Getting Vietnam’s carbon market framework ready

Last year, Vietnam announced its national climate change strategy, in which the development of a carbon finance mechanism and compliance carbon market is one of the most important mechanisms when it comes to achieving emission reduction targets. With that, a pilot operation of a carbon credit exchange is expected to be established by 2025.

Eva Szurminska Jaworskae, senior partner, Dentons LuatViet (left) and Vi Nguyen, senior associate, Dentons LuatViet

The basic legal framework for setting up the compliance carbon market mechanism in Vietnam is provided in the Law on Environmental Protection and Decree No.06/2022/ND-CP on reduction of greenhouse gas (GHG) emissions and protection of the ozone layer. Both the law and Decree 06 came into force in 2022.

Decree 06 sets out the rules for a national measurement, reporting, and verification system for reduction of GHG emissions, along with the rules of GHG inventory.

Pursuant to Decree 06, until the end of 2027, Vietnam shall develop provisions on formulating carbon credit management regulations, GHG emission quota exchange and carbon credits, and on operational rules of the carbon credit exchange.

By 2025, Vietnam shall establish and organise a pilot operation of the carbon credit exchange, and the fully fledged carbon credit exchange should be in operation in 2028. Also, by this year, Vietnam should be able to connect and exchange domestic carbon credits with regional and global credit markets.

The Ministry of Natural Resources and Environment (MoNRE) will have the authority to certify the carbon credits and GHG emission quotas permitted for exchange. This will include the amount of carbon credits obtained from the programme or project under the domestic and international carbon credit exchange and offsetting mechanism in accordance with the local laws and international treaties.

The exchange of GHG emissions quotas and carbon credits will be carried out on the carbon credit exchange and domestic carbon market. The companies will be allowed to auction of GHG emission quotas in addition to the amount of GHG emission quotas allocated to them in each commitment period.

They will also be allowed to transfer unused amount of GHG emissions quotas in the previous year to the following years within the same commitment period or borrow emissions quotas allocated for the following year to use in the previous year in the same commitment period.

The companies will also be able to use carbon credits from projects under the carbon credit exchange and offsetting mechanism to compensate for their GHG emissions in excess of their GHG emissions quota allocated in the same commitment period. The number of carbon credits for offsetting cannot exceed 10 per cent of the total GHG emissions quota allocated to the given entity.

If the company ceases to conduct business operations, is dissolved, or is declared bankrupt, the allocated emission quotas shall be automatically recovered by the MoNRE.

Each entity which exceeds its allocated emission quota, after auction, transferring, borrowing, and using carbon credits for offsetting, will need to pay for the excessive emission at the end of each commitment period. Furthermore, the GHG emissions in excess of the allocated quota will be deducted from the allocated quota for the next commitment period.

Decree 06 also provides a legal framework for participation in projects under the exchange and offsetting mechanism of carbon credits, in accordance with the provisions of the framework of the UN’s Framework Convention on Climate Change (UNFCC) or the international treaties and agreements promulgated by Vietnam.

Issuing approvals

To participate, an interested entity, both local or foreign, should submit a registration application requesting approval of a project to the MoNRE. The application should include a set of documentation developed in accordance with the ministry’s requirements and in accordance with the provisions of the UNFCC.

Within five days after the application is submitted, the MoNRE should decide on acceptance of the application, rejection of an invalid application, or on requesting additional documents or explanations (within 15 working days).

Within 30 working days, it should evaluate the application for approval of the initiative through collecting opinions from the relevant state agencies. The agencies have seven working days to respond to a request for opinions.

Within three business days after collecting opinions from agencies, the MoNRE shall issue a decision on approval. Decree 06 also enables the application for an approval under the carbon credit exchange and offsetting mechanism outside of the framework of the UNFCC and international treaties to which Vietnam is a signatory.

Pursuant to the decision on the list of sectors and facilities subject to GHG inventory development, issued in January 2022, over 1,900 companies must adhere to GHG inventory regulations and the list will be updated every two years. The MoNRE and the Ministry of Industry and Trade (MoIT) have also devised guidance on calculations, reports, and appraisal of GHS inventory within their respective sectors.

Also in 2022, the MoNRE published a draft of technical guidance for forests and forestry land. In November that year, it issued its technical guidance for waste management. The following month, the MoIT released draft technical guidance for industry and trade sector for public consultation.

In August 2022, the prime minister announced an action plan for methane emissions reduction by 2030, under which, the formulation and completion of carbon management and exchange of carbon credit generated from the methane emission reduction are essential action points.

In July this year, the prime minister instructed the MoNRE to formulate the decree on carbon credit management by mid-2024. It was also requested to collaborate with the Ministry of Agriculture and Rural Development (MARD) to draft a directive on management of forest carbon credit.

The Ministry of Finance is soon expected to finalise and submit to the government approval the draft of the carbon market development scheme.

Voluntary carbon markets in Vietnam

For the last 20 years, Vietnam has actively participated in voluntary carbon markets. Based on the data published by the UNFCC, up to September 2023, there were 258 clean development mechanism (CDM) projects and 15 groups of activities registered with over 32 million certified emission reductions issued.

This makes Vietnam one of the top four countries with the most registered CDM projects, following China, Brazil, and India, as per information on the Climate Change Department’s website.

Other than CDM, Vietnam has developed other carbon initiatives in accordance with different international standards. As per data published on the Voluntary Registry Offsets Database at the Goldman School of Public Policy, up to May 2023, Vietnam had 70 projects registered with GOLD standard and 52 registered with VCS standards, with a total of over seven million and two million issued credits respectively.

According to the Global Environment Centre Foundation, up to May 2023, Vietnam also had 44 initiatives involving a joint crediting mechanism, with over 3,100 issued carbon credits. In addition, as cited by the MoIT website, almost 50 projects to issue carbon credits under the Global Carbon Council mechanism have been submitted.

Last year, the MARD and the International Bank for Reconstruction and Development signed two emission reduction payment agreements in the north-central region of Vietnam for the purpose of reducing emissions from deforestation and forest degradation. The agreements contracted 10.3 million emission reduction units under the price of $5 per unit, according to the World Bank.

The World Bank’s fund unlocks over $50 million for Vietnam’s efforts to reduce carbon emissions from deforestation and forest degradation between 2020 and 2025; as a consideration, Vietnam must reduce 10.3 million tons of CO₂ emissions from six north-central provinces.

Vietnam’s preparation for its carbon market compliance framework is still a work in progress. Given the complexity of the planned regulations and the number of the stakeholders involved, there will be very dynamic progress of the policies and other regulatory documents related to the carbon market compliance in the upcoming months.

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