CARBON PAYMENT FOR FOREST ENVIRONMENTAL SERVICES (C-PFES) A Feasibility Study Identifying Opportunities, Challenges, and Proposed Next Steps for Application of C-PFES in Vietnam
Prepared by the USAID Green Annamites Project in support of the Vietnam Forest Protection and Development Fund – March 2018
This study is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this study are the sole responsibility of ECODIT and do not necessarily reflect the views of USAID or the United States Government.
CONTENTS
EXECUTIVE SUMMARY ...... 5 INTRODUCTION ...... 8 HISTORY OF PFES IN VIETNAM ...... 9 JUSTIFICATION FOR CARBON - PFES ...... 10 LEGISLATION AND POLICIES ...... 10 PFES SYSTEMS IN PLACE ...... 11 STRENGTHENING THE PFES PROGRAM ...... 11 FUNDING FOR NDC TARGETS - REDUCED ODA FOR VIETNAM ...... 12 OPPORTUNITIES TO CONTRIBUTE QUANTIFIABLE OUTCOMES AND CONTRIBUTIONS TO NATIONAL COMMITMENTS AND PLANS ...... 13 GLOBAL EXPERIENCES AND NATIONAL PROGRAMS TO BUILD UPON...... 13 IDENTIFYING THE PAYERS AND PAYMENT LEVELS ...... 14 AN OVERVIEW OF GHG EMISSIONS IN VIETNAM ...... 14 DEFINING LARGE EMITTERS IN VIETNAM ...... 17 CONSIDERATION OF SCOPES IN CALCULATING GHG EMISSIONS FOR C-PFES ...... 19 DETERMINING PAYMENT LEVELS FOR C-PFES ...... 20 OVERVIEW OF C-PFES PAYER SECTORS AND PROPOSED PAYMENT EQUATIONS ...... 26 SCENARIOS FOR C-PFES REVENUE INVESTMENT ...... 42 C-PFES INVESTMENT OPTIONS ...... 43 HYPOTHETICAL EXAMPLES OF C-PFES INVESTMENT OPTIONS ...... 50 ADMINISTRATION IMPLICATIONS OF C-PFES FOR THE VNFF CENTRAL FUND AND PROVINCIAL FUNDS ...... 53 BENEFITS DISTRIBUTION ...... 55 REALATIONS AND SYNERGY WITH OTHER NATIONAL PROGRAMS ...... 56 COMMUNICATIONS ...... 58 ENABLING CONDITIONS AND NEXT STEPS FOR C-PFES AT THE NATIONAL LEVEL AND THE PROVINCIAL LEVEL ...... 58 ESSENTIAL ENABLING CONDITIONS ...... 59 INTEGRATION INTO EVOLVING NAMAS AND FUTURE CARBON TAX OR ETS ...... 60 PROPOSED NEXT-STEPS AT THE CENTRAL LEVEL AND FOR PROVINCIAL PILOTING ...... 62 NEXT STEPS FOR PREPARING FOR PROVINCIAL PILOTING ...... 66 CONCLUSION ...... 68 ANNEXES ...... 69 ANNEX A - REFERENCES ...... 69 ANNEX B – VIETNAM GOVERNMENT POLICIES RELEVANT TO C-PFES & IMPLICATIONS ...... 74 ANNEX C – LIST OF LOW EMISSIONS DEVELOPMENT PROGRAMS IN VIETNAM ...... 76
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ACRONYMS AND ABBREVIATIONS
ACMA Adaptive Collaborative Management Approach BUR Biennial Updated Report (to the UNFCCC) CAAV Civil Aviation Authority of Vietnam CER Certified Emissions Reductions CIGG UNDP project Strengthening Capacity and Institutional Reform for Green Growth and Sustainable Development in Viet Nam C-PFES Carbon Payment for Forest Environmental Services DARD Department of Agriculture and Rural Development EPT Environmental Pollution Tax ERPD Emissions Reduction Project Document ERP Emissions Reduction Program ETS Emissions Trading Scheme EVN Electricity Vietnam FCPF Forest Carbon Partnership Facility FMCR Forest Modernization and Coastal Resilience Project FPDF Forest Protection and Development Fund GA USAID Green Annamites GGAP Green Growth Action Plan GHG Greenhouse gas Green ID Green Innovations for Development IATA International Air Transport Association ICRAF International Center for Research in Agro-Forestry INDC Intended Nationally Determined Contribution IPCC Intergovernmental Panel on Climate Change JICA Japan International Cooperation Agency LNG Liquified natural gas LPG Liquid petroleum gas LULUCF Land Use, Land-Use Change, and Forestry MARD Ministry of Agriculture and Rural Development MOC Ministry of Construction MOF Ministry of Finance MOIT Ministry of Industry and Trade MONRE Ministry of Natural Resources and Environment MOT Ministry of Transport MPI Ministry of Planning and Investment MRV Monitoring, Reporting and Verification NAMA Nationally Appropriate Mitigation Actions NDC Nationally Determined Contribution NGO Non-governmental organization NRAP National REDD+ Action Plan NTFP Non-timber forest product ODA Overseas Development Assistance PES Payment for Environmental Services PFES Payment for Forest Environmental Services PMR Partnership for Market Readiness (of the World Bank) PMU Project Management Unit PPC Provincial People’s Committee PRAP Provincial REDD+ Action Plan REDD+ Reducing Emissions from Deforestation and Degradation RIFEE Research Institute for Forest Ecology and Environment RL Reference Level UNDP United Nations Development Programme UNFCCC United Nations Framework Convention on Climate Change USAID United States Agency for International Development
3 | C-PFES FEASIBILITY STUDY USAID.GOV VFD USAID Vietnam Forests and Deltas Program VN Vietnam VND Vietnamese Dong (national currency) VNFF Vietnam Forest Protection and Development Fund VRO Vietnam REDD+ Office
CHEMICAL SYMBOLS C Carbon CH4 Methane CO2 Carbon dioxide HFC Hydrofluorocarbon N2O Nitrous oxide
UNITS OF MEASUREMENT CO2e Carbon dioxide equivalent h Hour kg kilogram kWh Kilowatt hours ktCO2e MW Megawatts tce Metric tons (tonnes) coal equivalent tCO2 Metric tons (tonnes) carbon dioxide tCO2e Metric tons (tonnes) carbon dioxide equivalent
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EXECUTIVE SUMMARY In 2017, the Vietnam Forest Protection and Development Fund (VNFF) began a collaborative effort with United States Agency for International Development (USAID) to assess the potential for Carbon- Payment for Forest Environmental Services (C-PFES). The USAID Green Annamites Project (implemented by ECODIT, LLC) contracted with a consultant team to produce a comprehensive feasibility study on the potential to expand Vietnam’s Payment for Environmental Services (PFES) program to include the service to sequester and store carbon dioxide (CO2) emissions in Vietnam’s forest environments. This assignment included a thorough assessment of the feasibility of institutionalizing different policy options for C-PFES and their implications for VNFF and provincial Forest Protection and Development Funds (FPDFs), as well as for prospective “payers” and different groups of forest and land owners that could benefit. The overall objective of the study is to provide policy recommendations to relevant governmental institutions for piloting and institutionalizing C- PFES. The study was also to determine if and how C-PFES could be piloted in Quang Nam and Thua Thien Hue provinces, the project area of USAID Green Annamites. This document provides perspectives and recommendations based on extensive consultations on the potential scenarios for C-PFES with key stakeholders and resource experts. It also presents recommendations for ensuring that C-PFES is coherent and complimentary to other climate change mitigation policies and programs in Vietnam, notably the country’s emerging carbon pricing initiatives.
The enabling national policy framework for C-PFES is strong. Decree 99/2010/ND-CP (dated 24/9/2010) - Item 2, Article 4 on PFES list five types of forest environmental services eligible for payments including “Forest carbon sequestration and retention, reduction of greenhouse gas emissions by measures of preventing forest degeneration and forest area decrease and developing forests in a sustainable manner”. The recently enacted Forest Law No. 16/2017/QH14 (dated November 14, 2017) goes further in stating within Article 63 on “Forest environment service amount payees and payers, payment methods, and management of the use of such amounts” – Paragraph No. 2-đ) that “Production and business organizations and individuals who emit large amounts of greenhouse gases must pay environment service amounts for the absorption and retaining of forest carbon”. Numerous additional Vietnam policy documents have targets for greenhouse gas (GHG) mitigation in the forestry sector, notably the National REDD+ Action Plan (NRAP).
The most important and justifiable argument for C-PFES is relative to the critical and opportunistic contribution it can make for the Ministry of Agriculture and Rural Development (MARD) and the Vietnam Government in respecting, and achieving, the unconditional “Nationally Determined Contribution” (NDC) commitment to the Paris Agreement as reported to the United Nations Framework Convention on Climate Change (UNFCCC), using domestic funding resources. MARD is responsible for over 46 percent of the overall Vietnam NDC (an 8 percent reduction in GHG emissions in 2030 as per the 2010 baseline through both reductions and removals), with 36 percent of carbon dioxide equivalent (CO2e) removals in land use, land-use change, and forestry (LULUCF) and 10 percent of CO2e reductions in agriculture [mostly in methane (CH4)]. The estimated cost from domestic sources is 1.017 billion US Dollars (US$ 885 million for the agriculture sector and US$132 million for the LULUCF sector to 2030). C-PFES is potentially the best opportunity to acquire the requisite funding to achieve MARD’s ambitious NDC targets and to incentivize GHG emissions reductions among the largest emitters in the Energy, Industrial, and Transport Sectors.
A considerable amount of aggregate data and analysis exists in relation to the sectors and production facilities that are responsible for the largest volumes of GHG emissions in Vietnam (i.e., the potential “payers” of C-PFES). Lowering emissions in energy, construction (cement and steel), and waste, together with agriculture and LULUCF, is the focus of the NDC as well as many development partner
5 | C-PFES FEASIBILITY STUDY USAID.GOV and donor supported low-emissions programs. However, much of the GHG emissions data and baselines from individual production facilities, if communicated, is self-reported and so emissions figures need to be refined using standard monitoring calculations based on specifically determined emissions factors that come from the production processes used.
Perhaps the greatest challenge to achieving Vietnam’s NDC, as well as the greatest evolving environmental challenge for the country, will be transitioning from an ever-increasing dependence on coal power plants, with plans to build many more, to cleaner energy sources. Though C-PFES could play an important role, the general consensus of most of the experts consulted was that, at this point in time, it will be a monumental challenge politically for MARD/VNFF to try to apply C-PFES to these thermal power plants.
Recognizing the aforementioned environmental challenge for Vietnam in the energy production sector, which has serious climate change repercussions globally, the donor community has a multitude of low- emissions development support-projects that are supporting alternative energy investments and energy efficiency targeting the other large energy users, and GHG emitters, with support programs to render production more energy efficient and less polluting. As coal-fired power plants, and the interests behind them, are informally considered by many working in low-emissions development as difficult sub-sector to approach for a variety of reasons, the sectors that are currently receiving low- emissions support are: steel; cement; textiles; sugar and other food processing. These sectors could be more feasible “payers” in the shorter-term and the donor support low emissions development programs could be leveraged as additional incentives.
The cement and steel sectors have been developing Nationally Appropriate Mitigation Actions (NAMAs) with plans for GHG emissions registries and Monitoring, Reporting and Verification (MRV) systems for which C-PFES should be developed in a complementary fashion. Both the World Bank and the United Nations Development Programme (UNDP) have programs to support the Vietnam (VN) government for “market readiness” and some form of a future carbon tax or emissions trading scheme (ETS) for those production sectors mentioned above and the “waste” sector. Ministry of Natural Resources and Environment (MONRE) and Ministry of Finance (MOF) will also be submitting a revised Law on Environmental Protection Tax to the National Assembly in 2018 that includes air pollution (but not specifically GHG emissions). Though a planned carbon tax or ETS schemes for Vietnam may take many years to be developed and implemented, it is suggested that C-PFES scenarios could help to catalyze a larger carbon revenue program and should be integrated within or under a future carbon tax or ETS. This could mean that C-PFES payments would be exempted from, or in lieu of, a future carbon tax or ETS through certified emissions reductions (CER) or, that a percentage of the future carbon tax would be allocated to the VNFF for forest CER mitigation activities in forest environments that the Fund has successfully piloted.
An equally important justification for C-PFES is that it will significantly strengthen the PFES program and should address the persistent and notable weaknesses of the program which are: monitoring and evaluation of outcomes in forest quality and environmental services provided; linking more directly the payments to improved environmental services and thus enhancing the willingness to pay of service buyers and; providing a more significant contribution to local livelihoods to offset opportunity costs. In seeking both political and private-sector willingness for C-PFES, it will be important for the VNFF to go beyond their existing program of paying forest owners, or groups of owners, for the protection and conservation of forests. The mandate of the VNFF should be expanded to developing activities that measurably remove CO2 from the atmosphere in forest environments. These additional activities should include upland and coastal forest restoration, long-rotation tree plantations, as well as agro- forestry systems, which will have both mitigation and adaptation benefits. Clear and measurable
6 | C-PFES FEASIBILITY STUDY USAID.GOV evidence (MRV) on the outcomes in CO2 mitigation from the investment of C-PFES revenues will be critical for the program to be justified, accepted, and to make credible contributions to the NDC.
C-PFES represents a large leap for the VNFF if the enabling conditions and political will are in place. It creates a very good opportunity to develop a domestic mechanism of measurable, potentially certifiable, carbon offsetting which could be offered to future international carbon markets. Beyond the requisite PFES policy revision implications under the new Law on Forests, the VNFF will have to further develop their capacities to administer a much larger fund envelope that oversees procurement and quality assurance of “service providers” (already needed for use of the offset funds the VNFF has collected) as well as robust MRV systems that could ensure verifiable contributions towards NDC reporting.
As proposed next steps, the VNFF should begin piloting additional forest activities together with support for their development partners, or invest available “offset” funds in provinces, in order to show measurable outcomes of CO2 removals and storage. At the policy level, MARD will need to make several strategic decisions based on the recommendations that have been developed and proposed in this study. These decisions include determining and endorsing the following: what constitutes a large emitter or large emissions; what are the forestry investment options for C-PFES; how to phase-in payments in line with sector targets for lowering GHG emissions; and how best to involve payers in more transparent administration of PFES. Once these strategic decisions have been made, then MARD should develop professional communications and advocacy strategies for justifying C-PFES at the highest political levels and draft the requisite policy measures for C-PFES piloting and implementation. Advocacy should place an emphasis on C-PFES as an opportunistic option towards achieving Vietnam’s NDC commitment while ensuring coherence with the National REDD+ Action Plan, emerging NAMAs, and a probable future carbon tax or ETS scheme.
7 | C-PFES FEASIBILITY STUDY USAID.GOV INTRODUCTION Since 1990, Vietnam has achieved remarkable economic development resulting in a significant reduction of poverty and a virtual elimination of food insecurity. However, this growth has evolving economic and social costs associated. The Vietnamese population at all levels share concerns about the quality of air, quality of water, and food safety. Many surface water bodies, and agricultural soils, are highly contaminated with chemical fertilizers and pesticides and the limited underground water supplies are also becoming contaminated and are no longer replenishing at the same rates of pumped extraction. Increasing levels of air pollution will significantly increase health problems among the population in urban areas, and associated national health care costs, as well as making increasing contributions to global warming. Given Vietnam’s vulnerability to climate change, more frequent natural disasters will continue to worsen the situation. The value of, and external costs to, the natural capital and environmental services has been neglected and under-valued in markets and prices that shape production, consumption and management decisions. Moreover, the natural resources base upon which economies and livelihoods are dependent is stressed and further threatened by climate change.
As part of a global effort to respond to climate change and avoid global warming beyond a 2 Degree Celsius rise in temperature due to GHG emissions, Vietnam became a signatory to the Paris Agreement in 2016 and set NDC targets for GHG emissions reductions that will be reported to the UNFCCC up to 2030. The NDC sets very ambitious targets for the LULUCF sector in reducing and removing CO2 emissions in forest environments that equal 36 percent of the aggregate CO2e emissions removals and reductions, with an additional 10 percent of CO2e in the agriculture sector
(which is mostly CH4 emissions). Thus, MARD has responsibility for 46 percent of Vietnam’s NDC. The recently enacted Forest Law No. 16/2017/QH14 (dated November 14, 2017) states within Article 63 on “Forest environment service amount payees and payers, payment methods, and management of the use of such amounts” – Paragraph No. 2-đ) that “Production and business organizations and individuals who emit large amounts of greenhouse gases must pay environment service amounts for the absorption and retaining of forest carbon”. Paragraph 5 of that same Article goes on to state that “The government shall set out detailed provisions as to the environmental service amounts payees and payers, payment methods, payment level; shall adjust, exempt or reduce payments levels; and shall manage the use of environmental service amounts”.
USAID has been a key supporter of the Vietnam Forest Protection and Development Fund, and PFES development, piloting, and expansion since 2008. At the request of the VNFF, USAID agreed to fund a feasibility study through the Green Annamites Project to assess the potential of institutionalizing different policy options for C-PFES and their implications for different actors involved, including VNFF, provincial FPDFs, future “payers”, and different groups of forest and land owners that would benefit.
A summary of preliminary findings and ideas based upon reviewing available information, and extensive consultations on potential scenarios for C-PFES with key stakeholders and resource people was produced in preparation for a national level workshop that was held in Hanoi on January 31, 2018. This workshop served to discuss various scenarios and to further orient how the feasibility study was to be finalized. The workshop was an important event as witnessed by the attendance and active engagement of participants. Some of the more pertinent recommendations coming from the workshop which shaped the finalization of this report were as follows:
There must be a common understanding that the concept of C-PFES is different from that of a tax or fee (which generally go to state budgets) - C-PFES payments are clearly for investments in forest
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environmental services and there are precedents in other countries of the world such as Costa Rica and various sub-national entities in the USA and Canada;
Piloting of projects to implement payment for forest environmental services (PFES) for forest carbon sequestration and storage services should be developed and implemented by MARD under a decision from the Government - Prime Minister’s Office that specifically defines the payers, the beneficiaries, the investment options, methods for supervising and coordinating (draft “piloting policy” to be prepared by late 2018 and inclusive scientific and practical basis, expected provinces to participate, and the budget support for pilot activities from international and national projects and programs);
The USAID Green Annamites Project, donors, international organizations, projects that could be involved in the development and implementation of the pilot C-PFES project should be organized into working groups by the VNFF under the General Directorate of Forestry; and
MARD and VNFF development partners should help to ensure that C-PFES is not developed in isolation to the other evolving carbon pricing initiatives as well as the National REDD+ and Green Growth Action Plans.
HISTORY OF PFES IN VIETNAM Vietnam’s forestry policy began to formally recognize the role of forests in providing essential environmental services with the Forestry Development Strategy for 2006-2020 of MARD. This strategy promoted the formulation and implementation of economic policy mechanisms to record the value of environmental services produced by the forest sector for society. Subsequently, organizations and individuals that benefit from the environmental services of the forest sector should be obliged to pay for these services to mobilize financial resources for reinvestment in the forestry sector as a basis for sustainable development.
Decree No. 05/2008/ND - CP dated 14 May 01, 2008 of the Government on the Vietnam Forest Protection and Development Fund (VNFF) stresses that the “fund” was established to "mobilize the resources of society to protect and develop forests, contributing to the social policy of forestry activities" (Item 2 of Article 3) and "raise awareness and responsibility for the protection and development of forests from those who benefit from forests or affect forest areas" (Item 3 of Article 3). The Government Decision 380 (2008) allowed for piloting of PFES in the Lam Dong and Son La Provinces.
Two years later, Decree 99/2010/ND-CP dated 24/9/2010 of the Government on the policy for payment for forest environmental services further stated that "organizations and individuals who benefit from forest environmental services should pay for the services to owners of forests which create the supply services”. According to Decree No.99, 5 the forest environmental services entitled to PFES payments are: (i) soil protection, restriction of erosion and sedimentation of reservoirs, rivers and streams; (ii) regulation and maintenance of water sources for production and social life; (iii) forest carbon sequestration and retention (reduction of greenhouse gas emissions by measures of preventing forest degeneration and forest area decrease and developing forests in a sustainable manner); (iv)protection of natural landscape and conservation of biodiversity of ecosystems for tourism services, and (v) provision of spawning grounds, sources of feed and natural seeds, use of water from forests for aquaculture.
9 | C-PFES FEASIBILITY STUDY USAID.GOV The VNFF exists at the national level and 44 FPDFs have been established, of which 39 are operational. Total PFES revenues to the end of 2016 were over 8.219 billion Vietnamese Dong (VND) (collected by both the national and provincial funds) with 494 contracts nationwide with “payers” (297 hydropower companies, 103 clean water companies and 79 tourism companies), and another 13 planned for 2017. Of that overall sum, 5,024 billion VND has been disbursed for protecting 5.87 million hectares (ha) of forest accounting for 38 percent total forested area nationwide, of which:
208 special-use and protection forest management boards managing 2.94 million ha;
81 forest companies that manage 716.5 thousand ha;
467 PPCs that manage 590.5 thousand ha;
195 other forest owners (public security, army services, private enterprises and research centers) managing 356.4 thousand ha; and
115,138 forest owners (individuals, households, and communities) managing 1.26 million ha.
The VNFF also manages offset funds for forest plantations. Up to the end of 2016, 1,054 billion VND had been collected by both national and provincial funds with 378 billion VND pending payment. A total of 507.76 billion VND has been disbursed for planting 24,556.6 ha of tree plantations. During 2011-2015, PFES revenues contributed on average 20 percent of the total investments into the forestry sector.
