Carbon markets are becoming an increasingly important instrument in global greenhouse gas (GHG) emissions reduction policies. By putting a price on emissions and enabling the trading of emission allowances and carbon credits, these mechanisms encourage businesses to reduce emissions and invest in cleaner technologies.
According to the World Bank’s State and Trends of Carbon Pricing 2026 report, approximately 29% of global greenhouse gas emissions are covered by 87 direct carbon pricing instruments.
In Vietnam, the domestic carbon market is entering its pilot implementation phase. For businesses, understanding how the market operates, the associated regulatory obligations, and the necessary preparations is essential to proactively adapt to upcoming changes.
What is the carbon market?
A carbon market is a mechanism that enables the exchange and trading of units associated with greenhouse gas emissions or emission reductions, primarily emission allowances and carbon credits, under established regulations and standards.
Essentially, carbon markets use economic incentives to promote emission reductions. By assigning a price to emissions, businesses can weigh the costs of investing in emission reduction measures against the costs of purchasing eligible emission allowances or carbon credits to meet their obligations.
Carbon markets form part of the broader carbon pricing framework. Two common direct carbon pricing instruments are Emissions Trading Systems (ETS) and carbon taxes. Unlike an ETS, a carbon tax imposes a charge on emissions or the carbon content of fuels without establishing a market for trading emission allowances.
These mechanisms aim to create financial incentives for businesses to reduce emissions, improve resource efficiency, and transition towards production activities with lower emissions intensity.
How does the carbon market work?
Compliance and voluntary carbon markets
Carbon markets are generally divided into two main categories:
| Criteria | Compliance carbon market | Voluntary carbon market |
|---|---|---|
| Nature | Operates under legal and regulatory requirements | Primarily driven by voluntary commitments |
| Participants | Facilities and businesses subject to regulatory requirements | Businesses and organizations choosing to participate |
| Tradable instruments | Eligible emission allowances and carbon credits | Primarily carbon credits |
| Purpose | Fulfil regulatory emissions obligations | Support climate goals or voluntarily offset emissions |
| Examples | EU ETS, Korea Emissions Trading Scheme | Carbon credit transactions under Verra (VCS) and Gold Standard |
It is important to note that carbon credits issued in voluntary markets are not automatically eligible for use in compliance markets. Their use must meet the specific requirements of the applicable regulatory framework.
Emission allowances vs. carbon credits
These are two key instruments traded in carbon markets, but they differ in nature:
- Emission allowance: The right to emit a specified quantity of greenhouse gases, allocated or authorized under a regulatory framework. Typically, one allowance represents the right to emit one tonne of carbon dioxide equivalent (tCO₂e).
- Carbon credit: A unit representing verified greenhouse gas emission reductions or removals under an eligible certification mechanism. Typically, one carbon credit represents one tCO₂e reduced or removed.
In other words, emission allowances represent the right to emit, whereas carbon credits are generated from verified emission reductions or removals. Not every emission reduction activity automatically generates carbon credits; businesses must meet applicable methodology, monitoring, verification, and certification requirements.
Trading mechanisms and emissions compliance obligations
One of the most common models used in compliance carbon markets is the cap-and-trade system. Under this model, regulators establish an emissions cap and allocate or auction allowances to regulated facilities. Businesses must monitor their actual emissions and surrender allowances corresponding to their obligations for each compliance period.
If actual emissions are lower than allocated allowances, businesses may have surplus allowances available for trading or carrying forward, subject to applicable regulations. Conversely, businesses exceeding their allocated allowances must purchase additional allowances or use other permitted compliance mechanisms.
For example, a business allocated 100,000 tCO₂e in allowances but emitting 110,000 tCO₂e would need to obtain eligible units to cover the 10,000 tCO₂e shortfall.
In addition to absolute emissions caps, some ETS frameworks determine allowances based on emissions intensity, taking into account production output or emissions benchmarks per unit of product. This approach is also being adopted during Vietnam’s pilot phase.
