Green financing in the transition to climate - Resilient economy in vietnam

Nội dung text: Green financing in the transition to climate - Resilient economy in vietnam

1. GREEN FINANCING IN THE TRANSITION TO CLIMATE - RESILIENT ECONOMY IN VIETNAM Prof. Dr. Tran Tho Dat The National Economics University, Vietnam Email: tranthodat@neu.edu.vn Associate Prof. Dr. Dinh Duc Truong The National Economics University, Vietnam Email: truongdd@neu.edu.vn MA. Nguyen Thi Hoang Anh Ministry of Natural Resource and Environment (MONRE) Email: nthanh1201@gmail.com Abstract Greening the economy involves improving the quality of the environment and tackling climate change, and is a major policy, economic and financial challenge. Key issues that have emerged in this context relate to financing climate change mitigation and adaptation and how to close the financing gap to fund the needed low- carbon investments. Beyond such capital mobilization there is the more general challenge of whether and how the financial system can enable capital reallocation consistent with the “green” transition and for the long run, and what risks, opportunities and incentives are involved. This paper provides a brief overview and summarizes a Vietnamese case discussion on these issues. Keyword: Climate finance, green financing, resilient economy, economic instrument, low carbon economy 1. Introduction As climate change is posing increasing risks for both human and natural systems, a shift toward low-carbon and green economic development is needed to meet future challenges. In order to switch from the sole pursuit of economic growth to a sustainable development path, transformational changes in both public and private sector investments are of much importance. Climate finance, defined as capital flows targeting low-carbon and climate-resilient development with direct or indirect greenhouse gas (GHG) mitigation or adaptation objectives, offers a great opportunity that should not be ignored. Significant investments are needed to support the global transition to a low- carbon climate resilient future in line with the 2015 Paris Agreement. Financial 947
2. instruments play a critical role in creating incentives and in triggering financial flows towards these investments. Governments have put various financial instruments in place to drive climate change mitigation, backed by funding from a variety of sources. This paper brief analyses some financial innovations in support closing the financing gap to fund the needed low-carbon investments and climate change in Vietnam, with some trends and solutions we can draw for future applications. 2. Literature Review The transition to an economy with low carbon and climate resilience requires significant economic investment in the areas of green sector. UNEP (2015) estimates that the annual investment needed to provide a green economy in the 2010-2020 period will be about 2% of global GDP. One of the most suitable features of environmentally sustainable investment is to include many technologies at different stages of maturity; each of these technologies may require a different type of finance (Ruppel 2013). Furthermore, funding requirements for sustainable transformation can significantly exceed the capacity of the public sector, requiring significant participation from existing private financing and capital use. From this point of view, GF plays an important role in promoting environmentally sustainable investment companies, supporting countries to reduce emissions and adapt to the consequences of climate change (Nakhooda 2014). GF can be defined as the entire flow of financial investments into sustainable development projects and initiatives, environmental products and policies to promote sustainable economic development. Accordingly, GF is not limited to climate finance (i.e. the set of financial tools specifically aimed at mitigating greenhouse gas emissions and adapting to climate change), but includes all financial products and services aimed at a wider range of environmental objectives, such as industrial pollution control and water, sanitation and biodiversity protection. Moreover, it comprises the “operational” costs of green investment, costs that are generally not included within the definition of green investment (e.g. project preparation and land acquisition costs) but can pose relevant financing challenges (UNEP 2018) GFs include many financial instruments, such as public funds, venture capital, business angels, project finance, equity, debt, retirement funds and green infrastructure bonds. Many people are adjusted to a specific development stage of a green project: venture capital is used with unproven and unproven technologies; Project funding is used for mature technologies and green infrastructure bonds are used in later stages of the project (e.g, refinancing operations). A key feature of all the tools of GF is that they make investment and lending decisions according to environmental screening and risk assessment in order to meet environmental 948
