LIST OF ABBREVIATIONS BVOCs Biogenic Volatile Organic Compounds CO2 Carbon dioxide CRED Centre for Research on the Epidemiology of Disasters CCS Carbon Capture and Storage CDM Clean Deve
The necessity of research issue
In 2018, global greenhouse gas emissions reached 55.3 gigatonnes of carbon dioxide equivalent, with 37.5 GtCO2 stemming from fossil fuel use in energy generation and industrial processes, according to the United Nations Environment Programme (UNEP, 2019) This rise in emissions has contributed to approximately 1.0 °C of global warming since pre-industrial times, and if current trends persist, temperatures could increase by 1.5 °C between 2030 and 2052 (Fawzy et al., 2020) The resulting climate change has intensified various indices, including temperature fluctuations, altered precipitation patterns, ocean acidification, and extreme weather events In 2018 alone, 315 natural disasters occurred globally, with the majority being climate-related (Fawzy et al., 2020).
In 2018, natural disasters impacted 68.5 million people, with floods, storms, and droughts accounting for 94% of those affected The economic toll reached $131.7 billion, primarily driven by storms ($70.8 billion), wildfires ($22.8 billion), floods ($19.7 billion), and droughts ($9.7 billion), which together represented about 93% of the total losses Alarmingly, the financial damage from wildfires in 2018 was comparable to the cumulative losses from wildfires over the preceding decade, highlighting the increasing severity of these disasters (CRED, 2019).
Climate change and global warming are urgent global economic concerns, affecting approximately 3.3–3.6 billion people, as highlighted by the Intergovernmental Panel on Climate Change (IPCC, 2022) Unsustainable development exacerbates these issues, leading to detrimental impacts on both humans and ecosystems The IPCC's Climate Change 2023 Synthesis Report emphasizes the need for greenhouse gas emissions to peak before 2025 and be reduced by 43% by 2030 to limit global warming to 1.5°C As climate change increasingly influences the political, economic, and environmental landscape, there is a growing recognition of the need for alternative solutions to address the resulting imbalances (Leitao et al., 2021) Effective climate action is essential for sustainable, climate-resilient development (Dogan et al., 2023), with pivotal commitments established in the Kyoto and Paris Agreements regarding CO2 emissions Achieving the temperature goals set by the Paris Agreement and the Sustainable Development Goals (SDGs) outlined in the 2030 Agenda requires a shift towards sustainable development and net-zero greenhouse gas emissions Therefore, global initiatives are crucial for mitigating the effects of global warming and advancing sustainability.
In 2015, the United Nations introduced the Sustainable Development Goals (SDGs), known as the Global Goals, as a global initiative to address climate change The SDGs focus on eradicating poverty, safeguarding the environment, and fostering prosperity and peace for everyone by the year 2030 (Spaiser et al., 2019).
Governments worldwide are implementing measures to reduce emissions through alternative energy development, energy efficiency improvements, and promotion of low-carbon lifestyles (Junior, Fien, and Horne, 2019) Despite these efforts, CO2 emissions continue to rise, hindering sustainable development progress, necessitating stronger actions to achieve climate goals and expedite the clean energy transition (Olabi et al., 2022) The IEA's research (2023) highlights the significance of the United Nations' Sustainable Development Goals (SDGs) in addressing global challenges such as poverty, inequality, and climate change The SDGs provide a comprehensive framework for sustainable development, emphasizing the importance of reducing carbon emissions as a critical step toward achieving these goals (Yang, Li, and Guo, 2022) Many governments are now prioritizing carbon reduction strategies to enhance environmental quality and combat climate change (Higgins, 2013; Cheng et al., 2019; Raihan, 2023) Achieving the 17 SDGs, including climate action (SDG 13), affordable and clean energy (SDG 7), and sustainable cities (SDG 11), requires a 45% reduction in global carbon dioxide emissions from 2010 levels by 2030, ultimately aiming for zero emissions by 2050 (Purnell, 2022; United Nations, 2021).
Carbon markets and renewable energy sources play crucial roles in achieving emission reduction and promoting low-carbon technologies The European Union Emissions Trading System (EU-ETS), established after the Kyoto Protocol of 1997, is the largest international carbon market, designed to reduce emissions cost-effectively Estimates suggest that this market could contribute 30% to carbon mitigation by 2030 Carbon pricing, a key mechanism within these markets, incentivizes the transition to low-carbon societies by integrating the costs of greenhouse gas emissions into economic decision-making This approach encourages investments in cleaner energy solutions and discourages funding for carbon-intensive fossil fuels, ultimately fostering the development of low-carbon economies.
The establishment of a carbon market in Vietnam is essential for generating economic value, protecting the environment, and fostering sustainable national growth This initiative will lead to reduced greenhouse gas emissions and unlock financial opportunities, aligning with Vietnam's ambitious goal of achieving carbon neutrality by 2050 The study titled "Factors Affecting the Environment: The Role of the Carbon Market in Vietnam" employs both qualitative and quantitative methodologies to assess the carbon market's impact on the country's development The comprehensive findings will serve as a robust foundation for the successful establishment and operation of a carbon market in Vietnam.
The objectives of the research
This study aims to identify the environmental factors influencing the establishment of a carbon market in Vietnam To achieve this overarching goal, four specific objectives have been outlined.
Firstly, build and test a theoretical model of factors affecting the environment to estimate their impact on environmental change
Second, research about theories about environmental pollution associated with economic growth
Research on carbon markets across various countries highlights the challenges and limitations of implementing a carbon market in Vietnam This analysis serves as a foundation for integrating quantitative research findings to formulate effective solutions for enhancing carbon market strategies in the country.
To enhance the effectiveness of establishing and managing a carbon market in Vietnam, it is essential to develop a comprehensive system of solutions informed by the findings of the model and the country's specific practical conditions.
The subjects and scope of the research
Research subjects
This research investigates the impact of various factors on the environment, emphasizing the Carbon market's crucial role in mitigating greenhouse gas emissions and facilitating a transition to a carbon-neutral economy By integrating theoretical and empirical studies, an analytical framework and proposed model have been developed to assess variables influencing carbon emissions in Vietnam The research employs a comprehensive data system to test and quantify these factors while utilizing qualitative analysis of reports related to the Carbon market and emissions The combination of quantitative and qualitative findings will inform solutions aimed at advancing the Carbon market in Vietnam, ultimately contributing to the nation's carbon neutrality goals.
