With a population size of nearly 700 million and rapidly growing energy consumption needs, Southeast Asia will play a vital role in global efforts to reduce greenhouse gas (GHG) emissions towards a net-zero economy by 2050.

Carbon trading and offsets in the region will play a key role in compensating for emissions generated in Southeast Asia and beyond. From Singapore’s pioneering efforts in the use of technology to improve carbon credit integrity, to Indonesia’s new framework towards a regulated carbon market, nations across the region are increasingly focused on the transition to net zero and the role carbon trading can play.

In this insight we describe the development of carbon trading markets in Southeast Asia and anticipate the direction and prospects of further development of these markets in the foreseeable future.

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Southeast Asia’s commitment to a net zero economy as a driver

The Southeast Asia bloc of ten countries, the Association of Southeast Asian Nations (ASEAN), are all parties to the Paris Agreement. Currently, 8 out of 10 ASEAN members have committed to net zero by 2050, with Indonesia making the commitment to achieve this by 2060 or sooner and only the Philippines yet to make a definitive promise.[1] While there is no uniform approach or policy towards reducing GHG emissions, Southeast Asian countries are generally taking material steps towards transitioning to a green, net-zero carbon economy.

As one of the largest emitters and coal producers in the world, Indonesia has been taking active measures to develop its domestic carbon markets. In particular, it has launched a voluntary carbon market and is contemplating a regulated emissions trading market.

A framework towards building a regulated market

In October 2021, Indonesia targeted GHG emissions reduction and committed to achieve its NDC by issuing the Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value to Achieve Nationally Determined Contribution Targets and Control over Greenhouse Gas Emissions in Relation to National Development (Regulation 98).

Prior to Regulation 98, Indonesia operated a voluntary carbon market covering coal fired power plants. The move towards a compliance market has been viewed as a natural development in expanding the scope and effectiveness of carbon trading in Indonesia’s domestic market.

Regulation 98 is a wide-ranging piece of legislation covering a regulatory framework for carbon pricing and trading. Under Regulation 98, the Indonesian government will use carbon economic value (CEV) as a tool for climate change mitigation and adaptation actions. CEV can be implemented through carbon trading, economic incentives, carbon levies or other mechanisms to be determined by the Minister of Environment and Forestry (MOEF) depending on scientific and technological developments (including detailed tracking and valuation of CEV under a national registry called the SRN PPI).[19]

Regulation 98 provides two mechanisms for carbon trading:

• emissions trading (cap and trade, which is applicable for business sectors subject to the greenhouse gases (GHG) emissions limit (or emissions ceiling) imposed by the government/relevant ministries), and
• GHG emissions offset (for businesses/entities in sectors without a GHG emissions limit/ceiling).

There will be government fees associated with carbon trading activities in the form of non-tax state revenue.

A carbon market is also planned to facilitate domestic and international carbon trading. Regulation 98 requires any party conducting international carbon trading to obtain prior approval from the Indonesian Ministry of Environment and Forestry. MOEF has issued an implementing regulation of Regulation 98, namely MOEF Regulation No. 21 of 2022 on the Procedures for the Implementation of Carbon Economic Value (MOEF Regulation 21). MOEF Regulation 21 provides further arrangements regarding, among other things, the procedure to conduct carbon trading activities, the implementation of a national carbon registry (SRN PPI), and the verification procedures.

Under the Indonesian business licensing system, the trade of carbon credits is not categorized as a separate business line/activity. In theory, any company engaged in a business activity that includes GHG emissions reduction or mitigation activities will be able to conduct carbon trading pursuant to the applicable mechanisms, subject to Regulation 98, MOEF Regulation 21, and, once they are enacted, the other relevant implementing regulations of Regulation 98.

Currently, the most prominent players in this field are forestry concession companies which engage in the business line “sequestration and storage of carbon”. These companies trade carbon credits from their REDD+ activities following the international measurement and verification scheme under VERRA, pending the government's stipulation of the national standard.

