Aviation And Carbon Markets – A Vietnam Focus.
Just as airlines began to recover from COVID-19, they were hit by a rapid spike in jet fuel prices. According to the International Air Transport Association (IATA), the average price of jet fuel rose from approximately US$1.50 per gallon in 2022 to over US$2.00 per gallon by mid-2023, a surge of over 30%.
Beyond economics, aircraft account for approximately 3% of global carbon emissions, and the industry is faced with another challenge: an enforced requirement to reduce pollution.
The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) was initiated by the International Civil Aviation Organization (ICAO) in 2016. Under CORSIA, airlines with annual emissions of more than 10,000 tons of carbon equivalent (TCE) are expected to monitor and report their emissions on international flights. As from 2027, they will be required to purchase carbon credits from a regulated carbon market to offset their emissions. Many airlines are preparing for this eventuality.
This scheme, along with rising jet fuel costs, requires Vietnam’s aviation sector to explore carbon exchange markets, invest in projects that generate offsetting carbon credits, and participate in these markets.
In February 2024, the world’s first carbon credit project eligible for participation by airlines was announced. A total of 7.14 million credits were issued by Architecture for REDD+ Transactions (ART) to Guyana for its performance in sustaining one of the world’s highest levels of tropical forest coverage. Guyana also boasts one of the world’s lowest deforestation rates. 2.5 million of these credits have already been sold at a floor unit price of US$20, leaving a balance of 4.64 million credits available on the international market, including for use by airlines towards their CORSIA emission reduction targets.
International carbon markets for airlines
Several airlines have initiated projects to create, offset, and sell carbon credits.
For example, United Airlines has its Eco-skies program. It involves investing in sustainable aviation fuel (SAF), new technologies and operational practices to improve fuel efficiency.
By offering carbon offset programs, Eco-skies allows passengers voluntarily to offset the carbon emissions generated by their flights. The passengers make a payment beyond the air fare, which will then be invested in forest conservation projects or REDD+ initiatives. REDD+ is a voluntary climate change mitigation framework, referred to as “reducing emissions from deforestation in developing countries”. It was developed by the United Nations Framework Convention on Climate Change (UNFCCC).
Further, the program REDD+ also enables United Airlines to engage in partnerships with environmental organizations, local communities and government agencies, to implement conservation and sustainability projects that generate carbon credits.
Qantas’ Future Planet, JetBlue’s Carbon Offset, Delta Airlines’ Global Clean Air, Air France-KLM’s CO2ZERO are similar initiatives.
Carbon market status in Vietnam
In 2022, Vietnam announced its nationally determined contribution (NDC) commitments at the UNFCCC. Its purpose is to reduce greenhouse gas emissions by 15.8%, or a reduction of 146.3 million tons of CO2e, by 2030. This is compared to business-as-usual (BAU) levels. It uses 2014 as the base year.
The Law on Environmental Protection 2020 and its subordinate Decree 06/2022/NĐ-CP, adopted in 2022 and currently being amended, have set a goal for Vietnam to create carbon credit trading markets by 2028, with pilot carbon trading markets to begin in 2025.
Decree 06 provides that entities with the following characteristics must conduct greenhouse gas (GHG) inventories beginning in 2025: (a) companies that emit 3,000 tonnes of CO2 equivalent (TCE) or more annually; (b) thermal power plants, industrial facilities, freight transport companies, commercial buildings that consume 1,000 tonnes or more of oil equivalent (TOE) annually, (c) solid waste treatment facilities that annually treat 65,000 tonnes or more of waste, and (d) large-scale livestock operations.
To assure compliance with these requirements, the Vietnamese government has outlined specific measures and guidelines for entities that fall under the GHG inventory mandate. Entities must establish a systematic process for monitoring, reporting, and verifying their GHG emissions, adhering to standardized methodologies and protocols. The Ministry of Natural Resources and Environment (MONRE) will oversee implementation and will provide necessary technical support and training to ensure accurate and consistent reporting.
More specifically, Vietnam’s Decision 13/2024/QĐ-TTg identifies 2,166 commercial facilities which must report their GHG inventory by March 31, 2025. These are commercial facilities in industrial, trade, transport (including air transport), construction, and in the natural resources and environmental sectors.
Some aviation facilities have already been specifically named. They are Noi Bai International Airport (7,465 TOE), Tan Son Nhat International Airport (5,952 TOE), Phu Quoc International Airport (1,225 TOE), and Cam Ranh International Airport (1,238 TOE).
Six Vietnamese airlines–Vietnam Airlines, Vietjet Air, Pacific Airlines, Bamboo Airways, Vietravel Airlines, and VASCO–are now included in Decision 13. That is, they are now required to comply with the carbon inventory reporting obligations.
First initiatives
SAF is produced from renewable feedstocks such as agricultural residues, waste oils, and algae. It creates 70% less carbon than regular jet fuel. But SAF costs more than regular jet fuel. According to data from Argus Media (an energy and commodity pricing agency), the retail price of traditional jet fuel in the US is about US$2.85/gallon (about US$3.8/litre), while the price of SAF is US$6.69/gallon (about US$9.0/litre). The hope, of course, is that the price will continue to come down.
Vietnam Airlines and Vietjet have plans to use SAF. In May 2024, Vietnam Airlines successfully conducted a flight from Singapore to Hanoi using SAF. Even though much of what is currently happening in the market is experimental, the situation is rapidly evolving.
