Carbon Emissions

Harnessing Carbon Market Opportunity in Asia

As the global community intensifies its efforts to combat climate change, the carbon market has emerged as a promising avenue for investors looking to align their financial goals with environmental sustainability. Asian governments and companies are striving to develop and scale up voluntary carbon markets (VCM). 

The existing VCM, however, has several issues that prevent it from progressing. These difficulties consist of low-quality credits, a lack of standardized methods, little transparency, and low prices. Additionally, the expanded usage of carbon offsets is coming under increased scrutiny. The effectiveness of current international marketplaces is hampered by these problems. If these issues are not resolved, money may be wasted on shaky initiatives that won’t help the environment or local populations.

Understanding the Carbon Market in Asia

Countries around the world are implementing carbon market regulations to curb greenhouse gas emissions and promote sustainable development, including Asia. The emerging carbon market regulations in Asia are highlighting key initiatives and their impact on the region’s transition to a low-carbon economy. Every country in Asia has different Emission Trading Systems (ETS) and pricing mechanisms to reduce carbon emissions and reach Net-zero targets.

South Korea is one of the first countries to apply an ETS in Asia. South Korea’s Emissions Trading Scheme (K-ETS) launched in 2015, targeting major industrial sectors. K-ETS covers approximately 70% of the country’s greenhouse gas emissions and aims to reduce emissions by 37% below business-as-usual levels by 2030. Through market-based mechanisms, K-ETS incentivizes emission reductions and promotes the adoption of low-carbon technologies, contributing to South Korea’s sustainable development goals. According to Korea Exchange data, the price of Korean Allowance Units in the K-ETS decreased by almost 20% in the first four months of 2023.

China, the world’s largest emitter of greenhouse gases, launched its ETS in 2021. It covers more than 4 billion metric tons of CO2 emissions annually with the aims to encourage emission reductions, improve energy efficiency, and foster the development of clean technologies. In its next stage, China anticipated to extend to other industries with a high carbon footprint, such as steel and construction.

As South Korea and China play significant roles in Asia’s carbon trading, other Asian countries are also developing regional schemes to curb carbon emission.

Asian Voluntary Carbon Markets Initiatives

Asian and Southeast Asian (collectively represented by the ASEAN) countries have started to develop carbon market regulations. ASEAN member states are working towards establishing a regional carbon market, enabling countries to trade emissions allowances and offsets across borders. These initiatives demonstrate the region’s commitment to collective action, promoting sustainable development, and addressing shared environmental challenges.

Singapore, Thailand, Hong Kong, and Malaysia have recently established carbon trading platforms and voluntary local initiatives to make the purchasing and selling of carbon credits easier, while Japan, Indonesia, India, and South Korea plan to follow suit.

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The carbon market regulations in Asia have far-reaching implications for the region’s economic and environmental landscape. These regulations foster innovation, drive investments in clean technologies, and create opportunities for businesses to participate in emission reduction efforts. By pricing carbon and establishing market-based mechanisms, Asian countries are taking proactive steps to address climate change while aligning with global sustainability goals.

Challenges remain in effectively implementing and harmonizing carbon market regulations across different countries in the region. Efforts coordination are necessary to address issues such as monitoring, reporting, ensuring the integrity and transparency of emissions trading platforms, and verification standards.

Economic Opportunities in the Carbon Market

The financial incentive is luring new participants to the carbon market. Every stakeholder is required to solve the climate crisis, including debt financiers, project developers, auditors, registries, quality supervision boards, merchants, and consumers. By 2030, the offset market in Southeast Asia has the potential to generate a total economic opportunity of $10 billion per year, according to Bain & Company.

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Investing in the carbon market in Asia offers a compelling opportunity for both financial and environmental gains. With the region’s growing commitment to mitigating climate change and transitioning towards a low-carbon economy, carbon markets provide avenues for sustainable investments and the promotion of green technologies.

Although, investing in the carbon market in Asia also comes with challenges. These include the need for standardization, ensuring transparency and quality of carbon credits, and addressing market imperfections. Regulatory frameworks must be effectively designed and implemented to instill confidence and prevent issues such as double-counting or greenwashing. According to the report from the World Economic Forum (WEF) in collaboration with Bain & Company, there are three main challenges for the market; projects quality and credibility, building corporate participation, and reform requirements to build transparency and trust.

 

  • Projects quality and credibility

Ensuring the reliability of carbon credits as an accurate representation of mitigation efforts requires changes on the supply side. These changes should ensure that the actions undertaken have no negative impacts within or outside their boundaries, are additional (would not have happened without carbon credits), permanent, and credible. Guidance from organizations like the Integrity Council for the Voluntary Carbon Market (ICVCM) will be crucial in establishing the necessary credibility to significantly grow the market.

 

  • Building the corporate participation

Corporations are facing challenges in scaling their funding of climate action through carbon markets due to factors like a lack of immediate urgency, market imperfections, and concerns about reputational risk. Over 90% of corporations aim for net zero emissions by 2050, and less than 25% of them have plans to offset their emissions before reaching that target.

This uncertainty caused the retirement of carbon credits, which is the activity that represents the claim of the attached climate benefit to decrease by 3% in 2022 (from 2021), as opposed to an average annual growth of 48% from 2019 to 2021.

 

  • Reform requirements to build transparency and trust  

Regulation is crucial as the lines between VCM, compliance carbon markets, and sovereign carbon credit mechanisms become blurred. Clear regulatory regimes are needed to provide guidelines for the use of VCM. The recent implementation of the Singapore carbon tax mechanism is an example that merits further evaluation in this context. 

Carbon markets in Asia present both opportunities and challenges in the region’s pursuit of sustainable development and combating climate change. These markets offer a mechanism for countries to reduce greenhouse gas emissions and promote the transition to a low-carbon economy.

Investing in the carbon market is not only financially rewarding but also aligns with the global imperative to combat climate change. By leveraging data and regulatory developments, investors can identify opportunities and manage risks in this evolving market. Whether through carbon allowances, offsets, or renewable energy investments, individuals and organizations can contribute to a sustainable future while achieving their financial objectives. However, it is important to conduct thorough research, seek professional advice, and remain mindful of the inherent risks associated with any investment.

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