Overview
Vietnam is among the fastest growing markets in ASEAN. Strategically located in the centre of Southeast Asia, its GDP, foreign direct investment and middle-income population have all grown over the past decade. Vietnam’s share of annual global emissions is relatively small - approximately 0.88% in 2021 - for a population of almost 100 million, or roughly 1.2% of the world’s people.
The country is severely affected by climate change. With 3,260 km long coastline, many low-lying cities and river delta regions, Vietnam ranks first in the world for exposure to flooding alongside Bangladesh. The World Bank estimates Vietnam lost around US$10b in 2020 due to climate impacts. Without appropriate adaption and mitigation measures, climate change could cost Vietnam around 12% to 14.5% of GDP annually by 2050 according to World Bank estimates.
The Prime Minister approved the proposal of missions and solutions to implement Vietnam’s commitment to achieving net zero emissions by 2050 in July 2022. Vietnam aims to unconditionally reduce 15.8% of total greenhouse gas (GHG) emissions by 2030 compared to business as usual (BAU), and conditionally reduce its contribution by 43.5% of total GHG emissions by 2030 compared to BAU under the updated 2022 Nationally Determined Contribution (NDC).
Navigate the opportunities and challenges in the net zero transition:
Energy Transition | Carbon Markets | Financing | Transport | Housing and Buildings | Agriculture | International Collaboration
Energy transition
Challenges
Heavy reliance on fossil fuels has seen electricity and heat generation account for the vast majority of Vietnam’s emissions. Electricity consumption has surged alongside its rapid economic development and population growth. In the decade to 2020 consumption more than doubled - from 89.94TWh to 225.95TWh.
Clear government policies and incentives will play an important role in the pathway to decarbonisation for Vietnam, as one of the most coal-dependent countries globally. The government and Prime Minister Pham Minh Chinh are focused on increasing the share of renewable energy and improving energy efficiency to reduce emissions. More than 70% of targeted GHG emissions reduction by 2030 is planned to come from electricity and heat generation.
Vietnam’s coal exit strategy includes:
- no new coal-fired power projects after 2030 and phasing out coal power capacity after 2035 (under The National Strategy on Climate Change up to 2050, in line with commitments as a signatory to the COP26 global pledge)
- converting all coal-fired power plants to alternative fuels or retiring them by 2050 under the Power Development Plan 8 (PDP8) released on 15 May 2023
- reducing domestic coal production to 33m mt / year by 2050 and coal imports to 50m mt in 2045 under the National Energy Masterplan (Masterplan), from 41m – 47m mt/year in 2030 and 85m mt in 2035 respectively.
Integrating the power grid to transmit renewable energy sources has lagged the construction of projects, as in many other countries. This limits the output of clean electricity and is a disincentive to investors. The high initial capital investment required to reduce GHG emissions is not matched by the limited domestic market demand for energy-saving technology and renewable energy.
Gas will play a transitional role, with natural gas production targets rising from 5.5b -15b CU (Carbon Units) m/year by 2030 to 10b -15b cu m/year by 2050.
Bankability issues in connection with the model power purchase agreements (PPA) for renewable projects are the key concern for sponsors and financiers which may impede the ability to procure international project finance for large-scale renewable projects.
The direct PPA (or corporate PPA) program has not been put in place. EVN (Vietnam Electricity, the state-owned utility) and its subsidiaries are still playing as monopoly offtakers in the market.
The attractive feed-in tariffs (FiTs) are no longer available to solar and wind power projects that have failed to achieve the commercial operation dates by the relevant deadline prescribed by the Prime Minister.
Opportunities
Solar presents enormous opportunities in Vietnam, both as:
- the world’s third largest manufacturer of solar PV modules, and
- one of the fastest growing solar power markets in the world. In 2020, capacity increased by over 10 megawatts - more than all ASEAN countries combined.
Offshore wind also has potential across Vietnam’s 3000+km coastline. Under PDP8 the total planned capacity for offshore wind development is 6,000MW by 2030 and will reach up to 91,500MW by 2050.
Hydro, solar, wind and biomass power are set to provide 48% of Vietnam’s installed capacity by 2030, rising to approximately 63% in 2050, under the ambitious PDP8. This significantly increases the National Strategy goal of a 33% share by 2030 and a quantum leap from the 15.3% recorded in 2020.
Over four days in March 2023, The Australian Energy Trade Mission explored trade and investment opportunities in Vietnam. From grid operation, energy storage solutions and virtual power plants, to green certification system and decarbonisation technology, the opportunities are wide-ranging.
This continues Australia’s history of support. A recent example is an Export Finance Australia US$32m (AU$41m) loan provided in 2021 as part of a green syndicated finance facility to build onshore wind farms in Vietnam. The loan facility will enable the development, construction, and operation of three wind farms with a total capacity of 144MW located in the Quang Tri province in the central highlands of Vietnam. The projects will generate 422GW-hours of electricity and avoid an average of 162,430 tons of CO2 emissions annually.