3. sustainability standards (Tukker 2015). In other words, GF takes into account the environmental factors during the lending and investment decision making process, the old post monitoring and the risk management process. In this regard, investors should be directed to green investment for a variety of reasons, including ethical considerations, beneficial profit profiles, legal or regulatory constraints and improved reputation of investors (Bracco et al 2018). 3. Vietnam and climate change Vietnam is one of the five countries most severely affected by climate change. In Vietnam, natural disasters are increasing in both scale and repeat cycle. In the period 2002 - 2010, about 9.500 people died and went missing due to natural disasters. The lowest damage caused by natural disasters in the whole country is 0.14% of GDP (in 2004) and the highest is 2% of GDP (in 2006). On average in the past 15 years, natural disasters have damaged about 1.5% of GDP annually (Tran Tho Dat, Dinh Duc Truong and Vu Hoai Thu 2013). Under the climate change scenario, at the end of the 21st century, the average temperature will increase 2-3 degrees celsius, the sea level will rise by nearly 1 meter (the highest scenario). If the sea level rises by 1 meter, the Mekong Delta will flood 39% of the area, Ho Chi Minh City is flooded with 20%, the Red River Delta provinces have and the Central provinces 10% and 30% flooded respectively. An one meter rise in sea level could have a direct impact on the lives and livelihoods of about 20% of the population and losses could reach 10% of GDP each year. The Government of Vietnam is well aware of the challenges facing climate change and has responded strongly through institutional policies and agendas to address the vulnerability to climate change and promote less carbon emission and green growth path. In 2013, the Party Central Committee issued Resolution No. 24 / NQ-TW on Proactive responding to climate change, strengthening natural resource management and environmental protection. The resolution identified the fight against climate change as "one of the most important tasks of the whole political system". Before that, the Government promulgated the National Strategy on Climate Change (2011) and Green Growth (2012), which is the focus of Vietnam's policy to respond to climate change. After the Government approved the Paris Agreement on October 31, 2016, Vietnam was obliged to fulfill its commitments under the Paris Agreement. As one of the countries heavily affected by climate change, Vietnam has actively and positively built its proposed Contribution of its own decision (INDC). According to Viet Nam's INDC, by 2030, by domestic resources, Vietnam is committed to reducing 8% of greenhouse gas emissions compared to the normal development scenario and 949
4. can further reduce it to 25% if it receives support internationally. At the same time, Vietnam will implement many adaptation activities to increase resilience to climate change, creating conditions to contribute more to reducing greenhouse gas emissions. ”To implement the tasks of responding to Climate change from now to 2030, Vietnam will need about 30 billion USD from state resources, international support and both domestic and foreign enterprises (MPI 2015). 4. Overview of climate finance in Vietnam Public spending Public spending is an important part of climate finance. In Vietnam public spending has some characteristics: Firstly, the budget spent on responding to climate change of the Government remained stable from 2010 to 2013, while the total expenditure decreased slightly. Calculated as a percentage of GDP, spending on climate change response is still low, estimated at only 0.1% of Vietnam's GDP. In order to transform from the conventional development model (BAU) to the road of low carbon emission and climate adaptation, Vietnam needs to increase this rate. Secondly, spending on responding to climate change focuses on large-scale infrastructure projects to increase resilience, but the budget for carbon reduction actions is also increasing. During the period of 2010-2013, the government allocated about 88% of expenditure on climate change response to projects that created a large number of simultaneous benefits on climate change adaptation. Direct funding for light reduction from recurrent expenditures tends to increase. In the period of 2010- 2013, the proportion of direct spending to reduce slightly only accounted for 2%. By 2013, the budget for mitigation increased to 3.9%, mainly due to the increase in recurrent expenditure through the National Energy Saving Program. Thirdly, most of the budget expenditure is devoted to investment in responding to climate change, and only a small amount is spent on scientific, technical and social capacity, policy and governance activities. A large percentage of ministerial-level expenditures (89%) are for investment in climate change. Only a small percentage of spending on climate change response is allocated to capacity building for science, technology, society and policy and governance, each of which has important implications in creating lips. The school promotes investment in responding to climate change. Spending on science, technology and social capacity accounts for 9% and policy and governance only account for 2% of total expenditure on climate change. 950
