Asia carbon credit buyers put voluntary markets on hold: Bain

COMPANIES in the Asia-Pacific have doubled down on a “wait and see” approach as global voluntary carbon markets (VCMs) face a crucial test of confidence in 2023, said Dale Hardcastle, Bain & Company’s global head of carbon markets.

In a global brief that called 2023 a “crossroads” year for VCMs, Bain noted that VCMs grew more slowly in 2022 than many expected, despite buoyant market sentiment in the wake of COP26 summit in Glasgow. Compared against 2021, issuances by top standard bodies Verra and Gold Standard fell 27.6 per cent, while retirements fell by 7.5 per cent, according to Climate Focus’ VCM dashboard.

Speaking to The Business Times, Hardcastle said fence-sitting is particularly acute in the Asia-Pacific, because the region’s corporate buyers have less experience navigating offset strategies and VCMs. He noted that only about 6 per cent of carbon credit retirements in 2021 were done by companies in the Asia-Pacific, with many of these being Australian corporates.

“Corporates need assurance that the emissions reduction claims that they make from credit purchases will be deemed meaningful and acceptable by regulators and the public,” Hardcastle said.

Fuelling the uncertainty are hot debates about the quality of credits, sparked by scathing media reports that have claimed that the market is currently flooded with “junk” carbon credits. In the meantime, industry governance bodies set up in 2021 are still trying to figure out how to write the rules for VCMs.

The Integrity Council for the Voluntary Carbon Market (ICVCM) and Voluntary Carbon Markets Integrity Initiative (VCMI) are currently in the process of creating draft guidelines for both the supply and demand side of the markets to address credit quality and integrity of demand. ICVCM’s consultation, which has not settled on a definition for credit quality, drew 655 pages worth of feedback and is expected to yield finalised standards in March this year.

The Bain report argued that 2023 will see VCMs either rationalise or be stifled by uncertainty and complexity, partly depending on the positions that the ICVCM and VCMI take. Government and regulatory bodies’ involvement and oversight of the markets are wild cards as well.

Hardcastle said that as the VCMs are still young, ICVCM’s expected “core carbon principles” will act as “rules on the road”, providing companies with guardrails on how to select, invest and use carbon credits.

Optimism in South-east Asia

Despite the uncertainties, Hardcastle, who was “bullish” in December about carbon opportunities in South-east Asia, said that regional investors and owners of natural capital now are “still believers” in the region’s potential carbon projects. They “continue to look beyond the current news cycle and see the future” despite the market reactions, he said.

There remains a great deal of interest in bringing projects to market as Indonesia – the highest potential market in the region – has more than 200 carbon projects in the development pipeline, waiting to get necessary approvals from relevant ministries, he pointed out.

Singapore, he added, is creating certainty for buyers with its carbon tax regime, given updates last year that the tax rate per tonne of emissions will reach S$50 to S$80 by 2030, with companies being able to offset up to 5 per cent of taxable emissions by purchasing offsets. Minister for Sustainability and the Environment Grace Fu had indicated that the Singapore government will issue a white list later this year with eligible international offsets, so corporate buyers have complete clarity on which ones they can buy to offset emissions.

It also helps that Singapore is signing memorandums of understanding with other countries, and seeks to be a regional standard setter for transparent and high-integrity markets, he added.

Meanwhile, Hardcastle noted that Indonesia is taking steps as well to provide clarity to buyers by introducing its own Indonesian standard for certified emissions reductions and creating its own registry and registration process. He, however, said many questions remain as to how the final regulation and market structure will look.

But the more important work that needs to be done – one with real implications for the markets – is the task of creating a clear incentive for corporates’ use of carbon credits as part of their net-zero strategy for “today, not tomorrow”, he said.

Stressing that this remains ambiguous under the Science Based Targets initiative, he said investment in natural capital solutions is not going to scale, unless a more pragmatic approach is adopted where abatement and carbon credits can meaningfully co-exist.

Without this, the value of VCMs will likely remain closer to current levels of US$2 billion in 2030, versus its potential of 10 to 15 times that amount, he pointed out.

“Put simply, companies need an incentive to invest. We cannot expect companies to do this en masse out of goodwill,” he said.