Tackling Climate Change while Maintaining Economic Growth

9:38:00 AM | 7/20/2022

Vietnam is witnessing more and more impacts of climate change on the country's development and is currently working to achieve green and sustainable development.

After more than two decades of steady growth, Vietnam has set an ambitious goal of achieving high income status by 2045. According to the Socio-Economic Development Strategy for the 2021-2030 period, the results of the economic transformation of the country will depend heavily on effective management of natural capital – the vast reserves of agricultural, forest and mineral resources that have supported driving development in Vietnam.

However, with more than 3,200 km of coastline, many low-lying cities and river deltas, Vietnam is one of the countries most vulnerable to climate change. The effects of climate change, primarily higher temperatures, sea levels and greater volatility, have been disrupting economic activity and undermining growth. Calculations show that Vietnam will lose US$10 billion by 2020, or 3.2% of GDP, due to the effects of climate change.

Without appropriate measures, it is estimated that climate change will cost Vietnam between 12% and 14.5% of GDP per year by 2050 and could put up to one million people in extreme poverty by 2030. To help Vietnam develop a future climate change response strategy, the World Bank Group's Country Report on Climate and Development (CCDR) for Vietnam has released solutions and options for both the public and private sectors to improve climate resilience, fulfill the commitment to net zero greenhouse gas emissions by 2050, and promote socio-economic development, while ensuring a “fair transition” to support households impacted by the transition to a low-carbon and climate-resilient economy.

In order to implement the roadmap for climate-adaptive development and net zero emissions, it is expected that Vietnam will need to increase its investment by about 6.8% GDP, equivalent to US$368 billion, between now and 2040. With the right policies and strategies, Vietnam can leverage its decarbonization activities to achieve its development goal of net zero greenhouse gas emissions without slowing GDP growth. Government commitments can and should be reinforced by domestic private sector involvement and through foreign, public and private financial resources.

According to Mr. Alfonso Garcia Mora, Vice President of the Asia-Pacific region of IFC, two goals that include becoming a high-income country and achieving net zero emissions in the next 30 years require Vietnam to raise a large amount of private capital. To realize this, it is important for Vietnam to design and implement the right policies and reforms. Greening the financial sector, promoting green growth projects across multiple sectors and promulgating transparent and predictable procedures for energy projects are clear priorities for Vietnam.

According to CCDR, Vietnam needs a roadmap to improve resilience, focusing on protecting assets, infrastructure and people. Measures should focus on the most vulnerable sectors and locations of the country, in particular agriculture, transport, trade and industry, coastal areas and the Mekong Delta. Complementary policy reforms in the fiscal and financial sectors could stimulate investment from both the public and private sectors, with total financial need estimated at US$254 billion between 2022 and 2040, including about US$219 billion to upgrade the private property and public infrastructure, plus US$35 billion for social programs.

Regarding the decarbonization roadmap to bring Vietnam to the goal of net zero greenhouse gas emissions by 2050, Vietnam needs to invest heavily in energy, transport, agriculture and industry. Industry investments will need to be backed by a carbon pricing tool. This tool will change behavior and help fund the transition. (For example, raising the carbon tax to US$29 per ton of carbon dioxide equivalent (tCO2e) in 2030 and US$90 per tCO2e in 2040, would generate an additional US$80 billion in revenue.) These support measures will help achieve the net zero emissions target without slowing GDP growth.

CCDR estimates show that, in the decarbonization roadmap, the total capital need for the period 2022 - 2040 is up to US$114 billion, mainly to support the energy transition (about US$64 billion), partly for industry, transport and agriculture (US$17 billion) and social assistance programs (US$33 billion).

One important action to achieve the above roadmap, according to the World Bank, is that Vietnam needs to focus on financing the transition, mobilizing domestic finance and seeking external support. Because of its large capital needs, Vietnam needs to reallocate savings from the domestic private sector to climate-related projects, increase savings from the public sector, and mobilize external financial support. Public investment can account for about a third of total investment and can be financed through a carbon tax or borrowing in the domestic market. Private capital equivalent to about 3.4% of GDP per year can be mobilized through green credit from banks, green stocks and green bonds, as well as applying risk mitigation tools.

CCDR said that there were five priority policy packages that needed immediate attention from the Government, as well as urgent and timely public and private investment to fulfill Vietnam's adaptation and mitigation goals. These are a coordinated regional program for the Mekong Delta region; an integrated coastal resilience investment program for major urban centers and connectivity infrastructure; a targeted air pollution reduction program in Hanoi to achieve the WHO midterm target by 2030 and improve labor productivity. In addition, the Government also needs to accelerate the transition to clean energy and build a new social contract to protect the most vulnerable.

By Quynh Chi, Vietnam Business Forum