5. Private investment and international funding In recent years, the Government has issued many policies to encourage enterprises to protect the environment, minimize and respond to climate change. Typical regulations are tax exemption and reduction for enterprises operating in the field of environmental protection (Law on Corporate Income Tax); preferential capital for environmental protection investment projects (Decree No. 04/2009 / ND- CP dated January 14, 2009 by the Government). At present, there are few systematic studies on the spending and investment of the private sector for climate change. According to MPI (2017), investment and regular costs for environmental protection account for a very small proportion of total investment and production and business costs of enterprises. Approximately 40% of businesses invest in environmental protection activities and have regular costs for environmental protection. In particular, the ratio of regular expenses for environmental protection of enterprises only accounts for more than 1% of the total production costs. Table 1: Sources of finance for climate change in Vietnam Percentage contribution Financial source Billion VND %GDP within total budget PUBLIC SECTOR National spending for natural 11.000 0.25 disaster relief and restoration National spending for climate 40% change response (capacity building, resilient, mitigation, research) 4.500 0.1 NON PUBLIC SECTOR Mobilization from Disaster Depends on Not Reserve Fund provinces significant Private company investment (%) 18.000 0.4 60% Total 33.500 0.75 100% Source: Authors synthesize from sources (2019) In Southeast Asia in particular and Asia in general, Vietnam is considered a key country in regional cooperation programs such as the Asia Region Low Carbon Development Strategy Forum. On the other hand, with a long-term cooperative relationship with major partners and sponsors interested in the fight against climate 951
6. change such as the World Bank (WB), Asian Development Bank (ADB) or Development Agency United States International (USAID), Vietnam has been receiving a lot of financial, technological and capacity building support. According to the report of the Ministry of Finance, in the period of 2010 - 2015, Vietnam received about USD 1.3 billion (equivalent to VND 26,000 billion) through the SP- RCC Program, including a part of non-refundable aid from Canada, Australia and most of it are concessional loans from WB, JICA, AFD, Korea. It can be seen that the financial support for climate change in Vietnam plays a very important role in the models of climate change response in the locality, especially in the context of limited budget and the need to pay for climate change. 4. Some policy implications for Vietnam on mobilizing and using financial resources for climate change After the COP21 agreement, experts estimate that in the period of 2016 - 2030, the world needs about USD 6,900 billion in investment each year, to achieve the goal of keeping the temperature not exceeding 2 degrees celsius by year 2100. Vietnam alone needs a capital of about USD 30 billion in this period to cope with climate change, of which 70% comes from non-state sector. If the rate of 0.5% of GDP is reported, Stern (2006) reports that at least one country must invest in responding to climate change, the capital demand for the 2016-2020 period is about 5.86 billion USD (MPI 2017, WB 2015). Figure 1: Financial resources can be mobilized to respond to climate change Source: UNEP (2015) 952
7. Policy implications for the government sector Tax increment In the current context, it is necessary to continue reforming the environmental tax system to increase budget revenue to create resources to respond to climate change, limit production and consumption of products causing harm to the environment and climate change. Environmental protection tax is considered as one of the tools that can overcome market failures and defects because it changes the behavior of pollution. In Vietnam, the Law on Environmental Protection Tax comes into effect from January 1, 2012, after achieving 5 years of implementation, a number of objectives have been achieved, including significant financial resources contribution to the state budget, increasing revenue, ensuring expenditure needs for the state budget. However, there are still two big points of environmental protection tax that can be reformed to increase revenue for the budget, contributing to the response to climate change. Firstly, current taxes are levied on 8 groups of subjects such as petroleum, coal, plastic bags, chemicals, while these 8 objects are only a small part of many goods and products that cause too much pollution in production and consumption processes (such as computers, phones, batteries, tires, cleaning chemicals, paper production, food processing, chemical fertilizers, ). The second is that the tax rate is still low and can be adjusted to increase in the direction of more accurately reflecting the social costs that pollution causes, and integrating with the region and the world. Application of environmental protection fees with emissions Environmental protection fee is a charge on the behavior of discharging air polluting gases, collected based on the volume of air pollution discharged into the environment. As with other environmental protection fees, the purpose of the emission fee is to regulate the behavior of the organization and individual towards reducing the discharge of emissions causing environmental pollution, while generating revenue for environmental protection. This is a direct economic tool to bring environmental protection costs into product prices on the principle that "polluters pay." In terms of charge-bearing subjects, it is still common for SO2, NOx, CO gas even CO2, which is significant in the context of the current climate change. Promotion of public-private partnership (PPP) in climate change response projects With the role of providing public services in general and environmental services in particular, the state is always the main person responsible for financial security to provide the above services. However, the way to mobilize investment 953
