Asia’s lead in global carbon markets is one to follow

THE United Nations climate talks in December did not deliver the progress on carbon markets that many hoped or expected. Negotiators failed to agree on a number of key texts, with countries clashing over how rigorous to make the rules.

But, many countries in Asia are now experimenting with their own alternatives, and showing leadership where it was missing in Dubai. With the texts facing another year of negotiation, Asian nations show no sign of holding back by launching their own carbon credit schemes and striking country-to-country carbon credit deals, offering a plethora of opportunities for countries to make good on their climate ambitions.

From its low-lying archipelagos and biodiverse tropical forests to its booming manufacturing and agriculture sectors, Asia is home to some of the world’s most vulnerable ecosystems – and, in contrast, some of the world’s biggest emitters.

As countries ramp up efforts to reduce emissions, carbon markets are essential. Research by the IETA shows that using carbon markets at scale can reduce the global cost of delivering emissions reductions identified in nationally determined contributions by about 30 per cent by 2030, and more than 50 per cent by 2050.

Research by both Trove and Ecosystem Marketplace shows that companies purchasing carbon credits decarbonise twice as fast as those who don’t.

One problem remains however: the world needs a steady supply of high-quality credits.

Yet, one region can produce credits more than anywhere else. Asian projects supplied more than half of the credits sold on the voluntary carbon market in 2021, positioning it comfortably as the world’s largest credit-producing region.

Demand for credits from business leaders in Asia is also rising, as the complementary role of carbon credits alongside a science-based decarbonisation strategy is increasingly understood. Meanwhile, the recent proliferation of voluntary trading platforms and exchanges across the region is helping to bring more international buyers to the table. Asian countries therefore hold one of the critical keys to accelerate global decarbonisation.

Road map for regional climate action

Although the strength of national climate commitments varies considerably within Asia, an overall pressure to implement national climate targets has spurred the establishment of stronger climate policies, regulations and domestic carbon market schemes.

With each of the countries and climate actions at differing stages of development, we are likely to see some initial confusion in the market. However, once rules are set, Asia will offer an array of new opportunities.

And, as each country vies to attract green investments, we also expect to see an atmosphere of healthy competition. Countries on the forefront of this change know that there is much for Asian ecosystems and communities to gain on this global journey to net zero.

With its dominance in the international financial and commodity trading sectors, Singapore is well placed to become Asia’s biggest international carbon trading hub and is becoming a unique case study on how compliance carbon markets can work well.

Many aspects of Singapore’s domestic strategy are highly replicable, and other countries should take note of its recently enhanced carbon tax that covers 80 per cent of the city-state’s greenhouse gas emissions and spurs climate action across the globe by allowing companies to use international carbon credits to offset up to 5 per cent of their taxable emissions.

Market stalwarts such as Japan are similarly innovating for the future. The country has been active in international carbon markets under the United Nations Framework Convention on Climate Change (UNFCCC) for over 10 years now.

Just recently, Japan’s stock market started trading carbon credits and now with its Green Transformation (GX) League, which builds on the country’s existing carbon trading systems such as the Joint Crediting Mechanism, the country is paving the way for a future emissions trading scheme similar to the European Union’s.

Meanwhile, Thailand is one of the first countries in the world to authorise a transaction under Article 6 of the Paris climate agreement. The deal, agreed between Thailand and Switzerland, allows the latter to counterbalance its national emissions based on Thailand-based carbon projects through the introduction of over 2,000 electric vehicles to Bangkok’s public bus fleet.

The credits generated are sold to a buyer in Switzerland, the Klik Foundation. The world’s first carbon trade under the clause, the Thai-Swiss project is an example of how Article 6 could work in practice to drive climate action around the globe.

Unlocking the benefits of carbon markets

There are many more examples of Asian innovation. The region is sitting on the precipice of change but to forge a successful net-zero transition, there are major questions that Asia must next tackle.

These include which carbon mitigation outcomes to keep; which ones to transfer; and, how to leverage international transfers for more long-term impact and use them to increase climate ambitions at home.

While each country has its own emission reduction strategy, voluntary and compliance markets will develop best when countries work together. Collaboration will help drive ambitions across the region as a whole, while helping each country meet its international climate commitments.

Due for renewal in 2025, the next generation of these commitments will be an opportunity for world leaders to utilise the innovation occurring across Asian markets as they look for smart investment tools that can help scale their own climate ambitions.

On the corporate side, engaging in multiple markets – including international, voluntary, domestic, and Article 6-aligned ones – is an effective means of hedging risk.

Whether you sit within the public or the private sphere, one thing is abundantly clear – the precedents set in Asia will prove extremely influential for the future of global carbon markets. They will also likely have a significant influence on decisions and progress to be made on Article 6 at the COP29 climate summit in Baku, Azerbaijan, in November.

The writer is regional director for climate policy, finance and carbon markets in Asia at South Pole, a carbon project developer and climate solutions company