LV Thạc sỹ_Bussiness strategy for a new established firm in local clean development mechanism market

ACRONYMS AND ABBREVIATIONNo Abbreviation Description 1 ADB Asian Development Bank 2 CDM Clean Development Mechanism 3 CER Certified Emission Reduction 5 DNA Designated National Authority

………

ACRONYMS AND ABBREVIATION

No Abbreviation Description

1 ADB Asian Development Bank

2 CDM Clean Development Mechanism

3 CER Certified Emission Reduction

5 DNA Designated National Authority

6 DOE Designated Operational Entity

7 EIA Energy Information Agency

8 ERPA Emission Reduction Purchase Agreement

11 tCO2 Million tons of Carbon Dioxide

12 tCO2e Million tons of Carbon Dioxide equivalent

13 PDD Project Design Document

15 UNDP United Nations Development Program

16 UNFCCC United Nations Framework Convention on Climate Change

TABLE OF CONTENTS

ACKNOWLEDGEMENTS 1

ACRONYMS AND ABBREVIATION 2

TABLE OF CONTENTS 3

EXECUTIVE SUMMARY 5

CHAPTER 1: INTRODUCTION 6

1 Rationale 6

2 Research Objective 6

3 Thesis Structure 6

4 Scope and limitation of research 7

CHAPTER 2: BACKGROUND 8

1 Michael Porter’s 5 Forces Model 8

2 Niche Market: 11

3 Blue Ocean Strategy 11

4 Value Chain Conrol 12

CHAPTER 3: CDM FUNDAMENTALS 15

1 Introduction 15

2 CDM and the Carbon Market 15

3 Kyoto Protocol and the CDM 16

i) Kyoto Protocol 16

ii) Clean Development Mechanism 16

iii) Kyoto Protocol and CDM Issues 17

iv) CDM Project Cycle 18

4 Opportunities and Threats from CDM Activities 21

i) Opportunities from CDM Projects 21

ii) Threats from CDM Projects 22

CHAPTER 4: GLOBAL CARBON MARKET 26

1 The Structure of the Carbon Market 26

2 Global Carbon Credits: Demand and Supply 27

3 Global Carbon Credits: Buyer and Seller 31

4 Volume and Pricing in the Carbon Market 33

CHAPTER 5: CDM CAPACITY DEVELOPMENT IN VIETNAM 35

1 Institutional Actors for CDM Activities 36

2 Approval Procedures and Management Rules 36

CHAPTER 6: VIETNAM CARBON MARKET 39

1 Economic Profiles 39

2 4P Market Performance Model 39

i) Price 40

ii) Product 40

iii) Promotion 42

iv) Placement 43

CHAPTER 7: VMPEC’S BUSINESS MODEL, STRATEGY 45

1 Overview 45

2 Services 46

3 Strategy and Activities 47

CHAPTER 8: RESULTS AND ACHIEVEMENT 49

CHAPTER 9: RECOMMENDATION AND CONCLUSION 50

REFERENCES 51

EXECUTIVE SUMMARY

Build up a new company which operates in a new market (called Blue Ocean) is difficultand needs a strong strategy My company VMPEC found 2009 operating in Emission ReductionTrading related Kyoto Protocol has been survived and started growing can be considered as asuccessful apply

With aim to appreciate the correct strategy and effective management of companyVMPEC this thesis will review aspect of VMPEC to give good recommedation to BOM of thecompany So, I chose the topic " BUSSINESS STRATEGY FOR A NEW ESTABLISHED FIRM IN LOCAL CDM MARKET” as my thesis with the desire to contribute a small

contribution to the development of VMPEC

Strategy of VMPEC based on 5 forces model of Michal Porter, operating in niche market

is Blue Ocean strategy and applied Value Chain Control

And after all, VMPEC’s achievement for applied right methodology into its business isthe results from the research

End of the these, there are some brief experiences and recommendation for new player inthe market want to build up his new business in Vietnam

CHAPTER 1: INTRODUCTION

1 Rationale

With the strong development of Vietnam economy and the trend to integrate deeper withthe World economy, opening a new business in Vietnam face many difficulties in compete withcurrent strong players in the market and new invisible competitors from all over the world

How a new SME can survive in the economy with limited resource and can be one of theleaders of the market?