Research scope and access
Regarding research space, this study will use data from Vietnam and other countries to learn about experiences in applying the Carbon market to limit emissions
Regarding research time, this study will use research data from the period 2000 -
2021 for quantitative research and data from the period 2000 - 2023 for qualitative research
Collecting environmental data presents significant challenges due to difficulties in measurement and limitations in updating information from relevant sources As a result, researchers have only been able to gather quantitative data up to 2021, rather than extending their research to 2023.
The methodology of the research
Qualitative research methods involve analysis and evaluation techniques that synthesize the theoretical foundations of environmental factors, leading to the development of a proposed model for a project focused on the role of the carbon market.
This study employs quantitative research methods, utilizing a proposed research model and secondary data sources for observed variables It conducts OLS, FEM, REM, and FGLS regression analyses using the Stata program to evaluate the significance and influence of these observed variables on environmental factors.
For data, the author uses panel data for this study, with observed factors varying over both time and space The variables are considered for 22 years from 2000 to 2021 including
A comprehensive study was conducted across 12 countries, gathering a total of 22*12&4 observations to develop a quantitative model, utilizing data sourced from the World Bank and World in Data Additionally, qualitative research was supported by reputable articles, journals, and data from various ministries and departments, providing a solid foundation for the topic's implementation.
The structure of the research
The report includes Introduction, Conclusion and 5 main chapters:
Chapter 3: Current overview of the Carbon market in the world and in Vietnam
LITERATURE REVIEW
Overview of past research
In recent decades, sustainable development research has prioritized the crucial challenge of carbon dioxide (CO2) emissions and their effects on environmental sustainability and human health A multitude of studies has explored the intricate relationship between CO2 emissions and different aspects of sustainable development, revealing both the difficulties and potential solutions to this urgent global concern.
Previous research has investigated the socioeconomic aspects of CO2 emissions and sustainable development, focusing on the effects of climate policies and the opportunities for green growth Scholars have evaluated the effectiveness of policy tools like carbon pricing, renewable energy subsidies, and emissions trading schemes in encouraging emissions reductions while ensuring economic efficiency and social equity Additionally, studies by Hu et al have assessed the impact of carbon markets on these dynamics.
Research indicates that carbon trading policies have significantly reduced energy consumption by 22.8% and CO2 emissions by 15.5% in regulated industries (Hu et al., 2020) Additionally, Wen et al (2020) highlight that these policies can enhance excess profits for firms in carbon markets through differential arbitrage However, Ji et al (2021) note that carbon prices remain low and volatile since the inception of China's carbon emissions trading pilot programs In Pakistan, Shah et al (2022) identify a U-shaped relationship between ecological footprint and real GDP, as well as an inverted U-shaped relationship between CO2 emissions and GDP, emphasizing the necessity for energy conservation and a shift towards renewable energy sources for sustainability Furthermore, Aye and Edoja (2017) find that economic growth positively influences CO2 emissions during periods of high growth, while Hoffmann (2015) argues that green growth relies on reducing greenhouse gas emissions, fostering innovation, implementing structural changes, and ensuring equitable income distribution.
Empirical studies by Ahmad et al (2019) and Tokpah et al (2023) reveal a negative correlation between greenhouse gas emissions and foreign direct investment (FDI) in green and renewable technology, suggesting FDI can reduce carbon emissions by 0.11% in the short term and 0.14% in the long term, with a potential 14% decrease in CO2 emissions linked to increased energy consumption and population Long-term reductions in CO2 emissions have also been associated with economic growth, financial development, and enhanced international trade In contrast, Wen et al (2022) found that in MINT countries, GDP correlates positively with CO2 emissions, while information and communication technology (ICT) and renewable energy are negatively correlated McDowall et al (2018) highlighted the role of emerging high-tech energy companies, showing that solar energy industry expansion has led to a 7% reduction in global CO2 emissions Additionally, Anwar et al (2022) emphasized the significant influence of technological innovation and institutional quality on CO2 emission reduction, although they noted that economic growth in E7 countries often lacks environmental sustainability.
Despite progress in understanding the link between CO2 emissions and sustainable development, significant research gaps persist Future studies should explore the synergies and trade-offs between climate mitigation and adaptation, evaluate the feasibility of carbon neutrality and resilience goals, and promote interdisciplinary collaboration across natural and social sciences By leveraging past research and adopting a holistic approach to sustainable development, scholars and policymakers can pave the way for a more equitable, resilient, and environmentally sustainable future.
CO2 emissions significantly affect socioeconomic factors and are closely linked to sustainable development aspects such as air quality, public health, and ecosystem resilience The US Environmental Protection Agency (2023) highlights that the primary source of air pollution is carbon dioxide emissions from fossil fuel combustion—specifically coal, diesel, gasoline, oil, and natural gas—used for electricity, heating, transportation, and industrial processes This burning of fossil fuels is responsible for 85% of respirable particulate matter air pollution and is a major contributor to long-lived greenhouse gases that alter the climate (Perera, 2017) While indoor air pollution remains a critical concern, it has declined in recent years, primarily due to a reduction in solid fuel use for cooking, which has dropped from approximately 60% of households globally.
From 1980 to 2012, the prevalence of certain health issues decreased from 42%, as reported by the World Health Organization (2014b) In contrast, ambient urban air pollution rose significantly, with an increase of approximately 8% between 2008 and 2013, and this upward trend is expected to persist (UNICEF, 2016) Additionally, human activities contributed around 35 billion tonnes of carbon dioxide to the atmosphere.
From 1990 to 2016, the annual greenhouse gas index tracked by NOAA rose by 40%, primarily due to increasing CO2 levels, reflecting a significant concern for climate change In 2021, atmospheric CO2 concentrations reached their highest point in 800,000 years, highlighting the urgency of addressing this issue Additionally, air pollution poses a serious health risk for approximately 2.9 billion people globally, especially in low- and middle-income countries where traditional fuels like kerosene, oil, and coal are commonly used for cooking and heating.
