Sourcing the capital to meet Vietnamese climate pledges

Koos Neefjes, climate change expert and director of Climate Sense Co., Ltd

In 2015, Vietnam issued its Nationally Determined ­Contribution (NDC) to the Paris Agreement on climate change. This contains the country’s pledges to reduce greenhouse gas (GHG) ­emissions and to adapt to the effects of climate change over the period towards 2030.

Vietnam’s GHG emission mitigation target is an 8 per cent reduction by 2030 compared with “business as usual” levels by using its own means; and 25 per cent reduction if it receives international financial and technological support. For climate change adaptation, the government estimated that the national budget would carry “one third of the financial needs” and “international support and private sector investment for the remainder”.

Most of the very substantial investment that is required for responding to climate change would have to come from official development assistance (ODA) and the domestic and foreign private sector, especially for emissions reduction. But a large part of ODA concerns loans to state-owned enterprises (SOEs) such as Electricity of Vietnam (EVN). Such loans used to be guaranteed by the state, but because of the national public sector debt ceiling it is now preferred that any such loans are offered directly to SOEs without state guarantee and liability. So SOEs might get less ODA and need more private finance, for example to invest in increased energy efficiency and renewable energy production.

But simply targeting private sector investment, as Vietnam does, does not make it happen. Policies are needed that make it obvious for private sector financiers and businesses to invest in measures that reduce emissions and that increase the country’s climate resilience. Such policies can be divided into three groups: financial incentives, subsidies and other public sector support; taxes or fees to discourage certain investments and consumption patterns; and regulations that must be enforced by central or local authorities.

Let me give a couple of good and not-so-good examples of such policies, to illustrate how this could encourage private sector investment in GHG emission mitigation and climate change adaptation in Vietnam.

INCENTIVES

To encourage investment in wind and solar power production, for example, the government has issued feed-in-tariffs (FiTs) that the electricity buyers must pay. The current FiTs for solar and wind power are seen by investors as attractive enough to invest and that could lead to major GHG emissions reduction. These tariffs are higher than the average electricity selling price and so this renewable energy is cross-subsidised by cheaper power sources such as hydro-electricity. But the policies are temporary and these technologies are becoming cheaper, so in a few years the cross-subsidy may no longer be required.

But another example is that coal mining, transport and consumption in power production, and heavy industry are still being supported as well. For example the public sector has provided guarantees for loans for transport infrastructure, which is money that stimulates emissions when it could also be used for cleaner alternatives. Such support to fossil fuels is counter-productive from a climate change perspective.

Support to insurance products is one way of supporting those recovering from damage and losses from climate-related disasters. Some years ago, the government and an insurance company piloted agricultural insurance for small farmers, with the government paying part of the premiums and farmers also a part, thus generating a private capital flow.

Insurance companies invest the revenue in markets, grow the capital and pay farmers who suffer disaster damages, whereas the government would otherwise have to step in with emergency aid including, for example, the provision of seeds for replanting of crops.

Sourcing the capital to meet Vietnamese climate pledges, illustration photo

DIS-INCENTIVES

Vietnam’s environmental taxes are comparatively low and carbon taxes are still absent. This contributes to low petrol prices in Vietnam compared to many other countries. A significant tax or carbon-fee on petrol will increase the price and not be popular, but it will encourage consumers to limit their petrol consumption and drive less or drive more slowly. Consumers would also buy more efficient internal combustion engines, or perhaps electric motorbikes and cars. A tax on coal would have a similar effect on power production and heavy industry, encouraging investment in energy-efficient technology and a switch partly to other forms of energy. In addition, the government could allocate the additional tax revenue to green, benign investments or incentives. Economic model analysis has suggested that the result of this would be an increase in growth of the national economy because of increased efficiency and modernisation.

Vietnam is currently preparing policy on carbon markets, which can have the same effect as a carbon tax. For example, all producers in one sub-sector of industry such as cement or steel production would be allocated a maximum amount of GHG emission rights per unit of production. If they emit fewer emissions because they have invested in efficient, low-carbon technologies, they can sell their emission rights to manufacturers who emit more GHG than they have the right to. Depending on how many rights are allocated in total, this can create a fairly high carbon price and therefore a strong incentive for industries to become more energy efficient and low-carbon.

REGULATIONS

Energy efficiency or pollution/emission standards are types of regulation that can make a real difference. This can be done regarding specific sectors of manufacturing industry, vehicles, buildings and household appliances. They may be recommended standards or just labels for consumers to be able to compare products, or mandatory standards that certain inspection services/government agencies must be able to enforce. This could force certain producers to invest in certain technologies, and it could also forbid the manufacture, sale or use of certain equipment.

Construction standards for climate proofing could also be developed for industrial zones and manufacturing plants, tourist venues, schools and hospitals, to ensure that they are adapted to flood risks, extreme temperatures or other issues such as extreme rainfall. Standards for construction of roads, railways, bridges, or harbours will make them more resilient for similar risks as well, like landslides. Some of this is public infrastructure that will not attract the private sector. However manufacturing, tourism, and also some schools and hospitals will be private sector investments. Transport infrastructure investments include build-operate-transfer investments where the private sector can recover their investment by charging tolls for a certain period of time – and climate-proofing standards will ensure that they contribute to the climate resilience of the nation.