To do this, requires a smart strategy and a effective business model to achieve thisambition

During the time taking the MBA course in CFVG, I wonder how can apply theseknowledge in to the fact and make it to be practical knowledge And luckily, I have some friendshave the same expectation, we opened Vietnam Minerals, Power and Environments Corporation(VMPEC) to apply our knowledge and do the business we wanted After nearly 2 years VMPECexisted in the market and is recognized as a CDM player in the market, I choose the topic

"Business Strategy to Establish new local firm in CDM market" as my thesis with the desire tocontribute a small contribution to the development of SME development in Vietnam market

3 Thesis Structure

Chapter 1 - Introduction: this chapter provides general information about the thesis.Chapter 2 - Background: this chapter provides general background information which Ilearnt from CFVG and applied into my business

Chapter 3 - CDM Fundamentals: this brings to people basic understanding and knowledgeabout CDM and its original and history

Chapter 4 - Global Carbon Market: This gives a picture of current world carbon market.Chapter 5 – CDM Capability Development in Vietnam: This summarized the potentialcapability of Vietnam’s CDM market

Chapter 6 - Vietnam Carbon Market: This gives a picture of current Vietnam carbonmarket

Chapter 7 – Introduce about VMPEC’s activities in last 2 years

Chapter 8 - Achievement

Chapter 9 - Recommendations and Conclusion

In addtion to the acknowledgement, executive summary, table of contents, table offigures, appendices and references

4 Scope and limitation of research

The research focuses on establish new company in new business in Vietnam In particular

it concentrates on the case-study of VMPEC – a 2 years company working in SustainableDevelopment and Climate Change business

Porters model is based on the insight that a corporate strategy should meet theopportunities and threats in the organizations external environment Especially, competitivestrategy should based on an understanding of industry structures and the way they change.

Porter has identified five competitive forces that shape every industry and every market.These forces determine the intensity of competition and hence the profitability and attractiveness

of an industry The objective of corporate strategy should be to modify these competitive forces

in a way that improves the position of the organization Porters model supports analysis of thedriving forces in an industry Based on the information derived from the Five Forces Analysis,management can decide how to influence or to exploit particular characteristics of their industry

Overview

The Five Forces model of Porter is an 'outside looking in' business unit strategy tool that

is used to make an analysis of the attractiveness or value of an industry structure

The Competitive Forces analysis is made by the identification of 5 fundamentalcompetitive forces:

 The entry of competitors (how easy or difficult is it for new entrants to start to compete,which barriers do exist)

 The threat of substitutes (how easy can our product or service be substituted, especiallycheaper)

 The bargaining power of buyers (how strong is the position of buyers, can they worktogether to order large volumes)

 The bargaining power of suppliers (how strong is the position of sellers, are there many oronly few potential suppliers, is there a monopoly)

 The rivalry among the existing players (is there a strong competition between the existingplayers, is one player very dominant or all all equal in strength/size)



Threat of New Entrants

The easier it is for new companies to enter the industry, the more cut-throat competitionthere will be Factors that can limit the threat of new entrants are known as barriers to entry.Some examples include:

 Existing loyalty to major brands

 Incentives for using a particular buyer (such as frequent shopper programs)

 High fixed costs

 Scarcity of resources

 Government restrictions or legislation

 Entry protection (patents, rights, etc.)

 Economies of product differences

 Brand equity

 Switching costs or sunk costs

 Capital requirements

 Access to distribution

 Absolute cost advantages

 Learning curve advantages

 Expected retaliation by incumbents

Power of Suppliers

This is how much pressure suppliers can place on a business If one supplier has a largeenough impact to affect a company's margins and volumes, then they hold substantial power.Here are a few reasons that suppliers might have power:

 There are no substitutes

 The product is extremely important to the buyer, they cannot do without it

 The supplying industry has a higher profitability than the buying industry

 Supplier switching costs relative to firm switching costs

 Degree of differentiation of inputs

 Presence of substitute inputs

 Supplier concentration to firm concentration ratio

 Threat of forward integration by suppliers relative to the threat of backward integration byfirms

 Cost of inputs relative to selling price of the product

Power of Buyers/ Customers

This is how much pressure customers can place on a business If one customer has a largeenough impact to affect a company's margins and volumes, then they hold substantial power.Here are a few reasons that customers might have power

 Small number of buyers

 Purchases of large volumes

 Switching to another (competitive) product is simple

 The product is not extremely important to the buyer, they can do without it for a period oftime

