Green finance and blockchain technology for net zero emissions

Green finance and blockchain technology for net zero emissions

RMIT Senior Lecturer Dr Huy Pham explains the sustainable finance and technology solutions that can support Vietnam’s net zero emissions targets.

As climate change has become a serious international issue, many countries have taken actions to reduce greenhouse gas (GHG) emissions and achieve net zero emissions by 2050. In Vietnam, the government has made a tremendous effort to combat climate change by ratifying the Paris Climate Agreement in 2016, pursuing the National Green Growth Strategy for 2021-2030, and implementing the Law on Environmental Protection which came into effect at the beginning of 2022. However, the success of these measures comes down to their economic and financial effects on the local firms.

I’m currently leading a research project whose preliminary results indicate that polluting sectors tend to be punished after Vietnam’s Paris Climate Agreement ratification. These results are consistent with those of developed countries in our other research studies, including Singapore and France.

However, we have found that private and FDI firms in Vietnam that use polluting energy sources such as coal are not yet punished by the laws and their profitability even increases if they use non-environmentally friendly energy sources. Therefore, a more stringent approach is required by the Vietnamese government if they want to achieve the set environmental goals.

In addition to the regulatory effort, the Vietnamese government is also actively participating in the green bond market whereby Vietnam is ranked number 2 in the Southeast Asian region for green bond issuance. Over 80% of these bonds are government bonds according to the ASEAN Sustainable Finance – State of the Market 2021 report released by Climate Bonds Initiative and HSBC.

It is good to see the exponential growth of the green bond market in Vietnam and proceeds from these bonds allocated to eligible green projects. However, we need to have a mechanism to monitor and quantify the effectiveness of these projects in terms of reducing GHG emissions or in other words, the success of the projects funded by the green bonds.

Dr Huy Pham, Senior Lecturer in Finance, Founder of RMIT FinTech-Crypto Hub, RMIT University Vietnam Dr Huy Pham, Senior Lecturer in Finance, Founder of RMIT FinTech-Crypto Hub, RMIT University Vietnam

The government is also planning to pilot emission allowances and an emission trading scheme from 2025 but this timeline might not be sufficient to help Vietnam achieve its 2030 emission reduction target.

To achieve these goals, Vietnam also requires effort from not only the government but also other stakeholders such as the private sector. Many companies aim to achieve net zero emissions, but most do not have a concrete plan to make it happen.

Currently, the most common approach is through the carbon offset market and the companies can purchase carbon offsets to achieve their reduction goals. However, this approach should be criticised whereby the rich (companies or nations) can easily offset their CO2 emission while the long-term impact on the environment is not guaranteed as the projects which are funded by the money spent on these carbon offsets might not be effective at all.

Therefore, it requires a mechanism to ensure that firms not only purchase carbon offsets but also have to make an actual effort to reduce their CO2 emissions. In addition, both the public and private sectors in Vietnam need to pay more attention to other methods of capturing or reducing CO2 emissions (in terms of both regulation and investment). For instance, liquid and solid direct air capture (DAC) technologies are considered the most effective way to reduce CO2 emissions. Other methods should also be considered such as geologic and biologic carbon sequestration although they may be less effective compared to DAC.

Another aspect that also requires attention is the ability to track, record and monitor emission data as it plays a crucial role in helping Vietnam achieve its net zero emission target. CO2 tokenisation, for instance, has been considered an effective approach for more efficient, reliable and accurate handling and tracking emission.

A CO2 token (representing one tonne of CO2 – either captured, stored or measured) can be minted and available for purchase once verified by a validating party. The token can also be burned if the token holders opt to use it to offset their carbon footprint. This CO2 tokenisation approach is expected to revolutionise the existing emission trading scheme and carbon offset market whereby it will improve the carbon accounting process, enhance the liquidity of CO2 emission, and allow different emission trading schemes/markets to link to each other with ease.

In addition to tokenisation’s benefits, blockchain is expected to improve environmental, social and governance (ESG) reporting whereby the reporting suffers from non-transparent, questionable and hard-to-trace data at the firm level. At country and regional levels, one critical problem with emission trading schemes is they are susceptible to fraudulent activities, such as carbon-trading frauds. Blockchain could be a valuable tool to increase reporting transparency and increase emission traceability.

With the application of blockchain, firms are also less likely to commit carbon emissions fraud because governments can easily track emissions at the firm level in real time. Finally, blockchain will also help stakeholders utilise the network effect, transforming individual efforts into a network effort that could further boost innovations for fighting the impacts of climate change – and subsequently lead to sustainable development.

This story was originally published by Vietnam Investment Review in December 2022.

Story: Dr Huy Pham, Senior Lecturer in Finance, Founder of RMIT FinTech-Crypto Hub, RMIT University Vietnam


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