Economic Implications of the Nationally Determined Contribution (NDC) of Vietnam: A CGE Analysis with Capital-Energy Substitution Elasticities Estimated Using Firm-level Data

Abstract

Purpose - The purpose of this paper is to assess the economic implications of Vietnamese Nationally Determined Contribution (NDC) targets towards emission reduction. Design/Methodology/Approach - We devised four scenarios corresponding to economy-wide emission reduction targets and sector targets specified in the most up to date NDC of Vietnam and the NDC technical report. The scenarios were then simulated in a CGE framework to reveal how important economic indicators and welfare change relative to baseline scenarios in 2030. The capital-energy substitution elasticities of 24 Vietnamese sectors were also estimated using a nested CES production function and used for model calibration. Findings - The results indicate that the coal mining sector undergoes a significant decline in output in response to the imposition of emission reduction schemes. Outputs of sectors with high capital-energy substitution elasticities such as non-metallic mineral, metal, and agriculture are more resilient to mild restriction policies compared with sectors with low elasticities. Imposing a moderate economy-wide restriction might lead to slight improvements in GDP and welfare. Under aggressive emission policies, the CGE model predicts major trade shifts in key export sectors, including electronics, electrical equipment, and machinery, and losses in allocative efficiency due to reduced input tax revenue. Research Implications - We recommend excluding the coal mining sector from NDC, providing short-term tax cuts or cost subsidies for exporting industries under aggressive sector-specific emission policies, and imposing a carbon tax on sectors insensitive to emission restrictions to offset the loss in tax revenue.