Approximately 2 billion children reside in countries where fine particulate matter levels exceed the World Health Organization's annual guideline of 10 μg/m3, posing significant long-term inhalation hazards Notably, around 300 million children live in areas where outdoor air pollution levels surpass international standards by at least six times This alarming situation is linked to numerous adverse health effects, particularly for developing fetuses and young children, who are more biologically and psychologically vulnerable to the harmful impacts of toxic air pollutants.
Climate change and air pollution from CO2 emissions pose significant threats to forest ecosystems, which cover 30% of the Earth's land and serve as crucial carbon sinks, storing 80% of above-ground carbon and over 70% of organic carbon in the soil The interplay between air pollution and climate change can transform forests from CO2 sinks into sources, impacting atmospheric conditions Key factors in this relationship include air quality related to CO2 levels and climate change effects on insulation, temperature, and precipitation The cyclical nature of this interaction means that changes in air quality and climate affect forest attributes such as CO2 sequestration, photosynthesis, transpiration rates, and biodiversity, which in turn influence environmental processes While the impacts are largely negative, there can be positive effects, such as enhanced forest growth due to the CO2 fertilization effect, which increases gross primary productivity and leaf growth, leading to greater emissions of biogenic volatile organic compounds.
Asian forests face significant threats from pollution and global warming, primarily driven by late 20th-century development activities These environmental challenges have led to an increase in insect and disease pests, drought conditions affecting tree health, disruptions in biogeochemical cycles, and altered precipitation patterns.
2019) Moreover, climate change factors such as greenhouse gasses, including CO2, and extreme events (drought, floods, heatwaves, and extreme precipitation) also have adverse effects on forest health (Wang et al., 2020).
Research gap and question
Previous research has highlighted the importance of renewable energy, economic activities, and free trade for policymakers in various countries to attain environmental sustainability through the carbon market (Yu et al., 2022) This study investigates the long-term equilibrium relationship between CO2 emissions and key driving factors, including Renewable Energy Consumption (REC), Gross Domestic Product (GDP), the square of GDP (GDP²), Natural Gas Consumption (NGC), and Trade Freedom (TF).
A study examining 25 developing countries from 2001 to 2019 highlights the informative value of various factors in understanding CO2 emissions (Yu et al., 2022) The findings indicate a direct relationship between net greenhouse gas (NGC) emissions and CO2 levels, suggesting that economic development can have positive environmental effects Additionally, the research emphasizes the role of renewable energy sources (REC) in promoting air preservation and the benefits of trade freedom (TF) in reducing CO2 emissions However, the study acknowledges its limitation by focusing on only three factors, neglecting other significant influences Similarly, Zakarya et al (2015) analyzed the cointegrating relationship between CO2 emissions and economic variables, revealing that net foreign portfolio investment (FPI) flows and GDP contribute to long-term CO2 increases, with one-way positive causal relationships identified Nonetheless, Zakarya's research was limited to economic factors Therefore, our study aims to construct a more comprehensive model that includes both economic and social factors to provide a thorough assessment of influences on carbon emissions.
In addition, one study has classified factors related to CO2 emissions, including economic growth, industrial structure, technology, and urbanization in Vietnam (Li et al.,
Vietnam's carbon intensity relative to GDP rose by 48% between 2000 and 2010, driven largely by the growth of coal-fired power generation, industrial expansion, and increased transportation activities (World Bank, 2021) Despite this significant increase, existing studies have largely overlooked the effectiveness of carbon pricing mechanisms and market-based approaches in the country Consequently, researchers aim to explore the impacts of various methods, policies, and carbon pricing strategies on emission reduction in Vietnam.
Recent studies have examined various economic theories, such as the Environmental Kuznets Curve (EKC) hypothesis and the Growth Limit Theory, to analyze the link between economic development and environmental pollution Basar and Tosun (2021) supported the EKC hypothesis, demonstrating an inverted U-shaped relationship between environmental pollution and per capita income among 28 OECD countries from 1995 to 2015 In contrast, Li et al (2022) validated the Growth Limit Theory, revealing a complex correlation between China's GDP growth and SO2 emissions, which varies at different growth rates However, these studies predominantly focus on individual theories, lacking a comprehensive evaluation of the economic growth-environment pollution nexus To address this gap, the current study proposes an integrated approach that combines the Kuznets curve hypothesis with the Pollution Haven Hypothesis, aiming to enhance understanding of the intricate dynamics between economic growth and environmental pollution in Vietnam.
Previous studies have offered recommendations for market policies, but many have not adequately assessed their effectiveness or feasibility in the Vietnamese context Notably, one study suggested government policies aimed at establishing carbon markets, including the implementation of the Environmental Protection Law.
Despite advancements in 2020, Vietnam still lacks a comprehensive legal framework to support carbon markets (USAID, 2022) Previous research has often overlooked the engagement of key stakeholders such as government agencies, businesses, local communities, and civil society organizations, which is essential for gathering valuable insights on carbon market policies This study aims to offer tailored recommendations that align with Vietnam's unique capacity and context, focusing on the development of carbon market policies to effectively reduce environmental pollution.
To achieve the above specific objectives, the study needs to answer the following research questions:
Firstly, based on the model created and the actual situation, What are the main factors affecting the environment (carbon emissions)?
Second, what theories represent the relationship between environmental pollution and economic development?
Third, what is the current status of Vietnam's carbon market policy?
Fourth, what are the recommendations to promote the building and adoption of carbon markets in Vietnam?
Chapter 1 serves as a foundational overview for the study, featuring a literature review divided into two key sections The first section provides a comprehensive analysis of prior research on environmental issues and carbon markets, detailing significant theories, methodologies, and findings that inform carbon market implementation The second section identifies research gaps within the existing literature, pinpointing the shortcomings that this study intends to address.
This study identifies key areas needing further research due to limitations and unanswered questions in previous studies It formulates four specific research questions related to the environment and carbon markets, addressing identified gaps in the literature These questions serve as a guiding framework for the research investigation, with the researchers outlining the study's focus and goals to provide clear direction for subsequent chapters.
