MID – TERM INTERNATIONAL ECONOMICS REPORT TOPIC INTERNATIONAL CARBON TRADING AND VIETNAM’S CARBON TRADE PROSPECTS FROM COP26

TABLE OF CONTENTS ABSTRACT .................................................................................................................. 4 DISCUSSION OF FINDINGS .................................................................................... 5 1. INTERNATIONAL CARBON TRADING ................................................................................. 5 1.1. Introduction ......................................................................................................................... 5 1.2. The CapandTrade System ............................................................................................... 6 1.2.1. Regulated carbon market ............................................................................................... 6 1.2.2. Voluntary carbon market ............................................................................................... 6 1.3. Benefits and some disadvantages of International Carbon Trading .............................. 7 1.3.1. Carbon Trading ensures environment effectiveness ...................................................... 7 1.3.2. Carbon Trading System makes economic sense ............................................................. 7 1.3.3. Carbon Trading supports further public policy objectives ............................................ 9 1.3.4. Some disadvantages of Carbon Trading ...................................................................... 10 2. VIETNAMS CARBON MARKET ............................................................................................ 10 2.1. The formation of the Vietnam’s Carbon Market. .......................................................... 10 2.1.1. The need for Carbon Market in Vietnam ..................................................................... 10 2.1.2. Creating a premise for the formation of carbon pricing policies ................................ 11 2.2. Analysis of current carbon trade in Vietnam: ................................................................ 13 2.2.1. Clean Development Mechanism (CDM) ...................................................................... 13 2.2.2. Nationally Appropriate Mitigation Actions (NAMAs) ................................................. 14 2.2.3. Joint Crediting Mechanism (JCM) ............................................................................... 14 2.3. The potential of Vietnam’s carbon trade: ....................................................................... 15 2.3.1. Vietnam has accumulated experience when participating in the clean development mechanism, the Paris agreement, and joining the JCM ........................................................ 15 2.3.2. The size of the domestic carbon market has great potential ........................................ 15 2.3.3. Ability to link with markets around the world .............................................................. 16 2.3.4. Opportunity to sell certificates ..................................................................................... 17 3. COP26 AND CREATING A CENTER FOR CARBON TRADING ...................................... 18 3.1. COP26 ................................................................................................................................ 18 3.1.1. What is COP26? ........................................................................................................... 18 3.1.2. Attendees ...................................................................................................................... 18 3.1.3. Outcomes of COP26 ..................................................................................................... 19 3.2. COP 26 impacts on Carbon Trading Market of the world ........................................... 20 3.3. COP 26 impacts on Carbon Trading Market of Vietnam ............................................. 24 2 3.3.1. Opportunities: 24 3.3.2. Challenges. 28 3.3.3. What direction should Vietnam take to take advantage of the potential of international carbon trading? 29 CONCLUSION 31 REFERENCES 32 3 ABSTRACT The 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) began on October 31 in Glasgow, Scotland, and will last two weeks. This is a muchanticipated gathering, with several significant decisions to be taken in response to climate change problems and the current energy crisis, including the implementation of global carbon market trading laws. Carbon markets have been promoted by economists as a strategy for achieving climate objectives and decreasing CO2 levels in the environment by providing a financial incentive to limit emissions. The idea is that if one country pays for another country to decrease or capture emissions by planting trees or building renewable energy facilities, that country may include those reductions against its own climate target. The goal is to capture an additional ton of CO2 for every ton that is emitted elsewhere. On the global market, credits representing one ton of CO2 can be transferred between nations. If the program covers all emissions from human activity, this exchange might theoretically balance out and prevent an overall increase in emissions. Participating