JUSTIFICATION FOR CARBON - PFES There is strong justification for C-PFES development in Vietnam in relation to existing legislation & national policies on GHG emissions, forestry & agricultural sector planning, and the country’s commitment to the Paris Agreement and associated reporting to the UNFCCC. C-PFES may be the best opportunity available for sourcing the requisite funding to implement policies and respect ambitious plans and international commitments.
LEGISLATION AND POLICIES As described in the previous section on the history of PFES, Decree No. 05 of 2008 established the VNFF and Decree No. 99 of 2010 set the policy for PFES and for C-PFES wherein Item 2, Article 4 of this Decree listed as one of the forest environmental services entitled to payments as “Forest carbon sequestration and retention, reduction of greenhouse gas emissions by measures of preventing forest degeneration and forest area decrease and developing forests in a sustainable manner”.
Recently, the Forest Law No. 16/2017/QH14 (dated November 14, 2017) states within Article 63 on “Forest environment service amount payees and payers, payment methods, and management of the use of such amounts” – Paragraph No. 2-đ that “Production and business organizations and individuals who emit large amounts of greenhouse gases must pay environment service amounts for the absorption and retaining of forest carbon”. Paragraph No. 5 of this same Article 63 states that “The government shall set out detailed provisions as to environment service fee payees and payers, payment methods, payment levels; shall adjust, exempt or reduce payment levels; and shall manage the use of environment service fees”. This feasibility study is the initial step in detailing those provisions.
Finally, there are numerous national policy documents relative to both reducing GHG emissions and removing CO2 in Vietnam’s forests. These include: the national Green Growth Strategy; the Intended
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Nationally Determined Contribution (INDC) (now NDC) of Vietnam; the National REDD+ Action Plan; and numerous MARD planning documents.
PFES SYSTEMS IN PLACE Again, as described in the previous section on the history of PFES, the VNFF exists at the national level and 44 provincial funds have been established, of which 39 are operational. Total PFES revenues managed to the end of 2016 were over 8.219 billion VND (collected by both the national and provincial funds) with 494 contracts nationwide with “payers” by 2016.
Both at the national level and the provincial level, the capacities of the VNFF continue to grow with modalities for both PFES collection (diversifying to tourism through the direct payment with the payment rate at 1-2 percent of total revenue, and industrial water users with a payment rate of 50 VND per cubic meter of water based on the drafted Decree on Guiding Forest Law implementation) and for supporting environmental service providers, or forest owners, with alternative benefit distribution mechanisms. Though there remain challenges to address as PFES expands, notably in documenting and communicating measurable outcomes, the VNFF has the requisite structure and administrative mandate in place to manage C- PFES.
To date, the VNFF has implemented PFES for 3 of the 5 environmental services eligible for payments under Decree 99, including: i) soil protection, reduction of erosion and sedimentation in reservoirs, rivers and streams (for hydropower production facilities); ii) water source regulation and maintenance (for clean water production facilities); and iii) natural landscape protection and biodiversity conservation of forest ecosystems for tourism services (for tourism businesses). PFES is increasingly acknowledged by society as a justified and efficient financial mechanism for forest protection and management.
STRENGTHENING THE PFES PROGRAM Though the PFES program in Vietnam is considered as an evolving success and an important initiative for ensuring sustainable forestry management into the future, it is acknowledged that there are persistent weaknesses for which an expansion to C-PFES could result in the requisite circumstances for VNFF to successfully address. These weaknesses are best summarized a report from the SNV ENRICH Project of 2016 (Forest Landscape Restoration: Land Use Incentives in Ha Tinh Province – Advancing Understanding of Natural Forest Carbon Stock Enhancement as Part of REDD+) as:
Payments are not conditional and are often made to forest owners regardless of whether or not the forest has been protected and the forest environmental service provided (monitoring and evaluation is improving but remains relatively weak);
Payments are not directly linked to the actual provision of services, the quality of the service provided or the value of the forest, which reduces the willingness to pay of service buyers;
Payment levels are generally too low to provide a significant contribution to household livelihoods and too low to offset opportunity costs of providing the service, such as foregone agricultural revenue from illegal cleating of forest areas, or provide positive incentives for improving forest quality (the revised k-factors do not result in PFES being a performance-based system as k2-k4 cannot be influenced and k1 would not incentivize forest restoration and enhancement).
In addition, other stakeholders point out the realities that payment rates are uniform across the watershed and, hence, do not target areas that are particularly important for the provision of erosion
11 | C-PFES FEASIBILITY STUDY USAID.GOV control. Payment levels also vary greatly between watersheds and household payment rates are often not applied in a uniform manner within watersheds or even a village.
The current PFES program is also limited to areas where there are forested watersheds above hydro- electric power generation facilities thus other critically forest ecosystems are not able to benefit. C- PFES has the potential to significantly expand the forested areas of coverage as well as the investments for enhancing forest environmental services. C-PFES will also help to build capacity within VNFF and several Provincial Funds for investing the rapidly evolving volume of “offset” funds that have been generated from industrial land transformation projects.
C-PFES, if developed in line with the orientations and principles in this study, has the potential to addresses the ongoing weaknesses in the current PFES program and to develop a more robust and credible program with observable and measurable outcomes that satisfy service payers, deliver more tangible benefits to local livelihoods and forest environmental services, and make critical contributions to national policies and international commitments.
FUNDING FOR NDC TARGETS REDUCED OVERSEAS DEVELOPMENT ASSISTANCE (ODA) FOR VIETNAM The most appropriate argument for C-PFES development and implementation is relative to the critical contribution it can make for the Ministry of Agriculture and Rural Development (MARD) and the Vietnam Government in respecting, and achieving, the unconditional “Nationally Determined Contribution” (NDC) commitment to the Paris Agreement as reported to the UNFCCC, using domestic funding resources. MARD is responsible for over 46 percent of the overall Vietnam NDC (an 8 percent reduction in GHG emissions in 2030 as per the 2010 baseline through both reductions and removals), with 36 percent of CO2e removals in LULUCF and 10 percent CO2e reductions in
Agriculture and Animal Husbandry (mostly in CH4 emissions). The estimated cost from domestic sources is 1.017 billion US Dollars (US$ 885 million for the agriculture sector and US$132 million for the LULUCF sector to 2030). C-PFES could be the best opportunity to acquire the requisite funding to achieve MARD’s ambitious NDC targets (including agricultural emissions if agroforestry systems meet the criteria of forests in the new Forestry Law) and has the potential to incentivize GHG emissions reductions among the largest emitters in the Energy, Industrial, and Transport Sectors. Though the NDC calculations included perspective sources of the funding, of which PFES is one, the availability of this funding for MARD is uncertain at this point in time.
It is important to note that within the past ten years, much of the funding for both forestry investments (notably large-scale tree plantation programs), and for agricultural extension programs, has come from ODA sources in the form of grants and preferential loans. Vietnam’s middle-income status together with new fiscal policies seeking to limit national debt will mean that 2018 may be the last year for Vietnam to be eligible for preferential loans from bi-lateral and multi-national lenders. Future borrowing will be with commercial interest rates. C-PFES would be an appropriate means to fill this void, both for the forestry and for the agricultural sector as it could provide incentives to shift to low emissions production through transformation of land use from high CH4 emissions mono-culture agriculture to crop rotations or agro-forestry systems that reduce these emissions and also remove
CO2. Further to this argument, C-PFES creates a very good opportunity to develop a domestic mechanism of measurable, potentially certifiable, carbon offsetting which could be offered to programs such as the World Bank Forest Carbon Partnership Facility as well as other future international carbon markets
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OPPORTUNITIES TO CONTRIBUTE QUANTIFIABLE OUTCOMES AND CONTRIBUTIONS TO NATIONAL COMMITMENTS AND PLANS One of the more common criticisms of the VNFF and the PFES program is a perceived weakness in monitoring and an inability to show credible and quantifiable outcomes on the relative health or quality of the forested watersheds protected, as well as the improvement of the social and economic well- being of forest owners from the payments they receive. If C-PFES was to be set-up with an objective of making measurable contributions to the NDC, the NRAP, and national and provincial green growth and climate action plans, then some form of the Monitoring, Reporting and Verification (MRV) using similar social safeguards standards and technical norms of REDD+ merits consideration. Adhesion to REDD+ norms and reference levels would facilitate implementation of C-PFES as well as reporting on Vietnam’s commitments. It would also address the ongoing concerns of many “payers” and critics of PFES as to the impacts or outcomes of the “fund” revenues invested. Using REDD+ MRV would also provide opportunities for both agricultural and forestry related activities, above the unconditional contribution to the NDC, to other climate or forest carbon financing opportunities in the future (conditional funding).
In the six north-central coastal provinces of Vietnam, C-PFES could make parallel contributions to the Emission Reduction Project approved by the World Bank Forest Carbon Partnership Facility (FCPF).
Overall, this project is expected to generate 32.09 tons of carbon dioxide equivalent (tCO2e) of avoided emissions or additional removals. Within the agreed-upon project implementation period of six years, 2018-2024, 26 tCO2e will be accounted as verified carbon credits. The project conservatively takes away 4 percent for uncertainty and 21 percent reversal buffer (total 25 percent), leaving 19.5 tCO2e available for the carbon market. The FCPF to purchase 52 percent of these anticipated emissions reductions credits on a performance-based agreement, or 10.3 tCO2e. This leaves 9.2 tCO2e which could be paid for via C-PFES revenues in those six provinces. Alignment to the Emissions Reduction Program (ERP) of FCPF would provide credibility and performance-based outcomes for C- PFES.
GLOBAL EXPERIENCES AND NATIONAL PROGRAMS TO BUILD UPON Though C-PFES should be developed as an innovative and unique scheme for Vietnam, best suited to the national context, many of the elements for making C-PFES operational can build on global experiences. As of 2017, 40 countries and 25 sub-national entities have developed and initiated carbon emissions pricing programs either through a direct carbon tax or via an emissions trading system, some of whom allow for or mandate investments in mitigation activities in the forestry and agricultural sectors. The California Environmental Protection Agency’s Air Resources Board has developed protocols for compliance offsets in forestry that have been adapted and adopted in partnerships with Mexico and the sub-national entities of Quebec and Ontario in Canada (and possibly Colombia in the future). These protocols could also be adapted and adopted for Vietnam. The countries of Costa Rica and Colombia have set precedents for allocating carbon tax revenues to “Funds” that are administered for forestry actions. For Costa Rica it is the “Forest Financing Fund” and for Colombia it is the “Colombia in Peace Fund”. Both the California and Costa Rica models provide appropriate experiences for using carbon revenues for GHG mitigation in forestry investments. The California model has also been adopted by several other sub-national entities and Mexico allowing for networked offsetting of emissions in forests. California also uses carbon revenues for rewarding reduced emissions in the agricultural sector. Vietnam could seek technical support from both Costa Rica and the California led consortium to build on these examples.
13 | C-PFES FEASIBILITY STUDY USAID.GOV Globally, there is also an abundance of applied research on the contributions of various agro-forestry systems to reducing GHG emissions that could be adapted and contribute to MARD’s NDC in the agricultural sector. Nationally, there has also been a significant amount of research conducted on GHG reductions or removals in various agricultural and forestry programs in Vietnam, notably by the International Center for Research in Agro-Forestry (ICRAF), as well as estimated cost-norms for implementing large-scale programs.
Though C-PFES is a means to collect revenues for CO2 mitigation in forest environments, it should also be an incentive to large emitters of CO2 to invest in production processes that reduce emissions. As Vietnam is a country with one of the highest annual growth rates of GHG emissions, there are a multitude of donor supported programs supporting lower-emissions development in the principle sectors of energy efficiency, construction, transport, waste, agriculture, and LULUCF. If, and when, C- PFES is to be piloted, there are ample opportunities to associate the pilot “payers” with one or more of these low-emissions programs for support in identifying the more appropriate and feasible technological solutions for lowering emissions and energy efficiency in production processes as well as for developing business plans and seeking climate financing opportunities that can facilitate investments in cleaner production. C-PFES has the potential to create these “win-win” situations. Full consideration of these collaborative opportunities with other development partners is merited in order to make the program more acceptable for “payers”. A list of ongoing low-emissions development support programs in Vietnam is provided as Annex C of this document.
IDENTIFYING THE PAYERS AND PAYMENT LEVELS
AN OVERVIEW OF GHG EMISSIONS IN VIETNAM In developing the INDC (2015), MONRE led a large team of experts in the collation of a data and data analysis, inclusive of several Ministries (Ministry of Industry and Trade (MOIT), MARD, Ministry of Construction (MOC), Ministry of Transport (MOT)), in relation to the sectors and production facilities that are responsible for the largest volumes of GHG emissions in Vietnam. In the initial INDC Report to the UNFCCC, Vietnam’s GHG emissions are placed into one of five large sectors: energy, industrial processes, agriculture, LULUCF, and waste.
The trends for these sectors in terms of overall GHG emissions and removals are shown in the Figure 1 below.
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Figure 1: The trends GHG emissions and removals by sectors Source: Vietnam Biennial Updated Report (BUR), 2017
The relative percentage of the overall emissions from each of these sectors is shown in Figure 2 below.
Figure 2: The 2013 GHG shares of emissions by sectors (Source: Vietnam BUR, 2017)
The Vietnam government in its’ NDC regroups industrial processes and transport into the overall energy sector covering 63 percent of overall GHG emissions. The breakdown of emissions from diverse sub-sectors in the energy sub-sector is shown in Figure 3 below.
15 | C-PFES FEASIBILITY STUDY USAID.GOV Figure 3: The 2013 GHG emission shares of the sub-sectors in the energy sector Source: Vietnam BUR 2
It is clear from these figures that the sectors with the largest emissions, notably of CO2, are the energy, manufacturing industries and construction, and transport sectors. Finally, the breakdown of the industrial processes and construction sub-sector is shown in Figure 4 below.
Figure 4: The 2013 GHG emissions shares in the Industrial Processes sub-sectors. Source: Vietnam BUR, 2017
According to BUR 2 (2017), Vietnam has 34 main sources of emissions/absorption sources/sinks. tanks. The results of the 2013 GHG inventory shows that the total GHG emission in Vietnam is 259.0 million tons. From additional information contained in Vietnam’s BUR INDC (2015) and BUR (2017), the largest CO2 emitting sectors in the country are: energy production in the thermal-coal fired power plants); cement production; transportation; and steel production. Although the agriculture and waste sectors do contribute significantly to overall GHG emissions, the majority of these emissions are in the form of methane (CH4) and most are through relatively small entities spread across Vietnam, or farming families. Figure 5 below shows the overall GHG emissions by sector and Table 1 by sector and specific GHG.
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Figure 5: The GHG emissions and removals by sector Source: Vietnam BUR, 2017
Table 1: The GHG emissions and removals by sector and by gases Source: Vietnam BUR 2, 2017
According to MONRE Circular 31/2016/TT-BTMNT, data on the amount of GHG emissions from production facilities is to be self-reported to provincial Departments of Natural Resources and Environment (DONREs). Therefore, in principle, data is available within MONRE and provincial DONREs relative to the estimated, or reported on, emissions from the larger individual production facilities within each of the aforementioned sectors. However, it is unclear as to how credible the data is from this self-reporting. More importantly, data on the number of production facilities, emissions factors, and quantity of products produced in the sectors of energy, cement, and steel is either contradictory among sources or, unavailable. Thus, the data above is based on calculations that aggregate production facilities in each sector and then use the Intergovernmental Panel on Climate Change (IPCC) default values for energy consumed, production processes used, or both. It is clear that the GHG emissions stated in the BUR 2 are still very much an estimate and that the accounting and reporting processes will need to be significantly enhanced in the coming years through national registries.
DEFINING LARGE EMITTERS IN VIETNAM As stated earlier, the Vietnam Forestry Law No. 16 of 2017 declares that “production and business organizations and individuals who emit large amounts of greenhouse gases must pay environment service amounts for the absorption and retaining of forest carbon”. The Law does not define what constitutes “large amounts” of greenhouse gases and only states in a subsequent sub-article that “the government shall set out detailed provisions as to environment service fee payees and payers, payment
17 | C-PFES FEASIBILITY STUDY USAID.GOV methods, payment levels; shall adjust, exempt or reduce payment levels; and shall manage the use of environment service fees”. As such, one of the first essential steps for applying the Law, and for the development of C-PFES, is defining what constitutes a “large amount” of GHG emissions in Vietnam. This will also be an essential step for the development of other evolving carbon pricing mechanisms in Vietnam that will most likely be phased-in with “large emitters”.
GLOBAL EXPERIENCE SETTING EMISSIONS THRESHOLDS Globally, thresholds for reporting on, or paying a price for, GHG emissions from individual production facilities or corporations varies from country to country from 3000 tCO2e (for paying in some Chinese city jurisdictions) up to 50,000 tCO2e (for reporting in Canada). However, the most common thresholds used for mandatory reporting on GHG emissions are either 10,000 tCO2e (typically for reporting) or 25,000 tCO2e (for paying) annually, often both. Many countries are expected to slowly phase-in carbon pricing to this lower 10,000 tCO2e threshold with facilities that have poor production efficiency and high emissions levels coefficients (relatively high tCO2e emissions per ton of material produced for instance). In many of these administrative entities, there is also a corporate threshold of
125,000 tCO2e set for aggregate emissions from corporations where they own and operate several smaller production facilities (food and beverage processing, animal feed and dairy production facilities for example), multiple infrastructures (apartment or other commercial building complexes), or fleets of transportation units (such as an airline company).
EMISSION THRESHOLDS GLOBALLY
The 25,000 tCO2e emissions threshold is increasingly adopted as a starting point for carbon pricing as it is approximately at that level where the administration of a carbon pricing scheme is the most feasible and cost-effective as businesses and facilities emitting over this threshold tend to account for over 90 percent, or more, of the CO2 emissions in those administrative entities. For instance, the US Environmental Protection Agency estimated in 2009 that lowering a hypothetical threshold
“cap” in the whole of the country from 25,000 tCO2e to 10,000 tCO2e would increase costs for administration of future emissions trading system upwards of 35 percent but would only cover an additional 1 percent of emissions. Many countries and sub-national entities also see the 25,000
tCO2e threshold as an appropriate point where the carbon pricing incentive and the emissions
abatement cost potential are in line to encourage businesses to invest in lowering their emissions. It is important to note that administrative entities have chosen alternative measures for thresholds
such as: thermal power input (10 MW for Switzerland and 25 MW for several States in the US that are part of the Regional Greenhouse Gas Initiative), amount of crude oil equivalent (Tokyo uses 1500 kiloliters); or amount of tons of coal equivalent burned (several Chinese city jurisdictions use 10,000 tce). Currently the following administrative entities are using the 25,000 tCO2e threshold as a starting point for carbon pricing mechanisms: several US States; the European Union; Mexico; Costa Rica; several Canadian provinces; Singapore; Korea; China (planned); and Australia (formerly). The possible advantage of the alignment of thresholds is that it allows for regional collaboration on mitigation actions, as is the case in North America where California is collaborating with Mexico and several Canadian provinces. Singapore has expressed hopes to catalyze a similar regional emissions trading network due to the limitations they face in mitigating emissions in the forestry and agricultural sectors due to the small size of the country.
In determining the GHG emissions of a given facility or corporation there are considerations for both direct emissions and indirect emissions, broken into 3 scopes. Scope 1 concerns emissions from sources controlled or owned by the entity, typically the emissions from fuel combustion in the
18 | C-PFES FEASIBILITY STUDY USAID.GOV production (or transportation) process. Scope 2, one of the indirect sources, includes emissions from the generation of electricity, heat or steam purchased by the entity for its own consumption. This would include all production processes using purchased electricity as well as commercial building complexes. Scope three, the other indirect source, includes emissions in the value chain of the reporting company, both upstream and downstream. This could include emissions from waste, extraction of fuels used at the entity, production and transportation of materials purchased or sold by the entity, and use of these products.
An additional noteworthy point from a review of global case studies is that most administrative entities have designed a phased-in approach for carbon pricing that provides businesses with time to prepare for additional costs and to seek support in one form or another for lowering emissions.
CONSIDERATION OF SCOPES IN CALCULATING GHG EMISSIONS FOR C-PFES The consideration of three different Scopes for calculating GHG emissions for individual or corporate entities implies a minimum of two different scenarios for C-PFES development. The first scenario is where thermal energy production entities are identified as “payers”. In this scenario, most of the indirect emissions of Scopes 2 and 3 involving electricity purchased and used will have payments applied already to the power generation facilities. Thus, the focus of C-PFES would be on Scope 1 or the direct emissions. This would render, initially, C-PFES much easier to apply and it would mean that commercial building operators and production facilities using large amounts of electrical energy would not be counted, initially, as “payers” (as the energy company would most likely pass on the C-PFES costs to these consumers). In the second scenario, where it is too politically challenging to propose applying payments to thermal power producers, then Scope 2 would need to be applied with large electricity consumers to compensate for the emissions resulting from the electricity consumed. Thresholds would need to be set relative to megawatts (MW) of electricity consumed, or the respective tons of coal equivalent (8.14 MW = 1 ton of coal equivalent (tce)).
Until the time when there are national registries and tools in place for calculating both direct and indirect emissions for individual entities or corporations, this study suggests that C-PFES development should initially focus solely on Scope 1 or direct GHG emissions. This suggestion is inclusive of a proposed attempt to apply payments to the thermal energy producers so as to contribute to efforts to wean Vietnam from a high dependence on coal fired power plants.
VIETNAM’S LARGE EMITTERS In contrast to other middle income and developing nations, Vietnam has relative high GHG emissions levels in the agricultural sector at an estimated 30 percent of total emissions (see Figure 2 and Table
1 above) mostly in the form of CH4 and nitrous oxide (N2O). Roughly 50 percent of these emissions come from landscapes of irrigated rice farmed in small parcels. Thus, only a limited number of large rice producing companies in the Mekong Delta and a few dairy companies would possibly have aggregate emissions to be considered large emitters.
