The Year of the Rabbit is set to see carbon trading continue to grow and strengthen worldwide, across compliance and voluntary mechanisms.
There are 72 regional, national and sub-national carbon pricing initiatives (including Emissions Trading Schemes (ETS) and carbon tax regimes) worldwide representing almost 18% of global greenhouse gas (GHG) emissions, according to The World Bank’s Carbon Pricing Dashboard for 2022. This includes China’s ETS, introduced in late 2021 and during its first cycle.
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.
For more detail, visit our insight on the development of carbon trading markets in Southeast Asia.
There are 35 more schemes either scheduled for implementation or under consideration around the world, from Brazil and Chile in Latin America to Indonesia and Malaysia in Asia, and Gabon and Nigeria in Africa.
In the latest insight from our Carbon Markets Series, we visit some of the regimes around the world that are driving change. This includes regulated ETS markets and, in some cases, other mechanisms. For an introduction to carbon trading, see our Explainer.
European Union (EU)
ESTABLISHED IN 2005, the EU ETS is the world’s first (and largest) ‘cap and trade’ system for reducing GHG emissions.
PROCUREMENT OF CARBON ALLOWANCE By auction, however some companies (other than electricity generators) receive some free allocation of allowances.
WHERE? Operational in all EU countries plus Liechtenstein, Norway and Iceland (EEA-EFTA).
REGULATORY MARKET - CAP AND TRADE: The EU ETS imposes an overall cap on how much GHG can be emitted annually and companies in the EU member states (within regulated sectors) need to hold emission allowances (EUAs) for every tonne of CO2 they emit. A proportion of EUAs are allocated to certain companies (depending on their sector and EU member state) for free. The remainder are auctioned by the EU member states. EUAs can also be traded among the regulated companies.
The EU ETS has evolved through periodic fixes such as the adoption of a market stability reserve mechanism in 2019, an instrument that helps to regulate the price of EUAs by reducing allowances when supply is high and releasing allowances when supply is low.
SECTORS: The EU ETS now covers over 11,000 power plants and factories engaged in energy-intensive industries (such as aluminium, iron, cement and glass production), as well as commercial aviation within the EEA-EFTA.
COVERAGE: This covers around 40% of the EU’s GHG emissions.
GHGs: Carbon dioxide, nitrous oxide and perfluorocarbons.
United States
While there is no federal carbon trading market, several states in the United States have implemented their own carbon trading markets, most notably California and Washington.
California
ESTABLISHED IN 2013, the California ETS was the first of its kind in the United States. The ETS followed the state’s earlier cap and trade program, enacted in 2006 with the passage of a landmark climate policy.
PROCUREMENT OF CARBON ALLOWANCE By auction.
WHERE? California state-wide. California and Québec connected their programs in 2014, creating one shared carbon market.
REGULATORY MARKET – CAP AND TRADE: The California ETS sets a limit on how much companies in California can pollute and gives them an option to buy or trade carbon credits.
SECTORS: Electricity generation, refineries, oil and gas, industry, building (such as cement production facilities) and transport.
COVERAGE: The California ETS has since covered almost 80% of the state’s emissions.
GHGs Carbon dioxide, methane, nitrous oxide, perfluorocarbons and other fluorinated GHGs.
Washington
Established in 2023, Washington is the second state in the United States to pass a law requiring such a program, after California.
PROCUREMENT OF CARBON ALLOWANCE By auction.
WHERE? Washington state-wide, but the Climate Commitment Act (2021) allows for linkage to other states in the future if certain conditions are met. Washington is starting the process of determining whether linking the carbon market with California and Quebec would be beneficial. A decision is expected to be made around July 2023 or later, and if a decision is made to link these carbon markets, any linkage is unlikely to finalise until at least 2025.
REGULATORY MARKET - CAP AND INVEST: creates a limited number (or cap) of overall state-issued carbon permits to be auctioned four times a year to companies that exceed the 25,000-metric-ton threshold.