At the end of 2023, Vietjet signed an aircraft financing agreement with Novus Aviation Capital to finance its growing fleet. Also, Vietjet partnered with SAF One, a pioneering platform founded by Novus Aviation Capital and Sencirc Holding, which is focused on developing SAF and delivering it to the global aviation industry.
In February 2024, Vietjet received its 105th aircraft. This is the new Airbus A321neo ACF aircraft capable of saving fuel by up to 20%, thereby reducing emissions into the environment by up to 50% and reducing noise by up to 75%.
These initiatives are excellent steps, but the higher costs of SAF and other green technologies remain challenging for airlines. What if these initiatives could be compensated, by, say, charging a premium for green flights and selling carbon credits on carbon markets? These credits can be earned from sustainability projects, or by collaborating with corporations that must offset their carbon emissions.
How a project earns carbon credits
To earn carbon credits, there must be a specific project. The project must involve activities, technologies, or methodologies that can reduce or eliminate GHG emissions. Projects involving forestry and land use, renewable energy, energy efficiency and fuel switching, agriculture, waste disposal, transportation, household devices, chemical processes, and industrial manufacturing, can be created by any entity, including airlines, to offset carbon emissions. That is, projects need not relate to the aeronautics industry.
Certifying a project
The certification of a project consists of the following basic stages:
The first stage involves project planning. The climate impact of the project is assessed against the standards set by a carbon credit certification organization. During this stage, a feasibility study is conducted. Its purpose is to provide an independent assessment of the project, including technical, economic, financial, legal and environmental considerations.
Secondly, project developers open a registry account with a carbon credit certification organization and submit the project description via the account. Once the project description is submitted, the project will be open for public comment.
Thirdly, after the project is commented upon by the public, an approved validation body (AVB) will validate it. The AVB is usually appointed by the project owner and will conduct an independent assessment of the project. This requires a thorough site visit to verify the project’s claims and data.
Fourthly, upon successful validation by the third party, the project can start. Upon completion, the project will be issued certified carbon credits. These credits can then be traded via a carbon registry or used by the project owner to offset its own emissions.
The last stage is a post-certification process. At this stage, project owners must implement the monitoring plan submitted during the project planning stage. They regularly submit monitoring reports to the certification organization. Additionally, validations and verifications occur every five years to ensure ongoing compliance and the accuracy of the calculation of carbon credits.
Certification of credits
Several independent certifying organizations have received broad acceptance and are trustworthy. The following programs and emissions units are eligible for CORSIA’s 2021-2023 pilot phase:
- American Carbon Registry
- Architecture for REDD+ Transactions (ART)
- China Greenhouse Gas (GHG) Voluntary Emission Reduction Program
- Clean Development Mechanism (CDM)
- Climate Action Reserve (CAR)
- Global Carbon Council (GCC)
- The Gold Standard (GS)
- Verified Carbon Standard (Verra)
There are others. They will fix carbon credits to a project, and those credits can be traded.
Considerations and Potential Issues
Being carbon-intensive, the aviation sector is seen to require more stringent regulations and oversight to govern its carbon market.
The purpose of a mechanism to certify projects is to ensure that projects not only reduce carbon emissions but also support sustainable development, last long-term, and do not cause unintended side effects:
- Sustainability: The project should benefit the local community and environment in the long run. It should not just reduce emissions temporarily.
- Permanence: The carbon reductions should be permanent. For example, Clean Development Mechanism (CDM) projects require safeguards such as commercial insurance to ensure that the reductions are long-term.
- No leakage: The project should not cause increased emissions elsewhere. For instance, in project-level REDD+ projects, there is often a concern that protecting one area of forest might lead to deforestation in another area.
For example, a project in the Amazon aimed to reduce deforestation by promoting conservation in a specific area was accredited by REDD+. However, because deforestation was merely displaced to an adjacent area not covered by the project, the overall emissions reductions were negated. This issue, known as leakage, undermines the effectiveness of such projects. Solid planning is important, and it is essential that integrity be uppermost in evaluating projects and the credits assigned to them.
CORSIA helps by setting rules to prevent credit inflation and keep such credits out of the market. Ignoring this issue will easily result in devaluating the credits in the market. By accepting only credits from projects that started in 2016 or later, CORSIA encourages new climate efforts in the aviation industry.
Additionally, when airlines buy carbon credits through CORSIA, adjustments are required in the countries where the projects are based. This ensures that the emission reductions are properly accounted for in national climate plans and are in harmony with local climate policies.
Conclusion
The aviation sector faces significant challenges to reduce its large carbon footprint. The challenges are exacerbated by rising fuel prices. CORSIA represents a crucial step in addressing these challenges by mandating emissions monitoring and carbon offset purchases from 2027. It acts as a catalyst for the sector.
While carbon credit programs such as those eligible under CORSIA provide a pathway for airlines to mitigate their emissions, issues remain to be resolved.
As airlines like Vietnam Airlines and VietJet Air explore sustainable aviation fuels, carbon offsetting projects, and carbon credit opportunities, carbon markets in Vietnam will evolve and will play a critical role in supporting these efforts and driving meaningful climate action.
For further information, please contact:
Lam Nguyen Hoang Thao, Russin & Vecchi
LNHThao@russinvecchi.com.vn
