Asia's ramp up in carbon trading will drive commoditization of carbon: experts

Asian firms drove up demand and impacted prices in voluntary carbon markets in the past year, highlighting their growing role in the global carbon marketplace, which is rapidly moving towards commoditization, industry experts said at the Asia Energy Transition Conference held by S&P Global Commodity Insights this week.

"Over the last one year, we really see Asia start to swing strong on the demand side. As market participants, we've become more of a price maker than a price taker," John Davis, director of business development, APAC with South Pole, a carbon project developer, said.

"We saw a very interesting, I guess almost a paradox, in the second half of last year, whereby the Asian markets, in particular Singapore and Japan, rallied very hard and prices quickly traded above where we were doing OTC (over-the-counter) trades in Europe," Davis added.

Global carbon markets grew in terms of scale, liquidity, and maturity in 2021, speakers said, with un precedented interest from Asian entities. This boosted prices but also opened opportunities for projects that generate carbon credits and traders to increase supply.

"The hardest piece for South Pole right now is how do we distribute the portfolio on a global basis, which is also exciting, because it shows that this market is growing exponentially in terms of participation and size," Davis said.

Angelo Sartori, director of regional outreach with carbon registry Verra, said it was trying to expand supply for nature-based solution credits and increasing focus on blue carbon, which is carbon stored in coastal and marine ecosystems.

"We're already reacting and acting like a true commodity market. It shows that there's a lot of opportunity and the market is becoming very robust," Ben Stuart, chief commercial officer with carbon trading platform Xpansiv, said.

Commoditization of carbon

Carbon credit prices had fallen sharply to multi-month lows in the first week of March in the wake of Russia's invasion of Ukraine and extreme market volatility across asset classes, but prices eventually rebounded by the end of the month.

Executives at the conference said prices had softened across European and California compliance carbon markets, and global voluntary carbon markets, indicating that the carbon market had evolved, that it was responding to global geopolitical turmoil and investors were adjusting their positions accordingly.

The price movement proves that the voluntary carbon market has become a meaningful portion of trading firms' portfolios, and that their risk departments were in a risk-off mode, and preserving cash as a defensive play for their trading positions, Stuart said.

"Their positions within the voluntary carbon market were significant enough for them to move the market," he said. "For me, that's a maturity level that this market has never seen before."

"The markets have stabilized and regained some of the losses that they had previously. We've seen some volume starting to come back to the market, and the confidence is growing back," Stuart added.

Stuart said carbon prices from exchanges are important to provide transparency to scale up the market, and the launch of standardized contracts will further help guide the market's development.

There are signs that Asian firms are rapidly building capabilities to boost investments in carbon, with growing interest in a wide range of carbon-related financial products that will further boost its commoditization.

Howie Lee, Singapore-based economist at OCBC Bank said that China, Indonesia, Malaysia and Singapore will be key carbon trading centers in the region, and there has been a surge in the number of carbon trading desks established in Singapore by multinationals in different sectors, with more room to grow.

Industry participants said that every major energy company with a presence in oil, gas and natural resources is now engaged in carbon trading, including oil majors, commodity trading houses and shipping firms.

Impact of Ukraine-Russia

Eddie Listorti, chief executive of Australia's climate investment firm Viridios Capital, said the Ukraine-Russia situation will probably lead to some hydrocarbon replacement such as more usage of coal, which is going to slow down the energy transition over the next three years.

"Offsetting is likely to increase, especially for those companies with carbon neutral and net zero ambitions," Listorti said, highlighting that nature-based solutions are "the most scalable and highest-impact way for private capitals to be mobilized."

Despite promising growth, the speakers recognized that the current voluntary carbon market is still fragmented and yet to be fully commoditized, which calls for better market education, regulations, standards, and financing.

"The biggest challenge is still market education. Until we have an informed market, we can't really have full commoditization and price transparency that the market needs," Davis said.

"This is fundamentally a very cheap market for people to enter and effectively [offset] carbon emissions right now. We will see a huge number of new participants in this market. We will see prices rise, and we need meaningful prices," he added.