THEORETICAL FRAMEWORK
Overview of Carbon market
Governments around the globe are increasingly focused on reducing greenhouse gas (GHG) emissions, as highlighted by the Paris Agreement on Climate Change established at COP21, which serves as the first international legal framework for climate solutions Additionally, the Kyoto Protocol, adopted in 1997 during the UNFCCC Conference of Parties, aims to limit GHG concentrations to safe levels, ensuring that climate stability is not compromised.
According to the United Nations Environment Programme (UNEP) (2023), carbon markets are systems that price carbon, enabling governments and non-state actors to trade greenhouse gas emission credits to meet climate targets efficiently and cost-effectively These markets are divided into compliance markets, which operate under regulatory mandates, and voluntary markets, where participants, including regions, communities, and corporations, voluntarily aim to offset emissions to achieve goals like climate neutrality and net zero emissions Although the voluntary carbon market is less structured and serves as a complementary platform rather than an alternative to compliance markets, it allows for broader participation, especially from low-income groups and underrepresented regions This inclusivity enhances private investment in initiatives that foster "carbon smart development" (Karavai and Hinostroza, 2013).
Carbon markets, which include mandatory and voluntary types, have significantly expanded across Europe, the Americas, and Asia since the ratification of the Kyoto Protocol (Lien et al., 2020) The compliance market features three flexible mechanisms: emissions trading (ET), joint implementation (JI), and the Clean Development Mechanism (CDM), established by the Kyoto Protocol in 1997 (Bửhm & Dabhi, 2009) The mandatory market is based on countries' commitments under the UNFCCC to reduce greenhouse gas emissions, primarily utilizing CDM and JI projects Alongside the regulated market governed by the EU ETS and the Kyoto Protocol, voluntary markets have emerged, facilitating cap-and-trade and carbon offset initiatives through cooperation among various entities (Lien et al., 2020) The World Bank (2016) identifies several voluntary carbon offset markets, including Japan's Joint Credit Mechanism (JCM) and REDD+, which focuses on reducing emissions from deforestation and promoting sustainable forest management Ultimately, the carbon market aims to minimize emissions while controlling costs, based on the principle that emission reductions are globally equivalent, regardless of location (Bửhm & Dabhi, 2009).
The market-based approach to carbon pricing is effective for setting greenhouse gas (GHG) prices, as it promotes cost-efficient emissions reductions and initiates new carbon reduction programs (Marron, Toder, & Austin, 2015) Key carbon pricing tools include the emissions trading system (ETS), commonly known as cap-and-trade, the carbon tax system (CTS), and carbon offsets (USAID 2022; Madones and Flores, 2018; Lien et al., 2020) Each of these mechanisms presents unique advantages and challenges that depend on the specific conditions of a country or region (Lien et al., 2020).
An Emission Trading System (ETS) is designed to limit greenhouse gas emissions across significant sectors within a jurisdiction by capping the total emissions allowed It operates by allocating carbon credits (CCs), which serve as permits for holders to emit a specific amount of greenhouse gases during their economic activities The effective distribution and trading of these credits among market participants help establish a market-driven price mechanism The primary goal of an ETS is to reduce emissions over time, as gradually decreasing the number of available credits leads to a corresponding decline in total emissions within the jurisdiction.
"cap-and-trade" principle, the government will establish a maximum threshold for carbon emissions attributed to firms, after which they will be granted a specified quantity of
The EU Emissions Trading System (EU ETS), established in 2005, is the world's largest multinational emissions trading system, operating under a regulated "cap-and-trade" model to combat climate change Companies that exceed their emissions cap can buy carbon permits from those with surplus credits, facilitating a market-driven approach to emissions reduction This system has been instrumental in shaping the global carbon market, particularly between 2008 and 2012, and remains a cornerstone of Europe's climate policy (Bohm and Dabhi, 2009; Lien et al.).
In addition to the EU ETS, various nations, including the USA, Australia, and China, have implemented voluntary cap-and-trade systems for greenhouse gas (GHG) emissions Notably, certain regions in the US, despite not being part of the Kyoto Protocol, have developed their own trading schemes, such as the Midwestern Region GHG Reduction Accord, the Western Climate Initiative, and the Regional GHG Initiative Proponents argue that permit trading fosters environmentally friendly innovations and reduces emissions cost-effectively, while critics contend that it may hinder investments in low-carbon technologies and disproportionately benefit large polluters with high emission allowances.
Governments issue carbon credits (CCs) exclusively within their own jurisdictions, making CCs from one region invalid in others, and the quantity supplied is independent of other governments Each jurisdiction's unique auction and allocation mechanisms lead to significant price variations, hindering the creation of a unified global market price for CCs and preventing efficient global allocation to emitters Most CCs are derived from activities that reduce emissions, with over 95% belonging to projects that produce fewer carbon units than a baseline scenario, while only 5% come from carbon removal initiatives such as afforestation and direct air capture Demand for CCs is expected to surge, driven by corporate climate commitments, with over one-third of major publicly traded companies aiming for net-zero emissions by 2022 These companies plan to offset hard-to-reduce emissions through purchased carbon credits while striving to decarbonize their operations The voluntary carbon market surpassed $1 billion in 2021, and demand is projected to increase fifteenfold by 2030, reaching an annual volume of 1.5 to 2 gigatons.
Overview of Carbon emissions
Carbon dioxide (CO2) is a significant greenhouse gas defined by NASA, primarily produced from the extraction and combustion of fossil fuels, wildfires, and natural events like volcanic eruptions As reported by the World Bank (2023), CO2 is a byproduct of fossil fuel and biomass burning, as well as land use changes and various industrial activities It serves as the main anthropogenic greenhouse gas, crucial for measuring the global warming potential of other gases The combustion of carbon-based fuels since the Industrial Revolution has led to a rapid increase in atmospheric CO2 levels, accelerating global warming and contributing to anthropogenic climate change Furthermore, CO2 is a major factor in ocean acidification, as it dissolves in water to create carbonic acid, resulting in rising Earth's surface temperatures, rising sea levels, and significant impacts on global agriculture.