As concerns CO2 emissions in relation to C-PFES, the energy and industrial sectors, inclusive of transport, account for over 99 percent of the total CO2 emissions in Vietnam. These emissions (156,969.3 ktCO2e) come principally from the production of thermal energy, cement, steel, and transportation. There is ample data and a multitude of analytical reports that have identified a select group of industrial sectors which have extremely high energy use or high emissions levels, or both. As early as 2006, the Vietnam Energy Efficiency Program created a comprehensive set of activities to conserve energy. Avoiding the thermal energy production sector, the four industry sectors targeted
19 | C-PFES FEASIBILITY STUDY USAID.GOV were the steel, cement, paper, and sugar industries. These four are highly energy-intensive, but they also have the most potential for energy saving. Investing in new technologies to use in the production processes of these sectors can help energy efficiency, reduce GHG emissions, and are therefore considered as climate change related investments. Aside from fossil fuel power plants (notably coal), these same industries are the ones that have been selected for low emissions support programs by donor and development partners. These are considered to be the large GHG emitters in the industrial sector and where there is the greatest potential for CO2 reductions.
If Vietnam were to adopt the aforementioned annual 25,000 tCO2e emissions threshold, all of the coal-fired thermal energy, cement, and most of the steel production facilities in the country would be identified as “payers” for C-PFES. If Vietnam also mandated payments in relation to larger thresholds
(of 100-125,000 tCO2e emissions) for businesses with multiple production facilities, there would also be several additional industrial facilities in food production and processing, textiles, paper, as well as airlines and commercial building owners identified as “payers” for C-PFES.
Until the time when national GHG emissions registries are established sometime before 2020, data on the number of large emitters above the aforementioned thresholds has not been available for this study. The various data sources on the number of existing and planned facilities in the energy, cement, and steel sectors is often contradictory and the calculated GHG emissions per sector and facility can only be assumed to be credible once national registries are established with clear protocols for measuring and reporting on emissions. For purposes of this study, the BUR 2 reporting on emissions per sector is used in combination with the planned target emissions reductions per sector in order to identify what potential C-PFES revenues could be overall, and with examples of individual production facilities, using a phased-in approach respecting these targets so that C-PFES is developed initially as an incentive to meet them.
Donor support for lowering emissions has, to date, focused efforts on the developing alternative energy sources to fossil fuels (notably hydro, wind, and solar energy), as well as energy efficiency and lowering emission in the transportation, cement, and steel industries. There is a “Readiness Plan” for a NAMA in the cement sector as well as a similar emerging plan for a NAMA in the steel sector. Within these NAMAs, national GHG emissions registries will be established. In addition, the Civil Aviation Authority of Vietnam (CAAV) was supported by the UNDP Strengthening Capacity and Institutional Reform for Green Growth and Sustainable Development (CIGG) Program to develop a Green Action Plan to Reduce CO2 Emissions from Vietnam’s Civil Aviation Sector (2015-2030). The CAAV plan intends to follow the International Air Transport Association (IATA) global industries pledge to cap emissions in 2021 and offset those emissions that are over the cap. This means that the CAAV will be establishing a registry of emissions from airline companies operating in Vietnam by 2020 and cap emissions as per the guidelines in the IATA’s carbon offset and reduction scheme for international aviation (CORSIA). It is unclear if this will apply only to international routes or to domestic routes as well.
DETERMINING PAYMENT LEVELS FOR C-PFES Once the large GHG emitters have been identified for C-PFES, and the requisite policy and decisions and other enabling conditions are in place for piloting, the first task will be to determine baselines for annual emissions using government endorsed industry standards, or IPCC standards. The baseline will determine if the production facility, or corporation, is over the agreed-upon thresholds, and will be used to calculate the designated amount of CO2e emissions for which payments will be placed. The payment will be based-upon the agreed-upon C-PFES phasing-in calculations and the cost for the forestry activity that will absorb and store the CO2.
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The C-PFES policy will need to clarify within subsequent policies under the Forestry Law, and for the pilot phase, what the term “storage” implies. It is strongly suggested that payment levels should follow an interpretation of the Forestry Law to cover the costs for “absorption and storage” of the designated amount of carbon in forest environments wherein the term “storage” is assumed to be that of the same carbon absorbed. It could be argued that avoided deforestation and degradation, through protection of forests (current PFES model) could be eligible for C-PFES in that it reduces carbon emissions into the atmosphere and thus offsets the emissions of a service payer. That said, this could be a weak and non-tangible argument for a service payer. The payer, in the case of C-PFES, needs to pay to have their emissions absorbed into forest environments and ostensibly, stored there. Again, this study advocates for C-PFES payments to cover the costs for removing GHG emissions through investments that absorb and store these same emissions in forest environments. This will allow for the expansion of the current PFES system, diversified investments opportunities and choices, and will inherently require a more robust MRV system.
IMPORTANT CONSIDERATION FOR DETERMINING PAYMENT LEVELS
In determining payment levels, there are several important considerations as follows:
The cement and steel sectors should have functional NAMAs within 2-3years complete with national registries and targets for emissions reductions for which C-PFES should be compatible with REDD+ and related initiatives so as to contribute an incentive towards reaching those targets (avoiding to the extent possible the reduced market competitiveness through higher prices for consumers);
Initial phasing-in of C-PFES in line with industry sector targets, or Green Growth Action Plans at the ministry or provincial level will be more politically viable and will provide significant revenue for the VNFF and provincial funds;
Realistic costs for absorption and storage of a tCO2 via investments in forestry activities should be used to determine payment levels as compared to a determined price for carbon;
Various formal and informal surveys conducted by the USAID projects in Vietnam have indicated an increased willingness to pay from future payers if they see the tangible and
measurable outcomes of the investment of revenues and, where possible, in close proximity to where their facilities are located; and
Payment levels and mechanisms should be developed to have a compatible relation with a
future carbon tax or emissions trading system through either an: offset option in forestry investments; exemption or deduction from a future carbon tax; or in reference to the Forestry Law as a possible adjustment, exemption, reduction to payments for C-PFES.
PROPOSED SCEANRIOS FOR DETERMINING PAYMENT LEVELS For the purposes of this study, the identified payers are the production facilities in the sectors with the largest emissions and over the threshold of direct emissions of 25,000 tCO2e/year, or at a corporate level over 100,000 tCO2e/year, including: thermal energy (with a focus on coal-fired power
21 | C-PFES FEASIBILITY STUDY USAID.GOV generation facilities), steel, cement, and transportation. In accordance with global “best practices” for phasing in payment for GHG emissions and in order to respect and contribute towards sector plans for lowering emissions that are already approved by the Government of Vietnam and Ministries, C- PFES should not be initially imposed on the totality of emissions from a given production entity or corporation.
For the thermal energy sector, it is proposed that C-PFES payments phased-in as an incentive to achieve the Green Growth Action Plan (GGAP) of the Industry and Trade Sector in Decision No.
13443/QD-BCT of 2015. In this Decision, the target of CO2e emissions reduction for the period 2015 – 2020 for coal thermal power compared to “business as usual” is 10 percent if voluntary and 20 percent with international support. All of the existing coal-fired power plants classify as large emitters in Vietnam. Although the liquid petroleum gas (LPG) power generation facilities are also large emitters, this is considered to be a much cleaner source of energy and it is suggested that C-PFES be phased-in to these facilities at a later date after 2020.
For both the cement and steel sectors, C-PFES should eventually be compatible and contributing to the future NAMA targets. According NAMA Readiness Plan for the cement industry (developed with the support of the Nordic Development Fund in 2016), the emissions reduction target is 20 million tCO2e by 2020 and 164 million tCO2e by 2030. For individual cement factories, coefficients already exist relative to tCO2e per ton of cement for diverse, yet standard, production processes. These coefficients will be used together with NAMA reduction target for the entire sector based on the quantity of cement produced by individual facilities. All of the existing cement producing facilities classify as large emitters in Vietnam.
The NAMA for the steel sector is planned and will be supported by the World Bank project Partnership for Market Readiness (PMR) implemented by MONRE. In the interim period, the current policy for this sector comes from the same aforementioned Green Growth Action Plan of Trade and Industry Sectors for the period 2015-2020 (Decision No. 13 443/QD-BCT of 2015) where the GHG emission reduction target in the period 2015-2020 compared to BAU in the steel industry is 10-20 percent, of which 10 percent is voluntary and 10 percent with international supports. As the nature of the steel production process determines the emissions factor coefficient. Each steel producing facility will have an emissions coefficient calculated and that will be multiplied by the tons of steel produced and the sector emissions reduction target per ton. There are currently 117 steel manufacturing companies in Vietnam, though many of these companies focus on value added investments to raw steel and so the number of facilities considered to be large emitters would most likely be between 40 to 70 (as per conversation with MOIT steel sector PMR focal representative).
The transportation sector should be approached in a different manner as the context is one with millions of small emitters and a few large emitters, all of whom already pay a pollution tax on fuel purchased. Given the existence of this Environmental Pollution Tax (EPT), which does cover air pollution but not specifically GHG emissions, C-PFES could be perceived as double-taxing. There is also a nominal tax on imported coal but at less than $US 1 per ton, it is not even symbolic and not worth collecting at that rate. Adding C-PFES to the existing EPT could also be socially unpopular, and hence politically challenging for approval. For road transportation and related emissions, it is therefore suggested that MARD seek to obtain a small percentage of the current EPT revenues coming from fuels purchased for investments in CO2 sequestration and storage. Though the EPT revenues enter into the central budget with legal restrictions on earmarking any of these revenues for specific purposes, there are precedents in other countries for using a percentage as an investment into “forest funds” as in the case of Costa Rica (which receives 3 percent of the fuel tax revenues for their Forestry Fund). If earmarking of EPT revenues is not an option in the foreseeable future, then C-PFES
22 | C-PFES FEASIBILITY STUDY USAID.GOV application would need to explore other options such as additional payments levied on; either fuel produced or purchased, or payments for operational permits for vehicle and motorbikes. These options could be expected to be highly unpopular and thus politically more challenging.
As concerns the air transportation industry, the CAAV fully intends to follow the global industry initiative being prepared by the IATA to cap emissions levels in the sector in 2020 and offset additional emissions above that cap into the future. For airlines operating in Vietnam, it is strongly encouraged that MARD begins to negotiate the investment of these offset funds into C-PFES. Both of the potential C-PFES revenues streams could be managed by the VNFF for priority investments across Vietnam.
COSTING FOR CO2 SEQUESTERED AND STORED Carbon pricing globally varies significantly from country to country, or among sub-national jurisdictions, from less than $US 1 per tCO2e (Ukraine, Poland) to $US 140 in Sweden. The table below shows the variation of carbon pricing around the globe.
23 | C-PFES FEASIBILITY STUDY USAID.GOV Note: Nominal prices on August 1, 2017, shown for illustrative purpose only. The Australia ERF Safeguard Mechanism, British Columbia GGIRCA, Kazakhstan ETS and Washington CAR are not shown in this graph as price information is not available for those initiatives. Prices are not necessarily comparable between carbon pricing initiatives because of differences in the sectors covered and allocation methods applied, specific exemptions, and different compensation methods.
Table 2: Prices in implemented carbon pricing initiatives Source: World Bank, Ecofys and Vivid Economics. 2017. State and Trends of Carbon Pricing 2017, by World Bank, Washington, DC.
In the aforementioned Forestry Law of 2017, Article 63 – paragraph 2-d, it states that large GHG emitters will pay for the “absorption and retaining” of forest carbon in forest environments. What is not clear is whether the term “retaining”” of forest carbon is relative to the actual carbon sequestered
24 | C-PFES FEASIBILITY STUDY USAID.GOV through investments in forestry activities that include planting or could it also be retaining existing forest carbon stocks through avoided deforestation and degradation. This study advocates for an interpretation wherein the large emitters pay for the absorption of CO2 and the retaining of that same
CO2 in forest environments. However, MARD may decide that the term “retaining” does imply storage of existing carbon in forests (avoided deforestation and degradation). As such, two different costing scenarios have been developed for this study. One costing scenario places a higher price on a tCO2e to cover forestry activities that include planting of tress, either native or non-native, and actual absorption of CO2 and storage of that CO2 in forests or agroforestry systems. The second costing scenario is at a lower price in line with the ERP funded by the FCPF which focuses more on avoided deforestation, degradation, and conversion of tree plantations from short to long cycle rotations.
Based on assumption that there will be agreement on phasing-in C-PFES in alignment with current low emissions planning and targets in the identified sectors, this study calculated the hypothetical revenues that could be generated using the two costing scenarios mentioned in the paragraph above. The first scenario used a figure of 400,000 VND, or roughly US$18, as a proxy cost for absorbing and storing a tCO2 through investments in forestry activities, including tree planting. The figure of US$18 per tCO2 sequestered and stored is a middle-ground figure related to proposed C-PFES investment options and associated cost norms that include tree planting, as described in the section on C-PFES investment options later in this document. A second calculation used a figure of US$ 5 per tCO2, which is the value to be paid for verified emissions removals within the Emissions Reduction Project Document for the six north-central provinces approved by the World Bank FCPF in January of 2018. For the road transportation sector, this study proposed negotiating the earmarking of 5 percent of the current EPT on fuel sales to be invested in C-PFES through the VNFF. These figures are used in this document, together with figures in VND, to show examples of potential payment levels and revenues. The payment levels per tCO2e will require further discussion with C-PFES stakeholders, but the principle of equating payment levels to the costs for absorption and storage of a given amount of
CO2 should remain.
Although this study considers two different “cost-norms” of $US 5 and $US 18 per tCO2 with a phased-in approach that is coherent with sector-based low emissions target (as compared to payments on all tCO2 emissions), the UNDP CIGG Project and World Bank PMR projects may propose different payment scenarios for a tCO2, together with an alternative phased-in approach. An ongoing Study funded by the UNDP CIGG project is proposing to the MOF and the Ministry of Planning and Investment (MPI) an incremental price phase-in from $US 1.5 to $US 5 and on to $US 15 by 2030 for overall tCO2 emissions per facility. When both the MOF and MPI make a decision on the phase-in of a carbon tax or ETS, then MARD may need to adjust C-PFES in consequence in order to ensure allocation of revenues for C-PFES.
For each of the four sectors mentioned above, the following sections provide an overview of the sectors and their relative GHG emissions, their emissions reductions plans, and some basic calculations on perspective revenues and payment level equations for individual payers. If it is determined that it is not politically feasible to apply C-PFES to the thermal power producing sector, notably coal-fired power plants, an alternative plan is suggested which would include a process to inventory both production facilities and corporations (commercial building owners) which use electrical energy that indirectly results in the same emission thresholds of 25,000 tCO2e (per facility) or 100,000 tCO2e (per corporation). This information may already be available at the MOC and the MOIT but, even if it is, the emissions calculations would need to be updated and those already paying PFES indirectly through consumption of electricity from hydropower stations would need to be identified so as to avoid double payments. It is suggested that this task of collating information on all of the large electrical
25 | C-PFES FEASIBILITY STUDY USAID.GOV energy consumers await the results of efforts to implement C-PFES with coal-fired power producers or on the actual coal used for power production.
OVERVIEW OF C-PFES PAYER SECTORS AND PROPOSED PAYMENT EQUATIONS
THERMAL ENERGY PRODUCTION SECTOR From 1994 to 2013, the total GHG emissions in Vietnam more than doubled, from 103.8 million tons
CO2e to 259.0 million tons CO2e. CO2e emissions in the energy sector had the highest rate of increase, up nearly five-fold from 25.6 million tons CO2e to 126.91 million tons CO2e. The total GHG emissions in the energy sector is 151.4 million tons (BUR 2, 2017), of which emissions from fuel combustion made up 86.1 percent and fugitive emissions made up 13.9 percent. The sectors that account for a large proportion of GHG emissions in the energy sector are: energy industry 28.8 percent; industrial production and construction 26.9 percent; Transportation 19.6 percent, Oil and natural gas 12.4 percent.
Vietnam’s energy demand increased very fast during the past 15 years, with 9.5 percent growth in commercial energy per year, and the growth rate is predicted to remain high in the coming 15 years. Vietnam’s electricity demand increased by an average 13 percent per year in the period 2006-2010 and about 11 percent per year from 2011 to 2016. Fossil fuel use in the power sector is a primary contributor to GHG emissions. The BAU would lead to Vietnam emitting 7.4 tons “equivalent carbon dioxide” (CO2e) of GHG emissions per capita in 2030, and the 8 percent target to nearly 7 tons/capita respectively (Wörlen and Riesenberg, 2015). This means that Vietnam would be emitting more GHG per capita than the European Union, whose average emissions are projected to be 6 tons/capita in 2030, according to its INDC.
Photo 1: Coal fired Power Plan Credit: Pham Thanh Nam/USAID Green Annamites
In MOIT’s revised Power Development Plan VII (Decision 428/QD-TTg of 18 March 2016, on approval of “Adjustments of the national Power Development Plan for the 2011 - 2020 period with a vision to 2030”), coal remains the most important future power source by far and an ambitious program of
26 | C-PFES FEASIBILITY STUDY USAID.GOV coal-based power development remains in place. The adjusted coal targets still require a planned completion of nearly 100 coal-fired power units with several new and within the 38 existing coal-fired power plants (complexes) between 2016 and 2030. The share of coal in the generation of power for Vietnam is expected to be over 50 percent by 2013, meaning significant increases of GHG emissions over this period and for the life of these facilities (40 years or more). Currently, Vietnam is both an importer and exporter of coal (importing upwards of 30 percent of the coal needed for selected coal fired power plants) but the increase in coal-fired energy production will result in Vietnam importing up to 50 percent of the total coal use in the country by 2030. This is will create serious environmental and social challenges.
Figure 6: Planned sources for energy production in the year 2030 Source: data interpreted from Decision 428/QDTTg, 2016
In relation to the previous point, the pollution standards that new coal-fired power plants must adhere to in Vietnam are considerably more permissive than standards in other countries. Furthermore, companies from countries with stricter pollution limits than Vietnam are designing, financing and/or constructing coal-fired power plants in Vietnam with technological specifications that are not accepted in their home countries.
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Figure 7: Emissions limits for new coal-fired power plants in selected countries
C-PFES FOR THERMAL ENERGY SECTOR According to MOIT’s the Decision No 428, the power supply mix for Vietnam in the coming 13 years is expected to be as shown in Table 03 below:
Facilities 2020 2025 2030
Capacity Production Prod. Capacity Production Prod. Capacity Production Prod. (MW) (billion. (%) (MW) (billion kWh) (%) (MW) (billion (%) kilowatt kWh) hours (kWh)
Hydro- 21.600 67 25,2 24.600 70 17,4 27.800 71 12,4 power
Coal 26.000 131 49,3 47.600 220 55 55.300 304 53,2 fired Power
Liquefied 9.000 44 16,6 15.00 76 19,1 19.000 96 16,8 natural gas (LNG) fired power
Others, 23 8,9 34 8,5 101 17,6 import
Total 60.000 265 100 96.500 400 100 129.500 572 100 Table 3: Vietnam Power Supply Mix 2020 – 2030 Source: MOIT’s the Decision No 428
The Ministry of Natural Resources and Environment has calculated an average emission factor for thermal energy in 2015 of 0.8154 tCO2e/MW (Document No. 315/ KTTVBDKH-GSP-2017 of the Department of Meteorology and Climate Change in the MONRE). The estimates for total emissions of the thermal power sector are shown in Table 04 below will be:
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Facilities 2020 2025 2030
Production Emission (tCO2) Production Emission Production Emission (billion (billion. (tCO2) (billion (tCO2) kWh) kWh) kWh)
Coal fired 131 106.817.400 220 197.388.000 304 247.881.600 Power
LNG fired 44 35.877.600 76 61.970.400 96 78.278.400
Total 175 142.695.000 296 259.358.400 310 326.160.000
Table 4: Projected Emissions from the Thermal Power Sector 2020 – 2030 Source: Trieu Van Hung/USAID Green Annamites
According to the GGAP of Industry and Trade Sector in Decision No. 13443 (2015), the target of
CO2 emissions reduction of coal thermal power for the period 2015-2020 compared to “business as usual” is 10 percent if voluntary and 20 percent with international support. Therefore, the CO2 emissions reduction target by 2020 is 14.27 million tCO2, of which 10.68 million tCO2 from coal fired power and 3.59 million tCO2 from gas fired power.
Using the 2020 estimated emissions figures, if proposed C-PFES payments were aligned with sector policy and made on the total of the 10 percent emissions reduction target for coal-fired power plants, meaning the facilities were unable to lower emissions, hypothetical payments could equal US$
192,240,000 in 2020 using the US$ 18/tCO2e rate for forestry investments or US$ 53,400,000 if a US$
5 per tCO2e rate were used. Any voluntary emissions reductions by these facilities would reduce these projected C-PFES revenues. In addition, there will be a need to develop coefficients relative to energy production processes used as some processes are more efficient with fewer emissions.
For the LPG-fired plants, a similar calculation could be used but, as previously mentioned, as this fuel is considered to be a much cleaner source of energy and it is suggested that C-PFES be phased-in to these facilities at a later date after 2020.
If the C-PFES payment from coal-fired energy production were to be passed on to consumers as an increase, or surcharge on top of the current price per kWh, it would equal 33.75 VND/kWh (at US$
18/tCO2e) and 9.38 VND (using the US$ 5/tCO2e).
US$ 192,240,000/131 billion kWh x 23,000 VND/USD = 33.75 VND/kWh (at US$ 18/tCO2e)
US$ 53,400,000/131 billion kWh x 23,000 VND/US$ = 9.38VND/kWh (at US$ 5/tCO2e)
If this C-PFES payment is passed on to consumers, it is again recommended that it be passed on to the high-end electricity consumers only and thus, additional VND charges on these high-end consumers would be slightly more.
