COP29: More policy alignment needed in S-E Asia to unlock potential from new carbon trading rules

WHILE the adoption of global carbon trading rules by countries at the United Nations’ (UN) COP29 climate change conference – nine years after talks began – has been described by carbon market players as a watershed moment for South-east Asia, it could take some time before significant carbon financing starts flowing into the region.

The standards governing international carbon trading set out by the UN – which is covered under Article 6.4 of the Paris Agreement – would have to be tested out through a few pilot projects first, before the market will have enough confidence in a sector that has been plagued by greenwashing scandals, noted Sharad Somani, who heads the infrastructure advisory practice in Asia-Pacific at KPMG in Singapore.

Carbon market participants also said that the policy landscape around carbon trading across South-east Asia is currently fragmented, and there needs to be a gradual convergence towards Article 6.4 standards.

How would Article 6.4 change things for the region?

With the operationalisation of Article 6.4 finally under way, what this means is that carbon projects under the previous regime – known as the clean development mechanism (CDM) – would be able to transition into the new crediting system under the Paris Agreement, provided that they fulfil certain conditions.

The CDM was the first international carbon finance scheme under the Kyoto Protocol – which is the predecessor of the Paris Agreement – but had failed a few years after its development.

Among the various criticisms aimed at it, one of the major ones was that carbon credits produced under this mechanism did not account for additionality requirements. This is a condition whereby a project is eligible to generate carbon credits only if it would not have taken place without the expected revenue from selling those credits.

With many CDM projects applying to transition to be under the new regime based in South-east Asia, Karolien Casaer-Diez, global senior director for Article 6 at carbon asset developer South Pole, said that the region is a prime landscape for the new global carbon crediting regime to operate.

“South-east Asia has a strong base of technical experts, project developers, validators, verifiers. So with a functioning Article 6.4 mechanism, the region is already fully equipped actually to further establish itself as a hub for carbon services around 6.4 and beyond, and support the economic and the employment opportunities that come with that,” she added.

Rueban Manokara, global lead for carbon finance and markets taskforce at non-profit WWF, noted that with expectations for Article 6.4 standards to be the new quality benchmark for carbon credits, the transition of CDM projects to the new mechanism will open up new demand sources for the credits they generate.

Besides companies seeking to voluntarily offset their emissions to meet their net-zero commitments, other sources of demand are countries needing to fulfil their climate targets – known as nationally determined contributions (NDCs) – as well as airlines required by the International Civil Aviation Organization to mitigate their emissions growth.

Crucially, both countries and airlines are required to purchase credits with corresponding adjustments for offsetting purposes – an attribute that Article 6-aligned credits would come with.

This means that the emissions being offset are counted only once by the entity that bought the credits; the producer then gives up the right to use the credits to meet its own climate targets.

“This increased demand might affect the price of such credits,” added Manokara.

A centralised mechanism would allow carbon trading to take place at a faster pace, said Casaer-Diez, as bilateral trading agreements – covered under Article 6.2 of the Paris Agreement – usually take longer to iron out. “It has been one of the reasons why the market has had a slow start... So in 6.4... you take away one of the biggest barriers to fast action... and that, I expect, will create more liquidity into the market and create appetite from the ‘buy’ side and the ‘sell’ side,” she added.

Somani noted that being able to implement these carbon projects will help South-east Asia, which largely consists of emerging markets, attract global investment dollars and fast-track their progress in meeting their climate targets.

What needs to be done?

Choo Oi-Yee, chief executive officer of carbon exchange Climate Impact X, said that an agreed framework alone will not drive impact.

Carbon market participants told The Business Times that the adoption of Article 6.4 is just the first step, but several things need to happen before a global carbon market is fully implemented.

The supervisory body of 6.4 will need to assess methodologies submitted to it or are transiting from the CDM, said Manokara. “Only then can carbon projects be undertaken, credits be generated and trading under the mechanism take place,” he noted.

Somani does not expect the market to get a boost immediately. “My sense is over the next six to 12 months, a few projects will come up. It will be tested against the methodology. And, as we develop more and more confidence in the methodology and the nature of projects that come, it will (set) a precedence for other projects to follow,” he added.

Choo pointed out that to ensure transparency and credibility – which is the crux in addressing integrity concerns in carbon markets – establishing clear protocols for credit authorisation and revocation will be key.

Aligning efforts with global initiatives, such as those led by the Integrity Council for the Voluntary Carbon Market, will help foster trust, strengthen market integrity, and prevent further fragmentation in the carbon markets ecosystem, she added.

Hirander Misra, CEO of carbon exchange Zero13, noted that having a single global registry of carbon projects could help facilitate this process.

Currently, individual governments in South-east Asia have their own or are developing their own national carbon policies. In the case of some countries such as Malaysia, different states are developing their own regional carbon policy.

“The problem is when everyone wants to do their own thing... then you have to find a way of joining everything up as well, because trying to shoehorn that into a centralised market just doesn’t work,” he added.

In the case of Singapore, the city-state has inked several agreements with other individual countries to operationalise bilateral carbon trading. It remains to be seen how Singapore, and other governments, would add Article 6.4 standards into their own domestic framework. The expectation is for governments to gradually converge their own national carbon policies towards Article 6.4.

South-east Asian governments also need to make a decision on how many carbon credits they are willing to export, and how many they want to keep to meet their own NDCs, said Vinod Kesava, CEO of carbon management consultancy Climate Resources Exchange.

There has been talk over the last few years of Indonesia and Malaysia considering limiting the export of carbon credits over concerns they might not be able to meet their own climate targets.

“I think there’s a lack of political will. Everybody wants to be sort of protectionist,” he added. “I think those things need to be considered carefully. I think there should be a more measured way of collaborating within our backyard.”