Harmonised standards can affect Asean’s potential as supplier of carbon credits: GenZero

A SINGLE, harmonised set of standards governing carbon markets globally could be what is needed to solve current challenges over the quality and integrity of carbon credits.

But if that vision were to become a reality in the future, South-east Asia’s potential to be a large supplier of carbon credits may be diminished, given that the abatement levers in this region are likely to be heavily skewed towards nature-based solutions, said Anshari Rahman, GenZero’s director of policy and analytics.

That is because the role of carbon markets in that highly climate-centric future would not be as critical, and definitions of what counts as quality climate solutions would be narrower. This leaves out many nature-based projects that inherently have higher level of uncertainties over quantifying carbon and permanence than technology-based solutions such as direct air capture.

This climate-centric world is one of the three possible scenarios that could play out for carbon markets, indicated a report released by GenZero on Friday (Apr 12), a Temasek-backed investment platform focused on decarbonisation.

The second plausible scenario is one where carbon markets are bifurcated due to geopolitical and ideological differences between power blocs. In this scenario, the Association of Southeast Asian Nations (Asean) could emerge as a regional market with member countries agreeing on a common set of quality principles and operating carbon trading among themselves, noted Rahman.

The third one is a fragmented market where countries trade carbon credits based on bilateral partnerships. In the context of Asean, this could mean the proliferation of bilateral agreements between countries willing to cooperate, rather than a regional market. 

GenZero’s chief executive officer Frederick Teo said that these scenarios are not predictions of where carbon markets would be headed, and that there is no preference over any of the three as there are both positives and negatives in each.

Instead, scenario planning involves understanding the various ways in which macroeconomic trends and geopolitics can shape carbon markets, and distil the “no-regrets” actions that carbon market participants and regulators can take today, noted Teo.

The three scenarios

Regardless of which scenario will play out in the future, the report stated that carbon markets would have a role to play in decarbonisation in all three, though at varying degrees.

For the first scenario where countries collaborate to prioritise climate action, there would be vibrant carbon trading between standardised carbon markets, with a strong focus on high-quality solutions, and enough financing for costly breakthrough technologies.

Rahman noted that there would probably be a strong multilateral process in defining quality projects, with Article 6.4 of the Paris Agreement – which governs rules on an international carbon trading system – being operationalised at scale and carbon prices trading higher in this scenario.

However, stringent requirements on quality, while helpful in weeding out low-integrity projects, will also reduce financing for solutions that rely on estimates to quantify its climate impact, such as nature-based solutions. These solutions are typically cheaper, more readily available, and can be implemented at scale.

This can eventually reduce the overall supply of carbon credits, and thereby the size of the voluntary carbon market as companies will be more liable to compliance mechanisms.

However, voluntary carbon markets will play a bigger role in scenarios where the world is ideologically divided into two power blocs, or fragmented by nationalistic interests.

An ideologically bifurcated carbon market will emerge in a divided world, with the western bloc – led by the United States and Europe – focusing on developing high-tech solutions, while the China-led eastern bloc will look at scaling up low-cost nature-based and community projects.

Carbon markets can eventually be an important bridge for climate collaboration between the power blocs, where trading occurs where their principles converge.

In the case of a fragmented world, governments will look towards carbon markets to channel financing towards under-funded climate solutions and remain one of the best ways to set a price on carbon. Countries will develop their own domestic carbon markets and trade bilaterally, though prices would vary significantly.

The lack of a central authority guarding the quality of carbon projects can be challenging for project developers located in jurisdictions lacking in climate ambition. Local carbon markets can go through boom-and-bust cycles when low-quality projects do not take off over integrity concerns.

Narrow definitions on quality climate solutions

Teo said that the report does not attempt to define what constitutes a quality carbon project. But it seeks to highlight the trade-offs involved in such concerns. These typically revolve around price, technological readiness and the durability of the solution.

“If you take a particularly restrictive definition around this, if the (solution) does not last for 1,000 years then it is not good enough – and therefore will not be accepted – then those solutions that can be good for 100 years will be priced out,” he said.

“Then those things that can help us address the climate crisis and buy us time to the end of the century will not be funded and will not work.”

While there needs to be a minimum level of quality to preserve confidence in the market, the report noted that there needs to be an appreciation of the practical realities that may not be able to satisfy the requirements if a very high bar is set.

Ongoing integrity concerns in the carbon market have led to a decrease in prices of carbon credits, and the size of the voluntary market over the last year.

Hence, the report argues that carbon markets need greater regulatory oversight by governments and standard setters to ensure alignment on a set of quality principles for market participants to have a common base when evaluating the pricing and quality of projects. Still, they should not be overly prescriptive.

There also needs to be better understanding of how carbon markets can support a company’s decarbonisation plan, and the claims that companies can make when using offsets, so that there can be clearer demand signals.

In the context of Asean, how carbon markets evolve in the region will depend on member states’ ability to meet their net-zero targets as well as willingness to cooperate, said Rahman.

“Irrespective of how global trends evolve, Asean can better leverage carbon markets through well-designed policies that clarify the role of carbon markets in decarbonisation, and harness digital technologies for environmental integrity,” he noted.

“Corporates in the region can take steps to identify where carbon markets best fit within their sustainability and decarbonisation strategy. By providing a clear demand signal to the market, they help encourage supply to be developed that would ultimately fit their requirements,” the GenZero’s director of policy and analytics added.