Carbon markets 101
- This report aims to provide an understanding of how carbon markets can play an important role in reducing carbon emissions.
- With the EU ETS and China ETS already in place, ASEAN member states are looking to introduce/strengthen their carbon taxes and domestic ETSs.
- The rise in corporate net zero goals may also increase demand for voluntary carbon credits in the years to come and supply will likely follow.
Carbon tax and ETS developments in ASEAN should accelerate
The IEA believes that current global efforts to reduce CO2e emissions are insufficient to prevent climate disaster, with the world’s average temperatures likely to rise to 1.5°C above pre-industrial levels by 2040; above this level, extreme weather events and melting ice caps may threaten food security and raise sea water levels. The planned actions of ASEAN member states only amount to 43-54% of the emissions cuts necessary by 2030 to put ASEAN on a path compatible with the goals of the Paris Agreement (PA), according to consultant Bain & Co. As a result, nations need to up the ante on their climate ambitions. The EU ETS has shown the way since 2018 through reduced supply and rising prices of allowances, with prices closing in on €100/tCO2e last week. The EC’s proposed ‘Fit for 55’ package aims to aggressively accelerate the EU’s climate ambition. Meanwhile, the China ETS took off in 2021, even though its emission targets are still lenient compared to the EU ETS and an oversupply of allowances has put pressure on prices. Within ASEAN, Singapore has led the way with a carbon tax regime since 2019 and it has already announced a pathway of large rate increases. Indonesia may introduce its carbon tax this year after piloting an ETS last year. Malaysia, Thailand and Vietnam are also in various stages of considering or piloting carbon taxes, ETS and voluntary carbon markets; faster action will be needed if ASEAN is to contribute substantively towards the PA’s climate goals, in our view.
Corporates should explore the use of voluntary carbon credits
The traded values of carbon credits in VCMs are very small compared to ETSs (compliance carbon markets) but the rise in corporate net zero or carbon neutrality targets suggests that VCMs may have the potential to grow significantly. The key enabler of growth is adequate supply of carbon credits, verified by respected standards to ensure additionality, permanence and other measures of quality, such as vintage. Airlines will also begin to participate in VCMs under ICAO’s CORSIA scheme as soon as their capacities recover above their 2019 baselines. Countries can also buy credits from each other under the PA’s Article 6 Mechanism in order to achieve their nationally determined contributions (NDC). We highlight that carbon markets – compliance or voluntary – are merely tools to an end, which is to reduce CO2e emissions. We encourage investors to continue conversations with their investee companies over the importance of setting carbon neutral or net zero goals and of active carbon mitigation investments and actions and to encourage companies to explore the use of voluntary carbon credits to offset their emissions in the meantime.