8. capital for climate change is mainly from the current budget and foreign aid (ODA). Theory and practical experience show that it is not necessary for the state to be a direct provider of public services to consumers. Recognizing that, Vietnam has many orientations and policies to promote socialization of environmental protection, such as Central Party Resolution 41; Law on Environmental Protection 2014; many documents under the Law such as Decree No. 69/2008/ND-CP on policies to encourage socialization of activities in the fields of education, vocational training, health, culture, sports and environment; and recently the Government's Decree No. 15/2018/ ND-CP on investment in the form of public-private partnerships. To improve the ability to apply PPP in climate change projects, some aspects need to be improved: (i) Complete the general legal environment system for PPP: need a state management agency for PPP; to ensure the guarantee of the Government as clear as the time of transfer and ownership of BOT projects; dealing with the conflicts between existing legal documents (such as the Decree on BOT, the General Investment Law, the Law on Corporate Income Tax), the initial support of the Government and advantages for climate change projects. (ii) Implementing the project: improving uncertainty about the role of government (project development agencies) and private investors in bearing costs and risks when developing projects; Real priorities of projects are developed according to PPP model in the field of climate change; make provisions on procurement procedures including signing contracts through negotiation with priority businesses. (iii) Project funding: providing strict regulations on foreign exchange reserves and exchange, and foreign currency transfers; guarantee loans and lender's right to intervene in case of late repayment or when the project is poorly operating. Mobilize capital for climate change from the private sector Addressing the impacts of climate change requires strong efforts and actions of the state and community, in which the private sector plays a very important role and meaning. With solutions, priority areas identified in the implementation of the Paris Plan and "Contribution decided by the country" (NDC) in Vietnam, many opportunities are also created for the private sector, which are opportunities for research, creativity and investment in greenhouse gas emission reduction and climate change adaptation activities. Promising areas include renewable energy; smart urban, eco-friendly; smart traffic; works and solutions to adapt or increase the ability to adapt to climate change. Supporting private sector access to climate change investment funds, the State Bank is developing a Green Credit Program to encourage commercial banks to provide more loans to support businesses to implement green growth. Currently, there are 4 banks participating in the pilot program: Agribank, BIDV, Sacombank and VCB. Accordingly, banks will support production and 954
9. business plans and projects in the field of new energy/ renewable energy, waste treatment/recycling and organic agriculture. In addition to macro policies, businesses can access many support funds for climate change. For example, the Green Credit Trust Fund (GCTF) encourages private investment in cleaner production systems and energy saving solutions, along with a performance-based grant. When the project is successfully implemented, businesses can receive bonus payments on debt: If new technologies help reduce emissions by at least 30%, borrowers will be entitled to 15% of the service debt financed from the Fund. If emissions are reduced by 30-50%, the subsidy rate will be 25%. So far, the Fund has supported more than 100 businesses in Vietnam. Develop green bonds to mobilize capital for climate change Green bonds are defined as fixed income securities to attract capital for projects with environmental benefits. Accordingly, the proceeds from this bond issuance will be committed to investment in climate change adaptation and mitigation programs, including clean energy projects, efficient energy use, public transport and clean water Green bonds can be issued by government, commercial banks, development banks, international financial institutions, companies. On the government side, policies to encourage green investment such as tax incentives, preferential loans, and procedures will be the main actors. Individual investors gradually demand more for businesses, not only does it require effective business but also has positive environmental and social impacts. Institutional investors also gradually increased their portfolio to investments that positively influence; share a portion of profits between traditional investors and "green" investors through compensation mechanisms. When increasing investment capital (demand for green bonds), it is necessary to have more green projects (supply side of green bonds). Attracting international capital