 Customers are price sensitive

 Buyer concentration to firm concentration ratio

 Bargaining leverage

 Buyer volume

 Buyer switching costs relative to firm switching costs

 Buyer information availability

 Ability to backward integrate

 Availability of existing substitute products

 Buyer price sensitivity

 Price of total purchase

Availability of Substitutes

What is the likelihood that someone will switch to a competitive product or service? If thecost of switching is low, then this poses to be a serious threat Here are a few factors that canaffect the threat of substitutes:

 Buyer propensity to substitute

 Relative price performance of substitutes

 Buyer switching costs

 Perceived level of product differentiation

 Fad and fashion

 Technology change and product innovation

Competitive Rivalry

And last but not least, this describes the intensity of competition between existing firms in

an industry Highly competitive industries generally earn low returns because the cost ofcompetition is high A highly competitive market might result from:

 Many players of about the same size, no dominant firm

 Little differentiation between competitors products and services

 A mature industry with very little growth

 Companies can only grow by stealing customers away from competitors

For many industries, this is the major determinant of the competitiveness of the industry.Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensionssuch as innovation, marketing, etc

 Number of competitors

 Rate of industry growth

 Intermittent industry overcapacity

 Exit barriers

 Diversity of competitors

 Informational complexity and asymmetry

 Fixed cost allocation per value added

 Level of advertising expense

2 Niche Market

A niche market is the subset of the market on which a specific product is focusing;therefore the market niche defines the specific product features aimed at satisfying specificmarket needs, as well as the price range, production quality and the demographics that is intended

to impact

Every single product that is on sale can be defined by its niche market As of special note,the products aimed at a wide demographic audience, with the resulting low price (due to priceelasticity of demand), are said to belong to the mainstream niche—in practice referred to only asmainstream or of high demand Narrower demographics lead to elevated prices due to the sameprinciple So to speak, the Niche Market is the highly specialized market that tries to surviveamong the competition from numerous super companies

In practice, product vendors and trade businesses are commonly referred as mainstreamproviders or narrow demographics niche market providers (colloquially shortened to just nichemarket providers) Small capital providers usually opt for a niche market with narrowdemographics as a measure of increasing their gain margins

Nevertheless, the final product quality (low or high) is not dependent on the priceelasticity of demand; it is associated more with the specific needs that the product is aimed atsatisfy and in some cases with brand recognition with which the vendor wants to be associated(e.g., prestige, practicability, money saving, expensiveness, planet environment conscience,power, &c.)

3 Blue Ocean Strategy

Blue Ocean Strategy is a business strategy book first published in 2005 and written by

W Chan Kim and Renée Mauborgne of The Blue Ocean Strategy Institute at INSEAD, one ofthe top European business schools The book illustrates the high growth and profits anorganization can generate by creating new demand in an uncontested market space, or a "BlueOcean", than by competing head-to-head with other suppliers for known customers in an existingindustry[1].bBased on 15 years of research, the authors used 150 successful strategic movesspanning 120 years of business history and across 30 industries to bring the Blue Ocean Strategytheory to life

The metaphor of red and blue oceans describes the market universe.

Red Oceans are all the industries in existence today—the known market space In the red

oceans, industry boundaries are defined and accepted, and the competitive rules of the game areknown Here companies try to outperform their rivals to grab a greater share of product or servicedemand As the market space gets crowded, prospects for profits and growth are reduced

Products become commodities or niche, and cutthroat competition turns the ocean bloody Hence,the term red oceans

Blue oceans, in contrast, denote all the industries not in existence today—the unknownmarket space, untainted by competition In blue oceans, demand is created rather than foughtover There is ample opportunity for growth that is both profitable and rapid In blue oceans,competition is irrelevant because the rules of the game are waiting to be set Blue ocean is ananalogy to describe the wider, deeper potential of market space that is not yet explored

The corner-stone of Blue Ocean Strategy is 'Value Innovation' A blue ocean is createdwhen a company achieves value innovation that creates value simultaneously for both the buyerand the company The innovation (in product, service, or delivery) must raise and create value forthe market, while simultaneously reducing or eliminating features or services that are less valued

by the current or future market The authors criticize Michael Porter's idea that successfulbusinesses are either low-cost providers or niche-players Instead, they propose finding value thatcrosses conventional market segmentation and offering value and lower cost

