What Is Carbon Credit? The Potential Of Vietnam’s Carbon Credit Market

To reduce emissions and curb global warming, carbon credits have emerged as a sustainable solution, opening new opportunities and challenges for various stakeholders. In this article, let's delve into carbon credits and explore their potential for growth in Vietnam with Baconco.

Introducing carbon credits and the carbon credit market

“Carbon credits are tradable certificates that represent the right to emit a certain amount of CO2 or equivalent greenhouse gas emissions converted to CO2. Each carbon credit corresponds to 1 ton of CO2,” - stated Mr. Vo Nguyen Truong An, Deputy General Director of ASEAN Carbon Credit Exchange Joint Stock Company (CCTPA) at the roundtable “Carbon Credit - Key to Transitioning to a Net-Zero Emissions World”.

The carbon credit market was established in 1997, originating from the United Nations' Kyoto Protocol on climate change. Accordingly, organizations or individuals with excess emission rights can purchase carbon credits to offset their emissions. They can also sell carbon credits if they reduce their emissions below their committed level. As a result, carbon credits became a new commodity, and carbon credit transactions are known as carbon trading or exchange, forming the carbon credit market.

1 carbon credit equals 1 ton of CO2

How does the carbon credit market work?

The carbon credit market can be divided into two types:

• Mandatory carbon market: Created by governments or regulatory bodies. It operates based on the United Nations Framework Convention on Climate Change (UNFCCC) or other conventions such as the EU ETS (Emissions Trading System) and the California Cap-and-Trade Program.
• Voluntary carbon market: Managed by non-governmental or private organizations, allowing companies or individuals to voluntarily purchase carbon credits to offset their emissions. This market operates based on bilateral or multilateral cooperation between parties.

Mechanism of the carbon credit market:

• Determining emission limits: A regulatory body or organization sets the maximum allowed emissions in a specific region or sector. This determination is based on international standards such as ISO 14064-1. For example, the EU ETS limits the total greenhouse gas emissions of over 10,000 plants in the energy, manufacturing, and aviation industries.
• Carbon credit allocation: Companies or individuals receive carbon credits based on their emissions. Currently, carbon credit allocation is based on three methods: free allocation, auction, and a combination of both.
• Carbon credit trading: Companies can buy or sell carbon credits in the market to achieve their emissions targets. For example, company A emits 8,000 tons of CO2 per year, which is less than the permitted limit of 10,000 tons of CO2. Company A can sell its remaining 2,000 carbon credits to other companies.
• Control and supervision: Regulatory bodies or organizations oversee the trading and use of carbon credits to ensure market transparency and efficiency.

The carbon credit market operates with the goal of encouraging organizations to seek more efficient emission reduction methods and promote investment in green technologies. Initially, organizations can own emission permits through auctions or free allocation. Over time, the number of permits in the market decreases, creating pressure for businesses to reduce their emissions and invest in cleaner production solutions.

Operation model of the carbon credit market

Benefits of the carbon credit market

Carbon credits offer numerous benefits to participating parties, including:

• For businesses/organizations:

• Allows companies to choose flexible approaches best suited for reducing emissions.
• Creates new business opportunities by developing emission reduction projects.
• Contributes to enhancing image and reputation through commitment to environmental protection.

• For nations:

• Creates motivation and financial resources for climate change response activities.
• Promotes the transition to a low-carbon, green, and sustainable economy.

• For society:

• Contributes to improving environmental quality, protecting ecosystems, and responding to climate change.
• Creates more job opportunities related to carbon and environmental fields.
• Aims for sustainable development, improving people's health and living conditions.

Thus, carbon credits offer multi-dimensional benefits, encouraging participating parties to collectively contribute to addressing climate change challenges.

Carbon credits help improve people's health and living conditions

Potential for growth of the carbon credit market in Vietnam

The carbon credit market in Vietnam holds significant potential for development, evident in its favorable policies and natural conditions:

• Policy and legal foundation:

• In 2021, within the framework of the 26th United Nations Climate Change Conference (COP26), Vietnam pledged to achieve net-zero emissions by 2050.
• Vietnam has enacted the Environmental Protection Law and policies encouraging greenhouse gas emission reduction.

• Favorable natural conditions:

• Vietnam possesses abundant natural energy resources such as solar energy, wind energy, hydropower,...
• Vietnam has a developed agriculture and forestry sector: According to the Ministry of Agriculture and Rural Development, as of 2023, Vietnam's total forest area is estimated at around 14,860,309 hectares. Earlier this year, a reforestation project in Quang Tri was awarded carbon credits under the VCS standard. This demonstrates the sector's immense potential for generating carbon credits in the future.

However, the carbon credit market in Vietnam is still in its early stages of development and needs to continue improving its aspects:

• Strengthening capacity and experience of participating parties
• Improving legal framework and management mechanisms
• Raising awareness and promoting business participation

Vietnam has an advantage in the agriculture and forestry sector

The carbon credit market is a crucial tool for promoting greenhouse gas emission reduction. In Vietnam, the carbon credit market has immense potential for growth. However, concerted efforts from the government, businesses, and international organizations are needed to overcome challenges and transform existing potential into levers, steadily moving towards the net-zero emissions target.