in the carbon market is a chance for developing nations like Vietnam to make financial revenue, get lowcarbon contemporary technology, promote the international economy, and join forces with the rest of the world to decrease greenhouse gas emissions. Our team conducted the study project International carbon trading and Vietnams carbon trade prospects from COP26 to understand the benefits and problems that this market presents to Viet Nam. 4 DISCUSSION OF FINDINGS 1. INTERNATIONAL CARBON TRADING 1.1. Introduction Carbon trading is the buying and selling of credits that allow a firm or other entity to emit a particular quantity of carbon dioxide; it is also known as carbon emissions trading. Carbon credits and carbon trading are permitted by governments with the purpose of gradually lowering overall carbon emissions and limiting their contribution to climate change. Purchasing credits paid per ton of carbon is sometimes less expensive than attempting to eliminate all emissions within a single organization or across national borders (something that can be virtually impossible). The buyer can then apply the averted emissions to its aim. Because greenhouse gas pollution is global (it affects the atmosphere similarly regardless of where it is released), the climatic benefit is the same regardless of where emissions are prevented or eliminated. In theory, carbon market money finances initiatives that would not have occurred otherwise (a concept known as additionally), allowing nations and businesses to reduce emissions at a lesser cost. Carbon markets of various kinds and flavors currently exist across the world, including legally required capandtrade markets for certain sectors in the United States, Europe, and China, as well as a thriving market for voluntary offset credits purchased by businesses. The 2015 Paris Agreement intends to increase the credibility and reach of carbon markets. The missing elements of a clause known as Article 6 will be filled up by negotiators in Glasgow COP26, which lays out the basic parameters for how nations might utilize global carbon markets to accomplish their carbonreduction pledges. International carbon markets have the potential to play a critical role in lowering global greenhouse gas emissions in a costeffective manner. The global number of emissions trading schemes is growing. Aside from the EU ETS, national or subnational systems are already in operation or development in Canada, China, Japan, New Zealand, South Korea, Switzerland, and the United States. The European Commission is a founding member of the International Carbon Action Partnership (ICAP), a group of nations and regions that have mandatory capandtrade systems. The ICAP provides a venue for the exchange of expertise and information, as well as regular training sessions. Through the Partnership for Market Readiness, the Commission also promotes the creation of domestic carbon markets (PMR). The PMR is a platform for the sharing of expertise on carbon market instruments, and it aids 17 countries in the preparation and implementation of these instruments. 5 1.2. The CapandTrade System This is how carbon trading works: Each country is given a particular number of licenses to release a specified amount of carbon dioxide. If it does not utilize all of its licenses, it can sell the leftover permits to another country that wishes to release more CO2 than its permits allow. Each year, each country receives a somewhat fewer number of new licenses. A capandtrade system is a type of carbon trading mechanism. In this situation, the commerce is done between firms, despite the fact that it is allowed and controlled by the government. Each firm is allotted a certain amount of carbon pollution allowance. Allowances that have not been used might be sold to other businesses. The purpose is to guarantee that, as a group, enterprises do not exceed a baseline level of pollution. The baseline is decreased on a yearly basis. California has its own capandtrade system in place. The Western Climate Initiative was formed by a collection of states in the United States and provinces in Canada. There are two types of international carbon markets that exist concurrently. The first already exists; the second cannot begin unless negotiators find an agreement on how it will function. However, both involve the sale of credits generated by emissionsreduction projects to customers wanting to satisfy an emissionsreduction target. 1.2.1. Regulated carbon market This market has (generally) legally enforceable compliance regimes for emission reductions, which might be at the international, national, regional, or municipal levels, and its rules determine which sectors must participate. The UNFCCCs REDD+ mechanism, as well as the Kyoto Protocols three mechanisms: the Clean Development Mechanism (CDM), the Joint Implementation (JI), and the European Unions Emissions Trading Scheme, are examples of regulated markets (ETS). 