4 Value Chain Conrol

Value chain analysis

Michael Porter in 1985 introduced in his book ‘ The Competitive Advantage’ the concept

of the Value Chain He suggested that activities within the organisation add value to the serviceand products that the organisation produces, and all these activities should be run at optimumlevel if the organisation is to gain any real competitive advantage If they are run efficiently thevalue obtained should exceed the costs of running them i.e customers should return to theorganisation and transact freely and willingly Michael Porter suggested that the organisation issplit into ‘primary activities’ and ‘support activities’

Primary activities

Inbound logistics : Refers to goods being obtained from the organisations suppliers ready

to be used for producing the end product

 Operations : The raw materials and goods obtained are manufactured into the final

product Value is added to the product at this stage as it moves through the productionline

 Outbound logistics : Once the products have been manufactured they are ready to be

distributed to distribution centres, wholesalers, retailers or customers

 Marketing and Sales: Marketing must make sure that the product is targeted towards the

correct customer group The marketing mix is used to establish an effective strategy, anycompetitive advantage is clearly communicated to the target group by the use of thepromotional mix

 Services: After the product/service has been sold what support services does the

organisation have to offer This may come in the form of after sales training, guaranteesand warranties

 Support Activities

The support activities assist the primary activities in helping the organisation achieve itscompetitive advantage They include:

 Procurement: This department must source raw materials for the organisation and obtain

the best price for doing so For the price they must obtain the best possible quality

 Technology development: The use of technology to obtain a competitive advantage

within the organisation This is very important in today’s technological drivenenvironment Technology can be used in production to reduce cost thus add value, or inresearch and development to develop new products, or via the use of the internet socustomers have access to online facilities

 Human resource management: The organisation will have to recruit, train and develop

the correct people for the organisation if they are to succeed in their objectives Staff willhave to be motivated and paid the ‘market rate’ if they are to stay with the organisationand add value to it over their duration of employment Within the service sector egairlines it is the ‘staff’ who may offer the competitive advantage that is needed within thefield

 Firm infrastructure: Every organisations needs to ensure that their finances, legal

structure and management structure works efficiently and helps drive the organisationforward

CHAPTER 3: CDM FUNDAMENTALS

1 Introduction

As a flexible mechanism contained in Kyoto Protocol, Clean Development Mechanism(CDM) offers developing countries an opportunity to attract investment in clean energytechnologies and promote sustainable development After the entry into force of Kyoto Protocol

in early 2005, the CDM gained momentum However, besides the emission reduction benefits,the sustainability benefits for developing countries have been continuously doubted

The Kyoto Protocol’s final entry into force in February 2005 marked a shift fromnegotiation to concrete action According to the Protocol, Annex-I parties have the bindingquantified reduction commitments to reduce their greenhouse gas (GHG) emissions by 5.2%below their 1990 level during the period 2008 to 2012 Besides through the concrete domesticactions to achieve the emission reduction targets, Kyoto protocol also creates three flexiblemechanisms to assist Annex I countries in reaching the obligations with lower cost, i.e.International Emission Trading, Joint Implementation, and Clean Development Mechanism(CDM)

According to Article 12 of the Kyoto Protocol, the CDM allows Annex I countries toinvest emission reduction projects in developing countries and receive credits in the form ofCertified Emission Reductions (CERs), which they may count against their obligatory reductiontargets The implementation of CDM projects shall also be to assist hosting countries in achievingsustainable development

Besides this, it offers new opportunities for developing countries such as Vietnam as well

as firms to enter into new potential market Basing on the fact of global and Vietnam’s CDMsituation, the thesis analyze one Vietnamese firm business on CDM for it challenges,opportunities And it provides some recommendation for the firm on how to achieve successthrough CDM activities

The global carbon trading market is emerging and more practitioners and stakeholders areinvolved in the carbon trading business Since January 2005, European Union Emission TradingScheme (EU ETS) has commenced operation across the 25 member states of the EU Althoughthe credit transaction in the EU market is segmented with the transaction in other areas, thecommodity traded is the same: emission reduction credit In addition, regardless of thedifferentiated pricing system, the existing emission trading system in EU provides linkage of thecredits from different mechanisms, which contributes CDM to gain greater momentum Up tonow, more than 3150 CDM projects have been in the pipeline, including 2600 projects have beenregistered