'[Australia is] one of Vietnam’s strongest energy partners, having supported the first ever 500KV transmission line connecting northern power sources to the central and southern regions back in the early 1990s.’ - Australia’s Ambassador to Vietnam, HR Andrew Goledzinowski
Carbon markets
Vietnam’s carbon pricing efforts includes a carbon tax that is limited in scope and – perhaps more significantly – a new carbon market from 2025 and a commitment to cross-border collaboration.
Hopes for an expanded carbon tax
Vietnam has not adopted carbon taxation but is applying environmental protection tax with respect to certain fuels such as gas and diesel. The government is working on a roadmap to apply carbon tax by way of either including in environmental protection tax or introducing as a separate tax.
Regulated emissions trading scheme– pilot from 2025
Vietnam plans to establish and trial the Carbon Trade Exchange (CTX) from 2025 with full operation expected by 2028. The establishment and implementation of the carbon market is provided for in amendments to the Law on Protection of the Environment and Decree No. 06/2022/ND-CP.
- have formulated carbon credit management regulations, GHG emission quota exchange and carbon credits, and operation rules for the CTX
- experimented with carbon exchange and offsetting mechanisms in key sectors, and
- provided guidance on the operation of the CTX an offsetting mechanisms in accordance with domestic law and international law to which Vietnam is a signatory.[1]
The MONRE and the Ministry of Finance have joined forces with the Southeast Asian Energy Transition Partnership (ETP) to create a pilot CTX simulation tool and learn-by-doing platform for key stakeholders to raise their awareness of carbon pricing. The key findings and lessons learnt from this project will feed into concrete policy recommendations for the government to roll out the CTX by 2027.
Cross border collaboration: Singapore, Australia back Vietnam’s efforts
Singapore and Vietnam signed a Memorandum of Understanding (MOU) on Carbon Credits Collaboration in October 2022. This includes the development of ‘modalities and procedures to enable the transfer of correspondingly adjusted carbon credits that are generated’. The MOU was made under Article 6 of the Paris Agreement and was the first MOU signed between Singapore and an ASEAN member State.
Australia will inject AU$3.3m and leverage over AU$3.7m in private sector investment and resources to improve the environment in Vietnam for carbon market projects. The deal is part Australia’s Department of Foreign Affairs and Trade (DFAT) Business Partnerships Platform and supports six new multistakeholder partnerships.
Decree No. 06/2022/ND-CP on Mitigation of Green House Gas Emissions and Protection of Ozone Layer.
Financing
Source: World Bank, Australian Prime Minister Anthony Albanese
Improving settings for foreign investment
International financial sources must supplement government incentives that encourage private investment and increased public funding (eg through a carbon tax) for Vietnam to satisfy its financing needs. Settings that would make it more attractive for investors include:
Stress testing climate-related risks. About 55% of loans made by banks in Vietnam went to businesses and people in climate-vulnerable regions. The government should consider assessing climate-related risks on the banking sector through stress testing to inform future green finance policies, in line with World Bank advice.
Consistent and reliable taxonomy. Vietnam’s membership of the ASEAN Taxonomy might buffer investor uncertainty around sustainable investments (eg green bonds) and mitigate greenwashing risk. Vietnam is also developing a national taxonomy that is expected to align with the EU Taxonomy.
ASEAN’s sustainable finance taxonomy – and the need for labels
The ASEAN Taxonomy Board released the second version of its Taxonomy for Sustainable Finance in early 2023, following consultations. This provides a roadmap for member nations to follow, giving investors critical guidance on attracting sustainable finance to reach goals. For more on the landmark 209-page guide, see the ASEAN Taxonomy update on KWM Pulse.
The Just Energy Transition Partnership (JETP) raising billions
The government and the International Partners Group (IPG) made a political declaration on 14 December 2022 to establish the JETP. This is expected to encourage more foreign investment.
- The partnership will mobilise an initial amount of at least US$15.5b over the next three to five years.
- This is split 50:50 between public sector finance raised by IPG members (EU, UK, USA, Japan, Germany, France, Italy, Canada, Denmark and Norway) and private finance facilitated by Glasgow Financial Alliance for Net Zero Working Group members.
[The JETP is] a long-term, ambitious partnership to support Viet Nam’s low-emission and climate resilient development, as well as support Viet Nam to accelerate the just transition and decarbonisation of the electricity system, and develop new economic opportunities to support Viet Nam’s transition towards net zero future.’ - European Commission, Political Declaration, Dec 2022
Developing domestic finance and investment
- Green Banking Development Scheme. Launched by the State Bank of Vietnam (SBV) in 2018, the scheme promotes green finance and encourages credit institutions to incorporate environmental and social risks into their credit decision-making processes.
- Legal framework roadmap. Vietnam is ‘actively implementing a roadmap for an improved legal framework for better attracting green finance and green technology; and encouraging green production and investment’, Vietnam’s Deputy Prime Minister affirmed at the 53rd World Economic Forum in January 2023. As mentioned above, establishing a national taxonomy is crucial.
- Need for internal procedures, external expertise. The lack of internal procedures for and expertise on green finance assessment is a key challenge for many domestic banks. Government policy and incentives will need to play a role to help the financial sector overcome these barriers. Former head of the Banking Strategy Institute Pham Xuan Hoe has called for a professional institution to manage and ‘ensure the effective implementation’ of in-bound green funds.