According to the World Bank (2023), carbon dioxide emissions primarily stem from the combustion of oil, coal, and gas, as well as from wood, waste materials, and industrial processes like cement production Emission intensity measures the average emission rate of pollutants relative to specific activities, allowing for comparisons of environmental impacts across different fuels and processes While carbon dioxide is a significant greenhouse gas, a comprehensive understanding of a country's climate influence requires consideration of additional gases such as methane and nitrous oxide, especially in agricultural economies The International Energy Outlook 2016 highlights the alarming rise in CO2 emissions from fossil fuel combustion, projecting a 7.6% increase by 2040, reaching 43.2 billion metric tons, significantly exceeding 2012 estimates of 32.3 billion metric tons The report emphasizes that emissions growth is particularly pronounced in developed countries reliant on fossil fuels to sustain economic growth, with OECD emissions expected to reach 13.8 billion metric tons and non-OECD emissions around 29.4 billion metric tons by 2040.
According to the International Energy Outlook 2023 (IEO2023) report, global energy-related CO2 emissions are projected to rise through 2050 in most scenarios, despite a decline in carbon intensity across all cases This reduction in emissions intensity indicates a shift towards lower-carbon energy sources, highlighting the ongoing transition in the energy sector.
By 2050, global energy-related CO2 emissions are projected to increase in all scenarios except for low economic growth Under high economic growth conditions, emissions are expected to rise significantly from 35.7 billion metric tons in 2022 to as much as 47.9 billion metric tons Conversely, in a low economic growth scenario, emissions may decrease to 35.1 billion metric tons by 2050.
2.2.2 The relationship between carbon emissions and economic
Economic growth remains a fundamental objective for nations worldwide; however, developed economies are increasingly prioritizing environmental impacts, while developing countries often neglect these issues in pursuit of growth Since the 1990s, carbon dioxide emissions from energy use in newly industrialized nations have exceeded those of developed countries This surge in greenhouse gas emissions, particularly CO2, is a significant contributor to climate change and environmental degradation, which has reached critical levels Numerous studies have explored the relationship between CO2 emissions and economic growth, frequently referencing the Environmental Kuznets Curve (EKC) and the Pollution Haven Hypothesis (PHH).
Figure 2.1: Kuznets curve hypothesis (EKC)
The Environmental Kuznets Curve (EKC) hypothesis posits an inverted U-shaped relationship between pollutants and per capita income, indicating that environmental pressure initially rises with income but eventually declines, as illustrated in Figure 2.1 Early economic growth correlates with increased CO2 emissions, while environmental degradation worsens until a certain income threshold is reached Numerous studies, including those by Agras et al (1999), Saboori et al (2015), and Samuel et al (2020), have explored this dynamic using environmental and income data across various countries Many media outlets argue that substantial economic activity negatively impacts the environment, suggesting that as income rises, so does the demand for improved environmental quality and investment resources For instance, Heidari et al (2015) found that in high GDP per capita countries like Singapore, economic growth is linked to reduced CO2 emissions Conversely, in countries with lower per capita income, such as Thailand, Indonesia, and the Philippines, CO2 emissions tend to fluctuate in tandem with economic growth Furthermore, Menyah and Wolde-Rufael (2010) demonstrated that the long-term income elasticity of CO2 emissions is lower than in the short term, indicating a decrease in emissions as income increases.
Research by Lopford and Yandle (2011) highlights the impact of the North American Free Trade Agreement (NAFTA) on air pollution in Mexico, indicating that trade openness influences environmental conditions by altering production methods and scaling operations The study applies the Environmental Kuznets Curve (EKC) theory, which suggests that while Mexico's environment has not significantly deteriorated post-NAFTA, it has also not seen substantial improvements This aligns with the EKC hypothesis, which posits that early economic growth is associated with abundant natural resources and minimal environmental harm However, as economic development progresses, the overexploitation of resources leads to increased pollution and environmental degradation This trend persists until the economy reaches a higher threshold, prompting advancements in environmentally friendly technologies and public services Consequently, as income rises, public awareness of environmental issues grows, driving demand for improved environmental quality, which often results in a shift towards cleaner production methods and stricter environmental regulations (Grossman and Kreuger, 1991 & 1995).
Flexible environmental regulations in developing countries create a comparative advantage that influences global financial trade patterns, as noted by Gill et al (2018) Developed nations, with strong economic potential, often seek to invest abroad, particularly in countries with lower costs to maximize profits on labor, land, and fuel (Solarin et al., 2017) This pursuit, however, leads to negative environmental consequences in developing nations, which possess abundant natural resources but lack stringent environmental protections As a result, foreign investors are drawn to these regions with lax regulations, allowing them to minimize costs associated with environmental taxes and social responsibility (Keho, 2017).
Copeland and Taylor (1994) suggest that trade liberalization prompts companies producing environmentally harmful goods to relocate from affluent nations with stringent environmental laws to developing countries that have less rigorous regulations Consequently, this trend of trade openness leads to an increase in environmentally detrimental production practices in developing nations.
Developing countries are increasingly becoming "pollution paradises" for dirty industries from advanced nations, leading to a potential carbon emissions crisis due to their weaker environmental regulations This trend fosters a trade cycle that benefits high CO2 emitting sectors, such as chemical manufacturing and resource exploitation, as noted by Cole et al (2010) The exploitation in these regions allows developed countries to reap significant profits while the scope of pollution expands, particularly with the rise in global trade Despite being aware of the environmental consequences, these nations often maintain lax management of production processes to attract foreign direct investment (FDI) Shahbaz et al (2019) highlight that Middle Eastern countries, in particular, experience heightened CO2 emissions linked to FDI.
Developing countries are increasingly becoming "Pollution Havens" due to three main factors (Guzel and Okumus, 2020) Firstly, these nations face significant cost challenges, as their limited financial capacity hinders the implementation and maintenance of environmental standards amidst the adverse effects of foreign direct investment (FDI) on their environments Secondly, funding shortfalls result in a lack of resources, including skilled experts and modern equipment, necessary for upholding high environmental standards (Guzel and Okumus, 2020) Lastly, the economic development priorities differ significantly between developing and developed nations; while developing countries often prioritize income and employment over health and environmental concerns, they are also undergoing rapid economic transformations that lead to increased CO2 emissions as they shift from traditional agriculture to manufacturing and urbanization.
In developed nations, the shift from a manufacturing-based economy to a service-oriented industry is expected to significantly reduce environmental harm (Guzel and Okumus, 2020) The PHH theory examines this transition through three key aspects: the relocation of environmentally damaging industries from developed to developing countries via foreign direct investment (FDI), the transfer of hazardous waste to developing nations through trade, and the unchecked exploitation of natural resources, particularly in energy and forestry sectors, for economic advancement.