SECTORS: Covered business types include (but are not limited to) fuel suppliers, natural gas and electric utilities, waste-to-energy facilities (starting in 2027), and railroads (starting in 2031).
COVERAGE: Roughly 75% of statewide emissions will be covered under this program. Generally, businesses are covered under the program if they generate covered emissions that exceed 25,000 metric tons of CO2 equivalent per year.
China
ESTABLISHED IN 2021, China officially launched a national carbon trading market operated by the Shanghai Environment and Energy Exchange (the Chinese ETS). This comes as part of China’s pledge to decarbonise its economy, which includes peaking carbon emissions before 2030 and being carbon neutral by 2060.
PROCUREMENT OF CARBON ALLOWANCE Free allocation.
WHERE? China.
REGULATORY MARKET – INTENSITY-BASED LIMITS: Unlike the EU ETS, the Chinese ETS is not a typical cap and trade market as it does not have absolute caps. Under an intensity-based design, covered companies are allocated their emission cap based on a national benchmarking method. As a result, compliant power plants can effectively increase their absolute emissions alongside production growth, as long as emissions per output of production decrease.
SECTORS: Initially, the Chinese ETS focuses electricity and heat generation. However, it is set to expand its sectoral coverage to other energy-intensive sectors including petrochemicals, chemicals, building materials, iron and steel, non-ferrous metals, paper and domestic aviation.
COVERAGE: 40% of China’s energy sector emissions.
GHGs: Carbon dioxide
Did you know that China’s national carbon market reached 200 million tonnes of trading in its first year? The power-sector scheme is expected to expand to new sectors and see another year of strong growth. For the latest, see an update on China’s carbon markets by our local expert Su Meng.
Japan
While there is no national carbon trading market in Japan, one is under official consideration and there are sub-national schemes in Saitama (2011) and Tokyo (2010). In September 2022, Japan began a pilot of a nationwide trading market. Below is a description of the Tokyo ETS.
ESTABLISHED IN APRIL 2010, the Tokyo ETS was the first city-level ETS targeting energy-related CO2 to be established. It is bilaterally linked to the Saitama ETS, whereby the governors of Tokyo and Saitama signed a Partnership Agreement on 17 September 2010, stating that it was crucial for the two prefectures to partner up in order to trade credits and to encourage other major Japanese cities to introduce a sub-national cap and trade program.
PROCUREMENT OF CARBON ALLOWANCE: Emission allowances are freely distributed at the beginning of each compliance period (note that the obligation for each compliance period must be met in the organisation period, which is 1.5 years from the end of the each compliance period).
WHERE? Tokyo.
REGULATORY MARKET - CAP AND TRADE: Known as the Tokyo Cap and Trade Program, it sets a baseline for facilities based on previous emissions and comprises three, five-year compliance periods.
SECTORS: Emissions from industrial and commercial sectors from the use of energy (such as electricity, gas and heating). The obligation for the sectors will differ depending on the use of energy in a crude oil equivalent.
COVERAGE: Around 40% of the CO2 emissions from covered sectors.
GHGs: Carbon dioxide.
Republic of Korea
ESTABLISHED IN 2015, the Korea ETS (K-ETS) had its cap lowered in 2021 and 20 financial institutions were allowed to enter. Today, the K-ETS covers 684 of the country’s largest emitters.
PROCUREMENT OF CARBON ALLOWANCE By auction.
WHERE? Republic of Korea.
REGULATORY MARKET - CAP AND TRADE: The K-ETS adopts a cap and trade system, similar to that of the EU ETS.
SECTORS: The K-ETS covers the heat and power, industry, buildings, transportation, waste, and public sectors. In Phase Three (2021-2025) the transport and construction industries were widened, increasing the number of sub-sectors to 69.
COVERAGE: It covers approximately 73% of the country’s GHG emissions.
GHGs: Carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbon and sulfur hexafluoride.
