Vietnam expedites domestic carbon market development to tackle CBAM, Article 6

Vietnam has expedited its carbon market development, assigning emission quotas to power, iron and steel, and cement industries from 2025, facilitating these industries to tackle the EU's carbon border adjustment mechanism (CBAM), and fine-tuning rules around Article 6 implementations, a recent document from Ministry of Natural Resources and Environment (MONRE) showed.

The document is a draft amendment for the Government's Decree No. 06/2022/ND-CP, which was released in January 2022 and set the foundation for regulating the country's greenhouse gas emissions. The amendment reflected the government's clear push for companies to adapt to emission reporting and carbon trading, so as to better understand and prepare for CBAM and Article 6.

The initial decree required around 1,912 entities with annual GHG emissions of 3,000 mtCO2e or more to conduct GHG emission reporting and keep their annual emissions within government-set quotas, starting from 2026. The covered sectors included thermal power generation, industrial production, cargo transport, commercial buildings and solid waste treatment, however, the decree did not provide much detail for implementations.

The amendment specified that power plants, iron and steel factories, and cement production facilities will be the pilots to receive government-assigned quotas for their emissions in 2025 and 2026, and they should implement emission reduction plans based on the allocated quotas.

The Ministry of Industry and Trade will propose the annual quotas for each thermal power plant and iron and steel production facility. Meanwhile, the Ministry of Construction will propose the annual quotas for each cement production facility. The power plants and industrial facilities are expected to receive their quotas by Dec. 31, 2024, according to the amendment.

In addition to the initial decree, the amendment proposed to add cow and pig farms that accommodate more than 1,000 cows and more than 3,000 pigs per year, respectively, to the list of the facilities subject to emission reporting, without specifying when these farms will receive government-set emission quotas.

Uncertainties remain in terms of whether and how Vietnam's regime will transform into a cap-and-trade, compliance carbon market.

Coping with CBAM

Approximately 200 facilities are expected to receive quotas in the pilot phase, which would account for about 45% of the total emissions from facilities regulated under this decree, MONRE said in a draft letter to be sent to the prime minister to justify the amendments.

The ministry added that other countries with established carbon markets have already started allocating quotas to these emission-intensive sectors. Furthermore, the EU has kicked off CBAM, and the US is considering a similar policy instrument.

Notably, EU's CBAM will start its definitive regime from 2026, namely putting a carbon tax on emission-intensive commodities exported to the region, mirroring the EU's internal carbon price under its emission trading system, or ETS. Without effective decarbonization measures, Vietnam's exports to the EU markets will be exposed to heavy compliance costs, especially iron and steel.

The EU has become the largest market for Vietnam's iron and steel products, with export volumes reaching 1.46 million mt in the first four months of this year, representing 33.6% of Vietnam's total outflows of 4.34 million mt, according to recent customs data.

International carbon trading

Vietnam plans to establish a national carbon credit exchange and officially start its operations in 2028. The draft amendment showed that before the full rollout of the exchange, the government proposes to initiate a pilot run of a carbon trading platform from 2025.

MONRE said that a national registration system will be established to track both the government-set emission quotas and carbon credits generated from Vietnam's projects, adding that Vietnam's domestic carbon market is expected to connect with regional and global markets after 2030.

"Despite the lack of consensus on regulations for international carbon credit transfers, countries like Singapore, South Korea, Australia and Switzerland have expressed interest and willingness to sign bilateral agreements with Vietnam," MONRE said in the draft.

If the developed countries purchase Vietnam's carbon credits through the Article 6.2 bilateral agreements, they can use these credits to meet their national climate targets, namely the Nationally Determined Contributions, or NDCs, committed under the Paris Agreement framework.

However, there have been concerns from various project host countries over exporting too many credits to developed countries and thus increased difficulties to achieve their own NDCs. In the draft amendment, MONRE said that a letter of approval will be needed for international transfer of carbon credits as a precautionary measure to address such concerns.

"Several ministries, agencies and provincial governments in Vietnam implemented carbon credit trading agreements with international partners. It is crucial for the parties to determine if such exchanges impact Vietnam's NDC, therefore, a letter of approval is needed," MONRE said.