Using 2016 data, the production from coal-fired power plants was 63,778 billion kWh, or 36 percent of the 175,745 billion kWh capacity (Statistic Year Book 2017). Total GHG emissions from coal-fired power plants is estimated to be 52.005 million tCO2 (63.788 billion kWh x 0.8154 tCO2/MWh). If the total amount of CO2 was to be reduced by 10 percent, or offset fully through C-PFES, (10 percent =
29 | C-PFES FEASIBILITY STUDY USAID.GOV 5.2 million tCO2), the offset value would be US$ 93,600,000 equal using the US$ 18/tCO2 rate for forestry investments or US$ 26,000,000 if a US$ 5 per tCO2e rate were used.
In that same year, if the C-PFES payment from coal-fired energy production were to hypothetically be passed on to consumers as an increase, or surcharge on top of the current price per kWh, it would equal 16.43 VND/kWh (at US$ 18/tCO2e) and 4.56 VND (using the US$ 5/tCO2e).
US$ 93,600,000/131 billion kWh x 23,000 VND/USD = 16.43 VND/kWh (at US$ 18/tCO2e)
US$ 26,000,000/131 billion kWh x 23,000 VND/USD = 4.56 VND/kWh (at US$ 5/tCO2e)
For piloting of C-PFES in the period 2018 – 2020, and using a mean figure between the 2016 calculation and the anticipated 2020 emissions level, it is suggested that the payment level for electricity produced from coal-fired power generation facilities is 25 VND/kWh (at US$ 18/tCO2e) and 7 VND/kWh (at
US$ 5/tCO2e).
ILLUSTRATIVE EXAMPLE FOR THE PHU YEN PLANT
As an example of potential payment costs for individual coal-fired power generation facilities, the smallest existing coal-fired power plant in Vietnam, the IPP Phu Yen Plant (Company KCP) with a capacity of 30 MW, is used. If this plant were to operate at full capacity, it can produce 262,800 MWh per year and emissions would equal 214,287 tCO2 (262,800 MW x 0.8154 tCO2/MW). Offsetting through phased-in C-PFES for 10 percent emission reduction would be 21,429 tCO2 x 18 US$/tCO2e = US$ 385.722 USD/year (using the US$ 18/tCO2e rate) for forestry investments or US$ 107,145 (using the US$ 5 per tCO2e rate). This is again assuming that this facility has not already voluntarily lowered emissions.
CHALLENGES FOR C-PFES IN THE ENERGY PRODUCTION SECTOR The energy production sector’s unconditional contribution towards the overall NDC mitigation target is unambitious even though its emissions of GHGs are the largest in the country and increasing fast. Overall reform, and the potential to introduce C-PFES in the energy production sector in Vietnam, is seen by most experts as extremely challenging due to the nature of energy subsidies and the significant vested interests of stakeholders involved. International experience shows that “phasing-out fossil fuel subsidies and introducing carbon pricing (or CO2 emissions pricing) requires comprehensive energy sector reform, sequenced energy price increases towards market-based pricing, mitigation of the impact of higher energy prices on low-income households and certain businesses, and a communication and consultation strategy” (Greening the Power Mix: UNDP, 2016). Though there is currently an environmental tax on coal procured, it is a very low rate of 10,000 -20,000 VND per ton. Though this tax is expected to be increased in the new Law on Environmental Protection Tax to be re-submitted to the National Assembly in 2018, it does not specifically refer to, nor address, the quantity of GHG emissions of the diverse uses for coal nor mitigation of GHG emissions.
Vietnam’s energy sector is led by the MOIT and dominated by several large State-owned Enterprises that include: Electricity Vietnam (EVN); VINACOMIN (coal mining and trade); the Vietnam Oil and Gas Group (Petro Vietnam using the acronym PVN); and the Vietnam Petroleum Group (Petrolimex). These state enterprises jointly control most of the electricity generation and distribution as well as
30 | C-PFES FEASIBILITY STUDY USAID.GOV coal mining, import, export and distribution, and oil and gas exploration, refinement, import, export and product distribution.
Decree 99 set a precedent for PFES in the energy production sector by requiring a payment from hydro-electric energy produced for forested watershed environmental services. There was a clear and understandable link between the health of the watershed upstream and the ability to produce this form of energy. C-PFES involves a distinctly different argument with more indirect linkages to forest environmental services. In addition, electricity prices are currently subsidized for consumers in many ways and the main electricity producing company, EVN, is operating at a loss in 2017. Assuming that C-PFES costs can be easily passed on by EVN to the end-consumer, given Vietnam’s relative low prices on electricity, may appear to be a reasonable possibility but, this scenario is naïve unless there is the political will at the highest level towards applying C-PFES to the thermal power generation industry and, more importantly, greener energy production and achieving Vietnam’s commitment to the NDC.
C-PFES STRATEGIES IN THE ENERGY PRODUCTION SECTOR The following are the proposed strategies for piloting and scaling-up C-PFES in the energy production sector:
As with the original PFES pilot project in 2008 (Prime Minister Decision 380), the MARD acted upon a request from the Provincial People’s Committee (PPC) of the Lam Dong Province by issuing a letter to consult the Prime Minister for piloting PFES. The Prime Minister agreed to the pilot in the Lam Dong and in Son La Provinces where there were development partners working with the Department of Agriculture and Rural Development (DARD) and the PPCs. After two years of piloting, the Vietnam Government issued Decree 99 on PFES in 2010. This same process should be used by the MARD in order to have a top-down approach (from the Communist Party and the Government) for piloting and implementing C-PFES with the thermal energy production sector – with the C-PFES payment on energy only being allowed to be passed-on as price increases to the large consumers of electricity and avoiding any associated price increases small consumers and low- income households;
In developing critical advocacy programs for the previous point, VNFF should consider partnering with development partners on communications campaigns for cleaner energy and, more
importantly, for removing CO2 emissions and purification of air through forest environmental services or C-PFES (to note that the national non-governmental organization (NGO) named Green Innovations for Development (Green ID) is already doing this);
C-PFES piloting could start with the largest coal-fired power production facilities producing over a “designated amount of emissions” and those facilities with the highest “emissions intensity factors”
(tCO2e emissions per kWh produced), payments would subsequently and gradually phased in to all fossil fuel power production facilities from 2020 to 2025 after a 2 to 3-year piloting phase and
refinements to payment levels and investment cost norms for removals of CO2 (to note that the aforementioned “designated amount of emissions” will be proposed in consultation with those experts preparing propositions for a future carbon tax or ETS scheme so as to be consistent with
proposals to the Government on CO2 emissions payments);
As there are currently no plans in place for an energy production sector NAMA, but there are plans for a carbon tax or ETS, VNFF will need to ensure that C-PFES can be integrated into what might be larger overall fiscal policies in the future. This would be done through advocacy either for: a) C-PFES to eligible for partial or full payment towards the carbon tax; or b) for payments to be
31 | C-PFES FEASIBILITY STUDY USAID.GOV counted as offsets within an ETS. Note that if the energy production sector is aware that a carbon tax or ETS system is forthcoming, they will be more willing to invest in C-PFES showing measurable forest mitigation outcomes, possibly within their provinces, than to pay a tax which could end up in a central budget. In addition, the donor and development partners supporting Vietnam in developing a future carbon tax or ETS, notably the UNDP CIGG and the World Bank PMR projects, have shown interest in advocating for an allocation of a percentage of these revenues towards GHG
mitigation actions, including CO2 removals in forestry activities.
CEMENT PRODUCTION SECTOR According to the Vietnam Cement Industry Master Plan period 2011-2020 and orientation to 2030 (Decision No. 1488/QĐ-TTg of 2011), as of 2010 there were 69 cement factories with a total production capacity of 62.56 million tons per year allocated in 20 provinces, of which 15 provinces have capacity of more than 1 million tons/year with 64 factories (92.7 percent of factories). At that time, it was planned that there would be an additional 81 factories with capacity to produce 86.16 tons per year by 2013; 91 factories with 94.24 million tons by 2015; 113 factories with 129.52 million tons by 2020, and by 2030 there will be 119 factories with the capacity to produce 139.34 million tons per year. Cement production planning under the Decision is still under review by the MOC and will be adjusted for the period 2017 – 2030. Accordingly, in 2030 it is now planned that there will only be 111 factories with a total capacity of 144.54 million tons. (www.baoxaydung.com 09:16 - 21/10/2017). However, at this time there is no official decision on the new master plan, so this report is based on Decision 1488, the planned figures are shown in Table 05 below.
YEAR NUMBER OF CAPACITY (MIL. PRODUCTION TOTAL EMISSION FACTORIES TONS) (1) (MIL. TCO2) (1)
(mil. tons) (%) to capacity
2010 69 62,56 55,8 (2) 89,2 (3) 45,01 (5)
2013 81 86,16 57,52 (2) 68,0 (3) 47,27 (5)/46,4 (6)
2015 91 94,24 67,65 (2) 71,8 (3) 54,57 (5)
2020 113 129,52 98,43 76 (4) 79,4 (5)
2030 119 139,34 105,9 76 (4) 85,43 (5)
Table 5: Planned Cement Factories to 2030 Source: The Vietnam Cement Industry Master Plan period 2011-2020 and orientation to 2030 (Decision No. 1488/QĐ-TTg of 2011)
Note: (1) Data according to Decision No. 1488/QD-TTg (2) According to the statistical yearbook (3) The production according to the statistical yearbook compared with the designed capacity (%). (4) Estimated as the average of 3 years 2010, 2013 and 2015 (5) The total emission calculated with an emission factor of 0.8067 tCO2 per ton of cement (6) According to BUR 2
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Photo 2: Luks Cement Plant in Thua Thien Hue Province Credit: Tran Thi Thu Ha/USAID Green Annamites
According to BUR 2, total CO2 emissions from the cement industry in 2013 were 46.4 million tCO2, accounting for 17.91 percent of total GHG emissions in Vietnam, of which emissions from energy combustion are 18.2 million tons CO2 and from the production process, 28.2 million tons CO2.
The emission factor in the cement industry in 2013 was 46.4 million tons CO2 for 57.52 million tons of cement produced which is the equivalent of 0.8067 tCO2e/ton cement. This emission factor is within the international range where “the emissions factor of cement production varies from 0.7 tCO2e per ton of cement on average in Western Europe to 0.9 – 0.95 tCO2e per ton on average in China, India and the US. This variation is due to the fuel used for combustion (most commonly coal and petroleum coke); the efficiency of the plant and type of kiln; the clinker-to-cement ratio; and the carbon intensity of any electricity inputs.
PLANNED GHG EMISSION REDUCTIONS IN CEMENT INDUSTRY (BUR 2) Mitigation of GHG emission in the cement industry will be through a NAMA for the sector for which a “Readiness Plan” has been developed with the support of the project Capacity Building and Support to Development of GHG Emission Reduction in Cement Production in Vietnam, funded by the Nordic Development Fund and coordinated by the Ministry of Construction. The NAMA is expected to be implemented from 2018 to 2030 with target emission reductions estimated at 20 million tCO2e by 2020 and 164 tCO2e by 2030.
According to the above target, from 2018 to 2020, the cement industry will have to reduce an average of 6.7 million tCO2e/year (20 million tons over 3 years = 6.7 million tCO2e); from 2021 to 2030, the average annual reduction will be 14.4 million tCO2e/year (164 million tCO2e - 20 million tCO2e = 144
33 | C-PFES FEASIBILITY STUDY USAID.GOV million tCO2e over 10 years = 14.4 million tCO2e/year). With the emission factor of 0.8067 tCO2e/ton cement as calculated above, the total emissions of the cement industry were 54.57 million tCO2e/year in 2015 (67.65 million tons cement x 0.8067 tCO2e/ton= 54.57 million tCO2e); and if it is hypothetically assumed that plants are operating at 70 percent of planned capacity in the future then the emissions are expected to be 73.14 million tCO2e/year in 2020 (129.52 million tons cement x 0,7 capacity x 0.8067 tCO2e/ton= 73.14 million tCO2e); and 78.68 million tCO2e/year in 2030 (139.34 tons cement x 0,7 capacity x 0.8067 tCO2e = 78.68 million tCO2e). According to Cement NAMA, the target of emission reduction of the cement industry in the period 2018-2020 is an average of 6.7 million tCO2e/year, equivalent to 9 percent (6.7 million tCO2e for 73,14 million tCO2e = 0.0903) and in the period 2021-2030 is 18.3 percent (14.4 million tCO2e for 78.68 million tCO2e = 0.1830).
CHALLENGES FOR C-PFES IN THE CEMENT PRODUCTION SECTOR The biggest challenge for C-PFES will be making a good fit within the cement NAMA. If the VNFF can develop C-PFES in such a way that it fully supports and helps to accelerate the implementation of the NAMA, and for the MOC to report on their NDC targets, then it will make piloting and full implementation much more feasible.
C-PFES FOR THE CEMENT PRODUCTION SECTOR
As calculated above, the total emissions of the Cement Industry in 2015 was 54.57 million tCO2e/year, in 2020 emissions are estimated to be 73.14 million tCO2e/ year, and in 2030 emissions are estimated to be 78.68 million tCO2e/year. According to the NAMA of the cement industry, the target emission reduction in the period of 2018 - 2020 is an average of 6.7 million tCO2e/ year, equivalent to 9.03 percent.
With the price of US$ 18/ tCO2e, in the period 2018 – 2020, the potential C-PFES revenue would be is US$ 120,600,000/year and US$ 33,500,000 if the rate of US$ 5/tCO2e were used. This is again assuming that the sector has not yet been able to lower emissions as per the planned target.
A proposed formula for calculating payment levels is as follows:
A x B x C x D = amount of C-PFES/year
A - Number of tons of cement produced in the year
B - The GHG – CO2e emission factor co-efficient determined in relation to the production process used to produce one ton of product at an individual facility (which will be part of establishing a national
“Registry”), in this study the average 0, 8067 tCO2/ton cement is used
C - NAMA emission reduction targets or the “phased-in” percentage relative to overall tCOe emitted as determined by the NAMA and/or VNFF (0.0903 for 2018-2020 and 0.183 for 2021 to 2030),
D - Cost norms for absorbing 1 tCO2e in forestry activities to reduce emissions (forest restoration, afforestation, agroforestry, forest protection) or the price determined for tCO2.
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ILLUSTRATIVE EXAMPLE FOR THE NAM DONG CEMENT PLANT
For a hypothetical example, the Nam Dong Cement Plant located in the Thua Thien Hue Province which has a designed production capacity of 1.8 million tons of cement per year (Decision No. 1488/QD-TTg). Using the national average emissions factors per ton produced (0.8067) and the NAMA emission reduction target co-efficient (0.0903) for the period 2018 to 2020, the following is the result:
(A)1.8 million tons/year if operating at capacity x (B) 0.8067 tCO2e/ton of cement produced x (C)
0.0903 target reduction rate = 131,112 tCO2e/year to be removed.
If the cost was directly related to tCO2e removals in forestry environments, it would be 131,112
tCO2e/tCO2 removed per ha per forestry activity multiplied by the cost norm procured for that
activity per ha (see next section for cost norms). According to the estimated removals and costs of forestry activities in the next section, to remove the 131,112 tCO e in a mangrove activity 2 would involve restoration of approximately 1009 ha at 130 tCO2/ha planted. For a forest plantation it involves planting approximately 1311 ha at 100 tCO2/ha planted. If invested in agro- forestry systems, it would require supporting the transformation of 298 ha at a VND or US$ unit cost per ha.
With a hypothetically fixed price per tCO2 in line with the FCPF project at US$ 5/tCO2e, the
payment will be US$ 655,560/year (with the current global average at US$ 3, it would be US$ 393,336).
STEEL PRODUCTION SECTOR In 2015, there were 91 operating steel production facilities with plans for an additional 54 facilities during the period 2015 – 2020 (World Bank PMR Project document 2016). According to Decision No. 694/QD-BCT dated January 31, 2013, the MOIT approved the master plan for development of steel production and distribution system in the period up to 2020, with a vision to 2025. Within this plan, the future steel production targets are: 65 million tons by 2020 (42 million tons of steel bars and 23 million tons of finished products); and 107 million tons by 2025 (68 million tons of steel bars and 39 tons of finished products).
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Photo 3: Viet Phap Steel Plant in Quang Nam - closed Credit: Google Earth
According to the 2016 Statistical Yearbook the actual steel production in 2013 was 12.74 million tons and in 2015 production was 16.64 million tons. The reported GHG emissions in the steel industry in
2013 were 2.64 million tCO2e, of which 1.62 million tCO2e came from energy combusted, and 1.02 million tCO2e came from production processes (BUR, 2017). Using these figures, the CO2e emissions factors for steel in Vietnam referenced in the BUR 2 is 0.2072 tCO2e/ton of steel produced (2.64 million tCO2e/12.74 tons produced = 0.2072 tCO2e/ton). However, this emission factor could be questioned as the IPCC reports a global average emissions factor of 1.06 tCO2e/ton of steel produced (varying from 0.08 to 1.72 tCO2e according to the process and technology used). Thus, the emissions factor for Vietnam appears abnormally low. Using this same emission factor in BUR 2, and the total production of steel in 2015 of 16.64 million tons, the emissions in that year were 3.45 million tCO2e. If the IPCC global average emissions factor were used, the emissions would have been 17.64 tCO2e/ton (16.64 million tons of steel x 1.06 tCO2e/ton steel = 17.64 million tCO2e).
With the total steel production in 2015 at 16.64 million tons, it amounts to only 53.7 percent of the planned target (Decision 694/QD-BCT). This actual production against target rate of 53.7 percent will be used below for the planned future targets in 2020 and 2025, or 34.9 million tons and 57.46 million tons respectively. Using the emissions factor in the BUR 2 (0.2072), GHG emissions in 2020 will be
7.23 million tCO2e and in 2025 - 20.91 million tCO2e. Using the IPCC global average emission factor
(1.06), it would be 37 million tCO2e in 2020 and 60.91 million tCO2e in 2025. This is illustrated in Table 05 below.
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Year Number of Capacity Planed Production Emissions plants target (mil. tons) (mil. t CO2/year) (mil. tons) (mil. tons) (%) BUR 2 (4) IPCC (5) compared to planned target
2013 Unavailable 12,74 (2) 2,64 13,5
2015 40 (1) 45,8 (1) 31 (1) 16,64 (2) 53,7 3,45 17,64
2020 67 (1) 101,0 (1) 65 (1) 34,9 (3) tbd 7,23 37,0
2025 73 (1) 126,91 (1) 107 (1) 57,46 (3) tbd 20,91 60,91
Table 6: Estimated Emissions in Steel Production Sector Source: Dr. Trieu Van Hung/USAID Green Annamites
Note: (1) According to Decision No. 694/QD-BCT dated 31/01/2013 of MOIT (2) According to the Statistic Yearbook (3) Estimated in terms of percentage of implementation against planned targets for 2015 (4) Calculated with Emission Factor based on BUR 2 (5) Calculated with average Emission Factor of IPCC
Based on the BUR 2 emission factor (0.2072 tCO2/ ton steel), for a steel production facility to be considered to have large emissions of over 25,000 tCO2e/year it would need to produce 120,656 tons of steel, or more. If the average production factor per capacity is assumed to be high at 70 percent, as above, then the capacity would need to be a minimum of 172,365 tons per year. Accordingly, plants with a design capacity of more than 170,000 tons/year might be subject to C-PFES. Using the BUR 2 emissions factor, only two of the steel producing facilities in Vietnam listed in MOIT’s Decision 694/QD-BCT of 2013 would be considered to have large emissions. However, if we use the IPCC global average of 1.06 tCO2e/ton of steel produced with the same assumed 70 percent ratio of production over capacity, then any steel production facility producing more than 16,509 tons of steel might be subject to C-PFES. This would mean that all facilities focusing on the production of raw steel products would be considered as having large emissions. However, it should be noted that some steel production facilities use electricity off the grid for a source of power. If C-PFES is mandated for the electrical production facilities, C-PFES on these steel factories would be a double-payment. Therefore, the power source needs to be taken into consideration.
For the purposes of this study, the global average emissions factor used by the IPCC of 1.06 tCO2e/ton of steel produced will be used.
PLANNED GHG EMISSION REDUCTIONS IN STEEL INDUSTRY (BUR 2) The project of Carbon Market Readiness in Vietnam (PMR) is under the International Partnership for Market Readiness Program, which is financed by developed nations and entrusted to the World Bank for the purpose of strengthening: the capacity building on development, implementation and dissemination of policies and instruments for state management of NAMAs; developing market instruments; NAMA piloting in steel production and solid waste management in Vietnam. The project has developed a roadmap for participating in domestic and world carbon markets and has an implementation period from 07/2015 - 06/2018. The projected outcomes include: a pilot NAMA for
37 | C-PFES FEASIBILITY STUDY USAID.GOV carbon credits; development of a reporting system for GHG mitigation actions; and a roadmap for carbon market participation in steel production.
According the Green Growth Action Plan of Trade and Industry Sectors for the period 2015-2020 from Decision No. 13 443/QD-BCT dated 08/12/2015, the target of GHG emission reduction in the period 2015-2020 compared to BAU in the steel industry is 10-20 percent, of which 10 percent is voluntary and 10 percent with international supports. Accordingly, GHG emissions must be reduced in the case of voluntary, in 2015 was 0.345 million tCO2e, in 2020 is 0.723 million tCO2e; in the period
2015 - 2020, the average reduction of 0.543 million tCO2e/year; GHG emission reduction in the whole 5-year period is 2.67 million tons. In case with international supports, it would be 5.34 million tCO2e.