The author, drawing on the research of Mulali et al (2015), observes that there is no correlation between environmental and economic Kuznet curves in Vietnam from 1981 to 2011, indicating challenges in reducing carbon emissions despite economic growth Vietnam, rich in natural resources and open to foreign direct investment (FDI), still lacks stringent environmental protection policies and effective regulations for resource exploitation and waste management Thus, implementing a carbon market in Vietnam is crucial to mitigate the environmental impacts of industrialization, aligning with global practices.
Factors affecting carbon emissions
(1) GDP per capita: GDP growth inevitably leads to an increase in carbon emissions, and GDP and environmental degradation are closely tied (Guo, Ren, and Shi,
A study conducted in 2016 revealed that carbon emissions rise in tandem with GDP, but the influence of GDP growth on emissions diminishes following an economic transition Liu (2005) also explored the relationship between GDP and CO2 emissions, finding a negative correlation between income levels and CO2 emissions This suggests that as income increases, CO2 emissions may decrease, aligning with the findings of Ali, Razman, and Awang.
The relationship between GDP growth and carbon emissions is complex, as highlighted by various studies While a growing GDP has been linked to increased electricity generation and consumption, leading to higher carbon emissions (2020), Begum et al (2015) found that during the period from 1970 to 1980, rising GDP per capita was associated with a decrease in CO2 emissions However, from 1980 to 2009, CO2 emissions sharply increased alongside GDP growth Their research indicates that both energy consumption and GDP per capita positively impact per capita carbon emissions in the long term Additionally, Begum et al (2017) noted that while high GDP growth boosts energy consumption, it also results in elevated carbon emissions Asumadu and Owusu (2017) further revealed that a 1% increase in GDP per capita could lead to a 1.45% reduction in carbon emissions, whereas a 1% rise in industrialization would increase emissions by 1.64% Thus, while economic growth may reduce environmental pollution over time, industrialization poses significant challenges to air quality and public health.
Foreign Direct Investment (FDI) plays a significant role in carbon emissions, as highlighted by recent environmental economics literature (Huang et al., 2019; Zhang and Zhang, 2018) Researchers have explored two opposing hypotheses regarding the relationship between FDI and carbon emissions: the pollution haven hypothesis suggests that FDI can harm the environment (Nasir et al., 2019; Liu et al., 2017), while the pollution halo hypothesis posits that FDI may enhance environmental quality (Valrie, 1999; Mert and Caglar, 2020; Jiang et al., 2019; Liu et al., 2017; Zhang and Zhou, 2016) Additionally, the impact of FDI on sustainable development is multifaceted, influenced by factors such as energy sources, institutional frameworks, preferential policies, and the economic development of the host country (Mann and Sauvant, 2017; Bu et al., 2019) Consequently, significant gaps remain in the research exploring the connection between FDI and carbon emissions (Salahuddin et al., 2018).
The pollution haven hypothesis posits that foreign direct investment (FDI) can worsen environmental degradation, as firms in pollution-intensive sectors often relocate to countries with lax environmental standards, leading to increased carbon emissions and "carbon leakage" (Abid et al., 2021; Luo et al., 2021) This trend is exacerbated by uneven global climate policies, prompting nations with stricter emission controls to shift production to regions with weaker regulations, undermining global carbon reduction efforts (Luo et al., 2021) Conversely, FDI can also yield positive outcomes for host countries by facilitating the transfer of advanced technologies and enhancing financial development, which can improve carbon management practices and promote environmentally friendly innovations (Khan and Ahmad, 2021; Bose and Kohli, 2018; Ahmad et al., 2019) This duality illustrates the pollution halo hypothesis, where FDI can simultaneously contribute to environmental challenges and offer solutions for sustainable development.
Energy consumption is a critical factor in the global challenge of sustainable development, with rising CO2 emissions posing significant threats, particularly to developing nations Developed countries' heavy reliance on energy leads to excess waste, contributing to environmental degradation The automotive industry's dependence on fossil fuels, especially coal, is a primary source of these emissions, directly linking energy use to economic growth Research by Ortiz et al (2020) highlights that energy consumption is the leading cause of CO2 emissions, exacerbating global warming and urging E7 countries to implement effective policies addressing energy use and environmental pollution.
In 2017, global energy demand rose by 2.1%, significantly higher than the 1.2% increase in 2016 and the 0.9% average growth over the preceding five years Notably, each E7 country ranks among the top 20 highest CO2 emitters globally, contributing to substantial pollution levels in 2016 (Ortiz et al.).
From 2005 to 2016, China contributed nearly one-third of global carbon emissions, driven by increased domestic consumption and the growth of energy-intensive industries, leading to a carbon emissions intensity higher than the global average In 2017, global fossil fuel CO2 emissions reached 36.3 billion tons, with approximately one-third attributed to China To mitigate CO2 emissions, it is crucial for high-energy-consuming nations to reduce energy consumption intensity through industrial restructuring and the gradual phasing out of excess capacity.
Population growth significantly drives carbon emissions, accounting for 40%–60% of emissions according to the United Nations Population Fund (UNPF, 2009) Rapid population expansion increases the demand for housing, transportation, water, electricity, education, and healthcare, resulting in higher energy requirements and carbon emissions Urban areas, characterized by their larger populations and economic prosperity, contribute substantially to energy consumption, responsible for 75% of total energy use and generating up to 85% of energy-related carbon emissions (Satterthwaite, 2008; Feng et al., 2013).
The richest 10% of the global population is responsible for nearly half of all carbon emissions, highlighting the significant impact of population size and structure on production and consumption behaviors (2021) Changes in household size can influence consumption patterns, thereby affecting carbon emissions (Zhu and Peng, 2012) Additionally, research by Casey and Galor (2017) indicates that lower fertility rates can lead to increased per capita income and reduced carbon emissions, with a 1% decrease in population growth potentially resulting in a 7% rise in income while lowering emissions Population dynamics also affect energy use and carbon emissions through shifts in consumption preferences, particularly among the elderly, who tend to engage in less transportation due to mobility issues (Brounen et al., 2012; Kim et al., 2020) This reduced reliance on private cars can lower energy consumption and carbon emissions (McDonald et al., 2006) However, increased indoor time among the elderly raises the demand for heating and cooling, leading to higher energy use (Jiang and Hardee, 2011; Bardazzi and Pazienza).
