions need to be implemented:

• Build an information and data system on the carbon market, including a management system for GHG emission quotas and carbon credits; issue GHG emission norms per unit of product for various types of production and business establishments; organize the allocation of GHG emission quotas to establishments for the 2026-2030 period and annually.

• Provide guidance on the implementation of international carbon credit exchange and offsetting mechanisms; establish domestic carbon credit exchange and offsetting mechanisms.

• Develop a mechanism to determine the total GHG emission quota, allocate quotas, and determine GHG emission levels; issue full regulations on activities connecting and exchanging domestic carbon credits with regional and global carbon markets. Regulations should aim to enhance market transparency, approach, and meet international requirements.