If the average global emission factor used by the IPCC is applied (1.06 tCO2e/ton of steel), GHG emission in 2015 is 17.64 million tCO2e, in 2020 is 37 million tCO2e and in 2025 is 60.91 million tCO2e. GHG emissions must be reduced in the case of voluntary (10 percent), in 2015 to 1.76 million tCO2e; in 2020 it will be 3.7 million tCO2e and to 6.09 million tCO2e in 2025; in the period of 2015 -
2020, the average reduction is 2.73 million tCO2e/year; GHG emission reduction in the 5 year period is 13.65 million tCO2e. In the case with international supports, it would be 27.3 million tCO2e.
CHALLENGES FOR C-PFES IN THE STEEL PRODUCTION SECTOR As was the case with the cement sector, the biggest challenge for C-PFES will be ensuring a good fit within the future steel NAMA. If the VNFF can develop C-PFES in such a way that it fully supports and helps to accelerate the implementation of the NAMA, and for the MOC to report on their NDC targets, then it will make piloting and full implementation much more feasible.
C-PFES FOR THE STEEL PRODCUTION SECTOR Similar to the cement production sector, the nature of the steel production process determines the emissions factor. It is possible to reduce emissions by different solutions: using energy more efficiently and effectively; retro-fitting facilities with more advanced modern technology and equipment; and managing and operating the production process more efficiently. C-PFES should be seen as an incentive within this sector to reduce emissions in line with the future NAMA targets and actions. With this thinking, the initial C-PFES for the sector should be equal to the amount of the emissions the sector is seeking to reduce which is 10 percent voluntarily as per the Decision No. 13443/QD-BCT.
As with cement CO2e, if the tCO2e price is hypothetically US $5/tCO2, the C-PFES revenue from the steel industry from 2015 to 2020 is:
Using the emission factors in BUR2
Voluntary implementation at US$ 18/tCO2e - 0.543 million tCO2e/year x 18 US$/t = 9.774 mil. US$/year
Voluntary implementation at US$ 5/tCO2e - 0.543 million tCO2e/year x 5 US$/t = 2.715 mil. US$/year
Using the average global emission factor as per the IPCC
Voluntary implementation at US$ 18: 2.73 mil. tCO2e/year x 18 US$/t = 49.14 mil. US$/year
Voluntary implementation at US$ 5: 2.73 mil. tCO2e/year x 5 US$/t = 13.65 mil. US$/year
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For now, this study is proposing that payments be linked not to a designated or market price on CO2 emissions but on cost norms for removing them in forest environments.
A hypothetical calculation for the amount a steel producing facility (steel plant or company) could pay is as follows:
A x B x C x D = US$ C-PFES/year
A – Tons of steel produced
B – Designated GHG (CO2e) emission factor co-efficient related to production process used for a ton of product at an individual facility (which will be part of establishing a national “Registry”)
C – Sector emissions target reduction or future NAMA target reduction (currently 10 percent voluntarily and 20 percent with international support) or the “phased-in” percentage relative to overall tCO2e emitted as determined by the NAMA and/or VNFF
D - Cost norm for removal of a tCO2e in agreed-upon forestry mitigation activity (restoration, planting, agro-forestry, or protection) or designated price for tCO2e
ILLUSTRATIVE EXAMPLE FOR THE CENTRAL VIETNAM PLANT
For an example, let us use the Central Vietnam Steel Plant, Vietnam - US Steel Joint Stock Company which has a designed production capacity of 500,000 tons of steel per year (Decision No. 694/QĐ-BCT dated 31/01/2013); The amount they have to pay will be:
(A) at capacity with 500,000 tons of steel produced x (B) 0.2072 tCO2e/ton of steel produced x (C) 0.1 target reduction rate = 10,360 tCO2/year. If the price of a CO2e is US$ 18 per ton, it will be US$ 186,400 per year. If the price of a tCO2e is US$ 5 per ton, it will be US$ 51,800 per year.
Using the global average emissions factor of 1.06 tCO2e/ton of steel produced we would have: (A) 500,000 tons of steel produced x (B) 1.06 tCO2e/ton of steel produced x (C) 0.1 = 53,000 tCO2e/year. If the price of a tCO2e is US$ 18 per ton, it will be US$ 954,000 per year. If the
price of tCO2e is US$ 5 per ton, it will be US$ 265,000 per year.
If the cost was directly related to tCO2e removals in forestry environments, it would 10,360 or 53,000 tCO2e/tCO2 removed per ha per forestry activity multiplied by the cost norm procured
for that activity per ha.
TRANSPORTATION SECTOR Vietnam’s BUR 2017 does not specifically mention GHG emissions reductions targets in the transport sector. In 2013, the BUR 2017 presents CO2 emissions attributed to the transportation sector as
29.492 million tCO2e out of a total of 126.914 million tCO2e from the energy sector, or 23 percent.
This 29.492 mil. tCO2e is further defined as follows: 1.218 mil. tCO2e were from aviation; 26.815 mil. tCO2e from road transport; 0.109 mil. tCO2e from rail; and 1.348 mil. tCO2e from river and sea transport. It is clear that road transport is the largest source of emissions.
39 | C-PFES FEASIBILITY STUDY USAID.GOV According to the IPCC 2006, the emission factor for gasoline is 2,297 kilograms (kg)CO2/liter(l) or
3,1007 kg CO2/1kg of gasoline and diesel is 2,712 kg CO2/liter or 3.2136 kg CO2/1kg of diesel (gasoline density is 0, 7408 kg/l and 0.8439 kg/l diesel, OECD/IEA, 2004). The average for both petrol and diesel is 3.1572 kg CO2/kg. Thus, in 2013 with 29.492 million tons of CO2 emissions, the amount of gasoline and diesel consumed was 9.34 million tons.
According to international analysts, traffic growth and petroleum consumption in Vietnam increased by 4.9 percent and 5.8 percent respectively in the period 2006 - 2016, and are expected to continue to grow by 4.7 percent and 4.9 percent in the period 2016 - 2025 (Business Monitor International- BMI, Wood Mackenzie, at http://cafebiz.vn/tieu-thu-xang-dau-viet-nam-duoc-du-bao-tang-truong-gap- 36-lan-the-gioi-20170725162343533.chn, 25/07/2017 04:46 PM).
To estimate emissions of the transport sector, this report uses an annual average increase in fuel consumption of 5 percent before 2016 and 4.8 percent for the period 2006-2025. Results are as follows:
Year 2015 2020 2025
Fuel consumption (mil. ton/year) 10,03 12,67 16,02
Emissions (mil. tons CO2/year) 31,62 39,94 50,51
PLANNED GHG EMISSION REDUCTIONS IN THE TRANSPORT SECTOR (BUR 2) The INDC (2015) mentions voluntary emissions reductions in the transport sector of 4.8 million tCO2e by 2030 out of a total of 29.462 million tCO2e in the energy sector, through shifting freight transport from road and private to public passenger transport shifts. This is virtually the only reference to voluntary emissions reductions in road transport sub-sector. The pilot project Green Transport of Central Environmental Programs-Phase 2, funded by the Asian Development Bank and implemented by Ministry of Transport from 2015 to 2016, set a target to reduce fuel consumption by 10-13 percent per vehicle per year and reduce CO2 emissions by 11-15 tons per vehicle per year.
As concerns the air transport sub-sector, the CAAV has developed a Plan to Reduce CO2e in the Civil Aviation sector for the period 2016 – 2020 that was approved by MOT Decision No. 4206/QD-
BGTVT of 28/12/2016. This plan has identified six groups of measures to reduce CO2 emissions including: improvement of operations at airports; tasks and technical solutions for aircraft; flight management measures; gradual shift to alternative energies and energy efficient application of vehicles and equipment; market-based solutions for emissions management; management solutions and international cooperation. The CAAV has also developed a “Green Action Plan to Reduce CO2 emissions in Civil Aviation Sector (2015 – 2030) that will follow the planning of the International Civil
Aviation Organization which intends to cap CO2e at 2020 levels and offset additional emissions over that cap. Thus, the aviation sector in Vietnam will follow the global program for the sector.
CHALLENGES FOR C-PFES IN THE TRANSPORT SECTOR There are a number of challenges for applying C-PFES in the transport sector, notably for the road transport sector. The first is that the fuels for this sector are already taxed and this tax is expected to increase with an amended Law on Environmental Protection Tax in 2018. Table 7 below shows the current and amended taxes proposed.
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Table 7: Proposed tax rates in the Draft Amendment to Environmental Protection Tax Law Source: Resolution No.51/2001/QH10 to be submitted to the National Assembly in 2018
The proposed EPT amendment was submitted to the National Assembly in 2017 but was sent back for revisions, in part due to concerns over fuel tax increases. This relates to the second major challenge - would be collection of C-PFES payments. Given the number of vehicles and motorbikes, the only feasible ways to collect C-PFES would be an additional payment via fuel purchased, a percentage of the EPT allocated to VNFF for C-PFES, or a one-off annual charge that comes with licensing. The first and third options would be unpopular and challenging in terms of the “willingness to pay” of consumers. The option on allocating a percentage of the EPT to VNFF for C-PFES would require a top-down instruction to the MOF.
As concerns the aviation sector, the CAAV and its members are set on following what will be future global protocols for reducing and offsetting emissions in the sector.
C-PFES FOR THE TRANSPORT SECTOR
As a proposed phase-in measure, this report will use reduction of 10 percent of CO2e emissions as compared to the above BAU projections for fuel consumed and associated emissions in the transport sub-sector, which requires an emission reduction in the transport sector of 3.162 million tCO2 in 2015; 3,994 million tCO2 in 2020 and 5,051 million tCO2 in 2025.
In 2015, with a price of US$ 18 per tCO2e revenues will be US$ 56,915,000 and at US$ 5 per tCO2e they would be US$ 15,810,000. In 2020, with a price of US$ 18 per tCO2e revenues will be US$ 59,910,000 and at US$ 5 they would be US$ 19,970,000. In 2025, with a price of US$ 18 per tCO2e revenues will be US$ 90,918,000 and at US$ 5 they would be US$ 25,255,000. This would involve an amendment to the current EPT on fuel sales that also allowed for “earmarking” of revenues for C- PFES. Another scenario is an amendment allocating a percentage of the current EPT to the VNFF for C-PFES.
Using the above projections for 2020 at US$ 18 tCO2e, the possible payment rate per liter of fuel would equal 86.2 VND/liter in (US$ 59,910,000/12.67 million tons = 4.73 US$/ton or 0.00473 US$/kg
41 | C-PFES FEASIBILITY STUDY USAID.GOV x 23.000 VND/US$ = 108.79 VND/kg x 0.7923 kg/l = 86.2 VND/liter). At the current rate of the EPT for fuels of 4,000 VND/liter, the phase-in of C-PFES payment represents approximately 2 percent of the tax. If the current tax is increased, as expected, in the new EPT law to 8,000 VND/liter, the C- PFES payment would represent only 1 percent. As this phase-in amount is relatively small, with relatively small revenues, it is suggested that MARD negotiates for 3 to 5 percent of the current EPT, or a separate addition to it. This percentage could be increased by 2025 and 2030. MARD could make a case that a percentage of the revenues should be allocated for C-PFES. Currently, the EPT revenues go into the central budget and there is no targeted allocation for environmental protection or mitigation of CO2 produced. An allocation to the VNFF for CO2e removals is justified – In 2016, Vietnam has over 2.7 million cars and 45 million motorbikes according to several national news sources. A gradually increasing allocation of the EPT to C-PFES could fund MARD’s commitment to the NDC and more, opening opportunities for other carbon markets and income generation. As compared to trying to apply payments on the energy sector producers, this may be the easiest route for C-PFES and for the Government. In a similar fashion to electricity, the big payers would be those using the most fuel. Low income families using less fuel would contribute little to C-PFES.
The aviation sector in Vietnam will follow global protocols for reducing CO2e with offsets for emissions over a “cap” on emissions per airline established in 2020 or 2021. VNFF should advocate for the investment of these offsets in CO2 removals in forestry activities in Vietnam, such as mangrove restoration. Discussions were held by Winrock International with Vietjet Air on this subject in 2015. At that time, Vietjet showed interest in a passenger voluntary offset program similar to that of Jetstar Air to be invested in mangrove restoration in Vietnam. They were also interested in discussing a plan for future offsets as per the CAAV Green Action Plan. To note that Jetstars voluntary passenger offsets, from passengers flying within Vietnam, are currently invested in projects in Australia. The VNNF could revive discussions with Vietjet and enter into discussions with both Jetstar and Vietnam Airlines.
SCENARIOS FOR C-PFES REVENUE INVESTMENT Based on the spirit of the recently enacted Forestry Law of 2017, scenarios for use and investment of C-PFES revenues are proposed based on consideration of the following principles:
C-PFES is a strategic solution for Vietnam to achieve its Sustainable Development Goals, green growth goals, and NDC by 2030;
C-PFES implementation should show clear results that can be measured and verified for CO2 absorbed and stored through forestry activities an MRV system that is compatible with that of REDD+, the NAMAs for specific sectors, and the biennial reporting on the NDC to the UNFCCC;
The management and investment of C-PFES revenues should be separate from other existing PFES revenues in the current VNFF system and include a Steering Committee (management council) including representatives of payers;
Payers could have some choices in terms on what their payments are invested in and be able to both witness the investments, take credit for them, and possibly be allowed to make direct payments following PFES norms and guidelines;
There should be close coordination with the REDD+ program and the Emissions Reduction Project of the FCPF so that the use of revenues contributes to the NRAP and Provincial REDD+ Action
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Plans (PRAPs) and there is coherence and complimentary aspects with MRV and social safeguards; and
Payments for C-PFES should be piloted on a step-by-step basis to improve the mechanism for broad implementation and to phase in payments as an incentive for payers to lower emissions in production processes.
C-PFES INVESTMENT OPTIONS
With the aim of achieving the highest return in terms of CO2 removals, and other benefits which could include lowering emissions both the LULUCF and agricultural sectors, the four proposed options for investments of C-PFES in order of priority are: (i) natural forest restoration, enrichment, and afforestation (for both coastal and inland forests); (ii) afforestation for large timber, long rotation, tree plantations; (iii) developing agroforestry systems across large landscapes; and (iv) natural forest protection (the current PFES model). The advantages and disadvantages for each option are discussed below. This is then followed by two hypothetical examples of how C-PFES payments from payers could be invested.
FOREST RESTORATION COASTAL FOREST RESTORATION
This includes mangrove reforestation, coastal forests on sandy soils, and other fresh water coastal wetlands. The focus would be on mangroves relative to the numerous environmental services they provide, high carbon stocking potential, and associated climate change adaptation benefits. The national level weighted average of carbon stocks in mangrove forests is 58.0 tC/ha or the equivalent of 212.86 tCO2e/ha (MARD-NREL, 2016). However, the national weighted average is dominated by the large percentage of mangroves in the Mekong Delta, which have much higher carbon stocks than for the rest of the country. Using this figure, for a payer to remove 1000 tCO2e/year, they would need to pay for 4.7 ha of mangroves to be restored and maintained to maturity, from a very degraded coastal area. Currently the government cost norms for mangrove planting is 50-60 million VND/ha, equivalent to a payment of 270-324 million VND for the 4.7 ha (as per Decision 1206/QĐ-BNN-TCLN, Decision 5365/QD-BNN -TCLN, QD 1937/QD-BNN-KHCN), excluding transfer and annual maintenance costs. The maintenance costs could use the standard PFES payment rate of 400,000 VND per ha/year (though PFES payments rate are variable) and transaction costs for the provincial funds would be 10 percent of the overall cost for technical supervision, monitoring, and preparation of contracting mechanisms. If an open procurement process were used, it is expected that the costs for mangrove or coastal forest restoration could be significantly reduced.
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Photo 4: Coastal forest restoration Credit: Pham Thanh Nam/USAID Green Annamites
For coastal sandy forests the assumptions are based on the reference level (RL) used in the Emissions Reduction Project Document (ERPD) under the category of “Other Forest,” with an average Above-
Ground Biomass and Below-Ground Biomass of 54.1 tCO2/ha. As per the ERPD, enrichment planting and protection will result in annual increment of 7.8 tCO2/ha/year. For the protection model of coastal/sandy forests (33,017 ha), no GHG benefits are counted because coastal forests are not subject to significant deforestation and forest degradation pressure in the ER-P accounting area. Thus, protection of coastal forests will maintain existing carbon stocks and the GHG benefits are assumed to be zero.
INLAND NATURAL FOREST RESTORATION
The restoration of inland natural forests could be achieved either through avoided degradation of rich or medium forest areas or through enrichment planting and silviculture techniques. Avoided degradation that allows poor forest to become medium forest, or medium to become rich, involves paying for basic protection of these areas from further degradation and also could involve different livelihood interventions to reduce pressures on forest environments. In essence, this is a reduction of emissions. In the ERPD for Vietnam’s six north-central provinces (FCPF funding), the sequestration and storage potential for avoided degradation for the upland evergreen forests is calculated as the difference between the RL emissions factors for evergreen forest rich and evergreen forest medium
– i.e., 544.5 - 261.1 tCO2/ha = 283.4 tCO2/ha. This emission reduction is assumed to occur over a period of 8 years, resulting in an annual emissions factor of 35.4 tCO2/ha/year for 8 years. Avoided degradation or natural regeneration of evergreen forest medium prevents forest degradation to evergreen forest poor. Emission reductions benefits are quantified as the difference between the carbon stock of evergreen forest medium and evergreen forest poor - i.e., 261.1 – 107.1 tCO2e/ha =
154 tCO2/ha. The accounting of GHG benefits is distributed over a period of 8 years – i.e., 19.3 tCO2/ha/year for 8 years.
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Photo 5: Inland natural forest restoration Credit: USAID Green Annamites
While the ERPD will pay for avoided degradation from rich to medium and medium to poor evergreen forests, it is proposed that C-PFES revenues are invested in enrichment planting and silviculture practices that “enrich” forest carbon stocks and forest areas from poor to medium and medium to rich. The MRV systems approved for the ERPD, which use remote sensing applications for forest biomass, would be used to verify that this carbon enrichment has taken place. As such, the same figures of 283.4 tCO2 for medium to rich and 154 tCO2 from poor to medium will be used with an extended time period surpassing 8 years. It is important to note that another study conducted by the SNV
ENRICH Project calculated much lower annual CO2 enrichment rates in the Ha Tinh Province (one of the six ERPD provinces) for enrichment planting in poor forests (1.57 tCO2/year). However, if the forest areas that have been enriched remain under protection and degradation is avoided, then it is assumed that the shift from poor to medium and medium to rich will happen over time. The remote sensing applications for forest carbon stocks to be used by the ERPD will validate this.
The advantages of these restoration options are that:
It would be easier to measure and verify the amounts of CO2 removed using the remote sensing applications approved within the ERPD;
It would make a much higher contribution to the NDC;
Multiple benefits for local livelihoods and climate change adaptation;
Enhancement of other forest environmental services and biodiversity;
45 | C-PFES FEASIBILITY STUDY USAID.GOV It will help Provincial Funds to develop activities for the investment of the existing “offset” funds;
It would be possible to establish a direct relationship between the payer and the forest owner (or community) benefiting from the mangroves, notably for branding or public relations purposes; and
It will entail a more robust MRV system that contributes to the REDD+ Action Plan, the NDC, and strengthens the PFES program.
The disadvantages of this option are that it will involve:
New activities for the VNFF, and provincial funds, inclusive of procurement and oversight of service providers which will involve significant training and could have higher transfer costs.
INVESTMENT FOR LARGE TIMBER, LONG CYCLE AFFORESTATION PROJECTS In the FCPF – ERPD (2017) it is stated that the Carbon stock of 12 years. Acacia plantation is 98 – 110 tCO2/ha. For other tree species commonly planted in Vietnam, in order to accumulate 100 tCO2e, a plantation of Pinus merkusii needs 16 years; Pinus kessya and Pinus massoniana need 10 years; Acacia hybrids needs 5 years; Acacia mangium needs 6 years; Eucalyptus europhylla 5 needs years (N. Que, 2005).
Photo 6: Long rotation tree plantation Credit: Pham Thanh Nam/USAID Green Annamites
If the payers would need to remove 1000 tCO2/year, they will need to pay to plant approximately 10 ha of plantation forest (depending on the region, tree species planted, technique, and rotation). With current government cost norms for afforestation of 50–80 million VND/ha, the payer has to pay this same 500-800 million VND million for that given year (QĐ 38/2005/QĐ-BNN, QĐ2197/QĐ-BNN - KHCN ngày 12/9/2012), excluding transfer and annual maintenance costs.
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As concerns the planned transformation of short rotation Acacia (4-6 years) to long-rotation Acacia
(12 years) the average long-term carbon stock is calculated as 98 tCO2/ha. Thus, the long-term benefit is 11.5 tCO2/ha, the difference of the RL carbon stock of 86.5 tCO2e/ha for short rotation and the 98 tCO2/ha for long rotation. Based on this long-term benefit an annual emissions factor is calculated as
11.5 tCO2/10 year. = 1.1 tCO2/ha/year.
The advantages of this option are that:
It would be easier to measure and verify the amounts of CO2 removed;
It would make a much higher contribution to the NDC;
Will help FPDFs to develop activities for the investment of the existing “offset” funds;
There are multiple benefits for reducing pressures on natural forests in the future, including biodiversity conservation and climate change adaptation;
Significant contributions to the priorities for re-structuring the forestry sector;
Could make a direct connection between payers and the forest owners providing the service, and thus respond to an identified and important criterion relative to the willingness of payers; and
The VNFF and provincial funds would have new roles in MRV and oversight of service providers.
The disadvantages of this option are that:
It means long-rotation tree crops with no short-term benefits for forest owners;
There is a higher risk of the timber being used for other purposes or for land use change that would create emissions; and
There are higher transfer costs.
