Fundamental Reforms to Environmental Law in Vietnam

As governments worldwide begin to face the problem of global climate change and attempt to soften the impact of human activity on our habitat, environmental law and regulation is rapidly evolving. In Vietnam the new Law on Environmental Protection and its implementing Decree No. 08/2022/ND-CP (collectively, the “2022 LOEP”) took effect in January 2022 with a wide-ranging reform of the way projects are evaluated and approved by the government. The 2022 LOEP replaced the 2014 Law on Environmental Protection, repealed and amended parts of four other laws and annulled eight governmental Decrees in their entirety. It is the third generation of environmental protection law enacted in Vietnam in the last 15 years aiming to address increasing domestic environmental problems as well as contribute to global environmental protection efforts.

Spanning over 300 pages, the new legislation includes fundamental changes in how projects are evaluated by the authorities for environmental approval, permitting mechanisms and more stringent environmental protection liabilities including requirements for extended producer responsibility to be phased in. Together with Prime Minister Pham Minh Chinh’s commitment in COP26 to reach net zero by 2050 and the recent promulgation of the National Environmental Protection Strategy in April 2022, enforcement of environmental protection regulation is expected to be more robust following the enactment of the 2022 LOEP.

In this note, we highlight seven themes underlying the notable changes in the new law and their anticipated impacts on doing business in Vietnam.

Focus on environmental impact of business activities

What is new?

Under the previous regime, the way a project was treated from an environmental protection perspective depended more on the approval process applicable to such project under the investment regulations (e.g., the investment law, public investment law, public-private partnership investment law, construction law, etc.) The 2022 LOEP shifts the focus to regulate projects based on their environmental impact rather than on other characteristics.

The 2022 LOEP sets out detailed criteria to determine the extent of the environmental impact profile of each project based on its size, scale, types of goods and services, land or water surface use requirements, use of natural resources and other environmentally sensitive factors such as proximity to water resources or cultural or natural heritage sites, etc. This new approach captures more projects with a material environmental impact even if their size or scale would not be subject to investment approval requirements under the investment regulations.

Implications for business

Investors should review the relevant environmental impacts of new projects and projects under development in light of the new criteria set out in the 2022 LOEP to determine how the project would be regulated under the new regime.

Clarity on preliminary environmental impact assessment

What is new?

For the first time, the 2022 LOEP provides guidance on preliminary environmental impact assessments. The Investment Law has long required investors in projects that are subject to investment policy approval to prepare and submit a preliminary environmental impact assessment report in accordance with environmental law. However, the prior lack of guidance on the form and content of the preliminary environmental impact assessment report created difficulties for investors in preparing the reports and for the authorities in evaluating them, resulting in delays and inconsistencies in licensing practices in different provinces. The new law aims to resolve this by clarifying what is required

Implications for business

As noted in item 1 above, more projects will now be subject to the preliminary environmental impact assessment requirement, including those that are not subject to investment policy approvals under the Investment Law. For projects with environmental impact assessments underway, those evaluations should be revisited and revised taking into account the requirements of the new law.

A single consolidated environmental permit

What is new?

Investors in projects that may have significant environmental impact must now apply for one single environment permit incorporating environmental protection requirements previously licensed under up to seven different permits (“component permits”)[1] which were issued in accordance with various laws and regulations. The Ministry of Natural Resources and Environment (“MONRE”) or the People’s Committees at provincial or district levels have the power to issue environment permits for projects depending on the environmental impact classification of each project. The Ministry of National Defense or the Ministry of Public Security will issue permits for projects involving state secrets in relation to national defense or public security.

Depending on nature of the specific project, the investors must obtain the environmental permit before (as applicable): (1) commissioning waste treatment facilities; (2) being granted a specific license to carry out the project (e.g., a license for exploitation of natural resources, or plan for exploration or exploitation of hydrocarbons); or (3) issuance of the construction permits.

An environment permit will be valid for seven years with respect to projects with more environmental impact and ten years with respect to others.