Research indicates that factors such as population size, affluence, and technology have a greater influence on CO2 emissions than population age (Fan et al., 2006) Additionally, Dalton et al (2008) suggest that an aging population can lead to a significant reduction in long-term CO2 emissions, potentially decreasing them by nearly 40% in scenarios with low population growth.
Forests have significant long-term effects on carbon dioxide (CO2) emissions, as highlighted by Waheed et al (2018), indicating that expanding renewable forest areas could help mitigate these emissions They are essential for environmental sustainability and play a vital role in climate change mitigation and adaptation As the largest natural carbon sequestration systems, forests are crucial in reducing CO2 levels Consequently, governments worldwide are actively working to increase forest coverage (Zhu et al., 2023) Additionally, forests act as the primary terrestrial carbon sink, absorbing approximately 27% of global annual emissions from fossil fuels (Jandl et al.).
To combat climate change over the next 30–50 years, nations and international organizations must prioritize expanding forest coverage and enhancing productivity, as emphasized by Yin et al (2022) The expansion of forests significantly boosts ecological carbon sequestration and absorbs substantial amounts of carbon dioxide (Qiu et al., 2023; Yin et al., 2022) According to the International Union for Conservation of Nature (2021), expanding forests is the most effective strategy for environmental restoration, supporting the carbon cycle, preserving livelihoods, and promoting sustainable development Forest preservation is crucial for maintaining the global carbon cycle, as highlighted in the Food and Agriculture Organization's Global Forest Resources Assessment 2005.
Forests, which cover 264 million hectares and absorb approximately 1.5 gigatonnes of carbon dioxide annually, have significantly declined to their lowest global area, according to the Food and Agriculture Organization (2015) Stern (2006) emphasizes that controlling or halting deforestation is one of the most cost-effective strategies for reducing CO2 emissions The United Nations Framework Convention has introduced financial incentives to promote deforestation reduction; however, a major challenge remains the lack of sufficient resources both domestically and internationally Despite their critical role in climate regulation and sustaining life, forests face substantial challenges that necessitate urgent precautionary measures for restoration (Waheed et al., 2018).
Urbanization is a critical driver of modern economic and social development, with the global urban population increasing from 1.35 billion in 1970 to 4.22 billion in 2018, raising the urbanization rate from 36.6% to 55.3% The United Nations projects that by 2050, over 6.6 billion people will reside in urban areas, resulting in an urbanization rate of 68% However, the relationship between urbanization and carbon dioxide emissions remains contentious Studies by Wang et al (2021), Khan and Su (2021), and Shen et al (2017) suggest that urbanization, through factors like expanded built-up areas and increased traffic, contributes significantly to rising carbon emissions For instance, research indicates that a 1% increase in city population correlates with a 0.20% rise in carbon emissions (Wang et al., 2016) Conversely, Han et al (2019) assert that urbanization can aid in achieving emission reduction targets and alleviating environmental pressures, while Zhu et al (2019) highlight its potential to enhance green development efficiency Additionally, Liu and Liu (2019) and Zhang et al (2017) propose that the impact of urbanization on carbon emissions may evolve over time, initially fostering reductions before ultimately leading to increased emissions as urbanization progresses.
In a study involving 141 countries, an inverted U-shaped relationship was identified between urbanization and carbon emissions, indicating that once urbanization surpasses a certain threshold, its positive effects on carbon emissions may be reversed Conversely, Rafiq et al (2016) suggest that urbanization does not have a significant impact on carbon dioxide emissions.
CURRENT OVERVIEW OF THE CARBON MARKET IN THE WORLD AND IN
Evaluate the current state of carbon market application in the world and experiences with Carbon
3.1.1 Current status of environmental pollution and Carbon market in the world
Environmental pollution has escalated since the onset of industrialization, driven by human activities such as waste generation, industrial processes, and unsustainable agricultural practices This pollution significantly impacts Earth's fragile ecosystems, manifesting in various forms, including light and noise However, the most critical types are air, land, and water pollution, which pose severe threats to human existence.
Figure 3.1: Average PM2.5 concentration in the most polluted countries worldwide in 2023 (in micrograms per cubic meter of air)
Billions of people globally face hazardous air pollution levels, particularly fine particulate matter (PM2.5), with underdeveloped nations being the most affected Over 90% of the populations in Bangladesh, Pakistan, and India experience harmful air quality Major contributors to air pollution include fossil fuel burning for electricity generation and transportation, which is responsible for approximately two-thirds of the over eight million annual deaths linked to outdoor air pollution Heart disease and strokes are the primary health issues arising from this environmental crisis.
Land pollution refers to the degradation of the Earth's surfaces due to human activities, including the use of agricultural fertilizers and pesticides, littering, waste dumping, and deforestation This pollution poses serious threats to wildlife and human health, contributing to land deterioration Currently, global land degradation is accelerating, jeopardizing food and water security for millions The United Nations Convention to Combat Desertification reports a loss of at least 100 million hectares of productive land annually, with Sub-Saharan Africa experiencing significant degradation, increasing by over 8% from 2015 to 2019.
Water pollution is primarily caused by human activities, with agricultural pesticide run-off leading to nitrate contamination in groundwater and untreated sewage exposing millions to diseases like cholera and dysentery Solid waste, particularly plastic debris, has become a significant source of water contamination in rivers, lakes, and oceans Additionally, oil spills, such as the catastrophic 2010 Deepwater Horizon incident, have devastating effects on marine life and habitats, with the full impact of this disaster still being assessed over a decade later.
Addressing climate change driven by excessive human-induced greenhouse gas emissions is a critical global challenge Climate scientists indicate that to achieve a 50% chance of keeping the global temperature rise to 2 degrees Celsius above pre-industrial levels, carbon dioxide equivalents must be reduced by 40%-70% compared to 1990 levels.
