Singapore needs both quality and quantity to win the carbon-trading race

SINGAPORE has spent the better part of a decade positioning itself to become Asia’s largest carbon-trading hub, in the face of stiff competition from Tokyo and Hong Kong. It is currently leading that race, with the recent opening of a long-planned carbon exchange and upcoming rules to let local companies buy internationally-sourced credits to offset emissions.

But even if Singapore looks like a good bet to emerge as the biggest and most internationally connected regional player, just how large, lucrative and effective can its carbon market be?

Much will rest upon a key question: Is carbon trading going to be a classic commodities market, where all products are essentially the same? Or more like a stock market, where variety drives trading activity and portfolio construction?

As the world pivots towards net zero, Singapore rightly regards its carbon market as key to maintaining its hard-won role at the centre of global finance. As an established financial and commodities hub, it can draw on a depth of skills, talent and infrastructure. Furthermore, it is positioned in the heart of Asia, close to many nations where nature-based solutions for generating carbon credits are likely to be located.

The biggest threats to Singapore’s plans are rising questions around the integrity of some credits being generated around the world, and increased scrutiny on the role of carbon offsetting in corporate net-zero strategies.

Assurance of quality

In the shift from a patchwork of national markets and bilateral trading arrangements to more globally connected carbon trading, companies that purchase credits to offset emissions are demanding the highest standards of quality. The reputational risk of being accused of greenwashing is too great to ignore.

High-quality credits are those generated by real, measurable activities that demonstrably remove, abate or prevent emissions, while sharing benefits with the local communities where these projects happen.

There must be assurance that credits traded internationally are not “double-counted” under the Paris Agreement’s nationally determined contributions – that is, the respective climate targets – of their origin countries.

Buyers will want such credits, and plenty of them. This presents a problem of scale.

Currently, there is a proliferation of smaller carbon projects across Asia and beyond. Each of these generates credits – but not in the kind of packaged, high-volume amounts that traders and buyers in a booming regional hub will need. Singapore will have to solve this aggregation challenge.

The government can play a role as a kind of trading concierge: installing regulations and market infrastructure that enable larger volumes of credits to be bundled, while prioritising integrity, so that those wishing to trade at a global scale can do so in Singapore.

Maintaining variety

Even as this happens, it will be vital to preserve variety in the market. We should not approach carbon markets from a commodity trading perspective in which a tonne of iron ore or soybeans, say, is essentially the same – wherever it comes from and however it was produced.

Many buyers will want to transact in carbon credits that suit their needs, choosing from a range of products with clearly-articulated characteristics. This, then, looks more like a stock market than a commodities one.

Some buyers will want credits that result from nature-based solutions such as reforestation or mangrove rehabilitation. These will likely be viewed – and valued – quite differently from credits generated by, say, carbon capture and storage projects.

Some buyers will want credits from specific places, or ones linked to particular nature or wildlife protection programmes. As the industry works to lift integrity, it is vital that this need for differentiation is prioritised.

Buyer beware

Companies participating as buyers should also carry out due diligence to ensure that the credits they purchase are of high quality. A well-designed market can make it easier to find information, but the onus remains on buyers to investigate thoroughly and choose carefully.

If buyers want to preserve their reputation and maximise their net-zero opportunities, they will also need to use offsetting wisely – not as a replacement for decarbonising business processes and supply chains, but as an adjunct to doing so.

Singaporean companies preparing to enter this space as buyers should understand that not all carbon credits are created equal. Carbon trading should be like investing in wine – buyers will want to see the provenance of what they are buying, having it transparently linked back to a specific record of production at a specific time and place.

In summary, the challenge for Singapore is how to aggregate and scale the market while preserving quality and maintaining product differentiation.

The nation’s newly opened exchange, Climate Impact X, is already starting to group blocks of similar carbon credits and auction them collectively, trying to establish different “types” of credit as references.

Singapore is also playing a leadership role in the United Nations Framework Convention on Climate Change’s negotiations for an international framework that can deliver greater trading volumes while safeguarding integrity.

The Republic has seized opportunities to model what a “good” approach looks like, when negotiating agreements with the governments of territories where credits are produced.

State-owned entities such as Temasek and its Gen Zero unit are making strategic investments in companies and projects that they hope can supply larger volumes of high-quality credits.

Singapore sits in pole position to emerge as Asia’s carbon-trading hub. Now begins the race to gather credits of the quality and quantity that buyers will want, if they are to trade in its marketplace.

The writer is Asia chair of climate change advisory and investment firm Pollination and a former Australian Ambassador for the Environment. He is speaking at the Singapore Carbon Market and Investor Forum this week.