Navigating the Green Transition: The EU and Vietnam’s Partnership for a Decarbonised Future

In the aftermath of COP28 in Dubai, the début of Vietnam’s Resource Mobilisation Plan (RMP) by its Prime Minister Phạm Minh Chính signifies a notable milestone in advancing the implementation of the Just Energy Transition Partnership (JETP). The timing of the launch also highlights the progress made one year after the collaborative agreement was formed between Vietnam and the International Partners Group (IPG), co-led by the EU and the UK, during the December 2022 EU-ASEAN summit in Brussels.

As Vietnam steadfastly pursues its objective of achieving net-zero carbon emissions by 2050 and given its development orientation to become a high-income developed country by 2045, the nation’s ambition presents opportunities and challenges for Vietnam’s economic growth and net-zero commitment. 2050 emerges as a pivotal milestone that serves as a common ground for both the EU and Vietnam. Within the EU, the year 2050 takes centre stage as a cornerstone commitment embedded in the European Green Deal— aiming to make Europe the world’s first climate-neutral continent by 2050. This parallel dedication from both the EU and Vietnam emphasises a shared vision, common future and accentuates their joint resolve to tackle climate change head-on, cultivating a sustainable legacy for both regions.

In the context of their unwavering dedication to sustainable economic growth, the partnership between the EU and Vietnam stands as a noteworthy example and model, embedding sustainability into the global value chain. In what follows we will dissect the collaborative efforts in effect between the EU and Vietnam, elucidating on how they are collectively fortifying their pledge towards a green transition.

Vietnam’s  Green Energy Path

Vietnam stands at a critical juncture in its energy trajectory, with the pressing challenges of climate change exacting a significant toll. The World Bank’s initial calculations suggest that Vietnam lost 10 billion USD in 2020, or 3.2 percent of GDP, to climate change impacts. Such vulnerabilities underscore the urgent imperative for Vietnam to pivot away from its heavy reliance on coal, a cornerstone of its economic engine, and align with sustainable energy alternatives.

In response to these challenges, Vietnam has approved its long-awaited eighth National Power Development Plan (PDP8) for the period of 2021-2030, with a vision to 2050, in a move meant to boost wind energy and gas, while reducing its reliance on coal. This strategic initiative is intricately tailored to harmonise the nation’s socio-economic developments with an overarching sustainable energy landscape by 2050, with solar energy poised to dominate its energy matrix. This trajectory aligns seamlessly with the nation’s ambitious decarbonisation goals, hinting at a future characterised by a diversified energy portfolio (shown in figure 1). 

Projected installed electricity capacity Vietnam PDP8

Figure 1: Projected installed capacity for electricity generation in Vietnam by source in GW, PDP8 (Source: The Green Finance & Development Center; Data Source: Vietnam’s National Power Development Plan 8 (PDP8) )

Trade at the Forefront of Green Partnership

In the midst of various challenges, Vietnam finds itself at a crucial point in its energy transition. The country is set to address existing regulatory gaps and financial uncertainties hindering private investment in renewable projects, especially considering the ambitious investment targets set in the National Power Development Plan No. 8. To effectively tackle these challenges and accelerate the implementation of its clean energy ambitions, Vietnam will need to tap into international partnerships providing both financial and technological support. The EU emerges as a promising green partner for Vietnam due to their longstanding trade relations and commitments towards sustainability collaboration. In this regard, the significance of Free Trade Agreements (FTAs) cannot be overstated as catalysts for the green transformation. Foreign Direct Investment (FDI) and collaboration focusing on advanced technologies and sustainable finance showcase the country’s potential for sustainable growth.

Entering its fourth year of implementation, the European Union-Vietnam Free Trade Agreement (EVFTA) not only brings forth preferential tariffs and market access schedules, but also propels EU-Vietnam strategic collaboration in supporting businesses on both sides in developing a sustainable and diversified supply chain amidst economic volatility and global geopolitical tension. 