2 CDM and the Carbon Market

The Clean Development Mechanism’s dual goals of creating cost effective GHG emissionreductions while supporting sustainable development are well-designed to be achieved viatransaction in a global carbon market Although uncertainties and challenges exist, the carbonoffset market has been emerging and evolving This chapter addresses the main issues related tothe CDM scheme and the state of carbon market, which set an external environment of Vietnam’sCDM project development First, an introduction to Kyoto Protocol and CDM project is given,followed by the description of the emerging carbon market and fast-growing CDM activities.Finally, an analysis of opportunities and threats in CDM implementation is provided

3 Kyoto Protocol and the CDM

2005, the Protocol finally came into force with the ratification of Russia It “has 155 Parties,including 35 Parties that account for 61.6% of the total carbon dioxide emissions subject toreduction targets.”4 The US and Australia have not ratified the Kyoto Protocol, and thereforethey will not adopt Kyoto emission reduction compliance targets

Besides through the concrete domestic actions to achieve the emission reduction targets,Kyoto protocol also creates flexibility mechanisms to assist Annex I countries in reaching theobligations with lower cost The three mechanisms are:

International Emissions Trading (IET) involves trading of GHG emissions The

Protocol addresses six greenhouse gases: Carbon dioxide (CO2), Methane (CH4), Nitrous oxide(N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF6) TheProtocol allows Annex I countries the option of deciding which of the six gases will form a part

of their national emission reduction strategy

Some activities in the land use change and forestry sector, such as deforestation and reforestation,which emit or absorb carbon dioxide from the atmosphere, are also covered

Clean Development Mechanism (CDM) provides for Annex I countries to invest

emission reduction projects in non-Annex I countries, in return for Certified Emission Reductions(CERs) The CERs can be used by Annex I countries to fulfill the legally-binding emissionobligations CDM projects are to help hosting developing countries in achieving sustainabledevelopment Article 12 of the Kyoto Protocol defines CDM

Joint Implementation (JI) enables industrialized countries invest in emission reduction

projects in other Annex I countries and receive credits called Emission Reduction Units (ERUs)

JI is defined in Article 6 of the Kyoto Protocol

The principle on which the mechanisms are based is that it is essentially irrelevant wherecuts in GHG emissions take place from a global perspective, so it is better to reduce emissionswhere the cost is the lowest This assumes that the country hosting the project will directlybenefit from it as well

ii) Clean Development Mechanism

CDM has primarily two objectives:

(1) providing public or private entities from Annex I countries with flexibility in realizingtheir quantified emission limitation and reduction commitments

(2) assisting non-Annex I countries who host CDM projects in achieving sustainabledevelopment Each CDM project activity is intended to result in real, measurable and long-term

GHG emission reduction benefits that are additional to those that would occur in the absence ofthe project.

The CDM is thus conceived as a project-based mechanism that can provide increasedflexibility (temporal, geographical, sectoral) to investor country or company, which can reducetheir overall compliance cost, while providing host countries and local partners with additionalfunds and environmentally friendly technology for achieving sustainable development

At the 7th Conference of the Parties to the UNFCCC (CoP-7) convened in Marrakech inNovember 2001, modalities, guidelines and procedures governing the use of flexiblemechanisms, in particular, the CDM, were adopted as documented in the Marrakech Accords,with a view to a prompt start to CDM project implementation, even before entry into force of theKyoto Protocol The Marrakech Accords paved the way for Annex I Parties to ratify the KyotoProtocol and thus bring it into force Under the Kyoto Protocol, the Conference of the Partiesserving as the Meeting of the Parties (CoP/MoP), the Executive Board (EB), and the DesignatedOperational Entities (DOEs) are the key players to the governance of the CDM The CoP/MoPhas the overall authority over matters pertaining to the CDM, in that it will provide guidance tothe EB, make decisions on its rules of procedure, and see to an equitable distribution of the CDMprojects amongst non-Annex I countries The EB supervises and approves the CDM projects.Affiliated panels or working groups have been established to assist the EB in performing thefunctions5 The DOEs are accredited by the EB to specifically perform the validation,verification and certification functions for a CDM project Project proponents can select oneDOE to validate its project and another DOE for verification and certification procedures