1.2.2. Voluntary carbon market In this market, the project developer decides under which standard they want to participate and must comply with the guidelines and standards of these. Some examples are VCS and CAR. In general, for AFOLU projects, the voluntary market is more interesting and developed than the regulated one. The regulations for a worldwide carbon market were agreed after much consideration at the Glasgow COP26 climate change summit in November 2021, executing a globally united strategy initially sketched forth in the 2015 Paris Climate Agreement. The agreedupon framework, dubbed Article 6, 6 will include a centralized system as well as a distinct bilateral system. The centralized system is intended for the public and private sectors, whereas the bilateral system is intended for nations to exchange carbon offset credits in order to satisfy their emission objectives. According to the new agreement, individuals that earn carbon credits will contribute 5% of the revenues to a fund to assist underdeveloped nations in combating climate change. In addition, 2% of credits will be invalidated in order to achieve an overall reduction in emissions. The new regulations allow participants to use earlier credits produced between 2013 and 2020, raising concerns that they might flood the market and drive down costs. Proponents of the framework argue that it provides financial incentives for nations and businesses to develop emissionreducing technologies and programs such as mechanical carbon capture systems and forest planting, all of which assist lower carbon levels in the atmosphere. 1.3. Benefits and some disadvantages of International Carbon Trading 1.3.1. Carbon Trading ensures environment effectiveness To begin, the Carbon Trading System (CTS) is designed to cut emissions. Setting an absolute cap expressly specifies the maximum quantity of emissions allowed under a CTS. Although a number of economic, political, and social factors can influence emissions levels, the CTSs quantitybased approach ensures that emissions remain at or below a predefined limit throughout the covered sectors, as determined by the cap. As long as CTS legislation stays robust and stable throughout time, CTS permits emissions reduction goals to be met with great assurance. Furthermore, by concentrating on emissions reductions, a CTSs established cap lends legitimacy to climate policy by emphasizing environmental objectives. CTS allows a realistic longterm policy signal and emissions trajectory in line with mid to longterm objectives by establishing a progressively dropping limit. As a result, CTS provides distinct emissionreduction pathways. A properly defined emissions reduction pathway provides certainty for economic players by framing market expectations and sending a clear signal for longterm investments that are required. 1.3.2. Carbon Trading System makes economic sense CTS uses the markets allocative power to achieve a specified amount of emissions reductions at the lowest feasible cost to the economy. As a result, CTS provides costeffective abatement. Trade in 7 limited emissions permits on the carbon market produces a carbon price, which offers incentives for a change in consumption, production, and investment decisions toward a lowcarbon economy under a CTS. Entities have the ability and flexibility to respond to the carbon price in whichever way they see appropriate, and as long as costs can be passed through, the carbon price will be reflected in the prices of products and services across the economy. The CTS policy framework includes a number of elements that increase the instruments flexibility, allowing participants to choose when and where to spend in abatement. These aspects promote a more stable carbon market and improve the systems overall cost efficiency. Temporal flexibility enables market players to decide whether to abate now or at some time in the future. Allowances can be banked and utilized later, or they can be borrowed from future emissions. Firms may thus capitalize on future developments, phase out obsolete technology at the most costeffective moment, and abate more now if future abatement costs are expected to rise. Temporal flexibility allows participants to abate when it is most cost efficient, ensuring emissions are lowered at the lowest possible cost during the policys lifespan. Furthermore, CTS promotes lowcarbon development by separating emissions from economic growth. Because economic development has historically been linked to carbon emissions from energy generation, it is often considered that lowering emissions will harm the economy. While this was true throughout the Industrial Revolution, it is not always the case now. This development has several underlying reasons and reflects economies improving energy efficiency, productivity, and technical level. CTS, by particularly addressing emissions, can provide a powerful incentive to this shift. It contributes to the decoupling of carbon emissions from economic growth and, more crucially, assists countries in transitioning away from a carbonintensive development path. CTS modifies market circumstances to encourage lowcarbon industrial methods, goods, and technology by producing a carbon price signal. Furthermore, it encourages businesses and entrepreneurs to participate in innovative activities. Through discern the impacts of a carbon pricing at various phases of the innovation cycle, from fundamental research in the laboratory to commercialization. The most obvious and wellknown consequences of a CTS on lowcarbon technologies are close to the market. 