Carbon markets, ‘just transitions’ key issues for Singapore, Asean at COP27

[SHARM EL-SHEIKH, EGYPT] Delegations from about 190 countries will kick off a fresh round of climate negotiations on Monday (Nov 7) in Sharm El-Sheikh, Egypt, amid questions about the extent to which governments will continue the positive momentum from previous meetings.

The 27th Conference of the Parties (COP27) of the United Nations Framework Convention on Climate Change (UNFCCC) will see renewed calls for developed countries to make good on their promise, made in 2009, to deliver US$100 billion annually to developing nations — a commitment that everybody knows is unlikely to be met. Negotiations around setting a new collective quantified goal by 2024, from the current floor of US$100 billion, will also begin. 

A big focus this year, with COP27 dubbed as an African COP, will be the establishment of a loss and damage finance facility, funded by richer countries, for developing countries that often suffer the brunt of the destructive effects of climate change but contribute the least to global emissions. 

Singapore and South-east Asia will be paying close attention to developments on “just transitions”, which refers to the goal of mitigating the negative impact of decarbonisation on economies and communities that are dependent on high-carbon activities for fundamental needs.

There will be a high-level session on just transition as part of the Sharm El-Sheikh Climate Implementation Summit at COP27, indicating its growing significance in climate action. This comes seven years after the phrase was included as a single line in the Paris Agreement, and one year after just transition was a topic in a number of discussions during the previous COP.

Fossil fuels still account for high percentages of South-east Asia’s economies, which makes just transition principles critical to national policies in the region. Just transition is one of Singapore’s two main strategies — alongside economic diversification and transformation — to mitigate the adverse impact of climate response measures.

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Top officials from South-east Asia have been major proponents. Indonesia’s finance minister Sri Mulyani Indrawati has said that the country’s shift to net-zero needs to be just and affordable, while Singapore’s central bank chief Ravi Menon has called for the finance sector to move from green to transition finance.

While there is agreement on the importance of a just transition, how to achieve it is still a source of uncertainty. There is still limited understanding of the consequences of mitigation and adaptation measures. There are also no clear guidelines on what constitutes a just transition, leading to downstream problems of identifying funding gaps and investment needs. 

Related to just transition is a greater push for transition finance, which refers to financing high-carbon emitting sectors or companies on their long-term strategies to reduce their carbon footprint. Greater clarity and certainty about just transitions could benefit a financial hub like Singapore if more capital flows into the region.

Singapore will additionally be invested in discussions to iron out the implementation of carbon markets, given that the country has no domestic supply of renewable energy and will probably have to buy carbon credits to meet its net-zero emission targets. It also has ambitions to be a carbon services and trading hub, and its proximity to other South-east Asian neighbours rich in natural resources makes it well-placed to provide such services. According to Bain and Company, the region’s carbon offset market could create US$10 billion in economic opportunities annually by 2030.

The overall framework on international carbon trading, which is governed by Article 6 of the Paris Agreement, was finalised in COP26. Countries can now establish bilateral agreements with another country or private developer to buy carbon credits to meet its climate goals.

With the conclusion of Article 6, Singapore has inked agreements with Australia, Vietnam and Colombia to collaborate on carbon credits, and it has also started talks with more than 20 countries, including Papua New Guinea, Indonesia, Brunei, Ghana and Morocco. 

Much like Singapore’s approach in diversifying food sources, these agreements and discussions could lay the foundation for the country to buy carbon credits from a variety of sources. 

However, concerns on carbon protectionism are on the rise as countries increasingly face pressure to meet their own domestic climate targets. Indonesia and India have announced that they would be banning carbon credit exports, while other countries, like Papua New Guinea and Honduras, are expected to follow suit. 

While COP27 will look at fine-tuning rules to ensure that carbon credits traded internationally actually result in a reduction in global emissions, it may also be timely for parties to clarify the rules on export bans.

BT Correspondent Janice Lim will be covering COP27 in Sharm El-Sheikh, Egypt this week. Follow BT’s COP27 coverage at www.businesstimes.com.sg/keywords/cop27