Stronger carbon market needed to unlock climate finance

Speaking at the seminar on credit policy and the carbon market organised by VIR on October 14, Bui Minh Giap, chief economist at the Asian Development Bank in Vietnam, said that Vietnam was estimated to need approximately $368 billion in additional investment by 2040 for climate change adaptation, resilience enhancement, and emissions reduction, equivalent to 6.8 per cent of GDP annually.

Of this amount, $254 billion would be required for climate change adaptation and resilience enhancement, while approximately $114 billion would be needed for emissions reduction. In the power sector alone, the revised Power Development Plan VIII estimates that $136 billion in investment will be required for power generation and grid development during the 2026-2030 period.

“The financing needs are substantial, but funding will only be disbursed when projects are assessed as effective, capable of generating sufficient cash flow to service debt, and supported by verifiable emissions reduction data,” said Giap. “The carbon market creates economic incentives for emissions reduction, while credit provides the capital businesses need to make the necessary investments.”

Bui Minh Giap, chief economist at the Asian Development Bank in Vietnam. Photo: Chi Cuong

According to Giap, these two instruments can effectively complement each other only when credit institutions have the capacity to assess customers’ green and transition activities, cash flows from carbon credits, and the debt repayment capacity of individual projects.

“An emissions reduction project may generate energy savings, reduce the cost of purchasing emission allowances, or generate revenue from carbon credits. For projects expected to sell carbon credits, credit institutions need to assess the likelihood of credit issuance, actual volumes, buyers, selling prices, verification costs, and the timing of payments. Long-term offtake agreements can reduce market risk, but they do not guarantee that a business will generate the credits or deliver the contracted volumes,” he explained.

Giap said that credit institutions should tailor financing packages to the specific characteristics of each project. Such support could include assistance with application preparation, technical due diligence, and the arrangement of appropriate financing amounts, tenors, and interest rates.

Accordingly, financing portfolios should cover both green activities, those that already meet environmental criteria and transition activities, which do not yet meet green criteria but have feasible emissions reduction plans with clearly defined targets and timelines, as well as verifiable outcomes.

Giap shared that international experience showed there was no single model suitable for every country. Some central banks provide direct funding support, while others focus on risk supervision, maintaining data systems, and strengthening the capacity of credit institutions.

“I believe the lesson for Vietnam is that investment support must be combined with risk management. First, the country needs to strengthen its criteria, data, and assessment capabilities; it can then pilot funding support for eligible loans. Regardless of the instruments used, credit institutions must conduct their own assessments and remain accountable for loan quality,” said Giap.

“I would emphasise that banks are an important channel for channelling capital, but they cannot meet the long-term financing needs of green and transition finance on their own,” he added. “Credit must be combined with green bonds, transition bonds, equity capital, blended finance, guarantees, and risk-sharing mechanisms. Each type of risk should be allocated to the parties best positioned to manage it.”

The carbon market requires high-quality credits and transparent institutions. Photo: Chi Cuong

Vietnam's domestic carbon exchange began pilot operations in June, establishing the basic infrastructure for trading emission allowances and eligible carbon credits. The exchange can connect buyers and sellers, but it cannot itself generate high-quality carbon credits or create demand for them. The market therefore needs to develop both its credit supply and its institutional framework.

On the supply side, Giap said it was necessary to develop high-quality carbon credits that reflect actual emissions reductions or removals, are calculated and independently verified, avoid double counting, and account for the risks of reversal or emissions leakage to other locations. Project documentation should be standardised, and smaller projects should be aggregated to reduce participation costs while maintaining credit quality.

On the institutional side, regulations need to clearly define ownership rights, the rights to have credits issued and sell them, revenue-sharing arrangements, procedures for credit registration, issuance, transfer, and use, as well as the responsibilities of each party in the event of disputes, according to Giap. The registry system must be capable of tracking each credit throughout its lifecycle.

“To unlock green capital flows, I believe Vietnam needs to develop its institutional framework alongside the carbon market and green finance. Policy quality and effective coordination among regulators, credit institutions, and market participants will directly affect the scale and cost of financing, as well as access to capital,” Giap stated.

According to Giap, the essential foundations include, first and foremost, a standardised set of criteria for green and transition activities, followed by a reliable emissions database, well-prepared projects, and appropriate risk allocation mechanisms.

“Responsibilities for drafting regulations, managing and supervising the system, and operating it must be clearly delineated. Inter-agency and interbank coordination should be strengthened, while credit institutions’ capacity to assess green and transition credit should be enhanced. A comprehensive institutional framework will help the market operate with greater confidence, lower transaction costs, and better direct capital towards viable projects,” he said.

For credit institutions, Giap explained that boards of directors and executive management must define their risk appetite, priority sectors, and approaches to customers seeking green and transition credit.

“During the credit assessment process, credit institutions need to evaluate cash flows, debt repayment capacity, and the feasibility of emissions reduction plans simultaneously. A green label should not be treated as a substitute for credit assessment. Loan terms must remain aligned with the project's payback period,” he said.

“For revenue generated from carbon credits, credit institutions need to verify buyers, contractual terms, delivery conditions, and verification requirements, while also accounting for scenarios involving a sharp decline in carbon prices or delayed payments.”

For borrowers, Giap said preparations should begin with a verifiable green transition plan.

“Borrowers must establish their current emissions levels and energy consumption, and identify investment items, technologies, emissions reduction targets, and implementation milestones. Loan applications should set out total costs, counterpart funding, operating expenses, cash flows, and debt repayment capacity under adverse scenarios. Any projected revenue from carbon credits should be estimated conservatively, with ownership rights, buyers, verification requirements, and delivery conditions clearly specified,” stated Giap. “Borrowers should also prepare the necessary permits, technical assessments, supply contracts, and contingency plans for potential implementation delays.”

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