8 1.3.3. Carbon Trading supports further public policy objectives CTS can create fiscal income by the auctioning of permits, comparable to a carbon tax. Depending on the jurisdictions legislative requirements, the regulator can use this cash to a number of uses, such as research and development or direct climate action, adopting tax reform, andor protecting lowincome people from increasing energy bills. CTS has raised around USD 37 billion by the end of 2017. CTS produces government income in this manner. CTS also generates emissions data and promotes the exchange of information. In order to work correctly, the implementation and operation of a CTS require extensive data on covered sources and their emissions. Companies that comply with reporting requirements create comprehensive and detailed emissions data that would otherwise be impossible to get. This can assist governments, researchers, and civil society groups in taking stock of the economys emissions, identifying the abatement potential of covered sectors, and tracking progress toward mitigation goals. Participating firms may also access this data, which may be used to make longterm investment choices and to discover costeffective carbon reduction alternatives. Participating in a CTS increases information sharing among key stakeholders even more. While the major goal of CTS policy is to reduce GHG emissions, a welldesigned CTS will operate in tandem with domestic public policy goals to provide other environmental and social advantages. The spectrum of these advantages is wide, and depending on CTS design and implementation environment, CTS is expected to produce beneficial outcomes for public health, energy security, job development, and landuse change. The longterm health advantages of reducing local air pollution through climate mitigation initiatives, in particular, have attracted a lot of attention. The quantity and range of governments that have selected CTS as their major mitigation instrument indicate that CTS policy is politically viable. While its implementation is still dependent on political will, the flexibility of a CTS, both in terms of the freedom it provides enterprises and the numerous design alternatives, allows it to be compatible with new and current policy frameworks and acquire broad political approval. It is critical to coordinate worldwide efforts and link various measures in order to successfully combat global climate change. Because of the nature of CTS policy, various systems can be linked by mutual (or unilateral) acknowledgment of emissions allowances for compliance. By connecting systems, a 9 broader carbon market is created, which can lower total compliance costs, boost market liquidity, and encourage market stability. 1.3.4. Some disadvantages of Carbon Trading Trading is used to avoid the requirement to reduce emissions by simply purchasing credits rather than investing in cleaner and carbonfree operations. Poor bookkeeping and outright deceit abound in the voluntary market in particular. Many offsets do not correspond to the claimed quantity of emissions, are not permanent, andor are generated from efforts that would have taken place even if the carbon market did not exist (and so do not indicate significant climate action on the buyers part). If carbon markets are unable to apply stringent accountability and transparency regulations, they will merely foster greenwashing, in which firms and governments appear to be lowering their carbon footprint while really increasing emissions. Although there are no absolutes here in that neither the advantages nor the drawbacks will dominate, we will see some organizations innovating and others bypassing, depending on the costs and rewards of innovating. Excessive red tape for project developers means that only large initiatives have a chance to finance development costs. If economic activity falls (as it happened during the 2008 financial crisis), the emission trading system collapses because no one needs the permits. A complicated market based on intangible goods is always vulnerable to manipulation. For political considerations, heavy industries will always be granted several exclusions. In reality, they profited handsomely (in the billions of dollars) from the selling of extra licenses. The biggest benefactors are dealers, attorneys, and nongovernmental organizations, not project developers. 2. VIETNAMS CARBON MARKET 2.1. The formation of the Vietnam’s Carbon Market. 2.1.1. The need for Carbon Market in Vietnam In order to reduce greenhouse gas (GHG) emissions with the most effective cost, many countries and territories around the world have been choosing a carbon pricing tool. In line with this trend, Vietnam is also in the process of strengthening its capacity to build market tools, facilitating the formation of a carbon market.Vietnam is considered a country with many advantages for the development of a selfcarbon market. First of all, what Vietnam has shown with its commitment to GHG reductions in NDC to the Secretariat of The United Nations Framework Convention on Climate Change (UNFCCC) with

FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS  MID – TERM INTERNATIONAL ECONOMICS REPORT TOPIC INTERNATIONAL CARBON TRADING AND VIETNAM’S CARBON TRADE PROSPECTS FROM COP26 TABLE OF CONTENTS ABSTRACT DISCUSSION OF FINDINGS INTERNATIONAL CARBON TRADING 1.1 Introduction 1.2 The Cap-and-Trade System 1.2.1 Regulated carbon market 1.2.2 Voluntary carbon market 1.3 Benefits and some disadvantages of International Carbon Trading 1.3.1 Carbon Trading ensures environment effectiveness 1.3.2 Carbon Trading System makes economic sense 1.3.3 Carbon Trading supports further public policy objectives 1.3.4 Some disadvantages of Carbon Trading VIETNAM'S CARBON MARKET 10 2.1 The formation of the Vietnam’s Carbon Market 10 2.1.1 The need for Carbon Market in Vietnam 2.1.2 Creating a premise for the formation of carbon pricing policies 2.2 Analysis of current carbon trade in Vietnam: 13 2.2.1 Clean Development Mechanism (CDM) 2.2.2 Nationally Appropriate Mitigation Actions (NAMAs) 2.2.3 Joint Crediting Mechanism (JCM) 2.3 The potential of Vietnam’s carbon trade: 15 2.3.1 Vietnam has accumulated experience when participating in the clean development mechanism, the Paris agreement, and joining the JCM 2.3.2 The size of the domestic carbon market has great potential 2.3.3 Ability to link with markets around the world 2.3.4 Opportunity to sell certificates COP26 AND CREATING A CENTER FOR CARBON TRADING 18 3.1 COP26 18 3.1.1 What is COP26? 3.1.2 Attendees 3.1.3 Outcomes of COP26 3.2 COP 26 impacts on Carbon Trading Market of the world 20 3.3 COP 26 impacts on Carbon Trading Market of Vietnam 24 3.3.1 Opportunities: 24 3.3.2 Challenges 28 3.3.3 What direction should Vietnam take to take advantage of the potential of international carbon trading? 29 CONCLUSION 31 REFERENCES 32 ABSTRACT The 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) began on October 31 in Glasgow, Scotland, and will last two weeks This is a much-anticipated gathering, with several significant decisions to be taken in response to climate change problems and the current energy crisis, including the implementation of global carbon market trading laws Carbon markets have been promoted by economists as a strategy for achieving climate objectives and decreasing CO2 levels in the environment by providing a financial incentive to limit emissions The idea is that if one country pays for another country to decrease or capture emissions by planting trees or building renewable energy facilities, that country may include those reductions against its own climate target The goal is to capture an additional ton of CO2 for every ton that is emitted elsewhere On the global market, credits representing one ton of CO2 can be transferred between nations If the program covers all emissions from human activity, this exchange might theoretically balance out and prevent an overall increase in emissions Participating in the carbon market is a chance for developing nations like Vietnam to make financial revenue, get low-carbon contemporary technology, promote the international economy, and join forces with the rest of the world to decrease greenhouse gas emissions Our team conducted the study project "International carbon trading and Vietnam's carbon trade prospects from COP26" to understand the benefits and problems that this market presents to Viet Nam DISCUSSION OF FINDINGS INTERNATIONAL CARBON TRADING 1.1 Introduction Carbon trading is the buying and selling of credits that allow a firm or other entity to emit a particular quantity of carbon dioxide; it is also known as carbon emissions trading Carbon credits and carbon trading are permitted by governments with the purpose of gradually lowering overall carbon emissions and limiting their contribution to climate change Purchasing credits paid per ton of carbon is sometimes less expensive than attempting to eliminate all emissions within a single organization or across national borders (something that can be virtually impossible) The buyer can then apply the averted emissions to its aim Because greenhouse gas pollution is global (it affects the atmosphere similarly regardless of where it is released), the climatic benefit is the same regardless of where emissions are prevented or eliminated In theory, carbon market money finances initiatives that would not have occurred otherwise (a concept known as "additionally"), allowing nations and businesses to reduce emissions at a lesser cost Carbon markets of various kinds and flavors currently exist across the world, including legally required cap-andtrade markets for certain sectors in the United States, Europe, and China, as well as a thriving market for voluntary offset credits purchased by businesses The 2015 Paris Agreement intends to increase the credibility and reach of carbon markets The missing elements of a clause known as Article will be filled up by negotiators in Glasgow COP26, which lays out the basic parameters for how nations might utilize global carbon markets to accomplish their carbon-reduction pledges International carbon markets have the potential to play a critical role in lowering global greenhouse gas emissions in a cost-effective manner The global number of emissions trading schemes is growing Aside from the EU ETS, national or subnational systems are already in operation or development in Canada, China, Japan, New Zealand, South Korea, Switzerland, and the United States The European Commission is a founding member of the International Carbon Action Partnership (ICAP), a group of nations and regions that have mandatory cap-and-trade systems