Transport
Action towards green movement
Vietnam has an action plan to develop a green transport sector by 2050. This involves developing modes of transport, facilities, equipment and infrastructure operated 100% through electricity or green energy. Approved on 22 July 2022, the Action Program for Transition to Green Energy and Mitigation of Carbon Dioxide and Methane Emissions from Transportation for 2022-2030 (Transportation Action Program) sets specific targets for roadways, railways, inland waterways, shipping, aviation and urban traffic.
Electric vehicle (EV) market should see dramatic growth
Vietnam’s EV market is still in its infancy. But EV sales are expected to increase from a few thousand cars in 2022 to 1m by 2028, reaching 3.5m by 2040. Growth is anticipated due to:
- Government incentives including lowering taxes on imports and reducing a portion of registration fees for electric vehicle owners.
- Development of charging infrastructure and enhancements in the manufacturing, assembly, import and use of EVs, under the Transportation Action Program.
Accelerating EV sales at home & abroad
Vietnamese-founded private automotive company VinFast has projected it will sell between 40,000 and 50,000 EVs in 2023. The leading electric car manufacturer ‘promises to bring affordable and luxury electric cars with powerful engines’ to market. Exports to North America and Europe have contributed to the almost seven-fold increase in sales since 2022, when the company’s only market was Vietnam. According to chairman and founder Pham Nhat Vuong, the company expects to break even by the end of 2024 ‘if things go as planned’. The company has received a funding pledge of US$2.5 billion from its parent company Vingroup and Vuong. VinFast currently has a plant in Vietnam and plans to open a second plant in North Carolina in 2025.
Australia – through Export Finance Australia and the Australian Climate Finance Partnership – provided VinFast US$50 million in support to increase production of public electric buses and establish Vietnam’s first national EV charging network in 2022.
Housing and buildings
Vietnam plans to modernise its urban areas with a focus on the green economy and the digital economy. The Vietnam Urban Green Growth Development Plan 2030 outlines five pillars for a sustainable city: quality, energy consumption, resource conversation, health and safety, and environmental impact.
Agriculture
The agriculture sector is Vietnam’s third highest GHG emitting sector – and a sector Vietnam aims to grow. Vietnam has ambitions to be in the top 15 agricultural developed countries and the top 10 in agricultural processing technology by 2030.
Innovation is needed to cut overall methane emissions by at least 30% below 2020 levels by 2030 – a commitment made at COP26 – and to address the impacts of climate change on the sector. The Mekong River Delta’s food production systems are unsustainable and increasingly at risk.
By 2050, Vietnam is expected to have a modern, efficient and environmentally friendly agricultural sector. The updated NDC has set specific goals for the agriculture sector, from the development of biogas to the modernisation of watering and fertilising perennial plants.
- The Climate Strategy identifies ways the agriculture sector can adapt to climate change and sets objectives and tasks for the sector as a high-emitting industry.
- The National Strategy on Green Growth (Green Growth Strategy) maps out foundations for re-organising production to further develop agriculture while improving climate change resilience in the region. The Green Growth Strategy was approved by the Prime Minister in October 2021.
The Australian Centre for International Agriculture Research (ACIAR) has a 29-year running program of research collaboration with Vietnam. The 2022-23 research program will see 25 ACIAR-supported projects in Vietnam. In June 2022, ACIAR and Vietnam reaffirmed a commitment to developing research into climate change, especially:
- drought-tolerant cropping systems in the Mekong River Delta and the Central Highlands, and
- saline-cropping systems for the Mekong River Delta.
Deeper, stronger ties between our innovation systems is a key goal for our strategic partnership with Australia… innovation – particularly when it is jointly developed and implemented – can transform our society and deliver economic, social and environmental sustainability.” - Bui The Duy, Vietnam Vice Minister of Science and Technology
The Australian Government is boosting innovation in Vietnam's agriculture sector via technology investments. Under the 10 year, AU$33.5m Aus4Innovation program, Australia is offering Innovation Partnership Grants (AU$2m in total) to fund tech-based innovation in Vietnam’s agriculture sector.
The goal is to support projects that tackle challenges in agriculture, like boosting production and processing productivity, using resources more efficiently, developing markets (domestic and export) and addressing climate change adaptation and resilience. This program promotes collaboration between Australia and Vietnam to drive innovation and sustainability. The partnership promotes cross-border collaboration and sharing skills and resources to bring economic, social and environmental benefits.
International collaboration
Vietnam & Australia established the landmark Green Economy Program in October 2023 to strengthen business partnerships. The program aims to equip Australian businesses with the knowledge, capabilities and networks to catalyse sustainable business collaboration with Vietnam.
EU & Vietnam were among members of the Just Energy Transition Partnerships entered in December 2022 as part of COP27. This will support Vietnam to accelerate its transition away from fossil fuels to clean energy.
This publication is intended to provide a high level overview of the net zero transition in Vietnam. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice Vietnamese law, and works closely with local lawyers to support our clients' needs in Vietnam. We are grateful to Frasers Law for their co-operation on this publication.
