How should SME businesses react if ETS regulations change suddenly?

Context and Policy Risks within the ETS System133 134

The Emissions Trading System (ETS) is an economic instrument adopted by many countries to control greenhouse gas (GHG) emissions by issuing emission allowances and allowing businesses to trade surplus or deficit portions in the market. However, because the ETS depends on national policies and international commitments, such as updates to the Nationally Determined Contribution (NDC) or regulations on border carbon taxes like the EU’s Carbon Border Adjustment Mechanism (CBAM), it can be subject to rapid and unpredictable changes. Examples of such sudden changes include reductions in free allocation of emission allowances, the application of auction-based allocation instead of free allocation, adjustments to MRV reporting regulations, and changes in penalty levels for exceeding allowances. These shifts can cause financial disruption, production interruptions, and reputational damage if businesses are not prepared.

Recommended Solutions for SME Businesses

Small and medium-sized enterprises (SMEs), due to limited resources, require proactive and flexible strategies to mitigate the impact of ETS changes.

Establishing a Department or Hiring Policy Monitoring Consultants

Businesses should create an internal team responsible for monitoring and analyzing policies related to the carbon market, particularly legal documents issued by the Ministry of Agriculture and Environment, the Ministry of Finance, and international commitments. If internal resources are insufficient, specialized consulting firms can be hired to provide regular updates on ETS, CBAM, and carbon market linkage mechanisms. Timely updates enable businesses to adjust production plans, investments, and reserve carbon credits proactively.

Scenario Planning

SMEs should develop different development scenarios depending on the extent of ETS policy changes, for example:

• Scenario 1: Maintaining the free allowance quota.
• Scenario 2: Reducing the allowance quota by 20%.
• Scenario 3: Mandatory purchase of the entire allowance quota through auctioning.

Each scenario should include corresponding financial plans, cash flow analysis, credit needs, and low-carbon technology investment strategies. Scenario planning helps businesses avoid being passive in response to policy changes and builds medium-term climate risk management capacity.

Developing a flexible strategy combining the ETS market and the voluntary market (VCM)

Businesses should not rely solely on ETS-allocated emission quotas but incorporate credits from the voluntary carbon market (VCM). Credits from VCM standards such as VCS (Verra) or Gold Standard can be:

• Stockpiled as carbon assets to cover potential ETS quota reductions.
• Used to cope with CBAM obligations when exporting goods to the EU.
• Sold to generate revenue to offset emission costs.

This combined strategy diversifies carbon supply and optimizes compliance costs.

Illustrative Example

A ceramics manufacturing business in Binh Duong emits approximately 15,000 tCO₂ per year. During 2025–2026, it is allocated 13,000 tCO₂ free under Vietnam’s ETS. If by 2027 the government reduces the quota to 9,000 tCO₂, the business faces a deficit of 6,000 tCO₂. If unprepared, it would need to purchase quotas on the exchange at high prices, increasing production costs and losing competitiveness. If prepared, the business could have proactively purchased 6,000 VCS credits at a lower price in advance and used them to cover the deficit, while simultaneously installing a fuel-efficient furnace system, reducing emissions to 12,000 tCO₂/year.

References

133. World Bank. (2022). State and Trends of Carbon Pricing 2022. World Bank. https://openknowledge.worldbank.org/entities/publication/a1abead2-de91-5992-bb7a-73d8aaaf767f
134. International Carbon Action Partnership (ICAP). (2025). Emissions Trading Worldwide: Status Report 2023. Berlin. ICAP. https://icapcarbonaction.com/en/publications/emissions-trading-worldwide-2023-icap-status-report