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 2 | C-PFES FEASIBILITY STUDY USAID.GOV 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 4 | C-PFES FEASIBILITY STUDY USAID.GOV 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