The emergence of voluntary global carbon markets – which allow carbon emitters to buy credits to compensate for their emissions – presents a big opportunity for Southeast Asia. But international authorities must do more to encourage investment in a region with great potential to combat greenhouse gas emissions
With the introduction and extension of judicious policies and financial regulations, Southeast Asia could become a global carbon trading hub. This would provide the region with funds to develop solutions for sustainable infrastructure and improve its international competitiveness.
As an extremely biodiverse region, Southeast Asia has the potential to sequester carbon and create carbon credits through nature-based climate solutions such as restoring forests and wetlands, regenerative farming, and harnessing the region’s abundant clean energy.
This is crucial work. After all, as Francois Villeroy de Galhau, Governor of the Bank of France, said in 2018: “One necessary step for public policies is to put a price on carbon: it is the only signal capable of aligning climate imperatives with economic agents’ decisions.”
But such projects need cash to function. Efficient and reliable markets play an important role in regulating the price of carbon and encouraging investment away from polluting and high emissions sectors, towards innovative low-carbon technologies and natural climate solutions.
Southeast Asia has the potential to sequester carbon and create carbon credits through nature-based climate solutions
Globally, the potential of offsetting carbon is vast: voluntary carbon markets could reach $50 billion by 2030, climbing to $200 billion by 2050. Singapore and other nations in the region such as Indonesia, Malaysia and Thailand are already leading the way by setting up their own systems to attract impact investors.
But voluntary carbon markets – which differ from the much larger compliance markets – are largely unregulated, fragmented and opaque, and pricing can be uncertain, which deters investors. In order to be effective, a voluntary carbon market must be liquid, transparent, accurately priced and aligned with the Core Carbon Principles benchmark for high-integrity carbon credits.
As part of our collaboration at Imperial College Business School with fellow academics, the private sector and the Singapore Green Finance Centre, we’ve identified the next steps in Southeast Asia’s journey to becoming a thriving global carbon hub.
A clear tax framework
As central bankers and investors agree, clear national carbon tax frameworks are essential. These can help create a credible price for carbon, which must be high enough to pay for the cost of emissions and pollution. Trustworthy carbon credits are valuable, but they currently come too cheaply in many places, meaning credits can lack credibility and prompt investors to lose confidence. Singapore has already taken the lead within Southeast Asia, becoming the first country in the region to introduce a carbon tax, with a commitment to raise it this year and beyond.
Leveraging existing market infrastructure
Established and regulated stock exchanges can play a dynamic role in supporting and expanding trade in carbon funds. Some exchanges are already leveraging their infrastructure and paving the way for viable carbon finance markets, providing opportunities to investors seeking low-carbon portfolios, and for companies wanting to offset their carbon footprint.
Recent initiatives are helping to build a regulated framework to support carbon credits as a commodity. The London Stock Exchange Group has moved to improve business’ transition to low carbon and expand a voluntary carbon market by listing carbon credit funds, and a regulated carbon trading exchange and clearing house have been created within Abu Dhabi Global Market. Singapore Exchange has launched a global exchange, Climate Impact X, with the support of Institutional investors and banks, for the trade of voluntary carbon credits.
Exchanges such as these can build market confidence by gauging the level of demand for high-quality credits and giving providers the confidence to expand their supply.
Financial accounting rules for carbon credits
While international regulators are establishing universal standards for companies to report their sustainability information, other areas of regulation need attention if voluntary carbon markets are to flourish.
There is an urgent need to clarify and alter the financial accounting rules that govern trade in carbon credits. These credits are currently considered intangible assets or inventories on balance sheets, but this definition carries punitive regulatory capital charges for banks when trading in carbon. If carbon credits could be reclassified instead as investable assets, this would cost banks less and boost trade.
In turn, carbon credits could become viable hedging tools for banking clients. But action is needed: high-quality voluntary carbon markets need common criteria and standards before they can develop. We strongly encourage the International Accounting Standards Board – the setting arm of the IFRS Foundation for accounting standards – to resume a project which stalled back in 2015 to establish exactly this financial accounting regulation.
A question for the future
As governments consider how to clean up polluting industries, moves are being made around the world to introduce green tariffs on certain goods such as steel, cement or chemicals that are responsible for high levels of carbon emissions. In April 2023, the EU’s tariff – the Carbon Border Adjustment Mechanism, or carbon border tax – became law, and the UK and US are expected to introduce similar tariffs.
While resistance lingers among industry sectors and nations towards this carbon border tax, we ask: could it make sense for Southeast Asian countries to set up their own carbon border taxes to speed decarbonisation and help fund their transition to clean energy, as well as make them more competitive in the long run?
This article draws on findings from "Financial Accounting For Carbon Finance: A New Standard For A New Paradigm" by Raúl Rosales (Imperial College London), María Ángeles Pelaez (Banco Bilbao Vizcaya Argentaria), Karen Wang (Imperial College London) and Marwa Elnahass (Newcastle University), and "Voluntary Carbon Markets in ASEAN: Challenges and Opportunities for Scaling Up" by Raúl Rosales (Imperial College London), Priya Bellino (Sumitomo Mitsui Banking Corporation), Marwa Elnahass (Newcastle University), Harald L. Heubaum (SOAS), Philip Lim (RHT Green), Paul Lemaistre (Arsari Group, Indonesia), Kelly Siman (National University of Singapore) and Sofie Sjögersten (University of Nottingham).