for climate change response In the Paris Agreement (2015), 195 out of COP21 member states agreed to limit the increase in global temperature by no more than 2 degrees Celsius compared to the pre-industrial era, and will try to bring this number to 1.5 degrees. This is the most important point about the goals to be achieved by COP21. To achieve this goal, developed countries will provide finance to help developing countries convert to renewable energy, as well as enhance their ability to cope with natural disasters, such as droughts or floods. Vietnam is a member of the Paris agreement and can access all financial funds to support climate change - Access criteria and evaluation criteria are different in funds - Some funds can receive project documents and provide direct financial support, a number of funds provide financial support through commercial banks or trust funds. 955
10. Although Vietnam has initially formed mechanisms to mobilize international cooperation resources to cope with climate change such as the Program to Support Climate Change Response (SP-RCC) or the National Target Program. But with climate change, policies and mechanisms are still incomplete and inconsistent. Therefore, in the coming time, the Government should review, update and perfect the system of legal documents related to financial policies as well as new capital mobilization mechanisms. Recently, the World Bank and the United Nations Development Program have jointly implemented the Climate Finance Options Forum to support countries and localities in accessing financial information for Climate change. This is an effective tool to synthesize, screen and share information about possible financing sources for climate change mitigation and adaptation. The development of a complete Monitoring, Reporting and Evaluation (MRV) system is also one of the tasks to be implemented immediately in the coming time. MRV is part of climate change mitigation approaches, a system to assess the contribution of climate adaptation investments to development goals. Along with this, Vietnam needs to increase transparency, efficiency and accountability in mobilizing and using funding sources for climate change to create trust for donors and ensure a solid financial mechanism to be proactive in the fight against climate change, economic growth and sustainable development. 5. Conclusion In order to successfully manage climate challenges in relation to sustainable transition, the implementation of green agendas in conjunction with GF is necessary at both national and international levels. This requires an open and sustainable debate in each country about the opportunities, bottlenecks and priorities of the GF for national action. In this framework, the present paper analyzes the opportunities and levels of challenges affecting GF in Vietnam. To fulfill the objectives such as commitments in the Paris Agreement and respond effectively to climate change, Vietnam needs a smart policy system, which allows attracting resources from businesses, communities and international donors. In addition, it is important to improve public financial systems to increase financial income from activities that cause environmental pollution. PPP is also a solution that has been successful in many countries and can be applied in Vietnam if there are adequate facilitation institutions. References 1. Bracco, S.; Calicioglu, O.; Gomez San Juan, M.; Flammini (2018), A. Assessing the Contribution of Bioeconomy to the Total Economy: A Review of National Frameworks. Sustainability, 10, 1698. 956
11. 2. Ministry of Natural Resources and Environment (2012), Climate change and sea level rise scenarios for Vietnam. 3. Ministry of Natural Resources and Environment (2013), Improving financial mechanisms and policies to mobilize, manage and effectively use financial resources in responding to the impacts of climate change in Vietnam Male, National Science and Technology Project (CC 59). 4. Kim Ngoc and Phuong Thanh Thuy (2013), Finance for responding to climate change, Vietnam Journal of Social Sciences, No. 10 (71). 5. Le Thi Mai Lien (2017), International experience on fiscal policy to respond to climate change, Journal of Insurance and Society, No. 9B. 6. Tukker, A (2015), Product services for a resource-efficient and circular economy—A review. J. Clean. Prod. 2015, 97, 76–91. 7. United Nations Environment Programme Finance Initiative (UNEP FI) (2018), Green Paper on Financing a Global Deal on Climate Change. 2009. Available online: . 8. Nakhooda, S.; Norman (2014), M. Climate Finance—Is it Making a Difference? Overseas Development Institute: London, UK. 9. Ruppel, O.C.; Luedemann, C (2013), Climate Finance: Mobilising Private Sector Finance for Mitigation and Adaptation; Institute for Security Studies: Pretoria, South Africa. 10. United Nations Environment Programme (UNEP) (2015), Aligning the Financial System with Sustainable Development. Pathways to Scale; Inquiry: Design of a Sustainable Financial System; UNEP: Nairobi, Kenya. Acknowledgment 11. This paper is a product of the Project "Study on economic losses caused by extreme hydro-meteorological phenomena in the context of climate change and propose solutions to manage risks for coastal province of Central Vietnam” - Code: BDKH.22/16-20 under the National Program for Science and Technology on resources, environment and climate change. 957