The EU Emissions Trading System (EU ETS) and California’s Cap-and-Trade program are two of the world’s most mature carbon pricing systems. Both demonstrate that well-designed cap-and-trade programs can cut emissions cost-effectively while stimulating clean investment — but only if policy design, market integrity, and social safeguards are carefully managed. Vietnam, now implementing a national roadmap toward a domestic carbon market, can accelerate learning by applying practical lessons from these two programs.
Quick comparison: scope, instruments, and governance
EU ETS (pan-EU): Economy-wide for covered sectors, auction + limited free allocation, steadily declining cap tied to EU targets, increasingly tight supply management and wider sector coverage (including maritime/aviation phase-ins). Robust registry, auctioning platform, and market surveillance underpin integrity.
California Cap-and-Trade (state level): Covers ~75–80% of state emissions via point-source regulation, combines auctions with direct allocation, funds climate programs with auction revenues, uses offset credits subject to stringent protocols. Strong domestic legal and administrative backing (CARB) and active stakeholder engagement. Recent legislation extended the program through 2045.
What worked well — transferable lessons
Clear declining cap and predictable tightening
A predictable cap trajectory gives firms regulatory certainty and encourages long-term investment in low-carbon technology. The EU’s phased tightening and California’s multi-year caps reduced market surprises and spurred clean energy deployment.
Robust MRV and registries to prevent fraud/double counting
Transparent Monitoring, Reporting, and Verification (MRV) systems and independent registries are foundations of trust. Both jurisdictions built detailed tracking systems that enabled reliable accounting of allowances and offsets. Vietnam should prioritize MRV early.
Auctioning + targeted free allocation balances efficiency and leakage risk
Auctions generate public revenue and reveal true carbon value; judicious free allocation prevents carbon leakage for trade-exposed industries during transition. Both systems blend these tools to manage competitiveness concerns.
Use of revenues for transition and equity
California channels auction revenues to vulnerable communities, clean technology, and adaptation — improving public acceptability. Vietnam can use revenue to finance just transition measures for workers, SMEs, and climate adaptation.
Phased inclusion and linkage options
Both systems expanded scope over time and explored linkages (EU’s technical interoperability; California linked with Quebec). Phasing allows capacity building and minimizes shock. Vietnam should pilot sectors before mandatory inclusion and keep the door open for international linkage under Article 6.
What to avoid — pitfalls experienced elsewhere
Overallocation and price collapses:
Early phases of some ETS programs suffered allowance oversupply, collapsing prices and weakening incentives. Vietnam must calibrate supply, include price-stabilizing mechanisms (floors/collars, reserve mechanisms), and avoid over-generous free allocations.
Overreliance on low-quality offsets:
California’s program refined offset rules after concerns about additionality and permanence. Vietnam should adopt strict offset quality standards and prefer domestic mitigation projects that build co-benefits.
Insufficient stakeholder engagement:
Program legitimacy depends on early, transparent dialogue with industry, civil society, and affected communities. Design choices tied to competitiveness, allocation, and revenue use must be consultative.
Practical recommendations for Vietnam
- Start with pilots + phased rollout. Use pilot sectors (power, cement, steel) to test MRV and market infrastructure before broadening scope.
- Build a transparent MRV + registry now. Prioritize interoperable, digital registries to avoid double counting and to enable later linkage.
- Design revenue use for a just transition. Ring-fence auction income for energy efficiency, retraining workers, rural adaptation, and support for SMEs.
- Implement price stabilization tools. Consider a market stability reserve and a minimum auction price to protect against collapse and excessive volatility.
- Adopt strict offset criteria; incentivize domestic mitigation. Favor high-integrity projects (REDD+, renewables, low-carbon agriculture) with co-benefits for communities.
- Plan for international linkage under Article 6. Ensure ITMO accounting and tracking are Article-6-compatible to access demand and liquidity from global buyers.
The EU ETS and California’s Cap-and-Trade offer a proof-base: well-designed cap-and-trade systems reduce emissions and mobilize investment when backed by strong MRV, smart allowance management, careful use of revenues, and social safeguards. Vietnam’s carbon market roadmap should combine these lessons with local realities — piloting, building institutions, protecting vulnerable actors, and keeping international linkage options open will maximize environmental and economic benefits.