Kazakhstan’s Carbon Market Reform: Insights for Vietnam

1. Overview of Kazakhstan Emissions Trading System (KAZ-ETS)
Currently, the system is in its fifth phase of implementation, covering a total of 135 companies and 212 installations across major emitting sectors such as power, oil & gas, and industry. The total cap in 2024 is set at 161.2 MtCO₂, which indicates the maximum allowable emissions under the scheme.

In terms of coverage, the KAZ ETS regulates approximately 47% of Kazakhstan’s total CO₂ emissions. While this is a significant proportion, it still leaves out important sectors, particularly transportation, which is a major source of emissions worldwide.

When compared to the European Union Emissions Trading System (EU ETS), which covers around 38% of EU emissions, the Kazakh system appears comparable in scope. However, the key difference lies in its effectiveness. The average carbon price in Kazakhstan is around US$1 per ton of CO₂e, which is approximately 90 times lower than the EU ETS price (close to US$90 per ton). This extremely low price reflects the weak incentive structure of the Kazakh system.

Another crucial design feature is the allocation of allowances. Unlike the EU ETS where a large portion of allowances are auctioned, in Kazakhstan there is full free allocation (100%). Moreover, the system allows unlimited use of offsets to meet compliance obligations. While this provides flexibility for companies, it has also led to a significant oversupply of allowances and a lack of scarcity in the market, which in turn depresses prices and reduces the incentive for emissions reduction.

2. Why Does Effectiveness Remain Limited?

Several factors explain why the KAZ ETS, despite having a solid monitoring and reporting framework, has had limited environmental and economic impact:

- Free Allocation Reduces Incentives
Because allowances are allocated entirely free of charge over five compliance periods, companies face no real financial pressure to cut emissions. This practice has led to an oversupply of allowances, low carbon prices, and very weak market activity. In other words, without a cost to pollute, the “polluter pays” principle is not applied, and the system loses its purpose.

- Limited Sector Coverage
The ETS currently covers less than half of total emissions. By excluding critical sectors such as transportation, which accounts for a large share of global emissions, the system’s overall impact is greatly diminished.

- No Role for Financial Institutions
Brokers, banks, and other financial actors are not allowed to participate in trading under current regulations. This restriction prevents the entry of market-makers and institutional investors, which are essential to improving liquidity and creating a functional price signal.

- Over-the-Counter (OTC) Transactions Only
Trading is limited to OTC transactions, meaning companies must negotiate directly rather than trading on an open exchange. This reduces transparency, discourages participation in offset projects, and further depresses market activity.

- Weak Legal Framework
Existing regulations lack detailed guidance on carbon pricing and trading. Without strong legal underpinnings, enforcement is weak, and the system cannot evolve into a robust carbon market.

As a result of these factors, Kazakhstan’s ETS, despite its early start and relatively wide sectoral coverage, has not yet become a meaningful driver of decarbonization.

3. Role of the Astana International Financial Centre (AIFC)

The Astana International Financial Centre (AIFC) is positioned as Kazakhstan’s modern financial hub. It operates under an independent legal framework based on English common law, which gives it flexibility and international credibility. The AIFC is also home to the Astana International Exchange (AIX), which is capable of handling advanced trading activities, including spot and derivative instruments.

To address the weaknesses of the KAZ ETS, the AIFC has introduced the Carbon Platform, a reform initiative designed to transform the system into a more effective, transparent, and financially integrated mechanism.

Key Reform Proposals through AIFC
- Introduce Paid Allocation via Auctions
The proposal suggests a gradual transition from free allocation to auctioning, starting with 3–10% of allowances and increasing over time. This shift would help establish a real carbon price that reflects abatement costs and enforces the “polluter pays” principle.

- Overcome Legal & Infrastructure Barriers
Under the AIFC’s legal framework, carbon units can be defined as financial instruments, overcoming the limitation of national laws where they are treated as commodities. With this redefinition, the Astana International Exchange (AIX) can serve as the main trading venue, enabling both spot and derivative trading and providing the legal and technological infrastructure for a modern carbon market.

- Enhance Market Liquidity
By enabling the participation of banks, brokers, and international investors, the AIFC aims to significantly increase trading activity. Financial institutions can provide essential market-making services, thereby improving liquidity, transparency, and efficiency.

- Create a National Carbon Fund
Revenues generated from allowance auctions would be directed into a dedicated Carbon Fund. This fund would be reinvested into industrial decarbonization projects, renewable energy development, and social support measures to protect vulnerable groups from the impacts of carbon pricing.

Through these measures, the AIFC aims not just to provide a trading platform but to create an integrated ecosystem—linking carbon markets with financial markets, international investors, and climate finance initiatives.

4. Lessons that Vietnam can Adapt

Vietnam is currently preparing to launch its pilot domestic carbon market in 2025, with full-scale operations targeted for 2028. The experience of Kazakhstan and the reform model proposed by AIFC offers valuable insights for Vietnam as it designs its own ETS.

Four Key Lessons
- Early Auctioning Roadmap
Vietnam should reconsider the prolonged use of free allocation. Even starting with a small share of allowances auctioned can send stronger price signals, create incentives for emission reduction, and generate revenue for green transition projects.

- Expand ETS Scope in Future Phases
Initially, Vietnam’s ETS is expected to focus on coal power, steel, and cement sectors. Over time, it should gradually expand to cover other high-emitting sectors, including transportation, to maximize emissions reduction.

- Establish a Carbon Finance and Trading Hub
Similar to the AIFC, Vietnam could establish a dedicated institution to treat carbon pricing as a financial instrument. By building a robust trading platform with transparent governance, Vietnam can attract both domestic and international investment.

- Broaden Market Participation
Vietnam should allow banks, brokers, and asset managers to participate in carbon trading. Their involvement will ensure liquidity, transparency, and market efficiency.

- Establish Transparent Reinvestment Fund from Day One
Revenues from allowance auctions should be channeled into a “Green Transition Fund”, which supports decarbonization projects, renewable energy, and vulnerable communities. Ensuring transparency in fund management will also help build political and social support for carbon pricing.

5. Conclusion
Kazakhstan’s experience demonstrates that an emissions trading system cannot be effective if allowances are allocated for free, if prices are too low, and if financial institutions are excluded. The reforms proposed by the AIFC, introducing auctions, redefining legal status, increasing participation, and reinvesting revenues, represent a comprehensive approach to overcoming these limitations.

For Vietnam, which is still in the design phase of its carbon market, this is an opportunity to leapfrog common pitfalls. By learning from Kazakhstan’s challenges and AIFC’s solutions, Vietnam can establish a modern, financially integrated carbon market that not only supports its climate commitments but also strengthens its position in the global green finance landscape.