The carbon market has become an important tool for addressing the biggest challenge of all – climate change. And much of the attention of late has focused on Asia as it is currently the world’s largest producer of carbon credits, and hosts a number of players on both the demand and supply sides.

South-east Asia has one of the most valuable investable carbon stocks in the world, driven by increasing financing opportunities for nature-based transactions in the ASEAN region that are committed to reducing deforestation. According to Southeast Asia’s Green Economy 2023 Report: Cracking the Code, the interest in Asia’s voluntary carbon markets (VCM) is reflected in an upsurge in domestic carbon market programmes. Governments and exchanges in Asia are establishing their plans in the market that can realise the industry’s best practices. Economies such as Indonesia, Malaysia and Thailand now host the largest carbon stocks, and regulators in the region are taking steps to establish both voluntary and compliance markets locally.

Closing the gaps in Asia’s booming carbon markets

While Europe and the United States remain the largest regions where the majority of carbon trading takes place, many foreign players are looking to Asia to tap initiatives that facilitate the buying and selling of voluntary carbon credits and to capture the increasing investments into the region.

However, question marks continue to hang over the ability to scale carbon markets in the region despite the market structure, which currently consists of a variety of private and public systems for certifying and trading carbon credits, making it increasingly difficult to attribute carbon emissions to a specific project.

Some examples are seen in China’s new China Certified Emission Reduction scheme, which allows offsets of up to 5 per cent of annual emissions and offers an advantage over VCM credits. In Australia, the use of domestic voluntary carbon credits is preferred instead of international carbon credits, and this has resulted in international participants in the VCM paying a premium in order to participate. Indonesia, which owns millions of peatlands and forests, has imposed restrictions on the potential. Many South-east Asia countries still do not have a proper framework to establish clear guidelines and regulations for carbon markets, but some are choosing to accept and adopt their own voluntary carbon standards in accordance with Article 6 of the Paris Agreement.

The mechanisms under Article 6 of the Paris Agreement, if implemented, can be of great benefit in promoting collaboration between corporates and governments in validating high-quality carbon credits. As part of the country’s effort to meet its Article 6 commitment, Singapore has partnered with world-leading carbon standard programmes such as Verra and Gold Standard, which allow high carbon emitters to flexibly use certain types of credits to comply with carbon tax obligations. Furthermore, these third-party registries can provide certification to verify that the projects are real and impactful.

Singapore’s green ambitions have opened many economic opportunities for the region, and partnership has been a key pillar for driving growth. To further build momentum for the next phase of growth in carbon markets, Singapore has joined the Article 6 Implementation Partnership initiated by Japan. Participating countries recognise the importance of building a high-integrity voluntary market. This must go hand in hand with private sector support and substantial private funding can help foster innovation and expertise in the market.

Initiatives such as the Claims Code of Practice launched by the Voluntary Carbon Market Initiative provide a stable foundation for participation by independent market participants. The Claims Code is a rulebook to guide the claims made by corporates and ensure clarity, consistency, and transparency in a company’s use of carbon credits.

Currently, the lack of harmonisation of data across registries is also creating problems of double counting. Climate Action Data Trust is creating a global public data layer built on public and permissionless blockchain technology. The global initiative is domiciled in Singapore and will be a gateway for private-public sector partnerships, as well as the broader collaboration within the carbon market ecosystem.

As we prepare for the first global stock take at COP28 – a critical review for all stakeholders involved to reassess and re-evaluate collective progress towards achieving the goals set out in the 2015 Paris Agreement –there is great hope that Asia will be a launchpad for financing opportunities and real collaborative actions for climate sustainability.

Written by Dinesh Babu, Executive Director, CAD Trust

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