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How regional collaboration could lift carbon trading in Southeast Asia

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Carbon markets are an instrumental tool to help countries achieve their GHG emissions reduction commitments. Yet smaller countries can face a problem: volume and liquidity levels that are insufficient to determine market pricing effectively; a result of insufficient market participants and investors in an emissions trading system.

To address this, some countries and regions have harmonised emissions trading systems, creating larger and more liquid carbon markets.

As part of our Carbon Markets Series, in this insight we consider potential opportunities for cooperation and harmonisation of carbon trading across Southeast Asia and the broader region. This includes:

  • Inter-ASEAN cooperation: A regional trading hub would bring benefits, but the concept is unprecedented in the region and would face obstacles
  • Cooperation with non-ASEAN countries: There is merit in exploring opportunities across borders, including with China and Australia – noting limitations.

As carbon trading in Southeast Asia continues to develop, meaningful collaboration and harmonisation will play an important role in facilitating the development of carbon markets across the region.

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Inter-ASEAN Cooperation

Southeast Asia is still heavily reliant on fossil fuels. And with the region’s growing economies and population sizes, significant growth in energy demand is expected to continue. If a regional cap and trade scheme was in place, the revenue generated from the auction or sale of carbon credits would provide much needed funds to support the development of green energy projects in Southeast Asia. The aggregation of carbon credit supply and demand across the region would also create significant potential scale and help to address the volume and liquidity issues which might otherwise exist within a market specific to a smaller individual member state.

Potential for a Regional Trading Hub

By working together and overcoming cooperation challenges, the region could become a leading carbon trading hub that captures significant global investments to deliver sustainable growth.

While the idea of a regulated carbon market across the region is attractive, the reality is that there are several significant obstacles. For example:

  • common standards would need to be accepted and implemented across the region, and
  • multilateral coordination agreements would need to be struck between the member states, covering matters such as carbon credit allocation.

Coordination of this nature and extent is unprecedented in ASEAN.  Unlike the EU, ASEAN is not a supranational organisation with the power to make binding regulations over its member states. We have written previously about the decades old, but unrealised, ambitions for a Trans-ASEAN Gas Pipeline and integrated gas market.

Southeast Asia nations are still in the early stages of developing emissions trading systems, and adequate time and processes are needed to address the development of frameworks for unified carbon accounting and disclosure.[1] In contrast to a uniform regulated carbon market, some or all Southeast Asian nations could seek to establish a coordinated voluntary carbon trading market via a commercial hub. This centralised approach would offer a platform for trading carbon credits and promote the development of green projects throughout the region.

As is often the case, Singapore is among the frontrunners for regional leadership in this regard and, with the launch of CIX, it has taken material steps towards that end.

Voluntary carbon markets face several limitations:

  • they do not impose an overall cap on carbon generation (caps are determined by individual countries)
  • it may be difficult to use credits generated from a voluntary market to satisfy emission reduction standards in a regulated market
  • certification and standards in voluntary carbon markets are ultimately determined by private entities, and
  • given the differences in monitoring and verification of carbon credits, there is no universal acceptance of a common standard.

While Singapore has an established reputation as a financial and trading centre, and the establishment of CIX is a positive step, it faces several hurdles before it emerges as a leading carbon trading platform. Furthermore, there is potential for competition in other parts of the world given voluntary carbon markets can in theory be established anywhere (and in respect of credits generated and voluntarily sold, acquired, or traded from any location).

Cooperation with countries outside of Southeast Asia

There are several opportunities for cooperation with countries outside of Southeast Asia for carbon trading and emissions reduction.

China

Logical synergies but some complexity

One possibility is the harmonisation of carbon trading markets between China and Southeast Asia. For example, if Southeast Asia provided green credits backed by reforestation and renewable opportunities and China offered demand for such credits from its power generation and manufacturing sectors this could bring significant benefits in terms of scale and liquidity of the carbon trade.

China’s market will be a source of future financial flows for efforts to reduce emissions from deforestation and degradation. Cooperation is consistent with China’s overall policy objectives in strengthening economic ties with Southeast Asia. It would also tie in with China's “green” belt and road initiatives, including the electrification of transportation, export of green technologies, and cross-border investment and cooperation on renewable energy projects.

Although attractive in theory, cooperation between Southeast Asia and China in carbon trading would face challenges. In addition to the issues associated with coordination within Southeast Asia, these include:

  • distinct discrepancies in economic development stages and characteristics
  • complex inter-governmental relationships, and
  • the relatively undeveloped state of carbon markets in many Southeast Asian countries.[2]

Australia

Bilateral agreements will help to pave the way

There is also notable progress in carbon trading cooperation between Singapore and Australia.

On 18 October 2022, trade ministers in Australia and Singapore signed the Green Economy Agreement (GEA). The GEA hopes to facilitate trade and investment between the two countries, remove non-tariff barriers to trade in environmental goods and services, and accelerate the uptake of green technology to reduce carbon emissions. Implementation of the GEA will begin with developing a list of environmental goods and services that could be given preferential trade treatment. 

With similar legal frameworks, it is envisaged that Australia will supply high-quality carbon credits in exchange for Singapore providing the regional hub platform for participants to trade. If realised, Singapore-based corporates who require credits to offset taxable emissions will be able to purchase credits from renewable or carbon capture and storage (CCS) projects in Australia.

Given the differences between the countries within Southeast Asia and the nature of the regional grouping, cooperation with non-ASEAN countries is likely to take place on bilateral rather than multilateral basis. We predict bilateral agreements will help pave the way for the gradual development of carbon markets in the region. 

An ambition for the GEA shared by Singapore and Australia is that it will provide a precedent and pathways for, and stimulate, wider cooperation in the region.

While Singapore has its recently established global carbon exchange, CIX, in Australia the regulated carbon scheme is national in scope. In mid-July 2023, Australia’s scheme – known as the Safeguard Mechanism – was amended to introduce new emissions baselines for large industrial facilities that will decrease over time. This is expected to cut emissions.

Despite the absence of a cross-border element, the scheme will indirectly affect voluntary markets.

In time, as global markets develop and become increasingly sophisticated, more local markets may open to cross-border carbon credit trades. This is especially given the rapidly increasing demand. We are watching this space.

With the rapid developments in the space and the escalating transition it is critical to consider the possibilities – including the important role collaboration and harmonisation can play.

For more, check out our Carbon page – and reach out to one of our team members to talk about how the market is evolving.

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