Singapore
While there is no national regulated carbon market, Singapore has Climate Impact X (CIX), a global marketplace enabling the exchange of carbon credits. Singapore has also announced plans to systemically increase carbon taxes on larger emitters over time. Singapore also has its carbon tax regime, under which regulated companies must pay tax on carbon dioxide emissions. While it is not a market mechanism, companies will be able to offset a small percentage of this liability through credits.
ESTABLISHED IN 2022, the CIX is a joint initiative of the Singapore Exchange (SGX), Singapore’s sovereign wealth fund GIC, Temasek, DBS Bank and Standard Chartered. CIX aims to scale the voluntary carbon market by facilitating the trade of high-quality carbon credits through standardised contracts. The CIX ecosystem consists of two digital platforms: a carbon marketplace and a carbon exchange.
VOLUNTARY MARKET: CIX differs from cap and trade schemes which impose mandatory targets on regulated companies, by virtue of its voluntary nature.
Hong Kong SAR
Like Singapore, Hong Kong has no regulated market but recently introduced a voluntary carbon market with international scope. Core Climate was launched by the Hong Kong Stock Exchange (HKSE) in October 2022 to facilitate carbon credit trading and connect carbon-related products in Hong Kong, Mainland China and the rest of the world. Hong Kong also has a Feed-in Tariff Scheme. While it isn’t strictly a market mechanism, under the scheme Hong Kong’s two major power companies CLP Power and Hong Kong Electric can issue renewable energy certificates that represent a volume of renewable electricity fed into the grid. Those who install solar photovoltaic or wind systems at their premises can then sell their renewable energy certificates to power companies at a rate as high as five times more than the normal electricity tariff rate. This aims to encourage investment in renewable energy by ensuring a quick return on investment.
ESTABLISHED IN 2022, Core Climate is described by HKSE as part of its “commitment to securing the future of our planet”. It aims to connect international capital with carbon reduction projects and technologies.
VOLUNTARY MARKET: Core Climate, like CIX in Singapore, is a voluntary scheme (in contrast to compliance cap and trade schemes).
Indonesia
ESTABLISHED IN FEBRUARY 2023, Indonesia is currently in its first phase of mandatory carbon trading for power plants. Applying to facilities with a production capacity of more than 100 MW, the intensity-based ETS will initially cover 99 coal-fired power plants directly connected to the Perusahaan Listrik Negara (PLN) state-owned power grids.
PROCUREMENT OF CARBON ALLOWANCE: Free allocation.
REGULATORY MARKET – EVENTUAL ‘CAP AND TAX’ SCHEME: The new ETS will eventually work alongside a carbon tax that was set out in Law No.7 of 2021 on the Harmonisation of Taxation Regulations. Carbon emitters that fail to meet their obligations will be subject to a tax rate linked to the price of carbon in the domestic market. Facilities will be offered a tax deduction if they buy carbon market allowances from other facilities unused allowances, or if they utilise carbon offset certificates (earnt through the investment in voluntary emission reduction projects).
WHERE? Indonesia.
SECTORS: The Indonesian ETS will be implemented in three phases, initially focusing on coal-fired power plants only. There are plans to extend the coverage of the ETS to oil and gas fired plants from 2025 and other coal-fired plants not connected to PLN’s grid from 2028 onwards.
COVERAGE: The Indonesian ETS currently accounts for 81.4% of Indonesia’s national power generation capacity.
GHGs: Carbon dioxide, methane and nitrous oxide.
Want to know more? Look out for more insights in our Carbon Markets series, including on China’s carbon trading market, and visit related pieces:
- Development of Carbon Trading Markets in Southeast Asia
- Carbon Trading is Booming Globally – What is it and How Does it Work?
- China’s Carbon Markets – A Key Tool for Achieving Net Zero
- China’s National Carbon market: A Guide for Investors
- Trading Carbon in China: A Game Changer
- ESG – Understanding Carbon Markets in China
- Indonesia’s coal-fired power plants to trade carbon – the latest Southeast Asia milestone
This publication is intended to provide a high level overview. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice law in all of the covered jurisdictions, and works closely with local lawyers to support our clients' needs where necessary.