During EU executive Vice-President Dombrovskis’ recent visit to Hanoi for the Green Economy Forum on 2 November 2023, he labelled the EVFTA as a ‘success story’. This accolade finds strong support in the remarkable 30% increase in EU-Vietnam trade flows observed in 2022, underscoring the tangible and positive impact of the agreement on economic ties between the two partners. A noteworthy development is Vietnam surpassing Singapore to become the EU’s largest trading partner in ASEAN in 2022. 

Beyond the FTA, the EU has introduced its ambitious Global Gateway initiative, taking proactive steps to address the global infrastructure investment gap. The Team Europe approach has proposed an investment package for ASEAN worth 10 billion EUR until 2027, focusing particularly on two pivotal priorities: fostering the green transition and promoting sustainable connectivity. In addition, in October 2023, Vietnam and the European Investment Bank solidified their partnership through a memorandum of understanding under the Global Gateway initiative. This emphasises their shared commitment to establishing a 500 million EUR credit facility for various projects. Once this credit arrangement will be finalised and formalised in the near future, it will serve as a foundational loan structure dedicated to financing initiatives that drive decarbonisation and promote the just transition for Vietnam. 

For Vietnamese businesses to effectively compete in the EU and fully harness the benefits of the signed FTA, it is imperative for them to adhere to stringent environmental standards. Meeting the demands of the green and sustainable consumption trend is inevitable on a global scale and a mandatory pathway for these enterprises to seamlessly integrate into the new, greening value chain. 

Unlocking Potential: How Vietnam Can Accelerate the EU’s Green Transition

Navigating the current global geopolitical environment poses a formidable challenge to the seamless progression of the worldwide energy transition. For the EU, recognising the indispensable role of critical raw materials is key to fueling its ambitious journey towards climate neutrality and bolstering its competitiveness on the world stage. These materials are not just resources, they are the lifeblood of innovation, powering the transition towards a more sustainable and technologically advanced future. The EU’s current heavy reliance on raw materials and components for clean technologies from outside its borders, with China providing 98% of the EU’s rare earth elements’ needs, underscores a vulnerability that demands immediate attention. The potential for supply shortages, prolonged extended times, and unpredictable availability, is emphasising the pressing need for more strategic planning. 

Amidst these challenges, Southeast Asia emerges with compelling prospects for global diversification efforts. The Asian Development Bank underscores the region’s significant potential in manufacturing clean technologies, projecting revenue opportunities ranging from 90 billion USD to 100 billion USD by 2030, with the potential creation of six million jobs by 2050. Within this landscape, Vietnam stands out as a key player, with a reserve of rare earths, totaling an estimated 22 million tonnes. As the demand for these materials continues to grow, Vietnam could play an ongoing role in meeting global energy transition needs, particularly in solar PV, wind, and battery storage. 

Therefore, Vietnam plays a pivotal role in facilitating sustainable and diversified supply chains amid economic volatility, simultaneously maximising the trade benefits stipulated by the EVFTA. The nation’s expanding capacity in decarbonisation technologies, coupled with policies designed to attract green investment, existing manufacturing prowess, a well-established regional supply chain, abundant reserves of rare earth and critical minerals, and an increasingly skilled labour force collectively propel Vietnam into a prime position to manufacture and export key decarbonisation technologies. 

Challenges ahead 

While Vietnam forges ahead with an ambitious plan and gathering the required financial aid to drive its sustainable development, a slew of challenges looms on the horizon. The nation’s economy grapples with the complexities of adhering to new industry-specific risks, adapting domestic and complying with international regulations and standards, especially those stemming from the EU’s measures on climate, environment, and sustainable practices, in particular from the recent Carbon Border Adjustment Mechanism (CBAM) and Corporate Sustainability Due Diligence Directive (CSDDD). This poses a considerable adjustment challenge for businesses operating in Vietnam, necessitating both foreign and domestic entities to adapt swiftly to the evolving economic landscape. As they navigate the terrain of compliance with new sustainability standards, businesses become integral players in shaping Vietnam’s sustainable future.