Legal framework and roadmap for carbon market development in Vietnam
Vietnam is progressively strengthening its legal framework for greenhouse gas emissions reduction and carbon trading. Current regulations focus on three key areas: greenhouse gas inventories, allocation and trading of emission allowances, and the development of the domestic carbon market.
Regulations on greenhouse gas inventories and allowance allocation
The Law on Environmental Protection 2020 and Decree No. 06/2022/ND-CP, together with subsequent amendments and supplements, establish the legal foundation for GHG inventories, emissions mitigation, and carbon market development in Vietnam.
Under Decision No. 42/2026/QD-TTg dated August 10, 2026, the updated list includes 2,441 facilities required to conduct greenhouse gas inventories, an increase of 275 facilities compared with the 2024 list. However, not all facilities subject to GHG inventory requirements are required to participate in the emissions trading system.
Under Decision No. 263/QD-TTg dated February 9, 2026, the total pilot GHG emission allowances for 2025–2026 were approved for allocation to 110 facilities across three sectors:
- 34 thermal power plants;
- 25 iron and steel production facilities;
- 51 cement production facilities.
The total approved allowances amount to approximately 243.1 million tCO₂e for 2025 and 268.4 million tCO₂e for 2026. These figures represent allowances for facilities covered by the pilot scheme, not an economy-wide emissions cap.
Regulations on emission allowance and carbon credit trading
Under Decree No. 119/2025/ND-CP, emission allowances are allocated free of charge to eligible facilities during the pilot phase. Businesses may use certain flexibility mechanisms, subject to applicable conditions, including:
- Carrying forward unused allowances to the subsequent compliance period;
- Borrowing allowances from the following period, up to a maximum of 15%, subject to applicable conditions;
- Using carbon credits for offsetting, up to a maximum of 30% of the total allocated allowances.
Trading activities are governed by Decree No. 29/2026/ND-CP on the domestic carbon exchange, covering the registration, custody, trading, and settlement of eligible emission allowances and carbon credits.
These regulations progressively establish the legal basis for carbon trading. However, businesses should verify the eligibility requirements applicable to each type of allowance or credit before engaging in transactions.
Roadmap for Vietnam’s carbon market
Under Decision No. 232/QD-TTg dated January 24, 2025, Vietnam’s domestic carbon market will be developed in two phases:
| Period | Key priorities |
|---|---|
| 2025–2028 | Finalize the legal framework, develop market infrastructure, and implement pilot operations of the domestic carbon market |
| From 2029 onwards | Officially operate the carbon market nationwide, continue improving market mechanisms, and explore international market linkages |
With the identification of pilot participants, approval of emission allowances, and issuance of regulations governing the carbon exchange, Vietnam is gradually moving from policy development towards practical implementation of its domestic carbon market.
How will the carbon market affect businesses?
The development of carbon markets may directly affect business operations in three key areas.
First, increasing compliance requirements. Regulated businesses must conduct greenhouse gas inventories, report emissions, and fulfil related obligations. For facilities allocated emission allowances, emissions data also serves as the basis for determining allowance surrender obligations during each compliance period.
Second, introducing carbon costs into business operations. As emissions are priced, businesses with high emissions intensity may incur additional costs to purchase allowances, while those achieving effective emission reductions may reduce their compliance costs. Consequently, carbon costs are becoming an important consideration in production and investment planning.
Even businesses not directly participating in carbon markets may be affected by international requirements. For example, the European Union’s Carbon Border Adjustment Mechanism (CBAM) imposes emissions-related obligations on certain categories of imported goods, increasing requirements for relevant exporters to provide and verify emissions data. However, CBAM is a separate regulatory mechanism and should not be confused with carbon credit markets.
Third, creating opportunities through emission reductions. Businesses may reduce compliance costs by improving energy efficiency, upgrading technologies, or trading surplus allowances where permitted.