Projects that generate an insignificant amount of waste are not required to obtain an environment permit but still must complete an environmental registration with the People’s Committee at the local (commune) level. This registration must include information about the project, the type and volume of waste to be generated, the proposed plan for waste collection and treatment, and commitments on environmental protection

Implications for business

The consolidation of component permits into a single comprehensive environment permit is one of the most important changes in the 2022 LOEP. This should simplify the licensing process for investors and allow the authorities to better supervise compliance. There are several issues of note to investors:

1. The 2022 LOEP states that “the environment permit can be issued for each phase, each construction work or each construction work item that generates waste. The subsequently issued environmental permit will incorporate the content of the preceding one.”
   1. Previously, investors could apply for separate environmental protection permits before undertaking each activity impacting the environment.  For example, if during the construction phase, the project only discharges waste water but not toxic waste (which will only be generated during the operation phase), then previously the project company would apply for the permit for discharge of wastewater during the construction phase and would only apply for a permit to discharge toxic waste later. The new law combines all the component permits into one to allow for holistic evaluation, and it is not yet entirely clear whether investors can continue the previous practice or will need to complete all the required environmental protection facilities before starting to operate any of them.[2]
   2. It is not clear whether (i) the effective term of the subsequent environment permit covering additional environmental protection facilities would be limited to the remaining term of the preceding permit or (ii) there would be a separate effective permit term with respect to the newly added component. The former interpretation does not seem reasonable as it may cause the effective term of the permit with respect to newly added component to be shorter than that permitted under the law. However, the latter interpretation would result in one environment permit having varying terms with respect to different environmental protection components. The template environmental permit included in the implementing Circular 02/2022/TT-BTNMT of MONRE does not appear to contemplate such different effective terms of one single environment permit. This ambiguity would need to be clarified by the MONRE to avoid difficulty in implementation of the new legislation.
2. For investment projects which obtained component permits under the former law, such component permits will be effective until their respective expiry dates, or in the absence of a specific expiry date, by 1 January 2027.
3. Investment projects that are operating but were not required to obtain any component permit under the previous law but must now obtain an environment permit by 1 January 2025.

More stringent environmental liability

What is new?

Environmental protection fees

The 2022 LOEP provides that environmental protection fees shall be charged to parties that discharge waste, exploit minerals, undertake other activities that have detrimental impact on the environment, or provide certain environmental protection public services. There is no overarching legislation on environmental protection fees. Instead, the government issues separate regulations on environmental protection fees applicable to different sectors. In general, environmental protection fees shall be charged based on the impact of the relevant activities on the environment. For example, fees for the discharge of industrial wastewater shall be chargeable on a progressive basis depending on the volume of wastewater discharged. The 2022 LOEP also suggests that there may be changes in the regulations on environmental protection fees in the coming time in terms of scope of application and the chargeable amounts.

Environmental protection deposit 

An “environmental protection deposit” is required to cover future costs for environmental recovery and restoration or remedying pollution caused by certain business activities. In addition to mining and import of scraps to use as manufacturing materials (which were subject to environmental protection deposits under the prior legislation), entities undertaking land filling of waste are also required to provide environmental protection deposits. Depending on the type of business activities, the depositor must make the deposit to the Vietnam Environmental Protection Fund, the provincial Environmental Protection Fund or the credit institution where it opens and maintains its bank account prior to carrying out the relevant businesses. The 2022 LOEP provides more detailed guidance on environmental protection deposit obligations, including the amount of the deposit, the timeline, the conditions for returning the deposit and use of the deposit following the occurrence of environment incidents caused by the relevant business activities.

Environmental risk insurance

More projects will be subject to mandatory environmental risk insurance under the 2022 LOEP than under the former regime: the types of business activities required to purchase insurance has increased from 4 groups to 17 groups. However, the 2022 LOEP still does not specify the required coverage scope of the insurance, leaving certain flexibility for insureds.

Determination of environmental damages

For the first time, the 2022 LOEP provides detailed guidance on how to assess environmental damages based on the following key principles:

1. damages will be determined based on the costs for restoring the environment and ecological system to similar conditions as those existing prior to the damaging business activities; and
2. damages occurring in a geological area will be the sum of all damages to each of the environmental elements in that area (i.e., water, land, ecosystem, animals and plants).

The 2022 LOEP further clarifies the formula for calculating damages to each environmental element, which should provide helpful guidance to both the authorities and businesses in handling environmental incidents and disputes.

Implications for business

Increased fees, deposits and costs of insurance should be evaluated as part of the project planning process.

