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Carbon Pricing: A Lever for Net Zero Goals

In the face of increasingly severe climate change, achieving net zero has become an urgent task for countries and businesses worldwide. To limit global temperature rise to no more than 2 degrees Celsius as per the Paris Agreement, nations, including Vietnam, are focusing on developing carbon pricing mechanisms.

These mechanisms are seen as effective ways to limit greenhouse gas emissions and promote sustainable development. This article will provide an in-depth understanding of carbon pricing, its benefits, and the common tools used for pricing.

According to the World Bank, carbon pricing is a tool that calculates the external costs of greenhouse gas emissions, such as crop damage, healthcare costs due to heatwaves and droughts, property loss from flooding, or sea-level rise. By attaching a price to CO2 emissions, carbon pricing shifts the burden of these damages back to the responsible parties who can mitigate emissions. Simply put, carbon pricing is an economic measure that assigns a financial value to the amount of CO2 emitted into the environment.
Instead of specifying who must reduce emissions, where, and how, carbon pricing creates an economic signal. Polluters can then decide whether to cease their polluting activities, reduce emissions, or continue emitting and pay for it. This approach allows environmental goals to be achieved most flexibly and cost-effectively for society. Furthermore, carbon pricing encourages the use of green technology and innovation, driving sustainable economic growth.

Carbon pricing tools play a crucial role in achieving greenhouse gas emission reductions, addressing climate change, and promoting sustainable development at a lower social cost. For governments, carbon pricing is a significant policy that generates substantial revenue from carbon taxes or emission allowances auctions. These funds can be invested in green technology research and development or support the transition to a low-carbon economy.

  • For businesses, carbon pricing standards help them recognize climate risks early and develop appropriate transition strategies, thus enhancing competitive advantages and creating opportunities for additional revenue.

For example, businesses can adjust production processes and climate strategies as fossil fuel prices rise due to government commitments. Moreover, companies with reasonable emission reduction strategies can generate revenue from selling carbon credits or surplus allowances.

  • For long-term investors, carbon pricing aids in analyzing the impact of climate policies on investment portfolios and allocating capital to low-emission or climate-adaptive activities. Through this mechanism, investors can identify the costs and benefits of investments to make effective decisions.

There are various tools for carbon pricing, each with distinct characteristics and benefits. Below are the three most common tools:

Carbon Tax

A carbon tax is a direct carbon pricing tool imposed by governments on greenhouse gas emission sources. The tax rate is determined based on the amount of CO2 equivalent emissions a facility emits. Carbon tax generates stable revenue for governments, which can be invested in green projects or support vulnerable communities. However, it is essential to adjust the tax rate reasonably to avoid negative impacts on the economy and people’s livelihoods. 

Emissions Trading System (ETS)

An Emissions Trading System (ETS) is a more flexible mechanism where governments cap total emissions and allocate emission allowances to facilities. These facilities can trade emission allowances on the market, creating economic incentives to reduce emissions. A prime example is the European Union’s ETS (EU ETS), where businesses can trade emission allowances to optimize their emission reduction costs. ETS allows facilities to comply with emission limits, encouraging firms to invest in green technology and reduce emission costs. Non-compliance can result in heavy penalties, pressuring businesses to implement effective emission reduction measures.

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Emission Offsetting and Credits Mechanism

Carbon credits, or emission offsets, are equivalent to one ton of CO2 reduced and generated from voluntary emission reduction activities. These credits can be traded and generate revenue, helping buyers offset their carbon footprint and meet emission targets and requirements within both ETS and voluntary markets. Carbon credits are created from emission reduction projects, such as reforestation or renewable energy investments. An example is the REDD+ program, where developed countries can purchase carbon credits from forest protection projects in developing countries.

According to World Bank statistics, Vietnam issued 2.4 million carbon credits in 2023 under the VCS standard. This mechanism not only helps businesses reduce emission costs but also promotes investment in green projects, creating dual benefits for both the environment and the economy. However, strict rules and methodologies are needed to ensure transparency and effectiveness.

Carbon pricing is a potential tool for countries and businesses to achieve Net Zero goals, reduce greenhouse gas emissions, and promote sustainable development. By implementing mechanisms like carbon taxes, Emissions Trading Systems (ETS), and crediting mechanisms, we can encourage green technology, enhance economic efficiency, and protect the environment. Achieving Net Zero requires close cooperation between governments, businesses, and the international community. We must continue to push for implementing carbon pricing tools, ensuring their transparency and effectiveness to build a green and sustainable future.

Source: Compiled