Background

Vietnam is located in South East Asia and has a tropical climate in the south and a monsoon climate in the north. Vietnam has low, flat deltas in the south and north, and highlands and mountains in the far north and northwest. Some of its environmental challenges include deforestation and soil degradation from agricultural malpractices, overexploitation of marine resources and water pollution. Industry is Vietnam’s most important sector, accounting for a share of more than 42% of GDP in 2013. The country has been industrializing at an  increasing pace, and industry now contributes to 38.5% of GDP, with knock-on effects on Vietnam’s energy consumption levels, especially of coal and oil, leading to growing carbon dioxide emissions levels. In 2011, carbon dioxide emissions from energy consumption amounted to 112.7 million MT.

Overall Fiscal Profile

Vietnam’s overall real GDP is projected to rise to 5.5 per cent in 2014 owing to its substantial FDI and export market.  The fiscal deficit increased in 2013, with further increases expected for 2014, owing to higher public debt and decreased tax revenue (as a share of GDP). In 2012, the account surplus spiked to US$9.1 billion from US$0.2 billion in the previous year due to the export market, and dwindling imports. While in the short term, risks exist including volatility, higher global interest rates, and geopolitical tensions, the IMF suggests a focus on broadening the revenue base and targeted social spending. As a result, Vietnam has the potential to expand its fiscal base through adopting further green fiscal policy measures.

Policy and Legal Framework for a Green Economy

Vietnam’s Green Growth Strategy, which was adopted in September 2012, is based on three core strategic axes: low-carbon growth; greening of production and greening of lifestyles. Priority areas include efficient resource use, reduction of environmental degradation, reduction of GHG, restoration of natural capital and creation of green jobs; with milestones to 2050. Targets under the Green Growth Strategy include:

Reducing GHG emission intensity by 8-10% from a 2010 baseline throughout the period 2011-2020

Reducing energy consumption by 1-1.5% per year per unit of GDPIncreasing the value of high-technology and green technology to a share of 42-45 per cent of GDP by 2020

Enriching natural capital to 3-4 per cent of GDP.

Mainstreaming green economic development by 2050

The strategy also aspires to promote fast development of green economic sectors to create jobs, although milestones have not yet been identified. In the current implementation period (2011-2020) the strategy is focusing on communication and capacity development, development of tools and indicators, as well as the development of policy mechanisms to support implementation. The government estimates that it needs about US$30 billion by 2020 to implement the Green Growth Strategy. At present, it spends about US$1 billion annually on climate change programmes and activities and aims to establish a Climate Finance Task Force to mobilize additional funding.

Fiscal Measures for a Green Economy

Vietnam passed an environmental tax law in 2010, which came into force in 2012 and  introduced an Environment Protection Tax. This made Vietnam a pioneer in environmental tax reform in South East Asia. Taxes are levied on refined fuels and coal as well as on environmentally harmful substances (HCFCs, certain pesticides, soft plastic bags) in the form of consumer unit taxes. The tax level is determined by the central government for each taxation period. For petrol the tax rate varies from between VND 1,000 to VND 4,000 (US$0.04 to US$0.19) per litre. This corresponds to an ad valorem tax rate of between 5.9 per cent and 17.6 per cent. The environment protection tax (EPT) was expected to generate VND12 trillion ($572 million) in 2012, derived from the tax on oil and petrol. This figure was 14 per cent higher than environment fees collected in 2010. Moreover, an academic assessment of the impact of the EPT estimated that it could increase the Government’s revenues by about 3.5 %. Taxes on coal and refined fuels are expected to account for 99.5% of the estimated tax revenue. The EPT has the potential to reduce Vietnam’s annual CO2 emissions by up to 75% and can contribute up to 1.5 billion euros in additional tax revenue by 2012 which can strengthen fiscal decentralization by allocating funds to both state and priovincial budgets. However, GIZ reports some challenges: tax on coal was only equal to 75% of its world market price, and there are concerns lower income households will bear the burden of the tax.

In addition to the Environment Protection Tax, the government introduced an Environment Protection Fee aimed at  wastewater, solid waste and extractive industries. The EPF was introduced in 2003 for wastewater, but to date collection has been challenging, particularly for industrial wastewater discharge. An EPF was introduced in 2007 for solid waste, but the revenues collected from these fees have not been sufficient to offset the cost of collection and treatment of solid waste. Lastly, an EPF was introduced in 2008 on  extractive industries, including coal gas, natural gas, crude oil and metallic and non-metallic minerals, and the specific charge depends  on the type of natural resource mined. However, collection has been hampered by low compliance on the part of extractive companies.

The Ministry of Planning and Investment is considering developing a roadmap to identify other useful fiscal incentives, such as additional carbon taxes or levies and shifting public investment towards energy efficiency and renewable energies. These efforts could contribute to implementing the Green Growth Strategy and its environmental and economic targets.

Fossil Fuel Subsidy Reform

There are several types of energy subsidies in Vietnam requiring reform: direct to domestic consumers, low interest or preferential loans and deferred tax liabilities for state owned energy enterprises, and finally reduced taxation on import tariffs for petrol products.  As of 2011, energy subsidies amounted to $4.12 billion, accounting for 3.4% of GDP and 8.6% of the state budget in 2010. The largest component of these subsidies is allocated to electricity (70%) but subsidies to coal and gasoline have been decreasing as prices for these fuels have moved towards market levels. Moreover, the government provides low-interest loans and subsidizes the capital investments of EVN, the national electricity utility.

Since 2012, prices have been set more on market-based principles, under the National Energy Development Strategy of 2012 although final decisions about price changes are in the hands of the government under the 2012 Price Law. Coal has not been subject to price stabilization since 2004, but a coal price subsidy has been applied to power generation. Since 2009, the government has allowed coal prices to increasetowards market level and  a cost-recovery price is currently in force. Electricity subsidy reform is currently in progress, and aims to adjust prices through a market mechanism to reach cost-recovery levels.

Retail electricity tariffs were raised by an average of 25% between 2007 and 2010, and by 17% in 2011. As a mitigation measure, the government provided small cash transfers to low-income households to compensate them for the higher charges. Moreover, lifeline tariffs were introduced in 2009, providing a preferential rate for the first 500KWh of electricity consumed by low-income households. In addition, the government provides subsidies for installing solar water heaters amounting to US$47 per household, through EVN.

Additional Reading

GIZ, 2011. Environmental Taxation in Viet Nam. Retrieved from: http://www.giz.de/expertise/downloads/giz2011-en-factsheet-efr-vietnam.pdf

GIZ, 2013. Environmental Fiscal Reform Case Studies http://www.giz.de/expertise/downloads/giz2013-en-environmental-fiscal-reform-case-studies.pdf

GSI and IISD, 2012. A Forum for South East Asian Policy-makers Fossil-Fuel Subsidy Reform: Challenges and Opportunities. Retrieved from: http://www.iisd.org/gsi/sites/default/files/ffs_gsibali_meetingreport.pdf

Ministry of Planning and Investment, 2012. Viet Nam Green Growth Strategy and its implication for fossil fuel subsidy reformhttp://www.iisd.org/gsi/sites/default/files/ffs_gsibali_sess1_phuong_0.pdf

Vietnam National Green Growth Strategy. Retrieved from: http://www.greengrowth-elearning.org/pdf/VietNam-GreenGrowth-Strategy.pdf

Vietnam Environment Administration, Environmental Management through Economic Instrumentshttp://vea.gov.vn/en/EnvirStatus/StateOfEnvironmentNews/Pages/Environmental-management-through-economic-instruments-.aspx