In addition, the Law on Environmental Protection Tax was enacted over ten years ago and remains effective, imposing taxes on eight groups of products that have environmental impact.[3] The applicable tax is an absolute amount chargeable on each unit of the relevant product and to be declared and payable by the parties that import, export or sell the relevant products in Vietnam. The Ministry of Finance has announced it is contemplating amendments to the Law on Environmental Protection Tax focusing on the review of the appropriateness of applicable tax amounts. In line with the recent trend, it is expected that any revisions may introduce more stringent tax requirements with a broader applicable scope.

Considering the expected more robust enforcement of the law in coming years, it is advisable that businesses take a prudent approach to at least follow the industry practice in obtaining environmental insurance in doing business in Vietnam.

Extended producer responsibility (EPR)

What is new?

While EPR has been a prominent concept for over 20 years,[4] it has only more recently started to be implemented as a regulatory tool to promote a sustainable and circular economy. Accordingly, importers and producers of certain goods and packaging products must be responsible for recycling a minimum percentage of their produced or imported goods at the end of their use term. EPR obligations were introduced in Vietnam in 2005 environmental protection law but were not enforced due to practical difficulties, including the absence of recycling facilities. The 2022 LOEP provides more detailed guidance on EPR including an enforcement timeline which is intended to be more realistic and practical.

Manufacturers and importers of certain recyclable goods[5] for sales in Vietnam must either (1) recycle a minimum percentage of the products themselves or by engaging a third party to undertake the required recycling; or (2) make monetary contributions to the Vietnam Environmental Protection Fund. The minimum recycling percentage of each type of goods and the formula for determining the monetary contribution are specified in the 2022 LOEP.

In line with the OECD Guidance Manual, EPR will be phased-in with the following timeline: (1) on 1 January 2024 in relation to packaging products, battery, greases, tubes and tires; (2) on 1 January 2025 in relation to electrical and electronic products; and (3) on 1 January 2027 in relation to transportation vehicles

Implications for business

Businesses that are subject to EPR obligations should be prepared to comply with recycling requirements in the coming years. Plans for recycling of goods and budgeted funding for such plans should be included in business plans.

Although the business community in Vietnam generally supports the concept of EPR, there are concerns about the practicability of those requirements in the context of the market. Transparency in the management of EPR contributions will be important to ensure the efficient use of funds for recycling activities.

Investment incentives

What is new?

The 2022 LOEP should create more opportunity for businesses engaged in environmental protection to benefit from investment incentives. The key incentives include land rental exemption or reduction, tax exemption or reduction, low-interest rate borrowings from Vietnam Environmental Protection Fund, service fee subsidies for certain urban sanitary services, green public procurement requirements by State entities and authorities, and support for advertisement and publication of environmental protection content.

Although many of these incentives were available in prior versions of environmental protection law enacted in 2005 and 2014, actual implementation has been limited (especially in areas such as preferential borrowings or green public procurement) due to limited funding of the Vietnam Environmental Protection Fund and limited public awareness about the importance of environmental protection

Implications for business.

Businesses in environmental protection areas should review available incentives carefully to assess their eligibility and prepare for how to best leverage such incentives. With more robust provisions on contribution to and management of the Vietnam Environmental Protection Fund, and more detailed guidance on how to implement investment incentives, it is expected that investment and financing incentives will be more accessible under the 2022 LOEP

Green financing

What is new?

For the first time, the 2022 LOEP Law sets out guidance on “green bonds” and “green credit” to support environmental protection projects. The MONRE and other relevant governmental authorities are instructed to develop detailed criteria for defining projects that are eligible for funding from green bonds or green credit in Vietnam before 31 December 2022. The 2022 LOEP also includes provisions supporting commercial banks taking foreign loans to finance eligible green projects in Vietnam.

Previously, the State Bank of Vietnam issued guidance to commercial banks in Vietnam on providing green financing, and many commercial banks in Vietnam developed their own eligibility criteria and policy on green financing. There have also been recent successful green bonds issuances by Vietnamese companies to promote renewable energy and electric vehicles. However, due to the lack of clear legal guidance on those criteria, Vietnamese companies still face challenges accessing the international green financing market.

Implications for business.

The 2022 LOEP and future implementing guidance to be issued by the Government should provide lenders and businesses with more certainty in proceeding with green financing transactions. Interested businesses should work closely with the Government to develop the eligibility criteria applicable to green projects consistent with international standards and practice to facilitate international financing.

Authored by Ngoc Nguyen.