Vietnam to start pilot emission trading in 2025, allow offsetting 30% emissions

Vietnam's Ministry of Agriculture and Environment has announced the initiation of a pilot emission trading scheme (ETS) in the power, iron and steel, and cement industries, and will assign emission allowances for their 2025 and 2026 emissions by the end of 2025, while compliance entities can buy carbon credits to offset up to 30% of their liable emissions.

Decree 119/2025/ND-CP, which was seen by Platts, part of S&P Global Commodity Insights, on June 11, lays the fundamental framework to regulate the country's greenhouse gas emissions and leverage international carbon markets to finance Vietnam's decarbonization.

The decree was signed by Vietnam's Deputy Prime Minister Tran Hong Ha on June 9. It was amended based on Decree 06/2022/ND-CP, and the final version, inked on June 9, had undergone rounds of consultations and refinements before its landing, according to local policy analysts.

Vietnam's ETS will run under a pilot phase until the end of 2028. During this pilot phase, emission allowances for the 2027-2028 period will be assigned to the eligible industries by Oct. 31, 2027, according to the decree.

From 2029, Vietnam will complete the regulatory framework for managing carbon credits, greenhouse gas emission allowance trading, and carbon credit transactions.

By 2029, the country is also expected to establish legal provisions for the organization, management, and operation of the domestic carbon market and set rules regarding participation in the global carbon market.

In addition, from 2029, the country will develop and implement mechanisms for auctioning emission allowances, according to the decree. Before that, emission allowances will be allocated to the eligible companies for free, according to intensity-based emission reduction targets.

Until the end of 2030, any company with allowance deficits can borrow allowances from the subsequent compliance period to meet its current compliance period's obligations, the decree showed, adding that the borrowed allowances should not exceed 15% of the total allowances allocated to the respective company.

Intensity-based targets

In some existing ETSs, like those in China and Australia, emission reduction targets have also been set based on intensity-based benchmarks.

Intensity-based benchmarks set caps on greenhouse gas emissions allowed for producing one unit of product, like a ton of crude steel, or one megawatt-hour of coal-fired electricity. However, using intensity-based targets also means that there will not be an absolute cap on total emissions covered by the ETS.

"The effectiveness of Vietnam ETS will largely depend on how (the intensity-based) benchmarks will be set and the trajectory of their tightening. The lower the benchmark, the more effective the carbon trading will be," Mai Duong, carbon market analyst with Veyt, told Platts.

She added that the sectors covered in the pilot phase jointly accounted for around 70% of Vietnam's total emissions.

"Also, Vietnam is still developing the national carbon registry and preparing for the first trading on the Hanoi Stock Exchange," she said.

The final decree did not specify when the domestic exchange will launch its official carbon trading platform.

"The effectiveness of Vietnam ETS would be rather insignificant at least during the pilot phase until the end of 2028, but in the long term, carbon trading will likely become a key policy instrument to drive the country's decarbonization," Veyt's Duong pointed out.

Duong said the sectors covered by Vietnam ETS' pilot phase overlap with the sectors covered under the EU's Carbon Border Adjustment Mechanism, but the actual impact of CBAM is negligible on Vietnam, at least during its initial phase.

She added that Vietnam has chosen to focus on the most emission-intensive facilities, instead of covering all facilities in the ETS-eligible sectors.

"Vietnam's ETS will cover only 27 crude steel production facilities in total of over 300, but these already constitute over 80% of the steel sector's emissions. The same with the cement industry. Vietnam's ETS will first regulate emissions from 56 clinker production facilities, but they already cover 90% of the sector's total emissions."

Carbon offsetting

The decree allowed compliance entities to use "carbon credits from projects under the approved mechanisms" to offset up to 30% of their ETS-liable emissions. The approved list included carbon credits aligned with the UN's Article 6.2 and 6.4 mechanisms, as well as other international carbon credits aligned with the Vietnamese government's requirements.

Duong said that in the original Decree 06, the government only allowed compliance entities to use offsets to cover up to 10% of their liable emissions, but the ratio was raised to 20%, and then 30% after several rounds of consultations.

She said the majority of offsets are expected to be sourced from afforestation projects, adding that these nature-based carbon offsets are likely to be priced lower than emission allowances, so companies with allowance deficits might prioritize the purchase of carbon offsets.

"Under Article 6.2, Vietnam has signed bilateral deals with countries like Singapore, South Korea, and Japan. The country is currently negotiating other deals with other countries," she highlighted.