2050 compared to 2010 levels (Allen et al., 2009; IPCC, 2014; Pollitt M.G., 2019)
Figure 3.2: Carbon emissions per capita of BRICs in the period 1990-2022
The BRICS countries—Brazil, Russia, India, China, and South Africa—are emerging economic powerhouses currently undergoing structural transitions, with their growth heavily dependent on energy consumption, which in turn contributes to energy depletion and increased greenhouse gas emissions As a response, achieving carbon peaks and carbon neutrality has become a global consensus, with around 130 nations aiming for carbon neutrality by the mid-21st century, representing about 61% of global carbon emissions Carbon neutrality signifies a balance between carbon emissions and sequestration, posing both a pathway for sustainable development and a significant challenge for the economic growth of BRICS nations.
The Emissions Gap Report (2021) highlights that leveraging all available carbon market mechanisms could lead to cost reductions of 40% to 60% by 2030 The World Bank's tenth edition of the annual State and Trends of Carbon Pricing study reveals that only 7% of global emissions were regulated by a carbon tax or Emissions Trading System (ETS) a decade ago Emissions trading, based on the "cap and trade" principle, serves as a market-based policy for reducing pollutants and addressing climate change while protecting both the environment and public health (ICAP, 2024; EPA, 2023).
Figure 3.3: European emissions by source (emission by source and verified emissions of ETS stationary installations, in million tCO2-eq)
As of 2023, 73 instruments contribute to nearly 25% of global greenhouse gas emissions, highlighting the significance of emissions trading systems (ETS) and carbon taxes in regulating these emissions ETS allows lower-emitting entities to sell excess allowances to higher emitters, while carbon taxes impose a direct cost on carbon emissions Although emerging economies are increasingly adopting these mechanisms, high-income countries remain the primary users Recent implementations of these tools have been observed in Austria, Indonesia, and various local jurisdictions in the United States and Mexico Australia plans to introduce a rate-based ETS in July 2023, with countries like Chile, Malaysia, Vietnam, Thailand, and Turkey also pursuing direct carbon pricing initiatives The EU emissions trading scheme (EU ETS) generates demand for carbon credits, despite criticisms regarding its environmental integrity Since 1990, EU28 GHG emissions have decreased by 34% by 2020, with significant reductions primarily in the manufacturing and energy sectors, largely due to installations governed by the ETS.
Figure 3.4 Emissions stayed well below the cap while the carbon price recently rallied
The EU ETS emissions management has evolved from a bottom-up approach in Phases 1 and 2, which led to an excess of European Union Emissions Allowances (EUAs), to a more structured system with a single EU-wide ceiling established in 2013 This ceiling decreases annually based on a Linear Reduction Factor (LRF), which increased from 1.74% to 2.2% in Phase 4, impacting the total EUAs issued Since 2013, power plants have not received free allowances, and the percentage of installations receiving these allowances has dropped significantly from 80% in 2013 to 30% by 2020, with exceptions for sectors at high risk of carbon leakage.
Starting in 2021, free allocation of carbon allowances will persist in sectors at high risk of carbon leakage For industries less impacted, allocation is determined by historical production levels and updated technical product standards, which have been revised twice since 2008 to incorporate technological progress However, for facilities not deemed at risk of carbon leakage, free allocation will progressively decline after 2026, reducing from a maximum of 30% to zero by the end of Phase 4 in 2030 (Bijnens and Swartenbroekx, 2022).
Since the launch of the EU Emissions Trading System (ETS), prices have remained low due to a surplus of European Union Emissions Allowances (EUAs) exceeding verified emissions levels The initial pilot phase featured generous national allocations with most EUAs distributed for free, leading to a price drop to $0 in 2007 as allowances could not be banked for future phases The 2008 financial crisis characterized Phase 2, causing a significant reduction in emissions and an oversupply of permits Phase 3 introduced key changes, including auctions as the primary allocation method and new rules for free grants; however, from 2013 to 2017, surplus EUAs continued to accumulate, keeping prices below €9/tCO2-eq, which hindered green investments To improve price signals, reforms were enacted, such as the postponement of 900 million EUAs to 2019-2020 and the establishment of a Market Stabilisation Reserve (MSR) While the carbon price trend in the US indicates an upward trajectory, EU ETS emissions are showing signs of decline.
Unlike the power sector, the manufacturing industry has seen minimal reduction in CO2 emissions over the past decade, according to EU ETS data Future emission reductions will require not only innovation but also technical advancements and a shift in economic activities towards more CO2-efficient businesses Even small adjustments in sector-wide operations away from high-emission enterprises could lead to significant reductions in emissions.
In addition to encouraging reallocation, a rising CO2 price would also spur innovation since higher CO2 costs might make certain industrial enterprises unprofitable.
3.1.2 International experience on applying carbon market to limit environmental pollution
The New Zealand Carbon Market (NZ-ETS), established in 2008, encompasses a significant portion of the country's economy and has undergone evaluations and modifications in 2011, 2015, and 2017 Notably, the market includes the forestry sector, which plays a crucial role in absorbing greenhouse gases rather than emitting them The NZ-ETS operates on a cap-and-trade system, promoting effective carbon management and sustainability in New Zealand.
In New Zealand, emission credits are allocated either for free or through auctions, with the government mandating all industries to report their annual emissions to comply with quotas Organizations that neglect their data collection duties or intentionally misreport face fines Initially, New Zealand aimed to integrate its emissions trading market with the international carbon market under the Kyoto Protocol, but since 2015, the focus has shifted solely to the domestic market, disregarding international credits By 2019, over 2,360 businesses were registered, representing approximately 52% of the nation's total emissions Additionally, the government implemented a floor price mechanism, establishing a fixed carbon price of 25 New Zealand dollars (NZD).
The New Zealand carbon market, while similar to its European counterpart, features distinct differences Notably, credit allocation in New Zealand is entirely free, and the market includes the forestry sector, which acts as a carbon sink and does not require emission quotas like other industries However, forestry businesses must secure credits for any emissions anticipated from clearing or converting forests Additionally, until 2015, credits from other mitigation mechanisms, such as the Clean Development Mechanism (CDM) and Joint Implementation (JI), were not traded on the market, and after that year, international mitigation credits ceased trading altogether Furthermore, while the European carbon market primarily regulates downstream emissions, the New Zealand model focuses on upstream emissions businesses.