Time to take action, carbon credits won’t stay cheap

READING between the lines of Singapore’s International Carbon Credit (ICC) framework suggests that voluntary carbon credits are probably going to cost more than predicted due to a near-term scarcity of eligible quality credits.

All companies should pay attention, even if they are not subject to Singapore’s carbon tax, and therefore will not have to buy ICC-eligible credits. The mounting urgency of climate action raises the likelihood that carbon prices will flow into all parts of the economy, and companies should start taking steps to decarbonise and minimise their need to pay for expensive credits down the road.

The special regime

When the ICC framework takes effect in 2024, it will allow companies subject to Singapore’s carbon tax to offset up to 5 per cent of their taxable emissions using eligible carbon credits. That is when the country’s carbon tax rate is set to rise to S$25 per tonne of emissions from S$5 a tonne now. By 2030, the tax rate is expected to be between S$50 and S$80 per tonne.

The ICC notably allows certain high-quality carbon credits to be used. For instance, these credits must feature a new safeguard called “corresponding adjustments”, which guards against double counting in the form of negotiated country-to-country deals.

Apart from this, the credits must fulfil six other criteria. Those include a requirement for “no leakage”, illustrated by the example of deforestation simply shifting to unmonitored parts of a forest. In practice, this will mean that credits claimed by a project must be considered across an entire jurisdiction, and not just within the project.

Frederick Teo, the chief executive of Temasek-owned investment platform company GenZero, said that the ICC’s structure will lead to a “harmonisation” of what the markets understand to be quality benchmarks, or quality standards. In other words, if the Singapore ICC framework admits a certain voluntary carbon project, the price of that project’s credits are likely to go up. That upward pressure is likely to affect all high-quality credits.

On top of that, governments are increasingly imposing a price on climate change or social externalities through mechanisms such as a carbon tax. Compliance costs will be on the rise as well.

Other countries to follow

Steve Tan, vice-president of strategic content at price reporting agency Opis, believes Singapore’s release of the ICC eligibility criteria will “probably pave the way for other countries to follow it, sooner rather than later”.

Noting that China has a similar mechanism of tying compliance to voluntary carbon credits but kept the linkage to voluntary credits produced from projects within its borders, he said Singapore not having the resources to do the same and status as a “net buyer” is significant.

Charles Bedford, the chief impact officer of investment management firm Carbon Growth Partners, believes Singapore’s is one of the steps towards creating a global market price for carbon. The European Union’s Carbon Border Adjustment Mechanism, a carbon tariff on imported carbon intensive products which took effect on Oct 1, is another step, he noted.

“This is a terrific advancement and testimony to what a little bit of structure from the United Nations, coupled with the power of markets, can achieve for the planet,” he remarked.

Abatement cost curve

But supply would be an issue. Bedford pointed out that no jurisdictional Redd+ projects – the type of forest conservation projects that Singapore indicated it would accept – are as yet available in the world.

Bedford said practical hurdles are getting in the way of jurisdictional credits: “Who decides on the deforestation rate? Who audits and validates that rate? How do you show additionality? What scale – country, province?”

Jurisdictional Redd+ also does not have a strong mechanism for enforcement into the future, he noted, saying it is “hard to see how future governments can be bound by the current government”.

Without that supply, the “low-hanging fruit” remaining under Singapore’s S$25 a tonne carbon tax regime would likely be credits from efficient household appliances and some renewable-energy projects, which lie on the lower end of the abatement cost curve.

That does not paint a great supply picture. After all, we need only this many clean cook stoves.

A better path

With the cost of carbon set to rise faster than expected, companies can do one or both of two things:

The first is to budget for higher costs down the road, be it in the form of energy prices or the internalisation of carbon prices through regulations.

But perhaps the more effective strategy is to step up decarbonisation efforts. Paying the price today is surely better than paying it later, after costs have taken the inevitable path north.