In addition, emission reduction projects that meet certification requirements may generate carbon credits. However, businesses should carefully assess implementation costs, certification requirements, and market demand, as the ability to generate credits does not guarantee revenue from trading activities.
What should businesses do to prepare for the carbon market?
To adapt to carbon market developments, businesses should prioritize three key areas.
Review regulatory obligations
Businesses should first determine whether their facilities are subject to mandatory GHG inventories, allowance allocation, or other relevant regulatory obligations.
Based on this assessment, they should identify applicable inventory methodologies, reporting periods, verification requirements, and compliance responsibilities. Businesses not yet covered by these requirements should also monitor the roadmap for future market expansion.
Conduct GHG inventories and standardize emissions data
Businesses need to identify major emission sources, establish reliable databases, and conduct GHG inventories using methodologies consistent with applicable regulations or standards.
At the same time, they should establish a Monitoring, Reporting, and Verification (MRV) framework to ensure that emissions data is consistently collected, controlled, and verified.
For businesses operating multiple facilities or subsidiaries, consistent methodologies and clearly defined data management responsibilities are particularly important. Over time, digitalizing data collection and consolidation can help reduce errors, improve traceability, and support audit and verification requirements.
Develop emission reduction plans aligned with business performance
Based on GHG inventory results, businesses should identify material emission sources and select appropriate reduction measures, such as improving energy efficiency, optimizing production processes, switching fuels, or investing in new technologies.
These measures should be evaluated based on their emission reduction potential, investment costs, financial returns, and implementation feasibility. Indicators such as emissions intensity, achieved emission reductions, and abatement cost per tCO₂e can help businesses assess performance.
For businesses allocated emission allowances, it is particularly important to compare the costs of investing in emission reductions against the costs of purchasing additional allowances or using permitted flexibility mechanisms. This enables businesses to make investment decisions aligned with both regulatory requirements and long-term business objectives.
Conclusion
Carbon markets are gradually making emissions costs an important factor in production and investment decisions. In Vietnam, the pilot implementation phase represents a critical opportunity for businesses to identify their compliance obligations and strengthen their emissions management capabilities.
Rather than focusing solely on carbon credit trading opportunities, businesses should prioritize GHG inventories, emissions data standardization, and the implementation of effective emission reduction measures. These efforts provide a foundation for regulatory compliance, cost management, and enhanced competitiveness as the carbon market continues to develop.
References:
- World Bank (2026). State and Trends of Carbon Pricing 2026.
- International Carbon Action Partnership – ICAP (2026). Emissions Trading Worldwide: ICAP Status Report 2026.
- Prime Minister of Vietnam (2025). Decision No. 232/QD-TTg approving the Project on the Establishment and Development of Vietnam’s Carbon Market.
- Government of Vietnam (2022, 2025, 2026). Decree No. 06/2022/ND-CP and subsequent amendments and supplements on greenhouse gas emissions mitigation.
- Government of Vietnam (2026). Decree No. 29/2026/ND-CP on the Domestic Carbon Exchange.
- Prime Minister of Vietnam (2026). Decision No. 263/QD-TTg approving the total pilot greenhouse gas emission allowances for 2025–2026.
- Prime Minister of Vietnam (2026). Decision No. 42/2026/QD-TTg updating the list of facilities required to conduct greenhouse gas inventories.
- Government of Vietnam (2026). Decree No. 396/2026/ND-CP amending and supplementing regulations related to greenhouse gas emissions mitigation.
Note: This article reflects the regulatory framework as of November 4, 2026. Decree No. 396/2026/ND-CP had been issued but had not yet entered into force as of this date. Its effective date is December 12, 2026.
About CGS Vietnam
CGS Vietnam Consulting Joint Stock Company provides specialized advisory services in Corporate Governance, Sustainability (ESG), Risk Management, and Internal Audit. Backed by a team of experienced professionals with deep expertise in international best practices, CGS Vietnam partners with businesses to strengthen corporate governance, enhance management capabilities, meet investor expectations, and achieve long-term sustainable growth.
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