Carbon tax delayed but expected by 2025

On 7 October 2021, Indonesia passed the Tax Regulation Harmonization Law, which introduced a carbon tax for activities producing emissions of CO₂ above a fixed limit.[20] The carbon tax regime, which applies in addition to the Regulation 98 regime, will be introduced in stages at a rate that will be no less than the higher of the market carbon price of CO₂ equivalent or Rp30 per kilogram of CO₂ equivalent (~US$2.11 per tonne).

Following this, on 4 April 2022, the Director General of Tax officially announced the issuance of the 14 implementing regulations.  As part of the implementing regulations, carbon tax was expected to be applied to coal power plant operations from 1 April 2022 onwards.  However, this proposed early stage element has been delayed pending further governmental guidelines and it is understood that the carbon tax regime as a whole may not be fully operational until at least 2025.

The carbon tax serves as part of the country’s efforts to phase out ‘dirty fuel’ and reach net-zero emissions by 2060 or sooner.[21] However, as the carbon tax rate is currently at a relatively low level, it is unlikely to create financial incentives for entities to switch to lower carbon-intensive energy sources.

Thailand has set reasonably ambitious goals to decarbonise its economy. This is reflected in its pledge to reduce GHG emissions by 30-40% from the projected business-as-usual levels by 2030 under the Paris Agreement.[22]

Voluntary market will soon make way for a mandatory scheme

Prior to COP26, Thailand had introduced voluntary carbon markets in the form of various government implemented schemes.

• Since 2013, the Thai government has introduced a voluntary nationwide carbon offsetting program (Thailand Carbon Offsetting Program), which encourages public and private organisations to calculate their carbon footprint and buy carbon credits to offset their unavoidable emissions, as well as a domestic voluntary GHG crediting mechanism (Thailand Voluntary Emission Reduction Program).
• In 2015, a voluntary emission trading scheme (Thailand Voluntary Emission Trading Scheme) was launched to serve as a pilot for testing and developing the infrastructure of a national system.

In March 2021, the National Climate Change Committee of Thailand approved a draft of Thailand's Climate Change Act setting out the potential establishment of a mandatory emissions reporting scheme and the disclosure of related data. The draft is now complete, and according to news reports it is set to be submitted to the cabinet for approval in 2023.[23]  

In the private sector, a group of some of the Thailand’s largest companies have recently established a voluntary emissions trading program (known as the Carbon Markets Club) in an effort to build up a voluntary carbon exchange[24] and support corporate emission reduction goals.

In January 2023, the Federation of Thai Industries (FTI), opened a platform carbon credit trading on its Renewable Energy and Carbon Credit Exchange Platform (FTIX). The FTIX aims to support the Thai carbon market and provide domestic exporters with the ability to purchase carbon credits and reduce pressure from importing countries to comply with carbon emission reduction standards.

In 2020, Vietnam updated its NDC, setting a target to reduce its GHG emissions by 9% compared to the business-as-usual scenario by 2030.[25] The updated NDC features more robust climate change mitigation and adaptation commitments that span across numerous sectors.[26]

Environmental protection effort focuses on carbon pricing

In late 2020, Vietnam passed an environmental protection law which addressed four major environmental challenges:

1. decarbonisation through a carbon pricing mechanism
2. reducing GHG emissions through a carbon pricing instrument (to help realise the renewable energy potential and transition to a low-carbon development model)
3. raising revenue through carbon pricing mechanisms and encouraging greener and cleaner innovation technology to reduce GHG emissions, and
4. applying carbon pricing frameworks to increase the attractiveness of Vietnam’s foreign direct investment.[27]

Carbon market by 2027

Several new legislative instruments on environmental protection took effect in early 2022, namely: the Law on Environmental Protection, Decree 08/2022/ND-CP and Decree 06/2022/ND-CP.

These two pieces of legislation provide a foundation for the development of a carbon market in Vietnam to address existing environmental and developmental challenges. Under the new environmental protection legislative instruments, Vietnam will establish regulations on the management and exchanges of carbon credits and the operation of domestic carbon trading platforms by 2027 and will organize the official operation of domestic carbon trading platforms and international carbon trading activities by 2028.[28]

The Ministry of Natural Resources and Environment will be authorised to certify carbon credits and emission quotas eligible for trading on carbon trading platforms.

