Compliance market
Depending on the provisions of the ETS an eligible offset can be used by an enterprise in lieu of an allowance.
An enterprise that violates (or fails to comply with) the requirements of the ETS should be subject to penalties. Such penalties should be predictable, transparent, significant so as to rectify the violation and deter future non-compliance. Penalties can require the offending enterprise to pay fines and may subject enterprise personal to civil and/or criminal consequences.
An enterprise that is subject to an ETS is said to be in compliance when it has satisfied all obligations of the ETS including, but not limited to those related to MRV, market engagement, the holding and subsequent surrender of a quantity of allowances and/or offsets that is equal to the quantity of emissions released by the enterprise.
The vintage of an an allowance is the first period of time (typically, a year) when the allowance can be used to satisfy an enterprise’s compliance obligation. Depending on the requirements of the ETS, prior year allowances can be banked and carried forward into subsequent years where such allowances can be used to satisfy subsequent (and thereafter) compliance obligations.
A government issued instrument that provides enterprises included in the ETS with the ability to emit one tonne of the regulated CO2e in accord with the conditions of the ETS. Typically, emission allowances are issued with ‘vintage’ designations which define the time period (typically, a particular year) in which the allowances can be first surrendered by enterprises to the ETS-administering entity. If allowed by the ETS, an allowance can be surrended in the defined year (vintage) or any year thereafter.
What companies need to prepare for the participation in Vietnam’s future ETS and carbon market?
According to results from the project Viet Nam Partnership for Market Readiness (VN PMR) steel, cement, and thermal power sectors are likely the potential entities regulated under Vietnam’s pilot ETS. These are companies with high emission profiles, reliable and available data for MRV, and high emission reduction potential.
Decree No.06/2022/ND-CP of the Government dated 07 January 2022 on mitigation of greenhouse gas emission and protection of the ozone layer sets out the development road map for the national carbon market under Article 17 as follows.
“1. The period up to the end of 2027
a) Formulating regulations on the management of carbon credits, activities on the exchange of GHG emission allowances carbon credits; formulating operation rules of the carbon trade exchange (CTX);
b) Pilot a domestic carbon crediting mechanism for potential sectors and guide the operation of domestic and international carbon exchange and cediting mechanisms following the law and the international treaties to which the Socialist Republic of Vietnam is a signatory.
c) Establishing and organizing the operation of a pilot CTX from 2025;
d) Carrying out activities to improve capacity and raise awareness about carbon market development.
2. The period from 2028 onwards
a) Official operation of the CTX in 2028;
b) Consider the linkage of domestic, regional, and global carbon markets.”
There is a lot of work required for the establishment of an ETS. The process of ETS design is iterative rather than following step by step. According to “Emissions Trading In Practice: A Handbook on Design and Implementation“, the designing and implementing an ETS can follow a 10-step process, these include:
Step 1: Prepare
Step 2: Engage stakeholders, communicate and build capacity
Step 3: Decide the scope
Step 4: Set the cap
Step 5: Distribute allowances
Step 6: Promote a well-functioning market
Step 7: Ensure compliance and oversight
Step 8: Consider the use of offsets
Step 9: Consider linking
Step 10: Implement, evaluate, and improve
Voluntary market
A wide range of project types can generate carbon credits, depending on the standard. Each standards publishes a list of methodologies, the project proposal must follow one of those eligible methodologies in order to be able to generate carbon credits. Some common examples include:
Clean energy, energy efficiency, improved forest management, reduction of deforestation and afforestation, conservation, methane recovery from landfills, compostage, among others.
A key aspect of carbon market participation is to ensure that the activities under the carbon market are additional, and do not happen under ‘business as usual’.
Additionality is crucial for the integrity of the voluntary carbon market. Without it, credits could represent reductions that would have happened naturally, invalidating their claim to offset emissions.
Carbon credits are generated through the development of projects that reduce or remove greenhouse gases. These projects must follow the steps of a project cycle process: project design, validation of project description, monitoring, reporting and verification of emission reductions.
Several independent, third-party organizations certify carbon credits based on rigorous standards. Some well-known standards include:
- Verified Carbon Standard (VCS)
- Gold Standard (GS)
- Climate Action Reserve (CAR)
- Clean Development Mechanism (CDM)
These standards ensure credibility and transparency in the voluntary carbon market by establishing methodologies for project development, measurement, verification, and issuance of credits.
Carbon credits: Represent verified reductions or removals of one metric ton of greenhouse gases (GHGs), most commonly carbon dioxide (CO2). These credits are generated through projects that prevent or remove emissions (e.g., renewable energy projects, and forest conservation). Companies or individuals can purchase carbon credits to offset their emissions.
Emission allowances: Permits issued by a government or regulatory body to allow emitting a specific amount of GHGs within a cap-and-trade system. Unlike credits, allowances are generally freely allocated or auctioned, and companies can trade them.
Key differences:
- Origin: Credits originate from emission reduction/removal projects, while allowances are permissions within a regulated cap-and-trade system.
- Trading: Both can be traded in voluntary or compliance markets, but allowances are typically only for regulated entities within a cap-and-trade system.
