Legal Framework for Carbon Credit Market Needed

9:09:40 AM | 6/28/2024

By 2028, Vietnam will join the carbon credit exchange of the world. This market is forecast to have huge potential for development but Vietnam must continue to improve the legal system for the effective operation of the carbon trading market, according to experts.

Vietnam holds substantial potential for generating carbon credits

The carbon credit market is planned to be piloted in 2025, the legal framework for this market is expected to be completed by 2027 and the carbon credit exchange will officially come into operation from 2028. However, the formation and operation of Vietnam's carbon credit market is confronting many difficulties.

Vietnam has much potential to create carbon credits

Vietnam is considered to have great potential to develop the carbon credit market, not only because of its rich forest resources but also thanks to the diversity of emission reduction projects in agriculture, renewable energy and waste management.

According to data from the Department of Forestry under the Ministry of Agriculture and Rural Development, each year Vietnam can sell 57 million carbon credits to the world market.

On the other hand, according to a report by the Department of Climate Change (DCC) under the Ministry of Natural Resources and Environment, Vietnam now ranks fourth in the world by projects implemented under the Clean Development Mechanism (CDM), with 258 projects approved by the Executive Board of Clean Development Mechanism and 13 programs operated under the Clean Development Mechanism, potentially with nearly 140 million tons of CO2 equivalent within the credit term.

Of these, 17 Gold Standard projects have internationally issued more than 3 million credits and 24 Carbon Standard verified projects have issued more than 600,000 credits.

At the Workshop "Carbon credit market: Perspectives from economics, environment and legal framework" organized by Law Newspaper, Prof. Dr. Vo Xuan Vinh, Director of the Institute of Business Research, Ho Chi Minh City University of Economics, said that Vietnam currently has 1,912 entities conducting greenhouse gas emissions inventories, which are potential players for the carbon credit market.

In addition, Vietnam has more than 14 million hectares of forests potential to create carbon credits from forest protection and restoration projects, he said.

"It is estimated that Vietnam can sell 57 million carbon credits to international organizations and can earn hundreds of millions of US dollars each year," he added.

In addition, agricultural projects such as low-carbon farming and sustainable land management are highly likely to reduce greenhouse gas emissions and generate carbon credits.

Prof. Vinh assessed that participating in the carbon credit market also opens up the possibility of cooperating with international organizations and receiving financial and technological support from green investment funds.

“Investment opportunities in green technology and renewable energy not only help reduce long-term costs but also improve operational efficiency and comply with more stringent emissions regulations,” he emphasized.

Legal framework needed for market development

Besides the potential, Vietnam's carbon credit market still shows many limitations. The current policy system only regulates basic issues such as assigning tasks to form or define components of the carbon market, resulting in inadequacies in this market.

Therefore, Vietnam needs to build a complete legal framework for the effective operation of the carbon market.

Dr. Vo Trung Tin, Director of the Faculty of Land - Environmental Law, Department of Commercial Law, Ho Chi Minh City University of Law, said that the tax issue of carbon credits in particular as well as emission quotas in general need to be studied and introduced synchronously.

The carbon credit exchange roadmap is expected to be piloted in 2025 and officially operated in 2028, he said. Therefore, the delayed introduction of laws will lead to tax loss for the State and cause difficulties for businesses to account for this new type of asset.

A carbon credit project within the framework of the United Nations Framework Convention on Climate Change (UNFCCC) needs to go through basic steps such as: Registering the project idea and methodology; Registering the project; Reporting the project implementation; appraising and issuing carbon credits. By authority, the Government can assign each ministry to manage and recognize methodology, approve the project idea, approve the project, and issue carbon credits.

Meanwhile, Prof. Vinh proposed the need to establish domestic carbon credit exchanges. Developing a robust domestic carbon credit market is key to engaging businesses and citizens. The government needs to form domestic carbon credit exchanges and create a platform for parties to transact transparently and effectively.

Furthermore, it is necessary to encourage the participation of financial institutions and investment funds in this market to increase liquidity and diversify the types of tradable carbon credits, he added.

In particular, the government should encourage investments in green technology and emission reduction projects through financial support policies and tax incentives. Applying green technologies not only helps reduce greenhouse gas emissions but also enhances production and business efficiency for companies. Renewable energy projects, energy conserving technology and improved clean production processes need to be prioritized for investment to achieve sustainable development goals.

According to the Department of Natural Resources and Environment of Ho Chi Minh City, the enabling environment for the voluntary carbon market in Vietnam has not been fully established to resolve outstanding concerns about benefit sharing and transfer ownership of carbon credits.

At the same time, transaction costs and legal regulations of the city to structure and sell internationally transferred credits to buyers have not yet been determined.

In addition, the awareness of businesses, organizations and society of this market remains limited. Research shows that more than 50% of businesses only know about the carbon market and emissions quota trading system, without clearly understanding the related operating principles and only a small percentage of them understand how this system works.

By Binh Minh, Vietnam Business Forum