Making Money from Carbon Credits

Original article (in Vietnamese): https://vnexpress.net/kiem-tien-tu-tin-chi-carbon-4757194.html

Vietnam has just received a payment of 51.5 million USD from the World Bank for reducing carbon emissions by limiting forest degradation and deforestation.

10.3 million tons of carbon emissions reduced from forests in six North Central provinces were transferred at a value of 5 USD/credit, bringing in an estimated profit of 1,250 billion VND. Essentially, the forest has turned into gold—potentially a lot of gold.

A carbon credit is a type of tradable permit or certificate that provides the holder the right to emit one ton of CO2 or another greenhouse gas listed in the greenhouse gas inventory.

Carbon credits are still a very confusing concept, but the news above naturally makes farmers excited. So, what needs to be done to receive money from selling carbon credits? I still remember a conversation with leading environmental experts two years ago while working at the Institute for Global Environmental Strategies in Japan. Dr. Pankaj Kumar—a policy research team leader—said: "The most important thing in any environmental policy is raising the awareness of those directly affected."

It is highly likely that farmers do not know that agricultural development is the second-highest cause of total greenhouse gas emissions in Vietnam.

The World Bank has committed to buying carbon credits from Vietnam at a minimum price of 10 USD/credit from low-emission rice farming. But transactions only occur when advanced rice farming techniques are applied with the policy of "1 Must - 5 Reductions": must use certified seeds; reduce seeds, reduce water, reduce fertilizer, reduce pesticides, and reduce post-harvest losses.

To actually receive money, the project must be approved, commitments must be adhered to, and emission reductions must be measured over time. Without large-scale training and coaching programs for farmers, the amount of emission reduction will not meet the initial standards, leading to a negligible number of carbon credits generated. The effort would be considered a waste.

The next issue is: How do we manage carbon credits for sale?

The whole world is prioritizing lofty goals like "Net Zero Carbon" or "Carbon Neutral." But let's look at reality: When mentioning these goals, businesses or emission sources always emphasize "net zero emissions during operations." This means the business only calculates the offset of emissions generated during operation, ignoring the products or services they create. This is like claiming that if all employees are vegetarian, the company is by default considered to care about health, even if their product is fried chicken.

The lack of clear regulations on the international stage is the main cause of economic loopholes. As long as there are no strict regulations and sanctions, participating in the commercial carbon market will place a burden not only on local people but also on governments—who have to bear the responsibility of fixing the losses caused by "fake green" projects.

In Vietnam, in January 2022, the Government issued Decree 06/2022 on reducing greenhouse gas emissions and protecting the ozone layer. From now until the end of 2027, Vietnam will build a system of regulations and foundational policies for market operation, as well as establish and pilot a carbon credit exchange. From 2028, Vietnam intends to officially operate the carbon credit exchange.

This decree is an early and necessary preparation of regulations and sanctions for the carbon trading market. However, the complexity of managing this new issue will still create many other challenges.

I believe that before building a carbon trading market, Vietnam should consider applying a carbon tax mechanism, primarily on goods such as coal, petroleum, and natural gas.

Even developed markets in the world like Japan or Canada are using tax rate tools, and have only piloted carbon trading markets in a few major economic centers like Quebec, Tokyo, or Saitama.

Although there are fundamental differences in nature and mechanism, the carbon tax option has many advantages compared to participating in or organizing a separate carbon trading market.

First, both tools agree on the principle: "Polluter pays." They impose a clear price on carbon, encouraging producers and consumers to absorb a portion of the social costs caused by greenhouse gas emissions. This creates motivation for developing emission reduction solutions or substituting carbon materials.

Second, applying a carbon tax helps the government avoid "micromanaging" businesses. Individuals and companies have full discretion to decide the best response based on factors like market, pricing, scale... without spending extra costs hiring third-party consultants or training employees on regulations and mechanisms to participate in the trading market.

Third, although both types generate revenue, a carbon tax will directly increase public revenue, while organizing auctions for emission allowances or carbon credits may face many difficulties regarding legal procedural corridors, time, and efficiency.

The world is applying carbon taxes in two common ways: (1) integrating carbon tax into an existing environmental tax; and (2) drafting and issuing a separate carbon tax.

The option of issuing a carbon tax as a new and independent tax has many limitations, requiring a complex drafting and approval process, increasing unnecessary administrative and technical costs. Vietnam already has an environmental protection tax, which partly overlaps in purpose with a carbon tax. Drafting another separate carbon tax law could easily cause double taxation, overloading businesses. Moreover, with the rapid change of climate change conditions as well as macro factors, issuing an independent carbon tax would need constant monitoring and changing to fit the economic situation, causing difficulties in management.

Therefore, Vietnam should integrate the carbon tax into the existing environmental protection tax based on the high compatibility between the two types of taxes, making management easier in every stage from registration, declaration to payment and settlement.

Vietnam has many natural advantages, possessing more than 14.8 million hectares of forests with a forest coverage rate of 42.02%. With 3,260 km of coastline stretching from Nui Do port (Mong Cai) to Ha Tien border gate (Kien Giang), Vietnam is also among the coastal nations with long coastlines in the world.

With these advantages, Vietnam has a very potential carbon sink whether going "up to the forest" or "down to the sea." However, protecting forests or marine ecosystems as well as funding these projects has not received appropriate attention.

I always wonder how our "golden forests, silver seas" are actually valued specifically and sold for how much. Now the answer has started to become clear.

By Pham Tam Long