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    Carbon markets and the drive to net zero in Asia

    Published On: 6 February 2023

    The development of carbon markets in Asia and the ways to explore and unlock their potential in the region were discussed by high level business and policy leaders at a hybrid conference at Asia House – in partnership with Standard Chartered Bank – on Thursday 2 February.

    Click here to watch a full video of the event.

    Opportunities and challenges

    Opening the conference, Asia House Chief Executive Michael Lawrence OBE highlighted that as Asia’s economy continues to expand, alongside its energy demands, the region has become the focal point for climate change mitigation efforts. Asia currently accounts for more than half of global greenhouse gas emissions, with coal the biggest source of energy generation. Carbon markets are therefore increasingly seen as a core component in the drive to achieve net zero.

    But while companies are already trading carbon offsets in voluntary markets, Michael Lawrence added there is still no agreement on international rules around carbon trading. At COP26 in Glasgow an agreement was reached on the broad principles governing international carbon markets, which was seen as a breakthrough at the time after six years of deadlock. Following COP27, however, there has subsequently been no agreement on the important technical details of effectively implementing a global carbon market.

    Advantages and criticisms of Asia’s carbon markets

    Head of Research and Advisory at Asia House, Zhouchen Mao, set out some of the key issues on carbon markets, highlighting the broad challenges Asia’s economies face and expanding on why carbon markets are increasingly seen as a core policy for the region.

    By putting a price on pollution, he added, carbon pricing is deemed effective due to its ability to mobilise private capital and reduce the cost of decarbonising the global economy through the reduction of green premium. Carbon pricing also enables cost efficient capital allocation and generates traditional revenue streams that go beyond public funds, he added.

    Mao explained that given the current trajectory, carbon pricing commitments are being aligned with both corporate and national goals to reduce emissions. Almost one fifth of global emissions are covered by carbon pricing mechanisms, equivalent to US$270 billion. This comes in two main forms: mandatory schemes, also referred to as the Emission Trading Systems (ETS), and voluntary markets also known as carbon credit schemes. ETS’s are often adapted by governments at different levels.

    One of the biggest the advantages of carbon markets is that putting a price on carbon will incentivise the usage, deployment and scaling of green technologies, making them comparatively cheaper. Mao clarified this is done through the narrowing of green premiums, defined as the additional cost of selecting green technology. If carbon prices are high enough, the cost of fossil fuels and the emissions will also be high, which in turn makes carbon free options more appealing.

    With regards to the criticisms, Mao explained there are several concerns related to the development of carbon markets – the biggest of which is the question of how to price the real cost of emissions. These can be costly and can trigger resentment. He added the development of certain carbon pricing mechanisms has led to opposition, largely because of their impact on exports which some argue undermine countries’ export-led growth models. Indeed, this has emerged as an area of concern since the recent establishment of the European Union’s Carbon Border Adjustment Mechanism (CBAM) in December 2022.

    Higher carbon prices may also perpetuate ‘carbon leakage’ where firms will relocate to areas where there are looser standards, making carbon market schemes less effective.

    Carbon markets in the race to net zero

    When asked how important it was to get carbon market standards right in the race to net zero, Bill Winters, Group CEO of Standard Chartered, explained that carbon market standards are “divided broadly between public sector initiatives and the compliance markets.” In terms of private sector initiatives, Winters added The Integrity Council has agreed a set of standards for carbon credits, which he hopes will filter back into the public sector.

    Professor Wang Yao, Director General of the International Institute of Green Finance, explained China now has carbon maturity plans across all of its major sectors and carbon trading is a very important instrument to reduce emissions. China’s ETS she added, represents the biggest carbon market in the world, and she believes other Asian countries can learn from China’s experience and lessons.

    Kurt Vandenberghe, Director General, DG CLIMA, European Commission, noted that since 2005 carbon emissions have been reduced by 35 per cent in Europe, with billions of euros reinvested into innovation and social justice schemes. The recent establishment of CBAM, he added, will help prevent ‘carbon leakage’ and only contributes to climate and environmental objectives.

    Alicia Eastman, Co-founder and President, InterContinental Energy explained many countries globally can produce green hydrogen and green ammonia and as a result companies may move to these countries to take advantage of cheaper, greener products.

    Speaking on the need for technical infrastructure to drive reporting and monitoring of carbon markets, Michael Wilkins – Executive Director, Centre for Climate Finance and Investment – explained how new technology can improve the quality of monitoring, reporting and verification within carbon markets. He added Asia was at a pivotal stage in the development of carbon markets and the scrutiny and integrity of carbon credits needed to improve. Effective accounting standards around carbon credits needed to improve too.

    With regards to achieving a joined up approach to carbon markets within the ASEAN regions, Wilkins added the growth of regulated exchanges for the voluntary carbon markets would be fundamental to allow different countries to converge and scale up their trading platforms.

    Speaking on the launch of Thailand’s first carbon credit exchange in 2022, the country’s Deputy-Secretary-General, Office for Natural Resources and Environmental Policy and Planning – Jiravat Ratisoontorn – outlined why Thailand is trying to be a hub for the region in carbon trading.

    Asia House helps organisations position themselves on key issues by curating high-level discussions with senior speakers and audiences. For more information about our thought leadership and positioning services, please contact Jonathan Smith, Corporate Relations Manager, at jonathan.smith@asiahouse.co.uk

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