Under the Paris Agreement, Malaysia has committed to cutting 45% of its GHG emissions intensity by 2030 as compared to 2005 levels.

Notable developments in Malaysia include:

‘Green’ approaches and clean energy

The Green Technology Master Plan consists of a range of initiatives and policies which focus on exploiting renewable energy resources, increase the use of green approaches in every sector and reduce reliance on fossil fuels which are responsible for most GHG emissions.

Voluntary carbon market planned

While there are no official timelines or proposals for the development of carbon trading markets, the former Finance Minister Datuk Seri Utama Zafrul Tengku Abdul Aziz in the Budget 2022 speech revealed plans to expand green technology initiatives and launch a voluntary carbon market.[29] Importantly, several listed companies in Malaysia have already expressed interest in producing carbon credits for the planned voluntary carbon market.[30]

Although it has not yet committed to a net-zero target, under its Paris Agreement pledge, the Philippines stated that it aims to reduce carbon emissions by 75% from its business-as-usual trajectory by 2030.[31]

In 2009, the Climate Change Act was enacted, which integrates climate change into government policy formulations, establishes the framework strategy and program on climate change, and creates the Climate Change Commission.[32] The law was amended in 2012 to create the People’s Survival Fund, a long-term finance stream to enable the government to effectively address climate change.[33]

Notable developments in the Philippines include:

Green jobs focus

In 2016, the Green Jobs Act was passed to achieve sustainable growth through the generation of green jobs (i.e., employment that contributes to preserving or restoring the quality of the environment, be it in the agriculture, industry or services sector) and to provide financial incentives for such jobs. [34]

Cross-border partnerships towards low-carbon energy

In 2017, the Philippines entered into a Memorandum of Cooperation on Low Carbon Growth Partnership with Japan, establishing a Joint Crediting Mechanism by which a project using advanced low-carbon technology is set up in the Philippines (by Japanese and Philippine proponents) and the resulting credits for carbon emission reductions are then shared between the project proponents.[35]

In 2021, the Philippines entered a partnership with the Asian Development Bank to set up the Energy Transition Mechanism which seeks to retire existing coal-fired power plants and replace them with clean power capacity.[36]

The Philippines has also entered a partnership with the United Kingdom to implement the ASEAN Low Carbon Energy Program, including the establishment of the “Green Force,” which is the Inter-Agency Technical Working Group for Sustainable Finance led by the Department of Finance (DOF) and the Bangko Sentral ng Pilipinas (BSP).[37]

Climate policy integrated with the nation’s development plan

The Philippine Government has adopted a comprehensive climate policy agenda, including the National Framework Strategy on Climate Change (2010-2022), the National Climate Change Action Plan (2011-2028), the Philippine Development Plan (2017-2022), the Philippine Energy Plan (2018-2040), the Philippine National Security Policy (2017-2022), the National Climate Risk Management Framework of 2019, and the Sustainable Finance Policy Framework of 2020.[38] The comprehensive climate policy agenda is integrated into the Philippine Development Plan.[39]

Regulated carbon market planned

There is pending legislation for a Low Carbon Economy Act that sets out provisions for a domestic cap and trade system, although no timeline has been specified.[40]

A net zero future for Southeast Asia: what next?

With its long coastlines and concentration of populations in low lying areas, Southeast Asia is at risk of the adverse impacts of global warming. Together with other climate initiatives, carbon trading is an important step forward in helping Southeast Asia achieve the net-zero target. With the continuing challenge to maintain economic growth in Southeast Asia it will be a difficult task for the region to achieve carbon neutrality.

Ultimately, carbon trading markets are a creation of policy decisions and, looking ahead, it is hoped that consistent and strong regulatory and government support in Southeast Asia will attract support from investors and potential participants, and help establish one or more viable and liquid carbon trading markets for the region.

King & Wood Mallesons does not practice law in all of these jurisdictions. KWM works closely with local lawyers to support our clients' needs across the region.