Although there are detailed methodologies and rules for projects still remain to be agreed,the overall regulatory framework and procedures for CDM are already established for approvingprojects and accounting for the generated carbon credits The GHG benefits from each CDMproject are measured according to internationally adopted and CDM EB approved methodologiesand are quantified in standard units, to be known as Certified Emission Reductions (CERs),which represent in tons of CO2 emissions avoided It is expected that when the Kyoto Protocolbecomes fully developed, CERs shall be linked to the emission trading system with other credits(AAUs, ERUs, RMUs) and be transacted like a commodity in the carbon market It has beenpossible to start CDM projects from 2000 if it can be demonstrated that CDM was an integral part

of the project design prior to project construction These projects should be registered prior toDecember 31, 2005 The crediting period for these projects may begin prior to the date ofregistration It is also possible to bank CERs generated in the first commitment period to asubsequent commitment period after 2012

iii) Kyoto Protocol and CDM Issues

Since the Kyoto Protocol was entered into force, the further development of the climateregime beyond 2012, when the first round of Kyoto emission targets expire, has become a heatedissue

In the CoP11 and the first Meeting of the Parties to the Kyoto Protocol (CoP/MoP 1), held

in December 2005, Montreal, opened a new round of talks to begin considering the future ofinternational climate efforts A new working group open to all Kyoto parties has been established

to discuss future commitment for Annex I countries for the period after 2012 The first meeting ofthe working group will be in May 2006 The purpose is to ensure that there is no gap between thefirst and second commitment periods

Under the convention, a two-year dialogue has been launched to analyze strategicapproaches for long-term cooperative action to address climate change The existingpanel/working groups include: the Accreditation panel, the Methodology Panel, the Small ScaleWorking Group, the A/R Working Group has four broad areas of focus: sustainabledevelopment, adaptation, technology and market based opportunities Its aims are to supportimplementation of existing commitments under the Convention; support “actions put forwardvoluntarily by developing countries”; and “enable Parties to continue develop effective andappropriate national and international response to climate change.”

The CoP/MoP reached consensus in strengthening and streamlining the CDM mechanism

It approved steps to clarify rules, speed the development of methodologies, strengthengovernance, and provide more funding and resources for the EB To support the EB’s operation,the decision established a levy on CDM proceeds to cover administrative expenses, and a number

of developed countries announced additional voluntarily pledges totaling nearly $8.2 million

The CoP/MoP also opened the door for a broad range of potential CDM activities beyondthose that are strictly project-based The project activities falling under a “program of activities”can be registered as a single CDM project provided there are appropriate baseline and monitoringmethodologies Carbon Capture and Storage (CCS) technologies are discussed in the conference.Global Environment Facility (GEF), which administers assistance to developing countries, isasked to consider whether the CCS technologies can be integrated into its funding programswhile the EB considering issues of designing new methodologies under the CDM scheme

iv) CDM Project Cycle

A complete CDM project will follow a number of essential steps, known as CDM cycle.Below figure shows the processes of a CDM project, the needed documents and the responsibleentities involved in the process This section outlines the steps and requirements of a CDMproject

PDD

Activites

Project Identification

National Approval

Figure 1: Processes and Parties involved in CDM Projects

A Project Identification and Formulation

The first stage is the identification of a potential CDM project in a Non-Annex I country.Project proponents need to take into account any national or regional requirements for projecteligibility Perspective CDM projects also need to meet the screening criteria of potentialinvestors It is important that local stakeholders' needs and aspirations are considered at this earlystage Normally, a Letter of Endorsement (LoE) is obtained from the host country’s government,which leads to further contractual negotiations

In order to get a CDM project approved and registered by the EB, the project proponentsmust prepare a detailed Project Development Document (PDD), which includes: the description

of the project; methodology used in the quantification of the GHG benefits; plans for monitoring

of the reductions; environmental impacts The project proponents can either formulate a specificmethodology to be approved by the EB, or use a methodology that has already been approved and

is applicable to the project

B National Approval

Before the CDM project can be registered by the EB, it must obtain approval from thehost government It is the Designated National Authority (DNA)’s responsibility to facilitate thisand determine whether the project will damage the sustainable development

C Validation

The PDD will be submitted and reviewed for validation by a Designated OperationalEntity (DOE), which must have been accredited by the EB During this period, the PDD will bemade publicly available for comments Only after the PDD is approved by the DOE can theproject be formally registered by the EB

D Registration

For registration, the validation report and the PDD will be submitted to the EB by theDOE Registration will be finalized after a maximum of 8 weeks from receipt, unless a review isrequested

