Optimizing Carbon Market Design: Balancing Economic Growth and Emissions Reduction
The Department of Climate Change (DCC), Ministry of Agriculture and Environment, and the Energy Transition Partnership (ETP) jointly organized a consultation workshop titled “Impact Assessment of Vietnam’s Domestic Carbon Market in the Pilot Phase” on April 16 in Hanoi. At this event, Ms. Nguyen Hong Loan, Executive Director of Green Climate Innovation Consulting Co., Ltd. (GreenCIC) and Leader of the Consultant Team, emphasized the importance of identifying design and governance options, assessing their impacts, and selecting the most optimal approach to ensure a harmonious balance between economic development and GHG emission reduction goals for the successful operation of the carbon market during its pilot phase.
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| Ms. Nguyen Hong Loan, Executive Director of Green Climate Innovation Consulting Co., Ltd. (GreenCIC) and Leader of the Consultant Team |
“We conducted an in-depth analysis and modeled the impacts of various governance options for the Emission Trading Scheme (ETS). This provides valuable insights for Vietnam to develop its national legal framework and operationalize the carbon market,” Ms. Loan stated.
The assessment focused on three key design elements: Scope of the ETS, cap-setting, and allowance allocation. By creating design scenarios, the team proposed specific governance options.
The steel, cement, and thermal power sectors, contributing over 50% of total GHG emissions in their respective industries, were chosen for the ETS pilot phase. Notably, the industrial sector as a whole accounts for more than 70% of national GHG emissions.
According to Ms. Loan, the pilot phase should prioritize 27 crude steel production facilities, 31 thermal power plants, and 56 clinker production facilities. These sites are responsible for a significant proportion of emissions in their respective sectors, with the selected steel and thermal power plants contributing over 80% and 86%, while the chosen cement facilities account for over 90% of the industry’s emissions.
Allowance allocation is based on emission benchmarks, integrating NDC emission reduction targets and sector growth goals. Two carbon credit offset scenarios, aligned with Decree 06/2022/ND-CP and its ongoing proposed revision, are considered: ETS10 with a 10% carbon credit offset limit and ETS20 with a 20% limit.
ETS20 Scenario: Advantages for Businesses and the Economy
Mr. Ho Cong Hoa from the Academy of Policy and Development, an expert on the consultant team, presented the economic modeling results. While the 10% and 20% offset scenarios for conditional and unconditional markets may slightly reduce Vietnam’s GDP, the impact is negligible…
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| Mr. Ho Cong Hoa from the Academy of Policy and Development |
The ETS provides covered sectors with a cost-effective pathway to meet their NDC targets, thereby reducing potential pressures on GDP, investment, and consumption.
In terms of structural transformation, the ETS offers flexibility in choosing between investing in technologies or purchasing credits. This allows sectors to optimize compliance costs while still achieving their NDC goals.
“Our modeling results indicate that the ETS20 scenario, with a 20% offset limit on allocated allowances, yields the highest level of effectiveness,” said Mr. Hoa. He further added that the ETS also contributes to stabilizing consumer prices and managing inflation more effectively compared to scenarios without an ETS.
Additionally, the ETS enables businesses to optimize their compliance costs and potentially generate revenue through the trading of allowances.
Mr. Hoa highlighted that the ETS20 scenario outperforms ETS10 in balancing climate goals with economic growth, setting the stage for Vietnam’s green transition and sustainable development.
A notable finding is that the thermal power sector is anticipated to experience the greatest reduction in compliance costs and is expected to be the largest net buyer of credits/allowances across all scenarios.
On the other hand, the cement sector is likely to favor direct investment in technology due to its relatively low-cost abatement opportunities. This positions the sector as a potential allowance supplier. The steel sector, with its higher investment levels, may sell allowances in the ETS10 scenario but could become a net buyer under ETS20 due to the higher offsetting limit and more favorable credit prices.
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| Overview of the conference |
However, the consulting team acknowledged a limitation in their analysis: the use of emission data from 2020–2022. The lack of facility-level direct GHG measurements may impact the accuracy of allowance allocation and offset cost estimates. Relying on secondary data may introduce bias and affect the robustness of the ETS design.
Experts recommended that future research should integrate additional emitting sectors beyond the three key industries to enable a more comprehensive assessment of the national carbon credit supply-demand balance. This expanded scope would also reflect the unique technical, cost, and behavioral characteristics of each sector.
| Furthermore, detailed assessments of ETS operational model scenarios tailored to Vietnam’s legal, institutional, and technological infrastructure are necessary. These should include governance structures, institutional responsibilities, market operation and oversight, registry and clearing mechanisms, and the potential for blockchain and advanced digital technologies. |
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