How ASEAN economies can capitalise on carbon markets to reduce emissions and turbocharge growth
Chris Leeds Head of Carbon Markets Development, Standard Chartered
16 Dec 2021
ASEAN is home to an abundance of natural resources that economies have harnessed to support growth and advance global trade. However, the region is overlooking perhaps its most important commodity, carbon, given that the economic bloc accounts for a quarter of the world’s total abatement potential of Natural Climate Solutions (NCS).1 By working together to measure and trade carbon, ASEAN countries will be able to develop projects that reduce carbon emissions and boost the investment needed to create sustainable jobs and economic growth.
Countries in ASEAN already have ambitious plans to reduce carbon emissions over the next few decades as they seek to mitigate the impact of climate change.2 One proven and effective way to achieve this reduction is the use of carbon markets.
Carbon trading works by creating incentives for companies to reduce their emissions through the setting of a cap on their carbon emissions or a reduction target below a business as usual baseline. Companies, which emit less carbon than their cap or baseline, can sell the excess carbon credits in global marketplaces to companies which have gone over their quota. This revenue can be funnelled into new carbon reduction projects, local communities or the natural world, creating a virtuous circle of investment.
And it works. It is estimated that the carbon market arrangements of the Paris Agreement, recently agreed in Glasgow at the United Nations Climate Change Conference, more commonly called COP26, have the potential to halve the cost of implementing country emissions reduction commitments, so called nationally-determined contributions (NDCs), facilitating the removal of an extra 5 billion tonnes of CO2 per year at no additional cost.3 Between 2005 and 2019, the European Union Emissions Trading Scheme (EU ETS) has successfully reduced emissions from power generation and energy-intensive industries by 35 per cent.4 It’s no wonder then that China has recently launched its own ETS (CETS) as it seeks to become carbon neutral by 2060.
Moreover, carbon markets are set to enter a new era following the recent COP26. Countries agreed new rules that include important requirements and safeguards for governments and companies engaging in international carbon markets. Rules that will accelerate the emergence of regional hubs that can compete with EU ETS and CETS.
The cost of not taking action
There are many reasons why it is important for ASEAN to embrace carbon trading. Like other commodities, carbon is a valuable and limited resource that can be traded to generate capital and attract investment, and consequently countries need to manage it in the same way as other resources to reap the benefits. According to the United Nations, the world must limit emissions to around 570 billion tonnes of CO2 if we are to stop global warming from exceeding 1.5°C. However, at current rates we will have used up that allowance within 10 years.5
Establishing a carbon trading scheme also sends the correct signal to businesses and individuals about the importance of reducing emissions and the cost of not taking action – the principle of the polluter pays. For example, coal was often considered one of the cheapest ways to produce electricity. However, coal emits almost twice the amount of CO2 than natural gas6 and infinitely more than renewables like wind and solar power. When the cost of that carbon is added to the cost of coal-powered energy generation, it becomes much more expensive than other forms of energy.
ASEAN needs to collaborate on carbon
Some ASEAN economies are forward thinking, having recognised the importance of carbon markets and a number of governments including Indonesia, Philippines, Thailand and Vietnam are in the early stages of setting up national programmes.7 This is great news, but more needs to be done now.
With other large trading blocs, such as the EU, and China setting up emissions trading schemes, ASEAN markets will need to act as one to create its own system to be competitive. From copper to coffee, commodity markets around the world compete for investment and the carbon market is no different. An ASEAN market would have a competitive edge as it is able to offer more cost-effective carbon credits than other regions.
This advantage stems from the fact that ASEAN is home to some of the world’s most precious ecosystems, including huge areas of rainforest which are crucial to climate adaptation and resilience. Based on conventional economics, countries like Indonesia are currently better off converting these rainforests into ‘productive’ land, for the supply of cash crops such as soya or palm oil. Putting a price on carbon will make it worthwhile to preserve these natural habitats, saving them for the local people, the region and the wider world.
And with global carbon trading already worth more than USD270 billion and growing fast,8 an ASEAN carbon market would generate billions of dollars to support the region’s sustainability targets. In the same way that naturally-sourced commodities can be harvested and sold into international markets, carbon can be used to generate much-needed inward investment. This investment can then support the development of clean technologies, such as renewable energy and electric vehicles, that will reduce dependence on fossils fuels.
Importantly, at Standard Chartered we know from our work with clients that there is strong demand from ASEAN businesses to use carbon markets to support their sustainability efforts. That’s why we created Climate Impact X (CIX), a global carbon exchange that allows participants to buy and sell carbon credits, in a joint venture with DBS Bank, Singapore Exchange and Temasek.9
And this demand was reflected in CIX’s pilot auction, with many buyers either companies with headquarters in ASEAN or those having a large presence in the region. Based on a portfolio of eight projects across Africa, Asia and Latin America, the initial transaction cleared 170,000 tonnes of carbon credits.
ASEAN countries are among those that face the biggest risks from climate change, yet the region is in a strong position to harness carbon markets to significantly reduce emissions. By working together, ASEAN can become a leading global carbon credits hub and attract the investment needed to deliver sustainable growth.
3 https://www.ieta.org/resources/International_WG/Article6/CLPC_A6%20report_no%20crops.pdf
4 https://ec.europa.eu/info/sites/default/files/revision-eu-ets_with-annex_en_0.pdf
5 This analysis draws on the work of the Intergovernmental Panel on Climate Change (IPCC, a United Nations body) by using a remaining carbon budget of 570 metric gigatonnes (Gt) CO2 as of 1 January 2018. Remaining within this budget would equate to a 66% chance of limiting warming to 1.5°C.
6 https://www.eia.gov/tools/faqs/faq.php?id=73&t=11
8 https://www.reuters.com/article/us-europe-carbon-idUSKBN29W1HR
9 https://www.climateimpactx.com/#home-about