G Verification and Certification

The DOE-B will verify the monitored emission reductions and produce a verificationreport for the project It also needs to prepare a certification report to the EB informing itscertification decision

H Issuance of CERs

The EB will issue CERs to the project proponents within 15 days after the date of receipt

of the verification and certification report from the DOE-B The CDM Registry will keep track ofall issuances of CERs CER is the final product after the above-mentioned steps and rigid

‘inspection’ procedures It now becomes real and additional When the “real” CER is generated,

it will be transacted through trading in the global carbon market or by following the price agreed

in the forward contract CDM cycle is a complicated CER “manufacturing process” with manyparticipants involved in the process to generate and trade these real, measurable and additionalassets However, for the developing countries, due to project-based nature of the CDM and thecapacity shortage reality, there are various institutional, legal, and financial challenges to addressand potential risks to manage Host government, in partnership with the local proponents andother actors, will play important roles in promoting CDM implementation Although manyfactors influence the size and stability of the global carbon market, the comprehensive analysis ofmarket will definitely provide a solid base for the policy making and strategy development

4 Opportunities and Threats from CDM Activities

CDM initiatives implicate various opportunities and threats, but the activities do notinvariably incur all the pros and cons Favorable CDM projects for host countries are those whocan maximize the potential opportunities and simultaneously minimize the threats The sectionanalyzed the opportunities and threats that undertaking CDM activity may incur to the hostcountries

i) Opportunities from CDM Projects

Article 12 of the Kyoto Protocol defines two major aims of CDM First is to assistdeveloped countries to meet their binding GHG emission targets in cost-effective manner Second

is to assist sustainable development of developing countries The CDM mechanism creates aplatform in which developing countries can voluntarily participate in the long-term global climateactions Meanwhile, CDM complements the existing national development priorities andinitiatives From developing countries’ perspective, CDM are supposed to bring in the followingopportunities:

 Provide a new revenue stream for emission reduction projects by sellingCERs, which can complement the conventional products and improve the financialviability of the projects;

 Promote the development, transfer and diffusion of friendly technologies;

environmentally- Support project-based capacity building activities which can involvediverse stakeholders;

 Encourage the active participation of public sectors, private sectors andlocal communities, as well the cooperation with international entities;

 Gain learning experience and special knowledge through early CDMprojects;

 Help define investment priorities in projects that meet sustainabilitygoals;

 Contribute to public health and environment improvements

 Alleviate local poverty through income and employment generation.Kyoto Protocol specifies that it is up to the host governments to assess and determine thesustainability of the prospective CDM projects; however, seen from the hundreds of projects thatsubmitted by the developing countries, the sustainability content is a highly contentious issue.The significant increase of CDM projects in the pipeline indicates that generating and tradingCERs out of CDM have been widely accepted in developing countries and the prerequisitecapacity in host countries, such as legal infrastructure and qualified personnel, to some extent,have been strengthened Another important potential benefit, technology transfer, is gaining moreattention among diverse stakeholders From long term perspective, proactive national policies,the intense carbon credit competition and more serious global warming concerns will mandateeffective technology transfer benefits

ii) Threats from CDM Projects

The threats imposed by CDM scheme can be mainly divided into two parts The firstthreat or challenge of implementing CDM projects is the negative impacts that the carbonemission reduction activities may incur to the development of developing countries Like manyother developing countries, Vietnam gave the overriding priorities to social and economicdevelopment and the elimination of poverty

In the long term, Vietnam rapid economic growth will continue, which will inevitablyincrease the energy demand and GHG emissions If there is no significant breakthrough ofdiffusing low-carbon high efficiency technologies, the emission reduction activities through theCDM could only restrict to a limited number of projects The wide implementation of CDM risksharming the national economic development and weakening the industrial competitiveness24.Another concern from the developing countries lies in the risk that the participation in the CDMwould lead to their commitments to reduction obligations in the future The developing countries,like China and India, are under greater pressure to take effective actions to limit and control GHGemissions

The second threat comes from the credit market competition It determines whether theemission reduction activities can finally have the CERs generated and transacted Carbon markethas emerged and is evolving Although the market is still fragmented, the credits generated fromdifferent mechanisms have established linkage CERs from CDM scheme can be seen as thecommodities that are produced from the “additionality workshops” in developing countries Bytransacting with the credit demanders and exchanging in different forms, CERs finally bringrevenue for developing countries and help annex I countries meet the Kyoto targets