ESTABLISHING AGROFORESTRY SYSTEMS ACROSS LANDSCAPES This option involves identifying appropriate agro-forestry systems for different agro-ecological regions of Vietnam, including delta and upland agricultural areas, then providing extension services and subsidies (contributions and technical support) to farmers to establish these multi-cropping systems that are over 15 percent tree cover. In Vietnam, carbon accumulation rates in agro-forestry systems vary between 5.02 – 9.83 tC/ha/year in Vietnam with highest rates in fruit garden systems (net C accumulation rates). Using a lower figure of 6tC/ha/year this will remove an estimated 22 tCO2/year/ha or 440 tCO2/ha in 20 years. To remove 1000tCO2, a payer would need to support a farmer to convert
2.27 ha of field to agro-forestry practices, according to cost-norms (this could significantly reduce CH4 emissions on these land areas, too, if rice paddies were converted to agroforestry systems).
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Photo 7: Agroforestry system Credit: Le Van Trung – Lam Dong DARD
The advantages of this option are:
There are multiple benefits for the environment, livelihoods, and biodiversity;
Good contributions to the NDC and re-structuring of the agricultural sector;
Could make a direct connection between payers and the forest owners providing the service; and
Depending on the system, there is the potential for high carbon sequestration rates and for lowering emissions from agriculture that would double the contribution to the NDC (e.g., converting paddy rice to a multi-cropping system of citrus trees and aerobic agricultural food
production systems, greatly reducing CH4 emissions).
The disadvantages of this option are:
There is a higher risk of farmers abandoning agro-forestry systems over time;
MRV would need to be done over larger landscapes (note that coefficients for agricultural emissions reductions over landscapes in Vietnam are already being developed)
There are higher transfer costs; and
The VNFF and provincial funds would have new roles in MRV and oversight of service providers in agricultural extension (and involving strong collaboration with other departments within MARD).
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NATURAL FOREST PROTECTION The average carbon sequestration rate of upland natural forests in Vietnam varies from 6.0 to 9.175 tCO2/ha/year. Using the lower rate (also used in the ERPD), if the payer must pay for 1000 tCO2e year, payments would need to be made to protect 166.7 ha of natural forest for that year. For mangrove protection, the average annual sequestration rate would be 212.86 for 20 years = 10.64 tCO2/ha/year, and thus, to remove 1000 tCO2 would require payment for protection of 93.9 ha of mangrove. With a current cost norm of VND 400,000/ha/year, the emitter would need to pay VND 66.7 million per year for upland forests and VND 37.4 million for mangrove forests (excluding transfer costs). As this is a relatively low payment, it could cover a larger portion of emissions if the program is phased in, or lower “caps” on emissions levels per production process used. As the current average cost norm of 400,000 VND per year for protection of natural forests is low and does not provide a significant contribution to household livelihoods nor offset opportunity costs, it is suggested that the price for CO2 removals and storage would be determined by the Government at a higher rate of than that for PFES of downstream water users or at US$ 18 which would make it a comparable cost to the other C-PFES investment options.
Photo 8: Natural forest PFES Credit: USAID Green Annamites
The advantages of this option are that:
It would be relative easy to implement for the VNFF;
The transfer costs are not high and systems are in place;
It would support forest owners that do not currently benefit from PFES; and
It is compatible with REDD+.
The disadvantages of this option are:
49 | C-PFES FEASIBILITY STUDY USAID.GOV The difficulty in measuring and verifying the amount of CO2 removed;
The amount of CO2 removed from natural forests might happen with or without C-PFES and so the added benefit of C-PFES is unclear and limited;
The amount of CO2 removed is relatively small compared to other options;
The benefits for forest owners are limited; and
It may be more difficult to establish a relationship between the payer and the forest owner.
HYPOTHETICAL EXAMPLES OF C-PFES INVESTMENT OPTIONS Two hypothetical examples of how C-PFES payments could be calculated and invested from existing companies in the Thua Thien Hue and Quang Nam provinces are provided below. It is important to acknowledge that these examples are presented in an overly simplistic way. More detailed analysis is needed on actual emissions produced by facilities as well as the emissions reduction potential for the forestry activity options within a given province. Each province will need to assess the feasibility, costs, and benefits of collecting and using C-PFES revenues. Piloting of C-PFES by VNFF, together with development partners, in selected provinces should help to determine guidelines for these provincial assessments. As concerns the costs to payers, payments will also need to be assessed in relation to their potential impacts on the market competitiveness of the products the company is selling. If payments result in significant price increases that reduce market competitiveness, then this could create unfavorable conditions for both C-PFES and for the payers. Thus, determining the phase-in approach in line with sector targets has been proposed.
CEMENT PRODUCTION FACILITY IN THUA THIEN HUE PROVINCE The Luks Vietnam Cement Company is located in the Tu Ha Ward of the Huong Tra District in the Thua Thien Hue province. Recent cement production figures for two years are as follows: 1,223,000 tons in 2015; and 1,339,000 tons in 2016. It should be noted that this company self- annual reported revenues of over US$ 57 million in 2016 (RIFEE Study 2017).
Using the average emissions factor in the cement sector for Vietnam of 0.8067 tCO2/ton of cement, the estimated emissions were 98,659 tCO2e in 2015 (1,223,000 tons Cement x 0.8067); and 108,017 tCO2e in 2016 (1,339,000 tons Cement x 0.8067).
As per the proposed phase-in approach in line with the sector target, the NAMA for the cement industry for the period 2018-2020 is 8.44 percent, and so the expected emissions reductions (or offsets) would be 8327 tCO2e for 2015 (98,659 tCO2 x 0,0844), and 9117 tCO2e for 2016 (108,017 tCO2 x 0,0844). It is important to note that this company has made several improvements to reduce emissions since production began in 1997 and, as such, the emissions factor, and emissions, may be lower than the national average of 0.8067 tCO2.
Hypothetical payment options for 2016: a) Mangrove planting
Mangrove planting can be considered, for example in Tam Giang – Cau Hai lagoon. The CO2 absorption capacity of mangroves in the north- central region as presented in the ERPD is 6.5 tCO2/ha/year, and for the 20-year cycle it will be 130 tCO2/ha.
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If the company were to sequester the carbon in mangroves or coastal wetlands, it would mean investing in restoration of 70.13 ha (9117 tCO2e/130 tCO2e/ha). Using government cost norms of approximately 52 million VND per ha (US$ 2280 in ERPD), this would equal 3.65 billion VND (or US$
159,896). If using the US$18/tCO2e as a standard rate, the payment level would equal US$ 164,106, covering costs for several years of maintenance and the partial administration of C-PFES. b) Plantation for large timber with indigenous species (enrichment & natural forest restoration)
Natural conditions in the north-central region, including Thua Thien Hue can be suitable for plantation for large timber with Tarrietia javanica (locally referred to as “Huynh”) or Chukrasia tabularis (locally known as “Lat Hoa”). The ability to absorb CO2 of Huynh plantation for a cycle of 24 years is 300.3 t CO2/ ha, and for a cycle of Lat Hoa plantation it is 561.7 tCO2/ ha over 30 years (Tiến, 2012).
If the company were to sequester the carbon in natural forest enrichment and restoration, it would mean investing in restoration of 30.36 ha of Huynh (9117 tCO2e/300.3 tCO2/ha) or 16.23 ha of Lat
Hoa (9117 tCO2e/561.7 tCO2/ha). Using government cost norms of 34 million VND per ha (US$ 1480 for five years in ERPD) would equal 1.032 billion VND (or US$ 44,932). If using US$ 18/tCO2e as a standard rate, the payment level would equal US$ 164,106, covering costs for the 25 – 30 years of maintenance and protection as well as the full administration of C-PFES. This is an attractive option for C-PFES. c) Plantation for large timber with Acacia hybrid
Acacia hybrid plantation with a cycle of 12 years can sequester 98-110 tCO2 ha (ER-PD, FPDF, 2017), with an average of 100 tCO2/ha. If the company chose this option, it would involve investing in 91.17 ha of plantation (9117 tCO2e/100 tCO2e/ha) at a cost of 35.5 million VND/ha (US$ 1542 in the ERPD) and would equal 4.558 billion VND (US$ 140,584). If using the US$ 18/tCO2e as a standard rate, the payment level would equal US$ 164,106, which would cover plantations costs using government cost norms. d) Agroforestry
Though there are various potential agroforestry models, the model of Litsea glutinosa planted with cassava in the highland areas of the Gia Lai province will be used as an example. This model has an average CO2 sequestration capacity of 55 tCO2/ha for a 10-year cycle (Bao Huy, 2009).
If the company were to sequester the carbon through support of individual farmers to adopt agroforestry production it would mean investing in restoration of 165.76 ha (9117 tCO2e/55 tCO2/ha). Using government cost norms of 40 million VND per ha this would equal 6.63 billion VND (or US$ 288,270). If we assumed that this would be cost-shared with farmers, at 50 percent for both labor and maintenance, the costs would be 3.32 billion VND for the company (US$ 144,135). Using $18/tCO2e as the standard rate, the payment level would equal US$ 164,106, covering costs for the extension support services that would be needed and the administration of C-PFES. e) Natural Forest Protection
Using the lower rate of 6 tCO2e for annual accrual of carbon in a protected forested determined by the ERPD for the upland forest areas of the six north-central provinces, a company choosing this option would have to pay for the protection of 1519.5 ha (9117 tCO2e/6 tCO2/ha). Using the current government cost norms for PFES protection (400,000 VND/ha) that would equal 60.78 million VND
(or US$ 26,426), a relatively low sum. Using the suggested US$ 18 per tCO2e, the payment would
51 | C-PFES FEASIBILITY STUDY USAID.GOV equal US$ 164,106 and could allow for payments to forest owners of up to US$ 108 per ha /year (2.48 million VND per ha/year) or a five to six-fold increase in payments after administration costs are deducted.
COAL-FIRED ENERGY PROUCTION FACILITY IN THE QUANG NAM PROVINCE The JSC Nông Sơn power generation facility is located in the Quế Trung Commune, of the Nông Sơn District of the Quảng Nam Province. The power generated and sold in recent years was 74,243.89 MW in 2015 and 139,847.51 MW in 2016.
In using the average emissions factor for a MW in Vietnam of 0.8154 tCO2/ MWh, the emission calculations for these years are as follows: for 2015 - 74,243.89 MW x 0.8154 tCO2/ MWh = 60,538.47 tCO2; and for 2016 - 139,847.51 MW x 0.8154 tCO2/ MWh = 114,031.66 tCO2.
The target of emission reduction in the GGAP of the MOIT in period 2015 - 2020 is 10 percent (QĐ
13443 QD-BCT). Accordingly, the amount of CO2 reductions would be 6053.85 tCO2 for 2015 and
11,403.17 tCO2 in 2016.
Hypothetical payment options for 2016: a) Coastal Sandy Forest planting
Barren coastal sand areas are abundant in Quang Nam Province and would be good opportunities for sandy coastal forests that both sequester carbon and provide windbreaks for coastal communities.
Mangrove and coastal wetlands are limited in this province. The CO2 absorption capacity of coastal sandy forests of Casuarina equisitafolia is 54.1 tCO2/ha over a 20-year period.
If this company were to sequester the carbon in coastal sandy forests wetlands it would involve restoration of 207 ha (11,403 tCO2/54.1 tCO2/ha) at a cost norm of 52 million VND per ha (US$ 2280 in ERPD), which equals 10.76 billion VND (or US$ 471,960). Using government cost norms of 30 million VND per ha would equal 6.21 billion VND (or US$ 272,285). However, planting of coastal forests can be done at much lower cost given the nature of the tree species used. If C-PFES uses the proposed US$18/tCO2e as a standard rate, the payment level would equal US$ 205,254, covering costs for several years of maintenance and the partial administration of C-PFES. b) Plantation for large timber with indigenous species (enrichment & natural forest restoration)
Natural conditions in Quang Nam can be suitable for plantations of large timber with Huynh (Tarrietia javanica), Sao den (Hopea ordorata), Dau rais (Dipterocarpus alatus) or cinnamon (Cinnamomum cassia - a special non-timber forest product in Quang Nam). The ability to absorb CO2 of Huynh plantation for a cycle of 24 years is 300.3 tCO2/ ha; Sao den plantation for a cycle of 16 years is 251,1 tCO2/ ha; and Dau rais plantation for a cycle of 16 years is 223,6 tCO2/ha (Tien, 2012). Cinnamon plantation absorbs 177.8 tCO2/ha (Phuong, 2009).
If the company were to sequester the carbon in natural forest enrichment and restoration, it would mean investing in restoration of 37.97 ha of Huynh (11,403 tCO2/300.3 tCO2/ha) or 64.13 ha of cinnamon (11,403 tCO2/177.8 tCO2/ha). Using government cost norms of 34 million VND (US$ 1480 for five years in ERPD) per ha, would equal 1.29 billion VND (or US$ 56,196) for Huynh and 2.18 billion VND (US$ 94,912) for cinnamon. If using US$ 18/tCO2e as a standard rate, the payment level would equal US$ 205,254 – enough for the Huynh option inclusive of covering costs for the 25-30 years of maintenance and protection, as well as the full administration of C-PFES. For the cinnamon
52 | C-PFES FEASIBILITY STUDY USAID.GOV option, we could expect a cost-sharing with the forest owners due to the NTFP they will harvest in time. This is an attractive option for C-PFES. c) Plantation for large timber with Acacia hybrid
An acacia hybrid plantation with a cycle of 12 years, can sequester 98 - 110 tCO2 ha (ER-PD, FPDF,
2017), with an average of 100 tCO2/ha. If the company chose this option, it would involve investing in 114 ha of plantation (11,403 tCO2/100tCO2/ha) at a cost of 35.5 million VND (US$ 1542 in the ERPD), which would equal 4.08 billion VND (US$ 54,741). If using the US$ 18/tCO2e as a standard rate, the payment level would equal US$ 205,254, which would include plantations costs using government cost norms. It is expected that using open procurement processes could lower the costs for plantation to 40 million VND or less. d) Agroforestry
Though there are various potential agroforestry models, the model of Litsea glutinosa planted with cassava in the highland areas of the Gia Lai province will be used as an example. This model has an average CO2 sequestration capacity of 55 tCO2/ha for a 10-year cycle (Bao Huy, 2009).
If the company were to sequester the carbon through support of individual farmers to adopt agroforestry production it would mean investing in restoration of 207 ha (11,400 tCO2/55 tCO2/ha). Using government cost norms of 40 million VND per ha, this would equal 8.28 billion VND (or US$ 360,000). If it could be assumed that this would be cost-shared with farmers at 50 percent for both labor and maintenance, the costs would be 4.14 billion for the company (US$ 180,000). Using US$
18/tCO2e as a standard rate, the payment level would equal US$ 205,254, covering costs for the extension support services that would be needed and the administration of C-PFES. e) Natural Forest Protection
Using the lower rate of 6 tCO2e for annual accrual of carbon in a protected forested determined by the ERPD for the upland forest areas of the six north-central provinces, the company choosing this option would have to pay for the protection of 1900 ha (11,403 tCO2/6 tCO2/ha). Using the current government cost norms for PFES protection (400,000 VND/ha) that would equal 760 million VND (or
US$ 33,043), a relatively low sum. Using the suggested US$ 18 per tCO2e, the payment would equal of US$ 205,254 and could allow for payments to forest owners of up to US$ 108 per ha/year (2.484 million VND per hae/year) or a five to six-fold increase in payments after administration costs are deducted.
ADMINISTRATION IMPLICATIONS OF C-PFES FOR THE VNFF CENTRAL FUND AND PROVINCIAL FUNDS This study proposes the C-PFES administration, collection and investment of revenues, should be made possible at two different levels. A C-PFES sub-fund at the central level would be responsible for administering payments from the energy sector in the urban provinces, the transportation sector, and for large corporations with GHG aggregate emissions across the country that surpass the 100,000 tCO2e threshold. Provincial C-PFES sub-funds would be responsible for administering payments from production entities within provinces that surpass the 25,000 tCO2e threshold.
At the central-level, and depending on how C-PFES is eventually set-up, the administrative implications based on orientations from this study could be:
53 | C-PFES FEASIBILITY STUDY USAID.GOV Establishment of a new sub-account within the Fund;
A more inclusive oversight board that includes representatives of the “payers” to ensure transparency and improve communication of the justification and outcomes of the program;
Developing guidelines for scenarios for both provincial C-PFES funds coming from provincial payers and invested within the same province and a central C-PFES fund coming from the transport sector, urban energy sector, or large corporate emitters operating over several provinces that would be
invested in priority areas across Vietnam with high CO2 removal return rates;
VNFF as overall manager of the fund would be responsible for developing the capacities and enabling conditions within provincial funds; developing robust procurement processes for service providers to implement selected investments in forestry and agro-forestry; and ensuring systematic MRV support that contributes to reporting to authorities for the NDC, NAMAs, and the REDD+ Action Plan.
Strategic Decisions for C-PFES
Prior to seeking the Government of Vietnam’s approval to pilot and scale-up C-PFES, MARD will need to make strategic determinations relative to how the program is to be implemented. These critical decisions are as follows:
1. What constitutes “large emissions” as per the Forestry Law of 2017?
2. What are the investment options for forestry activities to sequester and store carbon?
3. What is the proposed approach for phasing-in C-PFES in line with sector low emissions targets?
4. What is the scenario for increased participation of payers and more transparent administration of PFES revenues together with communication of measurable outcomes?
This study has proposed recommendations for all of these questions for consideration by MARD.
At a provincial level, the implications for FPDFs based on the orientations of this could include:
Establishment of a new sub-account within the FPDF;
A more inclusive oversight board that includes representatives of the “payers” to ensure transparency and improve communication of the justification and outcomes of the program;
Identification of potential payers (big emitters) within provinces;
Identification of areas with high potential CO2 removal return rates within the province as investment targets;
Development of scenarios for C-PFES implementation within the province and submission to the PPC for approval;
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Management of the C-PFES Implementation: Collection of C-PFES revenue coming from provincial payers; payment for forest owners or service providers for afforestation, agroforestry, or other activities;
Development of capacities and enabling conditions, especially procurement processes, for service providers to implement selected investments in afforestation and agro-forestry; and
Acquisition of skills for REDD+ MRV systems, inclusive of social safeguards.
Development of benefit distribution mechanisms compatible to those of the ERPD
BENEFITS DISTRIBUTION From 2014 to 2016, the FCPF program in Vietnam conducted an exhaustive participatory process for the development of the benefits distribution of the Carbon Fund that will be generated by the ERP. The resources generated by the ERP are to be allocated into the National REDD+ Fund and administered through MARD and by the Vietnam Forest Protection and Development Fund (VNFF), the official management unit responsible for the VNFF structure, which has been approved in the VNFF’s Operational Guidelines and with policy support from the Vietnam REDD+ Office (Decision 419/QD-TTg April 2017 on the revised updated NRAP). Given that these FCPF-ERP funds will be run through a separate sub-account within the VNFF, and administered to by the VNFF and the Provincial Funds together with DARD Forest Protection and Development Departments, it is suggested that C- PFES revenue use and distribution is managed in a coherent fashion with the ERPD. It is also probably that two or more of the provinces where C-PFES will be piloted, notably Thua Thien Hue and Thanh Hoa provinces, will have both C-PFES and the ERP being initiated within the same period.
The principle difference between the ERP funds and the future C-PFES revenues is that the ERP is set to be performance based on emissions reductions and C-PFES investments are for future emissions reductions. That said, the first years of the ERP will be run on advanced funds from the FCPF for developing emissions reductions actions, thus similar to what the C-PFES program will do.
In preparing the benefits distribution program of the ERP, less emphasis was placed on the monetary benefits that might be derived from the Carbon Fund for two important reasons. The first reason was that in accordance with good development practice, it is considered necessary not to unrealistically raise beneficiary expectations that ER-P will provide substantial monetary benefits on an individual basis. Secondly, it is still unclear as to what are likely to be the indicative amounts available for distribution under any benefit sharing arrangement that is agreed-upon locally. The emphasis was placed on performance-based payments based on collective and collaborative actions that both reduce emissions and provide benefits to local communities.
The ERP proposes that benefits will shared through an Adaptive Collaborative Management Approach (ACMA), which is a process that supports the interventions proposed through the ER-P, operationalized by the proposed Forest Management Councils. The ACMA is set to be a collaborative venture between communes and communities and local forest management stakeholders including: 1) the managers of the forests (Protection Forest Management Boards, Special Use Forest Management Boards and State Forest Management Boards); 2) Provincial, District People’s Committees and Commune People’s Committees; and 3) Mass Organizations which play a role in the management of the commune and the use of the land and forest resources. The new Forestry Law (2017) introduces and updates clear support to the use of benefit sharing mechanisms that includes local communities (Article 3, 4, 86) and also provides clear support for the involvement of communities in sustainable
55 | C-PFES FEASIBILITY STUDY USAID.GOV forest management by requiring state forest managers to collaboratively work with communities and prioritize the involvement of ethnic minorities. It also introduces a communal approach to sustainable forest management (Article102).
In developing the C-PFES benefit distribution model, it is proposed that the ACMA approach should also be used and piloting of C-PFES will help to refine how this approach can work in different contexts and integrated into policy guidelines. As C-PFES will be making up-front investments in emissions reductions activities, as will the ERP in the first three years, it is suggested that various models for investments be tested during piloting to identify benefit distribution models that provide the best outcomes for scaling-up.
Based-upon guidelines for piloting C-PFES that will be developed in 2018 by MARD and DARDs, the provincial Forest Management Councils will develop the regulations that govern the investment of C- PFES funds. Following communication of these regulations and conditions, one option is that forest management entities can register to have C-PFES resources invested in the forest areas that they manage. These entities could include: local communities and communes; households; Protection Forest Management Boards, Special Use Forest Management Boards and State Forest Management Boards. By registering, they agree to the conditions of C-PFES use which will include: transparent procurement processes for service providers (companies, NGOs, mass organizations) that implement the forestry activity or investment; contracting mechanisms that ensure the investment is allowed to mature and absorb and store the CO2; and provide requisite maintenance and protection of the investment.
