The government’s landmark announcement in 2021 that Vietnam will achieve net zero carbon emissions by 2050 and phase out coal power plants by 2040 was both bold and visionary. It marks an important milestone in the country’s development trajectory.
As a densely populated coastal country with large, low-lying delta areas, Vietnam is one of the most vulnerable countries in the world to climate change. By adhering to these ambitious goals, Vietnam has set an important example for other countries, especially developing and middle-income countries. If Vietnam – an exceptionally competitive, dynamic economy – can make this transition to net zero while maintaining the pace of development progress, it will provide a model and open the door for other countries to do the same.
The government recognizes that switching from fossil fuels can yield tangible benefits. We now have evidence that the transition to renewables will create more jobs than destroy them, although labor market outcomes will be mixed in the short to medium term. Countries that manage the transition well will prioritize education, skills upgrading and social protection programs to support economic growth while promoting equality and boosting investment in economically disadvantaged regions.
The random distribution of hydrocarbons around the world has led to enormous geographic imbalances and tensions. Fuel price volatility has been a constant source of macroeconomic instability for both producer and consumer countries. One of the great benefits of renewable energy, aside from the obvious fact that it is both clean and imperishable, is that it is produced locally and is not subject to the geopolitical winds and uncertainties associated with imported energy sources.
But while acknowledging these important benefits of the energy transition, we should not underestimate the magnitude of the challenge facing Vietnam and other countries on their way to net-zero emissions. Reducing dependence on fossil fuels will affect every sector of the economy, from power generation and agriculture to construction, manufacturing and transportation.
Much of the discussion over the past year has focused on financing needs for a just energy transition. Cost estimates vary depending on the assumptions used in making these calculations and, as usual, it is advisable to treat long-term projections with a healthy dose of skepticism.
Nevertheless, conservative estimates suggest that Vietnam will need to mobilize an additional $15 to $30 billion per year to meet the net-zero target and support rapid economic growth. Although wind and solar energy have lower operating costs than coal plants, they are more capital intensive in the initial investment phase.
Electricity networks will also need to be modernized to move power from surplus to deficit regions and to accommodate peaks and troughs in demand. Production methods in industry and agriculture must be modernized and systems for public transport, e-vehicles, charging stations and other components of the ecosystem developed.
The international dimension of climate finance came to the fore in the context of the 2015 Paris Agreement, and recent climate summits have seen the emergence of Just Energy Transition Partnerships and the adoption of the principle of loss and damage funds to provide support to vulnerable countries .
For large and dynamic economies such as Vietnam, international financing will at most be an additional source of capital. Most investment needs will have to be covered by domestic sources. This is because foreign financing – other than grants but including foreign direct investment – creates foreign liabilities that must be repaid in dollars.
Domestic energy production generates revenue, but mostly in the national currency. There is therefore a limit to the amount of foreign capital that developing countries can import through loans and direct investments to finance the energy transition.
Increasing the capacity of the domestic financial system to mobilize long-term capital is the core issue of climate finance. Vietnam’s financial system has grown rapidly during the reform era and is more sophisticated and diverse than a few years ago. However, the absence of deep and liquid secondary markets limits the availability of long-term financing. As recent events in the bond market have shown, corporate disclosure and accountability are major constraints on the development of active secondary markets.
Looking ahead, proactive policies are needed to remove these and other obstacles to the supply of domestic long-term finance for energy transition and other uses. There are numerous examples in advanced and developing countries of innovative policies to diversify domestic sources of finance and to use the government balance sheet to stimulate private investment.
Through Ramla Khalidi.
Ramla Khalidi is a Resident Representative of the United Nations Development Program in Vietnam
This article was first posted here
