Asean needs to come together on efforts to develop carbon pricing systems, offset markets: report

Singapore

THE recently concluded global climate summit, COP26, has injected fresh impetus into countries' efforts to decarbonise, as new and renewed pledges were made and fresh accords reached, in an attempt to avert a looming climate crisis.

Crucial to Singapore and Asean's efforts to decarbonise, however, will be the establishment of regional carbon pricing systems and carbon offset markets, which Asean nations ought to work together to advance.

These were among the key thoughts in a report released earlier this week by the Singapore Institute of International Affairs (SIIA), titled, "Greening the Road Ahead: Building a Collective Asean Climate Community".

It said the regional grouping should devote special attention to developing carbon pricing instruments including carbon border taxes, as well as carbon markets, in their decarbonisation roadmaps.

Carbon pricing can come in the form of carbon taxes, which directly place a price on greenhouse gas (GHG) emissions, or emissions trading systems, which set a limit on the total amount of emissions and allow companies to buy or sell extra allowances within this limit.

Carbon pricing captures the external costs of carbon emissions and internalises them, providing a price signal to the market on the direct cost of emissions; it also ensures the burden of emissions reduction falls on those who are responsible for emissions.

In Asean, carbon pricing can help countries align their short-term energy needs with their long-term climate goals.

Energy use in the region is still predominantly that of fossil fuels - 78 per cent of the energy mix in 2017 - and, with Asean's energy demand projected to increase by 70 per cent between 2015 and 2040, the current energy mix will be incompatible with countries' decarbonisation goals.

"There is certainly a need to diversify the energy mix to meet energy demand while addressing sustainability concerns, and national carbon pricing can accelerate the closing of this gap," SIIA said in its report.

But, Asean countries currently differ widely in their carbon pricing policies, with carbon pricing approaches having mainly been developed domestically. Carbon price differences also risk carbon leakage - where efforts to reduce emissions in countries with stricter measures inadvertently lead to an increase in emissions elsewhere, typically in countries with less stringent measures.

Beyond being a climate issue, SIIA said, carbon leakage also gives rise to concerns about competitiveness and unfair economic advantages for countries with lax environmental regulations.

"With the conclusion of COP26, each Asean government should accelerate the adoption of carbon pricing instruments, keeping in mind that the climate crisis is already upon us while the implementation of measures will take time. Carbon pricing is a holistic approach that can bring coherence to various policy instruments that discourage GHG emissions, as well as other policies that could inadvertently increase emissions," it said.

SIIA noted that the region would benefit from working collectively towards a regional carbon price, given Asean's economic interconnectivity, and this can accelerate the entire grouping's transition to a low-carbon economy, while ensuring that economic growth is achieved in tandem.

"Asean countries could eventually link or coordinate carbon pricing schemes, which would level the playing field and minimise carbon leakage due to regional trade. In addition, new and existing cross-border efforts for decarbonisation, such as regional carbon capture networks and energy grids, would benefit from carbon price alignment."

It also pointed out that the region would also not be immune from carbon pricing initiatives being developed elsewhere, for example, the European Union's proposal of a border levy on carbon-intensive imports.

"Greater regional harmonisation would strengthen Asean's collective voice and improve its position to engage with other carbon pricing systems in Asia and globally, thereby facilitating trade with other regions," it said.

But operational and reputational issues still dog the development of carbon markets, while gaps persist in policy and standards relating to carbon trading.

COP26, however, achieved notable progress in this area, with nearly 200 countries finally agreeing on guidelines creating an international market for carbon credits.

SIIA believes Singapore's efforts to build this industry - an example being Climate Impact X (CIX), a Singapore-based global carbon exchange and marketplace - will be useful in supporting its Asean neighbours' respective efforts to develop carbon trading.

Ultimately, synergising efforts across the region would yield greater benefits than competing against one another and having multiple national carbon markets with their own rules and standards.

"It would benefit all countries to seek alignment on factors such as carbon pricing and verification standards. To advance cooperation, a pan-Southeast Asian fund could be set up with contributions from multiple countries to de-risk earlier stage carbon credit project development or catalyse offset demand.

"A robust regional carbon market (would) unlock financing for green projects, foster greater innovation, and allow our region to harness green growth opportunities," SIIA said.

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