Whereas the forest protection investment option for C-PFES would involve benefits being distributed to local households and individuals, this option is not prioritized as it is difficult to show measurable and tangible outcomes for payers. It is also not prioritized in the ERP where more emphasis is placed in benefit sharing for livelihoods development and reducing the drivers of deforestation (as with the agro-forestry option proposed in this study).
Concerning the administration and oversight of the revenue investment, the recent study conducted by the Vietnam Research Institute for Forest Ecology and Environment (2018) on C-PFES options for the Thua Thien Hue and Quang Nam Provinces provided cursory recommendations for a 10 percent transaction and administrative cost for investments to the Provincial Fund (or central VNFF fund) and a 5 percent oversight cost to the recognized administrative entity for the forest area where the investment was to happen (commune or forest management board). This is justified and C-PFES is an up-front investment that will require monitoring and supervision. The ERP is set to allocate similar resources for oversight of the advance payments as well.
RELATIONS AND SYNERGY WITH OTHER NATIONAL PROGRAMS As stated throughout this document, it is strongly advocated that C-PFES is not developed in isolation from other evolving carbon programs in Vietnam. The potential contributions and compatibility of C- PFES to these programs will require ongoing development over the next two years and will help to justify C-PFES as well as investments of carbon funds into forest environmental services.
ERP - FCPF
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Though the ERP is a performance-based program providing benefits for CO2 emissions reduction and removals and C-PFES is an up-front investment, the two programs will operate in a similar fashion in the first three years. The ERP will advance funds for these first three years in order to develop the program and make the investments that will result in emission reductions. The ERP is set to be an adaptive program as the C-PFES program will also need to be. There should be close coordination between the initial phase of the ERP implementation and the C-PFES piloting. Lessons learned should influence both programs respectively. The ERP, together with the UN-REDD program, has developed reference levels and MRV systems that also should serve C-PFES.
UN-REDD Though the UN-REDD program is set to end in late 2018, many of the outcomes of the program could be built upon by C-PFES, notably in terms of monitoring outcomes. UN-REDD has also developed alternative livelihoods models that both reduce emissions and address some of the key drivers of deforestation in Vietnam. Finally, the UN-REDD initiatives on engaging business and piloting of benefit sharing models are applicable to C-PFES. The lessons learned from this program should be fully considered in C-PFES piloting.
PARTNERSHIP FOR MARKET READINESS AND UNDP STUDIES ON CARBON TAX - ETS In the BUR 2, Vietnam has stated the intention to begin developing a carbon pricing program in 2018. This is already being supported by the World Bank’s Partnership for Market Readiness Program (implemented by MONRE) and the UNDP CIGG program support to the MPI and MOF. It has been stated that C-PFES will need to be compatible in some form to either a future carbon tax or domestic ETS. How this can happen will be determined by forward thinking by both MARD and those supporting these larger carbon pricing initiatives. Both the World Bank PMR and the UNDP CIGG programs (supported by USAID) would prefer that there are GHG mitigation considerations for the revenues that will be generated from carbon pricing. Meaning, that as compared to a carbon tax going into the central budget with no earmarking for specific environmental actions, that a percentage should go to mitigation investments in reducing emissions from the larger sources and for forest environmental services. Alone, MARD will be challenged in making this argument. Together with USAID, the World Bank and UNDP, advocacy would be stronger. Thus, the VNFF and MARD should stay abreast of developments towards carbon pricing in Vietnam and make a case for C-PFES that compliments evolving policy. In the future, C-PFES could be seen as an offset mechanism within a future ETS or as an eligible, and attractive to payers, deduction to a future carbon tax.
PRAPS AND PROVINCIAL GGAPS In reality, many provinces have completed provincial green growth action plans but they have done so as they were requested and there has been little or no impetus, or financial resources, to implement these plans. C-PFES provides a critical opportunity to initiate what may be dormant GGAPs for many provinces. This is even more pertinent for PRAPs. The importance of these provincial planning documents should not be neglected in the process of engendering political will at the PPC and Communist Party levels in the provinces. The component areas within which C-PFES will contribute significantly to the GGAPs and PRAPs, as well as provincial climate change actions plans, merits important consideration in the preparation for piloting.
FOREST MODERNISATION AND COASTAL RESILIENCE PROJECT
57 | C-PFES FEASIBILITY STUDY USAID.GOV The World Bank supported Forest Modernisation and Coastal Resilience (FMCR) project is set to begin in 2018 in eight of the north-central and northern coastal provinces (a six-year investment of over $US 150 million). This ODA project within MARD will run for 6 years and will focus on coastal forest development and capacity development of the forest services for managing coastal forests with an emphasis on climate change adaptation, local livelihoods, and collaborative management with local communities. Some of these provinces will also be where C-PFES is planned to be piloted with USAID support. It will be important that C-PFES and FMCR investments in coastal forests areas are complimenting each other. If different approaches are used, this should be done as a common strategy to learn and share experiences so that both programs can improve over time. Through the Vietnam Forests and Deltas Program (VFD), USAID has funded a pilot program in the Haiphong province in 2016-2017 on participatory approaches for determining land tenure rights and responsibilities for coastal areas and coastal forests that would benefit C-PFES development in coastal areas of other provinces.
COMMUNICATIONS To address the essential enabling conditions that will be needed for C-PFES piloting and successful scaling-up of implementation into the future, the VNFF should develop a robust communications strategy and campaign. In addition to the diverse arguments described in the section justifying C-PFES (Forestry Law, NRAP, NDC, strengthening PFES, etc.), the communications materials should also address what is a highly evolving concern among the Vietnamese population about air pollution. The quality of air and water in Vietnam has become one of the major pre-occupations of society at all levels. Industry owners, or the large emitters, are also increasing concerned about their image, and politicians know that the current “business as usual,” with high levels of pollution, can no longer continue. Momentum at the individual level may have an important impact in creating the conditions and political will to move C-PFES forward. The Vietnamese NGO Green ID has already developed a campaign addressing the drivers of air pollution and reducing Vietnam’s increasing dependence on coal-fired power generation. VNFF and their development partners would do well to explore synergy with this program.
Returning to the policy arguments and advocacy, while many do not consider the NDC to be of importance or something that the Vietnam government may neglect over time, this study thinks otherwise. The NDC is a higher level political and international engagement for which Vietnam could become a leader regionally within the Association of Southeast Asian Nations. While respecting MONRE’s role as the focal point for Vietnam to the UNFCCC, MARD could play the largest role in achieving the NDC commitment.
In summary, communications on C-PFES should not overly focus on the potential revenues and outcomes in the forestry sector but more on the political and societal outcomes relative to green growth, enhanced ecosystems and environmental services to sustain growth, and a healthier country in which to live. The VNFF’s develop partners, notably the USAID projects, should consider contracting professional communications experts to develop a C-PFES communications strategy and materials as a critical investment for moving the program forward.
ENABLING CONDITIONS AND NEXT STEPS FOR C-PFES AT THE NATIONAL LEVEL AND THE PROVINCIAL LEVEL This section of the study will first describe what are considered to be critical enabling conditions for C-PFES to be successfully piloted and scaled-up over time. These enabling conditions illustrate the most common concerns and perceived challenges for C-PFES acceptance at various levels and for what
58 | C-PFES FEASIBILITY STUDY USAID.GOV is hoped to be a program that results in a much stronger and more comprehensive PFES program. The latter part of this section outlines the proposed next steps at both the national and provincial piloting levels that have been discussed with the two USAID PFES support projects (USAID Green Annamites and Vietnam Forests and Deltas) as well as with VNFF.
ESSENTIAL ENABLING CONDITIONS It must be stated that during the onset of this feasibility study, most of the stakeholders encountered were pessimistic that C-PFES could happen, notably with the largest emitters in the energy sector. Given the vested interests of the largest emitters, and their economic prominence nationally and in provinces, many saw C-PFES as a considerable challenge even if the new Law on Forests and Vietnam’s NDC are national policy. However, it is important to remember many also voiced similar comments in 2008 when MARD initially discussed piloting PFES in the Lam Dong and Son La Provinces. For C- PFES to gain the requisite traction for piloting and scaling-up, there are several critical enabling conditions which will need to be in place. The next steps for MARD, VNFF, and development partners should take full consideration of these enabling conditions and think strategically as to how they can be established. These are as follows:
HIGH POLITICAL WILL AND ENGAGEMENT AT BOTH THE PARTY AND PRIME MINISTER’S LEVEL Given the aforementioned vested interests of the energy sector stakeholders and the fact that other industrial sectors already pay environmental fees and taxes, C-PFES will need to be applied in a top- down manner in order to respect a global commitment to mitigate global warming and to reduce serious air pollution problems domestically. If C-PFES is not mandated from the very top, the discussions and negotiations with the various industry sectors, the Ministries that oversee them, and PPCs will be much more challenging for MARD. Thus, it is suggested that MARD/VNFF is supported in developing professional communications materials and seeks opportunities for presentations to Government and Party Leaders. If one or more people can be identified to “champion” C-PFES at a high level of Government, then those people should be briefed on the justifiable arguments for the program. This needs to include how C-PFES will make significant contributions to the NDC as well as the evolving NAMAs and the probable future carbon pricing mechanism.
REVISED PFES POLICY AS A NEW BYLAW TO THE LAW ON FORESTRY In preparation for the implementation of the new law on forestry, which enters into effect in January 2019, several guiding decrees will be revised or issued. The PFES Decree (no. 47) will be one of those revised. It was recommended in the national workshop discussions on the preliminary findings for this study, in January 2018, that the decree should pave the way for piloting and phasing-in of C-PFES but that it would also include a caveat so that the decree could be further refined after the results of piloting. It was also noted that this revised PFES policy should allow for a more targeted approach for using revenues in diverse forest activities as well as for forest areas within a province or nationally. These revisions, in two to three years’ time, would also fully consider how C-PFES will relate to other carbon pricing policies that should be outlined and proposed by then. MARD is expected to identify a lead consultant for the drafting of the revised articles pertaining to the PFES decree. This consultant should liaise closely with VNFF’s development partners in order to facilitate a consultative process both in provinces and at the national level.
59 | C-PFES FEASIBILITY STUDY USAID.GOV PROOF OF CO2 REMOVALS AND STORAGE A persistent criticism of the current PFES program in its’ early history is being able to show measurable outcomes, for either forested watershed environmental services, health or improved well-being of forest owners. Expansion of PFES into C-PFES will undoubtedly make the argument for measurable outcomes more justified in that “payers”, as per the Forestry Law, are paying “amounts for the absorption and retaining of forest carbon”. Payers have every right to seek to verify that what they pay for is actually happening.
VNFF and Provincial Funds will thus need to pilot activities that can show measurable CO2 removals and storage as examples and then scale those actions up as C-PFES revenues are collected and invested. It is also clear from consultations with prospective payers that they would hope to have clear visibility of where, how, and what outcomes have come from their C-PFES payments. This would enable them to show evidence of the contributions their payments have made to national policy and to their consumers (social responsibility and green marketing).
In the coming two to three years, VNFF’s development partners, notably USAID, should support selected provinces to develop some or all the forestry activities proposed in this study and which are the most appropriate for their specific ecological and social contexts. While awaiting the time it will take for C-PFES piloting to be formally endorsed, these would be wise investments as many provinces need to invest “offset” funds which are available and the activities implemented, with appropriate MRV, would be contributions to the NRAP, agricultural policies, and could be eligible for carbon markets of emission trading payments. In the case of the six north central provinces that are part of the Emissions Reduction Project of the Forest Carbon Partnership Fund (FCPF of the Word Bank), these activities could be eligible for the anticipated carbon credits that the FCPF will not be able to purchase.
ESTABLISHING ROBUST MRV SYSTEMS WITHIN VNFF The opportunity that C-PFES could offer to a significant expansion of the current PFES program should be seen as a catalyst for establishing a more robust system of MRV. During the course of this study, there were advocates that C-PFES should follow the more stringent REDD+ norms and social safeguards as an MRV system and therefore support capacity building for DARDs in all provinces. There were also others who had concerns that Provincial Funds might be overwhelmed by having to use REDD+ MRV systems and that maybe simpler systems could be developed that were both credible and verifiable. MRV requirements could vary greatly depending on how strict a C-PFES system is pursued. Hence, different options should have been evaluated in relation to the outcomes to be verified as well and the transaction costs. Most of those consulted within Vietnam during the study agree that the VNFF should seek to develop simpler MRV systems than those proposed for REDD+ but, these systems should show credible and verifiable evidence of carbon removals and storage in forest environments so as to contribute to the NDC. They should also have some form of social safeguards in place so that land tenure issues are addressed in areas where forest restoration actions or plantations are to be established. A working group should be set-up for this by the VNFF with interested development partners and the current UNREDD+ program.
INTEGRATION INTO EVOLVING NAMAS AND FUTURE CARBON TAX OR ETS If C-PFES is developed by MARD in isolation from either the evolving NAMAs or future carbon pricing in Vietnam, there is a high risk that any forward movement on C-PFES policy, or pilots, will be superseded or rendered redundant by larger overall CO2e emissions trading or pricing initiatives. NAMAs are created to mitigate GHG emissions by setting-up targets for lowering emissions, support programs for lowering emissions, and registries for monitoring these emissions over time. Though
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NAMAs do not involve carbon emissions pricing directly, they put into place the requisite means for establishing GHG emissions pricing within sectors and thus the incentive to lower emissions. The production facilities within the evolving cement and steel sector NAMAs will identify with the sector plan which is also set-up to contribute to the NDC. If they are to make C-PFES payments, these payments should be understood as incentive or penalty payments to encourage the production facility to lower their share of GHG emissions in line with the sector NAMA. This alignment should help both C-PFES as well as the NAMA implementation. If C-PFES is not set-up with these considerations, nor perceived to be as such, there could well be competing programs and associated difficulties.
The same is true concerning the evolving discussions on a possible carbon tax or ETS which Vietnam has stated it will begin developing in 2018, and for which both the UNDP and the World Bank have supporting projects. If there is to be a carbon tax or an emissions cap and trade system domestically, then where does C-PFES fit in? To have both separately would be considered to be double paying. Thus, C-PFES should be developed in such a way as to fit under, or be compatible with, what will be larger overall carbon pricing mechanisms in the future. There are two scenarios on how this fit could happen, and possibly various versions of these two scenarios. The first scenario is that all C-PFES payments made by “large emitters” would be exemptions in some form from the future carbon tax or, counted towards the mandated offsets in the ETS. The second scenario would be where the carbon tax makes redundant C-PFES. In this scenario, a percentage of the revenues from the carbon tax would be allocated to the VNFF or Provincial Funds for GHG mitigation activities that remove and store
CO2 in forest environments as committed to in the NDC. Note that in the section on payment levels, it was calculated that a mere 2 percent of the existing Environmental Protection tax placed on fuels for road vehicles and motorbikes would generate upwards of approximately US$ 60 million per year. A similar percentage of the future carbon tax going to C-PFES would generate significantly more revenues and enough to cover MARD’s contributions to the NDC, depending on how it is phased-in. Either of the above scenarios is possible, but this will only happen if MARD is involved in how these initiatives are developed and advocates strongly on the mitigation contributions C-PFES can make.
As MARD may not be invited to actively participate in these initiatives which are currently being discussed within MPI, MOF, and MONRE, the VNFF’s development partners will need to help bring MARD and VNFF into the discussions and planning. It is strongly suggested that MARD invite representatives from these other Ministries into discussions on C-PFES. Though easy enough to recommend, the institutional cultures of the Ministries in Vietnam make inter-ministerial cooperation and coordination challenging. A working group could be set-up for this among development partners that are supporting NAMAs and future carbon pricing initiatives. This would include the World Bank PMR program, the UNDP CIGG program, the Nordic Development Fund consortium, relevant USAID projects and the Project Management Unit leaders within the ministries they support.
DEVELOPING TRANSPARENT PROCUREMENT PROCESSES FOR SERVICE PROVIDERS VNFF and Provincial Funds are fund managers who are responsible for overseeing the collection of payments, and the oversight of the investments of those revenues, neither currently have the capacity to implement the full-range of forestry activities once C-PFES is scaling-up. The national and provincial funds will need to use service providers for these forestry activities, whether that be local community groups, forestry related NGOs, local associations (such as the Red Cross for mangroves), or private sector companies in the forestry sector. Procurement processes for investing payments should be transparent and possibly involve representatives of the payers themselves. The contracting of service providers in an open bidding process, will most likely reduce the costs payers will pay for removing and storing a tCO2, as compared to government cost-norms which are considered by many to be
61 | C-PFES FEASIBILITY STUDY USAID.GOV well-above realistic cost-norms. VNFF will need to develop the guidelines for initiating and reporting on procurement processes, monitoring the services provided, and communicating the results.
SINCERE ENGAGEMENT WITH FUTURE “PAYERS” Sincere engagement with future “payers” of C-PFES should go beyond conducting “willingness to pay” surveys and phasing-in of payments to remove and store CO2 in forest environments. Initial surveys and discussions with future payers in the industrial sector show that they want clearer links and evidence of how their payments are used, where, with what measurable outcomes in CO2 removals or storage, and possibly some involvement in determining the what and where. This study recommends that provincial and national C-PFES oversight committees are inclusive of payers so that they are part of the process in determining and monitoring investments as well as communicating the results to their peers. This transparency will help to avert criticism questioning where the money goes and how it is used. Sincere engagement and participation of payers in C-PFES oversight at the provincial level should involve a step-wise process with a common understanding of: why they should be engaged; whom best to engage; when to engage; what they should be engaged with; and how.
A second important consideration is that C-PFES payments should also serve as an incentive for production facilities to lower their emissions either through more efficient production processes or better management methods. This “polluter pays” incentive should encourage production practices to lower pollution and thus lower payments. That said, there is also the opportunity for the VNFF and its’ development partners to liaise and leverage a host of other low emissions development projects in Vietnam (Annex C) that could provide technical and planning support for lowering emissions. Several of these projects or programs provide both technical advice on what can be done to render the specific production processes more efficient and less polluting as well as financial and business planning advice which can enable the production facilities to access preferential lines of credit or even climate financing. Where C-PFES is approved for piloting, it is suggested that efforts are made to leverage other low emissions support programs to provide support to the pilot “payers” as a positive incentive.
PROPOSED NEXT-STEPS AT THE CENTRAL LEVEL AND FOR PROVINCIAL PILOTING The proposed next steps detailed below seek to address the requisite enabling conditions described above in this section as well and requisite actions for a preparatory phase before piloting could commence. It is expected that the USAID VFD Program will provide an important supporting role at the central level to the VNFF in establishing these enabling conditions for C-PFES to be piloted, refined, phased-in and scaled-up over time. It is also recommended that a formal working group, or informal but functional working group, is set-up to support VNFF. This working group might not need to have regular and more formal face to face meetings, but could generate ideas and recommendations via online forums or group conversations. Finally, specific support actions have been proposed for the USAID VFD Program and the USAID Green Annamites Project. The USAID VFD Program is proposing a two-year extension to support the VNFF at the central level. The USAID Green Annamites Project will focus on supporting the FPDFs in developing C-PFES pilots in the Thua Thien Hue and Quang Nam provinces. A proposed plan of action is presented below.