On 1 October 2023, the EU’s Carbon Border Adjustment Mechanism (CBAM) entered into application in its transitional phase, with the first reporting period for importers ending on 31 January 2024. Yet, Vietnam’s immediate exposure to CBAM on its exports to the EU appears comparatively modest in the short term as the phased implementation of CBAM involves an initial rollout focusing on high-risk goods susceptible to carbon leakage—specifically on iron and steel, cement, fertilisers, aluminium, and electricity generation. The current application of CBAM to limited suppliers of Vietnamese exports to Europe contributes to this subdued impact. However, a potential expansion of CBAM’s scope, encompassing indirect emissions and other carbon-intensive products, introduces foreseeable long-term challenges. Starting from 2026, EU importers will initiate a financial adjustment by surrendering CBAM certificates equivalent to the emissions associated with their imports. Simultaneously, as outlined in the interconnected proposal for the revision of the EU’s Emissions Trading System (ETS), the free allowances within the ETS will gradually diminish for the CBAM sectors, also beginning in 2026. Despite these challenges, the adoption of CBAM holds a potential to spur investments in Vietnam’s abundant natural renewable energy resources, positioning the nation in decarbonising its electricity sector and reducing greenhouse gas emissions across its broader economy.

Simultaneously, on 14 December 2023, a provisional deal was reached between the European Council and the European Parliament regarding the Corporate Sustainability Due Diligence Directive (CSDDD). This directive aims to elevate environmental and human rights protection within the EU and globally, including an obligation for companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation including financial requirement of companies to adopt and put such plans into effect. The EU Companies subject to this directive fall into two groups. The first group comprises large, profitable European limited liability companies with a net turnover exceeding 150 million EUR (160 million USD) and over 500 global employees. While the second group which consists of the EU limited liability companies operating in high-impact sectors, such as textile, clothing, footwear, agriculture, food, raw agricultural materials, mineral resources, and construction, will be subject to lower thresholds, specifically 250 employees and 40 million EUR net turnover. In the case of Non-EU companies, three years after the directive’s entry into force, the regulation will later extend to non-EU companies with over 150 million EUR net turnover generated in the EU. The exact effective date of the directive remains uncertain. The provisional agreement reached with the European Parliament, awaits formal endorsement and adoption by both institutions—the European Council and the European Parliament. The Vietnamese enterprises engaging with EU companies, therefore, must prepare for adherence to these due diligence requirements, in particular in the high-impact sectors which represent high trade volume between Vietnam and the EU. This directive signifies a global shift towards increased sustainability, prompting businesses to proactively align with evolving international norms toward corporate responsibility.

The Pathway Towards a Sustainable Future in 2050 

The path towards sustainable future value chains demands a comprehensive strategy. It is essential to raise awareness among local businesses regarding the benefits of sustainable practices. While the Free Trade Agreement between the EU and Vietnam holds promise, proactive risk mitigation measures, increased technological and infrastructural capacity investments, and collaborative efforts are key components to ensure a seamless green transition.  

Vietnam’s pivotal role in facilitating sustainable and diversified supply chains is crucial, especially in the context of economic volatility. Leveraging its abundant reserves of rare earths, growing economy, expanding capacity in decarbonisation technologies, and policies designed to attract green investment, Vietnam is well-positioned to play a significant future role in manufacturing and exporting key decarbonisation technologies. For the EU, recognizing and responding to this strategic role is essential. This can not only foster a resilient and interconnected global energy landscape but also maximises the trade benefits outlined in agreements like the EVFTA. It is a win-win scenario that strengthens ties, promotes sustainability, and contributes to a more robust global energy ecosystem.

In essence, the EU-Vietnam collaboration stands as a testament to their shared commitment to sustainability. They exemplify how economic growth can harmoniously blend with decarbonisation processes. The rigorous adherence to established standards ensures that sustainability transcends mere rhetoric, becoming a tangible pillar of business operations. Despite the challenges, both the EVFTA and the EU-Vietnam shared green transition endeavours offer tremendous opportunities.  

Author: Pimwan Pongsuwan, EIAS Junior Researcher

Photo Credits: Pixabay