The ICAP provides a venue for the exchange of expertise and information, as well as regular training sessions Through the Partnership for Market Readiness, the Commission also promotes the creation of domestic carbon markets (PMR) The PMR is a platform for the sharing of expertise on carbon market instruments, and it aids 17 countries in the preparation and implementation of these instruments 1.2 The Cap-and-Trade System This is how carbon trading works: Each country is given a particular number of licenses to release a specified amount of carbon dioxide If it does not utilize all of its licenses, it can sell the leftover permits to another country that wishes to release more CO2 than its permits allow Each year, each country receives a somewhat fewer number of new licenses A cap-and-trade system is a type of carbon trading mechanism In this situation, the commerce is done between firms, despite the fact that it is allowed and controlled by the government Each firm is allotted a certain amount of carbon pollution allowance Allowances that have not been used might be sold to other businesses The purpose is to guarantee that, as a group, enterprises not exceed a baseline level of pollution The baseline is decreased on a yearly basis California has its own cap-and-trade system in place The Western Climate Initiative was formed by a collection of states in the United States and provinces in Canada There are two types of international carbon markets that exist concurrently The first already exists; the second cannot begin unless negotiators find an agreement on how it will function However, both involve the sale of credits generated by emissions-reduction projects to customers wanting to satisfy an emissions-reduction target 1.2.1 Regulated carbon market This market has (generally) legally enforceable compliance regimes for emission reductions, which might be at the international, national, regional, or municipal levels, and its rules determine which sectors must participate The UNFCCC's REDD+ mechanism, as well as the Kyoto Protocol's three mechanisms: the Clean Development Mechanism (CDM), the Joint Implementation (JI), and the European Union's Emissions Trading Scheme, are examples of regulated markets (ETS) 1.2.2 Voluntary carbon market In this market, the project developer decides under which standard they want to participate and must comply with the guidelines and standards of these Some examples are VCS and CAR In general, for AFOLU projects, the voluntary market is more interesting and developed than the regulated one The regulations for a worldwide carbon market were agreed after much consideration at the Glasgow COP26 climate change summit in November 2021, executing a globally united strategy initially sketched forth in the 2015 Paris Climate Agreement The agreed-upon framework, dubbed Article 6, will include a centralized system as well as a distinct bilateral system The centralized system is intended for the public and private sectors, whereas the bilateral system is intended for nations to exchange carbon offset credits in order to satisfy their emission objectives According to the new agreement, individuals that earn carbon credits will contribute 5% of the revenues to a fund to assist underdeveloped nations in combating climate change In addition, 2% of credits will be invalidated in order to achieve an overall reduction in emissions The new regulations allow participants to use earlier credits produced between 2013 and 2020, raising concerns that they might flood the market and drive down costs Proponents of the framework argue that it provides financial incentives for nations and businesses to develop emission-reducing technologies and programs such as mechanical carbon capture systems and forest planting, all of which assist lower carbon levels in the atmosphere 1.3 Benefits and some disadvantages of International Carbon Trading 1.3.1 Carbon Trading ensures environment effectiveness To begin, the Carbon Trading System (CTS) is designed to cut emissions Setting an absolute cap expressly specifies the maximum quantity of emissions allowed under a CTS Although a number of economic, political, and social factors can influence emissions levels, the CTS's quantity-based approach ensures that emissions remain at or below a predefined limit throughout the covered sectors, as determined by the cap As long as CTS legislation stays robust and stable throughout time, CTS permits emissions reduction goals to be met with great assurance Furthermore, by concentrating on emissions reductions, a CTS's established cap lends legitimacy to climate policy by emphasizing environmental objectives CTS allows a realistic long-term policy signal and emissions trajectory in line with mid- to long-term objectives by establishing a progressively dropping limit As a result, CTS provides distinct emission-reduction pathways A properly defined emissions reduction pathway provides certainty for economic players by framing market expectations and sending a clear signal for long-term investments that are required 1.3.2 Carbon Trading System makes economic sense CTS uses the market's allocative power to achieve a specified amount of emissions reductions at the lowest feasible cost to the economy As a result, CTS provides cost-effective abatement Trade in