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Table 8: Recommended Next Steps for C-PFES at the Central Level
Next Step Timeframe Responsible Parties
1. Communications and Advocacy for C-PFES
1.1 Development of communications April - May 2018 VNFF with support of USAID and advocacy materials (inclusive of a projects (Green Annamites and policy advocacy “white Paper” for VFD) and in close collaboration MARD and the Government Office), for with MARD’s Office of Climate implementing the Forestry Law and the Change contributions to the NDC Investigate possibilities for synergy with the NGO Green ID on communications and advocacy efforts to reduce Vietnam’s dependence on coal-fired power plants and on reduced levels of air pollution Procure professional communication expert for campaign development and materials
1.2 Presentation with MARD leaders April 2018 VNFF and MARD’s Office for Climate Change (presentation preparation supported by USAID VFD and Green Annamites
1.3 Preparation and execution of study April to August 2018 USAID projects with USFS tour to the USA and Costa Rica (see MARD and USAID to select and justifications below) invite high-level and appropriate participants from (MARD, MPI, MOF, MONRE and Prime Minister’s OFFICE)
2. Drafting Revised PFES Decree and C-PFES piloting Decision
2.1 VNFF sets-up informal working March 2018 VNFF and their development group to support consultant/s inclusive partners of their development partners
2.2 Drafting Revised PFES Decree March to August 2018 VNFF with national consultants and working group
2.3 National workshop to discuss August 2018 VNFF Decree
2.4 Drafting Decision for piloting C-PFES April to June 2018 VNFF and working group in selected provinces DARDs in pilot provinces
2.5 Submission of Decision for piloting August – September 2018 MARD to the Government
2.6 Drafting of Regulations and April to August 2018 USAID Green Annamites and Guidelines for piloting of C-PFES at the VFD in support of provincial provincial level FPDFs and VNFF
3. Piloting of new C-PFES activities
3.1 Developing CO2 removals and May - June 2018 USAID projects with FPDFs storage investment maps for pilot provinces and action plans (that further refine PRAPs)
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3.2 Training of Provincial Fund personnel June – September 2018 VNFF and USAID projects
3.3 Guidelines for procurement July 2018 USAID projects in support of processes (tendering) developed for VNFF contracting service providers
3.4 Budgeting for piloting of C-PFES August 2018 USAID projects & investment activities and procurement of FPDFs (using PFES “offset funds’) service providers for 2018 and 2019
Provincial Funds pilot procurement September 2018 - December 2019 FPDFs with local partners using processes for piloting CO2 removal and either PFES “offset funds” or storage activities USAID project funding
4. Establishing MRV for C-PFES
4.1 VNFF to initiate regular working March – August 2018 VNFF, VRO (FCPF project); sessions with FCPF and Vietnam REDD+ development partners, notably Office (VRO) Japan International Cooperation Agency (JICA) and USAID; MONRE,; UNFCCC Focal Point and UNREDD+
4.2 Proposed guidelines for C-PFES MRV August 2018 VNFF, VRO, UNREDD+ that could be at different scales (NDC, with participation from USAID, FCPF, REDD+) JICA and UNFCCC Focal Point
5. C-PFES Relationship to Carbon Tax or ETS, and NAMAs
5.1 USAID VFD to take lead in 2018 - 2019 USAID VFD responsible for being associating C-PFES with NAMAs, carbon up-to-date on evolving NAMAs tax or ETS and carbon pricing schemes and encouraging MARD/VNFF to actively participate in working sessions and ensuring invitations from the World Bank, NORDIC development fund, and UNDP Project Managers, as well as the Project Management Units (PMUs) in MPI, MOC, and MONRE
5.2 Negotiated scenarios are proposed Mid – to late 2018 USAID VFD to ensure that the for C-PFES compatibility with carbon tax World Bank and UNDP have a or ETS, NAMA, or EPT common voice on possibilities for C-PFES compatibility and investments of carbon revenues for forest mitigation and that PMUs in MPI, MONRE and MOC are comfortable with scenarios to be proposed to MOF and the Government
5.3 Advocacy paper is produced June 2018 USAID VFD in support of VNFF presenting scenarios for C-PFES and with endorsement of World compatibility with carbon pricing Bank and UNDP programs initiative and NAMAs preparing carbon pricing initiatives (so that a percentage of the future carbon tax is earmarked for forest mitigation, possibly through VNFF C-PFES)
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Next Step Timeframe Responsible Parties
6. Engagement with future payers
6.1 Drafting of guidelines for national June 2018 USAID Green Annamites Project and provincial C-PFES oversight boards in support of provincial FPDFs and that engage payers VNFF and national consultants
6.2 Identification of low emissions May - June 2018 USAID VFD in support of VNFF development programs prepared to partner with VNFF on C-PFES and of climate related finance opportunities eligible to Vietnam’s private sector
6.3 Development of MOUs between prior to piloting of C-PFES USAID projects and provincial pilot C-PFES initiatives (project and funds (or PPCs) FPDFs with low emissions development projects)
6.4 Developing communications support after piloting of C-PFES USAID projects in support of programs for targeted or interested VNFF payers that highlight the future outcomes from their payments
As part of the proposed communications and advocacy for C-PFES, a study tour to the United States and Costa Rica are suggested, with high-level representation from MARD, MONRE, MPI, MOF, and the Prime Minister’s Office. Though it may be difficult for the USAID projects to dictate to MARD participation from these other Ministries and an acceptable gender balance, these should be conditions of USAID/Vietnam for funding the study tour.
California has been suggested relative to their proactive initiatives for mitigation of GHG emissions in the forestry sector and agricultural sectors. California has also developed important networking initiatives with several Canadian provinces and Mexico that allow for emissions reductions or emissions offsets across North America (note that Colombia may be joining in the near future). Given the decentralized nature of Vietnam’s provinces, this networking initiative could be a model for provinces to collaborate on C-PFES. The California Air Resources Board is stepping-up efforts to ensure that the Board, along with other states, cities and large corporations (emitters), are fully able to meet the U.S. commitment to the Paris Agreement, even though the U.S. federal government has withdrawn. This Board has developed MRV protocols for measuring mitigation results in the forestry sector and is a leader in this field. Much of the support for this Board on mitigation in the forestry and agricultural sectors was provided by Winrock International, based in the U.S., which could facilitate set-up of the study tour. The U.S. Forest Service International Program and Winrock’s American Carbon Registry can help facilitate the tour and an understanding of how this pertains to the Vietnamese context. Both the California Air Resources Board and the American Carbon Registry could also provide coaching on C-PFES development in the future and establishing those relationships with high-level leaders could help to ensure future support. Finally, Winrock International, with satellite offices in California, has developed simplified tools for measuring GHG emissions reductions in forest mitigation investments that could be presented to a study tour group and observed in this state.
Costa Rica has also been proposed for this study tour as, like Vietnam, it is one of the few countries in the world with a “forestry fund”. What is important about the Costa Rica case study is that the funding of the forestry fund comes from both carbon tax mechanisms as well as from 3 percent of the
65 | C-PFES FEASIBILITY STUDY USAID.GOV country’s fuel tax. These revenues go into forest mitigation actions that have measurable outcomes similar to those proposed in this study. If Vietnam adopts a future carbon pricing scheme, the model in Costa Rica wherein the forestry fund receives a percentage for forest mitigation efforts could be adapted and adopted for C-PFES within the VNFF.
NEXT STEPS FOR PREPARING FOR PROVINCIAL PILOTING USAID Green Annamites has already conducted a preliminary feasibility assessment for expanding PFES in the two provinces of Thien Thua Hue and Quang Nam for both C-PFES and for industrial water use. As such, C-PFES has been fully introduced to the Provincial Fund, the PPC, and actors in the industrial production sectors that would be future payers. According to the results of a study conducted by the Vietnam Research Institute for Forest Ecology and Environment (RIFEE), the current context creates favorable conditions for PFES expansion in the two provinces. There is both strong political will of provincial administrative agencies and an evolving willingness of potential payers for both C-PFES and for industrial water use. However, the study highlighted that for PFES expansion to be successful, certain enabling conditions or actions were needed. First, there is a need for the Provincial funds to develop communications actions so that potential payers have a common understanding of the PFES policy and new Law on Forestry. Second, there needs to be a much more transparent mechanism for PFES revenue management and use. The third point, which is related to the second, is that prospective payers would like to see clear links between their payments and the investment outcomes so they can see and communicate this as their social and environmental responsibilities, and possibly market their products as more environmentally friendly. Finally, there would be a need to further refine the scientific basis and technical application for C-PFES. As the proposed next steps for piloting C-PFES in these two provinces were not detailed in the RIFEE study, these steps are further detailed in this section. These next steps are also pertinent to the USAID VFD, which is set to develop pilot C-PFES initiatives in one or more of the four provinces in the project (Thanh Hoa, Son La, Quang Nunh, and Lam Dong).
Table 9: Recommended Next Steps for C-PFES at the Provincial Level for USAID Green Annamites Project and VFD
Next Step Timeframe Responsible Parties
1. Technical
1.1 Drafting of Regulations, Guidelines, April to July 2018 USAID Green Annamites and VFD and Plan for piloting of C-PFES at the in support of FPDFs and VNFF provincial level
1.2 Determine pilot payers (large June - July 2018 USAID projects in support of emitters) and payment rates based on FPDFs national guidelines and baseline National consultant to conduct emissions calculations; sector emission baseline emissions estimates for reduction plans (or NAMAs); phasing-in large emitters and agreed-upon GHG emissions measurement methods (NAMA/IPCC)
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Next Step Timeframe Responsible Parties
1.3 Developing CO2 removal and May - June 2018 USAID Green Annamites and VFD storage investment maps for pilot with FPDFs provinces and action plans (that further refine PRAPs)
1.4 Communications materials on C- July 2018 USAID Green Annamites and VFD PFES developed specifically for each province
1.5 Guidelines for procurement June 2018 USAID projects in support of processes (tendering) developed for VNFF contracting service providers
1.6 Training of FPDF personnel on July – August 2018 VNFF and USAID projects overall C-PFES implementation, communications, CO2 removal and storage activity development, and procurement processes for service providers
1.7 Further training of FPDF personnel August to December 2018 VNFF and UNREDD+ on accepted guidelines for MRV
1.8 FPDFs pilot procurement processes September 2018 - December 2019 FPDFs with local partners using and activities for piloting CO2 removal PFES “offset funds,” USAID project and storage activities funding, or both
2. Administrative
2.1 MARD sends request to selected March or April 2018 VNFF to draft for MARD VFD and Green Annamites provinces requesting pilot implementation of C- PFES based on Law on Forestry
2.2. PPC assign DARD to prepare May 2018 PPC proposal for piloting, inclusive of contents, methods, deliverables, and plan
2.3 DARD forwards the proposal to June to July 2018 FPDFs and USAID Green VNFF, provincial departments and Annamites and VFD (possible industrial production facilities (payers) additional national consultants) for comments
2.4 Provincial workshops held jointly July - August 2018 USAID Green Annamites and VFD among provinces (Communities of with FPDFs Practice approach) to communicate C- PFES piloting and to establish communications protocols with stakeholders
2.5 Submit revised Plan for C-PFES September 2018 FPDFs piloting to PPC for approval
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2.6 Draft PPC request for piloting to September 2018 USAID Green Annamites and VFD MARD and Government for 18 months with FPDFs (based on draft content of Decree and Provincial Regulations)
2.7 Budgeting for piloting in 2018 and August 2018 USAID Green Annamites and VFD 2019 project funds and FPDFs (using available PFES “offset funds’)
2.8 Establishment of C-PFES Provincial September 2018 FPDFs and PPCs Oversight Committee
2.9 Implement agreed-upon from October 2018 onwards FPDFs communications protocols with provincial stakeholders
CONCLUSION This feasibility study has taken a broad perspective to identify opportunities and challenges for developing a C-PFES program and to make recommendations for preparing such a program. The study was unable to provide a detailed recipe or instructions for determining the payment rates for large emitters, nor for the collection and investment of the revenues. However, based on consultations with a broad spectrum of stakeholders, this report outlines principles for phasing-in payments and investments that are generally supported by the VNFF and their development partners. The details for C-PFES implementation will still require several consultative sessions, both within MARD and between MARD and other government entities, and will benefit from piloting to allow for necessary refinements in the future.
C-PFES presents a very important opportunity for MARD to implement the new Forestry Law; to fund several strategic plans and targets in the forestry and agricultural sectors (most notably the NRAP and NDC); and to highlight the proactive measures that Vietnam is taking to address climate change. For this opportunity to be fully developed, there are numerous enabling conditions that will need to be in place, notably high-level political commitment as well as a significant strengthening of the current PFES program, including demonstrating verifiable outcomes. With evolving initiatives in other Ministries towards carbon pricing and markets, MARD should not attempt to develop C-PFES in isolation; rather, it will need to be compatible with these initiatives. VNFF’s development partners can play an important role in ensuring this compatibility and preparing the requisite capacity within the VNFF and FPDFs for a significant expansion of their roles from the current “business as usual” PFES. It is hoped that the orientations in this study will indeed provide for critical reflection and next steps in the development of the C-PFES initiative so that the idea becomes reality.
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ANNEXES
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Government. 2009. Decision No. 35/2009/QD-TTg dated March 3, 2009 approving the revision of the Transport Development Strategy up to 2020 and vision to 2030
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Government. 2012. Decision No. 1393/QD-TTg dated 25/9/2012 of the Prime Minister approving the National Strategy for Green Growth in period 2011-2020 and Vision to 2050
69 | C-PFES FEASIBILITY STUDY USAID.GOV Government. 2012. Decision No.779/QD-TTg dated 27/6/2012 of the Prime Minister on Approving the National Action Program on "Reducing emissions greenhouse gases through efforts to restrict deforestation and forest degradation, sustainable management of forest resources, conserve and enhance forest carbon stocks period 2011-2020”
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Government. 2015. Decision No. 2068/QĐ-TTg dated 25/11/2015 of the Prime Minister approved the Vietnam's renewable energy development strategy up to 2030 with a vision to 2050
Government. 2016. Resolution No. 73/NQ-CP dated August 26, 2016 approving the policy on investment in the target programs for the period 2016-2020, including the program on response to climate change and green growth in the period 2016-2020.
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IPCC, 2006. 2006 IPCC Guidelines for National Greenhouse Gas Inventories
Koos, N. and Dang, T.T.H. 2017. Towards a Socially Just Energy Transition in Viet Nam: Challenges and Opportunities. Friedrich-Ebert-Stiftung Foundation publication.
Lương Văn Tiến, Vũ Tấn Phương, Lương Xuân Hải. 2012. Carbon sequestration of some types of plantations provides large timber. Proceedings of the Central Forestry Science and Technology Conference. Agricultural Publishing House. Hanoi
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MARD. 2005. Decision No. 38/2005/QĐ-BNN dated 6/7/2005 of MARD promulgating the cost norm of afforestation
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MARD. 2011. Decision 3119/QD-BNN-KHCN, date on 16 Dec. 2011 on approving program of Green House Gasses (GHG) emission reduction in Agriculture and Rural development sector
MARD. 2011. Decision 543/QĐ-BNN-KHCN dated 23 March 2011 to promulgate the Action Plan on Climate change response of agriculture and rural development sector in the period 2011- 2015 and vision to 2050
MARD. 2011. Directive No. 809/CT-BNN-KHCN dated 28/3/2011 of the MARD on integrating climate change into the formulation and implementation of strategies, planning, plans, programs and projects, schemes on development of agriculture and rural development in the period 2011- 2015
MARD. 2011. Circular No. 80/2011/TT-BNNPTNT dated 23/11/2011 of MARD on Methods guiding identification of PFES
MARD 2012: Circular No.85/2012/TT-BTC dated 25/05/2012 of Ministry of Finance on Guiding financial management regime for Forest Protection and Development Fund
MARD. 2012: Circular No. 60/2012/TT-BNNPTNT of MARD dated 09/11/2012 on regulating the principles and methods to identify the forest area within the basin for payment for forest environmental services
MARD. 2012. Circular No. 20/2012/TT-BNNPTNT dated 07/05/2012 of MARD on guiding the PFES validation procedures
MARD. 2012. Joint Circular No.62/2012 dated 16/11/2012 of MARD and MOF on instructions on the mechanism of managing and using the PFES fund
MARD. 2012. Decision No.119/QD-TCLN-KHTC dated 21/3/2012 of Vietnam Administration of Forestry (VN-Forest) on Issuance of “provisional regulations on procedures for registering, listing and signing trust contracts on payments for forest environmental services
MARD. 2015. Decision No. 5339/QD-BNN-TCLN dated 25/12/2015 of VNFOREST on regulating the pilot sharing of benefits from REDD + within the framework of the implementation of UN- REDD Vietnam Program Phase II
MARD. 2015. Decision 5337/QD-BNN-TCLN dated 23/12/2015 approving the scheme on establishment of REDD + Fund MARD. 2016.
MARD. 2016. Decision No. 819/QD-BNNKHCN dated 14/3/2016 of MARD on Action Plan for responding to climate change in the agriculture and rural development period 2011-2015
MARD. 2017. Forest Carbon Partnership Facility (FCPF) Carbon Fund. Emission Reductions Program Document (ER-PD), 2017
71 | C-PFES FEASIBILITY STUDY USAID.GOV MARD. 2017. Decision No. 923/QD-BNN-KH dated 24/03/2017 of MARD promulgating the Green Growth Action Plan of Agriculture and Rural Development sector up to 2020
MARD. 2017. Final report on the implementation of the project "National Census for Forest Inventories 2013-2016", 7 -2017
MARD. 2017. Circular 22/2017/TT-BNNPTNT dated 15/11/2017 providing guidelines for implementation of the policy on payment for forest environment services.
McEwin A. and Dang Thinh Trieu, 2013. Analysis of carbon impacts of enhancement of degraded forests in Ha Tinh province. SNV, ENRICH Project (unpublished)
McEwin A, 2014. Options for incentivizing and sharing multiple benefits from REDD+ in Ha Thin Province. SNV publication.
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MOT. 2016. Decision No. 4206/QD-BGTVT dated December 28, 2016 of the Ministry of Transport approved the Action Plan to reduce CO2 emissions in civil aviation activities of Vietnam in the period 2016-2020
Ngô Đình Quế, Nguyễn Đức Minh, 2009. Study on criteria and indicators for afforestation under the clean development mechanism in Vietnam. Proceedings of the Northern Forestry Science and Technology Conference. Agricultural Publishing House. Hanoi.
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Nguyễn Chí Thành & Vương Văn Quỳnh. 2016. Report "8 years of operation of the Forest Protection and Development Fund (2008-2015) and 5 years of implementing PES policy (2011- 2015). ADB – iPFES project
Nguyễn Thị Minh Hằng, 2015. Report "Reviewing and evaluating the implementation of the natural resources tax policy" - Project “Capacity Building and Institutional Improvement for Green Growth and Sustainable Development in Vietnam (CIGG)”, Ministry of Finance, UNDP - CIGG project
National Assembly. 2012. Law on Environmental Protection Tax. No 57/2010/QH12 dated 15/11/2012
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PPC Quảng Nam. Decision No. 2975/QD-UBND dated 21/8/2015 approving the Green Growth Action Plan for 2015-2020 and vision to 2025 in Quang Nam province.
Rubenstein, Madeleine. 2012. Mitigating Emissions from Cement. THE GNCS FACTSHEETS, http://climate.columbia.edu/files/2012/04/GNCS-Cement-Factsheet.pdf).
UNDP, 2012. Fossil Fuel Policies and Greenhouse Gas Emissions in Viet Nam: Subsidies and Taxes in Viet Nam’s Energy Sector, and their Effects on Economic Development and Income Distribution in the Context of Responding to Climate Change. UNDP Viet Nam publication.
UNDP, 2014. Green Growth and Fossil Fuel Fiscal Policies in Viet Nam: Recommendations on a Roadmap for Policy Reform. UNDP Viet Nam publication.
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Võ Đại Hải và Đặng Thịnh Triều, 2012. Research on CO2 sequestration of Dipterocarpaceae forest in Central Highland of Viet Nam. Conference proceeding for Forestry Science and Technology in Central Highland of Viet Nam. Agricultural Publishing House, Ha Noi.
Vũ Tấn Phương và Trần Thị Thu Hà. 2009. Results of economic valuation of environmental goods and services of the main forest types in Vietnam. 2009. Conference proceeding for Forestry Science and Technology in Northern Vietnam 23 - 24/10/2009. Agricultural Publishing House, Ha Noi
73 | C-PFES FEASIBILITY STUDY USAID.GOV Vương Thị Thu Hiền. 2016. Report "Evaluation and assessment of environmental protection tax policy". Project on Capacity Building and Institutional Innovation for Green Growth and Sustainable Development in Vietnam (CIGG), UNDP - CIGG Project
ANNEX B – VIETNAM GOVERNMENT POLICIES RELEVANT TO C-PFES & IMPLICATIONS
Title of Document Implications
Law on Forestry (Law 162017QH13, dated Decree on provisions for implementation is required, 15th November 2017) for PFES in general and C-PFES
Law on Environmental Protection Tax (Law Advocacy proposed so that 3-5 percent of Fuel Tax th 57/2010/QH12, date 15 November 2010) revenue should be allocated to VNFF for CO2 sequestration and storage in forest environments
Decree 99/2010/ND-CP dated 24/09/2010 of The Decree should be revised, with guiding C-PFES Government on Policy on PFES implementation
Decree No.05/2008/ND-CP dated 14/01/2008 of Revision required for scaling-up C-PFES. The the Government on The Forest Protection and organization, responsibilities and powers of the Fund Development Fund should be more clear and in line with other documents
Decision No.779/QD-TTg dated 27/6/2012 of the C-PFES should be considered as a key means for Prime Minister on Approving the National Action achieving the objectives of this NAP in the period 2011 Program on "Reducing missions greenhouse gases – 2020 through efforts to restrict deforestation and forest degradation, sustainable management of forest resources, conserve and enhance forest carbon stocks" period 2011 – 2020
Decision No.111/2008/QD-BNN dated Revision required - the duties, powers, organizational 18/11/2008 of MARD on Promulgating the structure, financial source and operation of PFPDFs Regulations on organization and operation of the should be refined for C-PFES provincial FPDFs
Decision No.114/2008/QD-BNN dated Revision required - the duties, powers, organizational 28/11/2008 of MARD on Promulgating the structure, financial source and operation of the VNFF Establishment of VNFF should be refined for C-PFES
Decision No. 543/QĐ-BNN-KHCN dated March C-PFES play an important role in the implementation of 23rd, 2011 by MARD to promulgate the Action Action Plan on climate change response for the Plan on climate change response for the agriculture agriculture sector and rural development sector in the period 2011- 2015 and vision to 2050
Decision No.119/QD-TCLN-KHTC dated Revision required - to guide C-PFES implementation 21/3/2012 of VNFOREST on Issuance of “provisional regulations on procedures for
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registering, listing and signing trust contracts on payment for forest environmental services”
Circular No. 80/2011/TT-BNNPTNT dated Revision required - to guide C-PFES implementation 23/11/2011 of MARD on Methods guiding identification of PFES
Circular No. 20/2012/TT-BNNPTNT dated Revision required - to guide C-PFES implementation 07/05/2012 of MARD on guiding the PFES validation procedures
Circular No.85/2012/TT-BTC dated 25/05/2012 of Revision required - to guide C-PFES investments at both Ministry of Finance on Guiding financial the central and provincial level management regime for Forest Protection and Development Fund
Joint Circular No. 62/2012/TTLT-BNNPTNT Revision required - in line with agreed-upon C-PFES dated 16/11/2012 of MARD and MOF on mechanisms Instructions on the mechanism of managing and using the payment for forest environment services
Circular No. 22/2017/TT-BNNPTNT dated Revision required - to include C-PFES 15/11/2017 of MARD on guiding some issues for implementation of PFES policy
75 | C-PFES FEASIBILITY STUDY USAID.GOV ANNEX C – LIST OF LOW EMISSIONS DEVELOPMENT PROGRAMS IN VIETNAM The following list was compiled by the USAID Vietnam Low Energy Emission Program (implemented by Deloitte) in early 2017.
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