Q&A about the Carbon Market

19-12-2023

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Definition of Carbon Market, Commodities in the Carbon Market

The carbon market is a marketplace where commodities are traded and converted into carbon units. Specifically, there are two types of commodities traded in the carbon market: emission allowances and carbon credits.

Emission allowances represent the quantity of greenhouse gases (GHG), converted into tons of CO2 equivalent that a management agency allows a facility/object/organization to emit in a certain period. If the entity exceeds the allocated emission allowance, it must either purchase allowances from another entity or carbon credits on the market to offset the excess emissions, or it will be fined by state management agencies.

Carbon credits represent the number of tons of CO2 equivalent that an activity can generate, based on its ability to absorb or remove GHG (e.g. afforestation, capturing emissions for power generation) or based on the ability of that activity to reduce emissions compared to other conventional activities (e.g., renewable energy reducing emissions compared to fossil fuels, energy efficiency reducing emissions compared to non-efficient practices, etc.).

Classification of carbon markets: Compliance market and Voluntary markets

The carbon market operates based on supply and demand for the two above-mentioned commodities, divided into 2 types:

  • Compliance market: is a market where entities are required to reduce GHG emissions, as reflected in the allocated emission allowances set by the regulatory authority for each entity. Entities are allowed to buy, sell, and exchange these emission allowances on the market. For example, entities with lower emissions may have excess allowances to sell to entities exceeding their allocated limits. The overall emissions cap of the market remains constant. Therefore, the primary purpose of the compliance market is to control emissions. The main traded commodity is emission allowances (hence, the compliance market is characterized by an emissions allowance trading mechanism), which may allow the use of small amounts of carbon credits (usually 5-10%).
  • Voluntary market: is a market where businesses voluntarily undertake GHG emission reductions and purchase carbon credits to achieve this goal. For instance, a company committed to achieving net zero may still need to use a certain amount of fossil fuels due to operational demands. In this case, they would purchase carbon credits on the market to offset the emissions resulting from the use of these fossil fuels. Therefore, the traded commodity in the voluntary market is carbon credits.

Brief Overview of the Development History of the Carbon Market:

The international carbon market originated from the Kyoto Protocol, effective from 2005. Developed countries such as Japan, Europe, the United States, Canada, etc., committed to emission reductions and could use flexible tools to fulfill these commitments. These tools included three mechanisms: International emission trading, Joint Implementation (JI), and the Clean Development Mechanism (CDM).

To achieve this goal, countries such as Europe, have established their own domestic emissions trading mechanisms, or carbon markets. Currently, there are approximately 47 such markets in the world. Vietnam also plans to pilot the domestic carbon market from 2025 and officially operate from 2028.

Major Carbon Markets Worldwide:

Major carbon markets in the world currently include the EU, the UK, South Korea, North America, Canada, and New Zealand.

How are carbon credits used in the carbon market? What are the current mechanisms for generating carbon credits?

Carbon markets can utilize credits from international carbon credit mechanisms such as the CDM under the Kyoto Protocol, the Joint Crediting Mechanism (JCM) as a bilateral cooperation mechanism between Japan and other countries, or independent carbon credit standards like the Verified Carbon Standard (VCS), Gold Standard (GS), Global Carbon Council (GCC), etc. Some countries develop credit-generating mechanisms for their domestic carbon markets, such as China has China Certified Emission Reductions (C-CERs), and Thailand has Thailand Voluntary Emission Reductions (T-VERs).

How is the price of a carbon credit calculated? What is the current cost of 1 carbon credit?

The price of carbon credits is established based on market supply and demand. The prices of carbon credits vary depending on several factors: 1) the type of project, for example, forest credits often have higher prices than energy credits; 2) the applicable carbon standards, for instance, GS credits may have higher prices than VCS credits; 3) the type of carbon market in which the credits are traded, such as compliance or voluntary markets.

What economic benefits can businesses gain from the carbon market?

The carbon market provides a mechanism for businesses to flexibly and economically reduce GHG emissions.

  • Businesses mandated to reduce emissions may consider implementing low-cost GHG reduction measures initially. For measures requiring high upfront investments, they can opt to offset by purchasing emission allowances and carbon credits on the carbon market.
  • For businesses actively investing in advanced technologies to achieve emission reduction benefits, they can develop carbon credit projects and capitalize on revenue from selling carbon credits in the market.

Some basic information about the carbon market in Vietnam?

The development roadmap of the domestic carbon market has been outlined in the Environmental Protection Law of 2020 and the Prime Minister’s Decree No. 06/2022/ND-CP, which regulates the reduction of GHG emissions and ozone layer protection. Also, in 2022, the Prime Minister issued Decision No. 01/2022/QD-TTg, specifying a list of 1,912 businesses required to conduct GHG inventories and participate in the domestic carbon market. These businesses are required to submit GHG inventory reports starting from 2023, which will serve as the basis for the Ministry of Natural Resources to allocate emission allowances for each facility. The Ministry of Finance is also conducting research and evaluation for the establishment of a domestic carbon trade exchange in Vietnam, with plans to initiate a pilot program in 2025 and officially operate it in 2028.

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