As published in Vietnam Investment Review on 12/2/2019
Vietnam is making efforts to mitigate the impact of climate change via its policies and mechanisms. Dao Xuan Lai, United Nations Development Programme assistant resident representative, and team leader of Climate Change and the Environment, writes about business opportunities and challenges for investors in the country.
Climate action in both adaptation and mitigation are creating new types of businesses, attracting vast capital flows into low-carbon investments, creating jobs and spurring innovation and economic growth.
Climate is changing faster than anticipated, and as the Earth’s surface is warming, extreme weather events are becoming more frequent, more severe, and more difficult to predict. This has caused and will continue to cause damage to infrastructure, outbreaks of infectious diseases, and disruption to the supply chain.
For example, a record drought in 2015-2016, the worst in 60 years, and the strong typhoon Damrey in 2017 caused damage to roads, houses, schools, crops and disruptions to the water supply in large parts of Vietnam.
In response, Vietnam has set high priority in climate change adaptation. The Vietnamese government has made large investments into the construction of dykes, dams, and resilient schools and houses for vulnerable communities. But a lot remains to be done, and the government will need to engage and mobilise large capital and advanced technology from the private sector to build climate-resilient infrastructure.
As being most affected, the agriculture sector in Vietnam is applying climate smart agriculture practices, including advanced breeding and cultivation techniques to produce new crops that can thrive in new weather conditions such as drought, floods and brackish waters, and new irrigation technologies such as sprinkler irrigation.
The sector also has adopted and needs to introduce innovative policies to enable new types of business, such as agriculture insurance, and to mobilise investments that will support actions to adapt to the changing climate.
Action in climate change mitigation presents even greater opportunities to attract large investments in coming decades. The world has made strong commitments towards low- and even zero-carbon development to mitigate greenhouse gas (GHG) emissions and has started putting in place stringent climate policy by adopting a rulebook to implement the Paris Climate Agreement in December 2018. Vietnam has ratified the agreement and adopted an action plan to implement it.
Investments in low-emission transportation, smart cities and housing, and cleaner energy not only present tremendous climate-intelligent investment opportunities for the private sector and entrepreneurs, but will contribute to the reduction of GHG emissions.
First, the transition to low- and zero emissions mobility will not only help to combat climate change, with additional benefits through improved air quality, reduced noise pollution, reduced fossil fuel dependency, and ultimately reduced transportation costs; but the transportation sector also offers huge opportunity for green innovation in the coming years.
For example, Bloomberg New Energy Finance, an industry research firm focused on helping energy professionals generate opportunities, forecasts that “sales of electric vehicles will increase from a record 1.1 million worldwide in 2017, to 11 million in 2025, and then surging to 30 million in 2030”. China and the US were among the largest electric vehicles markets in 2018.
In Vietnam, the market of electric vehicles is at infant stage, with a small amount of e-bikes and -motorbikes being imported from China and Japan or produced domestically. For example, VinFast introduced two models of e-motorbikes in November 2018. However, the emerging low and zero emissions mobility market offers diverse business, services and job creation opportunities. As demand grows for e-vehicles in Vietnam, there is a need for more players in the e-mobility market, not only to create high quality and price competitive products for customers, but for transformational change in the growing transport sector to reduce GHG emissions.
Furthermore, to reduce air pollution, the government plans to put taxes on greenhouse gas emission from transport vehicles, which would lead to increase costs of using fossil fuel-based vehicles. The government will also enhance the technical standards to control GHG emissions to limit production and importation of high-emission vehicles in Vietnam. These changes will stimulate the use and production of e-vehicles in coming years.
Second, with fast urbanisation, the growing building sector in Vietnam has been attracting large scale investment from both foreign and domestic backers in recent years and will continue as more Vietnamese decide to live in urban areas.
It is estimated that the urban population will reach 52 million in 2025. As the government introduces stricter environmental policies and standards, and people demand higher quality of housing, businesses have growing opportunities to invest in greener homes, and building materials such as non-fired bricks, energy-efficient lighting products, and heating and cooling system equipment.
Third, the global renewable energy market continues to make remarkable progress, with an annual investment of more than $200 million over the past eight years. The significant falling costs for solar electricity, for example, led to a record number of new solar power projects installed in 2017.
Vietnam has witnessed a remarkable boom of investments in solar energy in the second half of 2017 and in 2018 thanks to the adoption of the first feed-in-tariff for solar electricity. Announced deals by both foreign and domestic financiers are estimated to reach $3 billion in more than 120 projects by 2020. These projects will generate more than 6,000 megawatts (MW) of electricity.
This is a very small portion of Vietnam’s potential of generating 85,000MW of solar photovoltaic generation capacity, as noted in a recent United Nations Development Programme technical report. Although the renewable energy market is at an early stage, there exists a real potential for growth and for smart investment and innovation from the private sector.
Application of blockchain technology and introduction of financial innovative schemes will significantly accelerate these climate intelligent investment opportunities.
For example, application of blockchain technology opens up new opportunities and new ways of doing business in energy markets in Vietnam. Blockchain enables people to buy and sell locally-generated solar energy within their communities.
This means that if a household has solar panels that produce more energy than it needs, the household can sell exceeded electricity to their neighbour directly. The use of blockchain technology not only helps to reduce transaction costs, and but in this case, can make neighborhoods more resilient to power outages.
Financial innovative schemes such as green bonds allow both businesses and the government to mobilise capital to finance a wide range of low-carbon, resilient and environmental projects.
The Climate Bonds Initiative reported the global green bond market to be $221 billion in 2017, an increase of more than 100 per cent from 2016.
Vietnam adopted a roadmap for bonds market in 2017 and regulations on municipal Green Bond in 2018, enabling pilot issuance of municipal green bonds in Ho Chi Minh City and the southern province of Ba Ria-Vung Tau, valuing $215 million for 18 environmental and green projects, and $22 million for eight green projects, respectively.
As Vietnam has made a strong commitment to tackle climate change and to fulfil its commitment under the Paris Agreement, the government will need to select priority sectors to make transformational change in the next 10 years of socioeconomic development. This transformational change will offer huge business opportunities and job creation as it requires large investment and advanced technologies, which are available from the private sector.
Looking ahead, the Vietnamese government should set clear directions, reduce risks for investors, and continue providing efficient and client-oriented public services that will enable new markets, new economic sectors, and new business and financial opportunities to emerge.
Climate-smart investments will help Vietnam’s path towards climate resilient low-carbon sustainable development, while safeguarding environmental integrity and leaving nobody behind.