Like other common products, some competitive forces exist in the market that threatensthe profitability of the CER producers In most cases, the host government and the domesticdevelopers have to confront these threats and make decisions based on their judgment whetherthe credit revenues are as high as they expected This section employs Michael Porter’s five-forcemodel to understand In a majority of countries, economic growth has the strongest influence onemission levels, usually putting upward pressures on emissions This is the case in courtiers as

diverse as the US, Australia, South Korea, etc.; in Russia and Ukraine, economic contractioncontributed to a decline in emissions World Coal Institute made studies on the factors thatcontribute to the CO2 (GHGs) emission growth in 1990-2002 According to the decompositionanalysis, the economic growth brought the upward pressures on emissions while at the same time,the improvement of energy intensity put downward pressures, but the general trend of emissions

is still increasing Another qualitative explanation is that economic growth is positively correlatedwith energy consumption, which highly impacts the emission level if no significant improvement

in the energy emission intensity

It means that CERs from CDM, EUAs from EU ETS, ERUs from JI and RMUs fromLULUCF are all commensurate with one unit of emission reduction, noted as one ton of CO2equivalent and they will be freely traded in the future carbon market

The competition structure and analyze the threats that CDM hosts may face The model isone of the frequently used business tools and particularly in thinking in an “outside-in” approach.Next diagram presents the five forces in an industry that threaten the performance of a firm: thethreat of entry; the threat of substitute; the threat of suppliers; the bargaining power of buyers; therivalry of existing firms

Figure 2: The 5-Forces Model of Environmental Threat

In correspondence, the five force model is established to understand the carbon market inwhich the CDM project is involved.Vietnamese developers as a whole is regarded as one CERproducer and analysis is done by outside-in way This assumption is reasonable when the focus isgiven to the national CDM policy study The five competitive forces and their key determinantsare listed in following table:

Threat of New CDM

Entrants

Threat of Additionality

Rivalry among CDM Supplier

Threat of other Credits

Threat of CDM Demand CDM in Vietnam

Figure 3: The 5 Competitive Forces in CDM Activities

Following are key determinants of these 5 competitive forces:

 Rivalry among CER suppliers:

- Comparison of marginal abatement cost with other developing countries

- Differentiated energy policy and climate policy

- Differentiated comprehensive capacity of streamlining CDM projects

- Differentiated integrated marketing management of CER

 Threat of CER demand:

- Performance of domestic emission reduction actions in Annex I countries

- Voluntary action and participation rate in non-Kyoto compliance market

- Risk assessment to Vietnam’s CER generation by demanders

- Credit buyers preference on quality(sustainability) of the CER

- Bargaining power of buyer’s and buyer’s incentives, etc

 Threat of other credits

- EUAs (EU Allowance) from EU-ETS (Emission Trading Scheme)

- ERUs (Emission Reduction Units) from JI

- AAUs (Assigned Amount Units) from perspective IET, etc

 Threat of additionality:

- CDM activities may induce negative impact on economic development

- Loose existing national energy policies may induce more credits

- The ambitions and qualifications of projects developers to produce credits

- The threat of introducing lower carbon emission technologies, etc

 Threat of new CDM entrants:

- Complexity of CDM procedures and rules

- Successfulness of CDM projects in other developing countries

- Assistance from host government and international donors

- Clean energy technologies may generate larger credits

- Lower abatement cost from other host countries

CDM scheme has developed fast It seems the one of the big coming threat to all thedeveloping countries is that the limited credit demand could not match with the supply, whichmay pull down the credit price The five force model offers a holistic perspective to analyze themarket competition factors of the CERs It outlines what the present developers will concerntowards getting more commercial benefits and what strategies the developers can make based ontheir understanding

On the other hand, it has some limitations First, the model ignores the possibleinconsistency of sustainability requirements from the government and the profitabilityconsideration from the developers, as well the synergies within all relevant entities in Vietnamdue to our assumption that taking CDM project activities in Vietnam as a whole Second, themodel might not reflect the changes of the present carbon market well, which requires us to takeflexible or dynamic approaches in strategy formulation To avoid these, the study will incorporatethe policy synergy analysis and seek solutions to enhance various actors’ capacities so as to bemore adaptable to the changeable environment