INTERVIEW: Singapore's CIX to diversify carbon credits for spot trading, build derivatives contacts

Singapore-based carbon exchange Climate Impact X expects to expand the types of carbon credit contracts it offers on its newly launched spot trading platform, its Chief Operating Officer Mark Glossoti said in an interview, adding the exchange is also working toward launching carbon credit derivatives with the Singapore Exchange.

The carbon exchange, backed by state investment fund Temasek, launched its spot trading platform for voluntary carbon credits called CIX Exchange for standardized contracts that currently cover 34 projects under the Reducing Emissions from Deforestation and Forest Degradation, or REDD+ framework.

There are more than 56 million credits that make up the basket of curated projects, covering around two-thirds of the open active traded volume available in the secondary market for those 34 projects, Glossoti said.

He said while the current scope of projects includes only nature-based REDD+ projects, the plan is to expand the variety of projects into sources like renewables or cookstoves, depending on market interest.

"If the CCP [Core Carbon Principles] comes out with a viable characterization and standardization, we could even have a CCP-eligible standards contract as well. So, we certainly hope to expand out into what the market is looking for," Glossoti said.

The Core Carbon Principles refer to a framework being developed in the voluntary carbon market to identify high-quality carbon projects and help address concerns pertaining to the integrity of carbon credits offered in the market. Once finalized, they are expected to boost demand for the credits that meet the criteria.

Glossoti said CIX was also looking to create depth and liquidity in the carbon market and drive standardization toward the convergence of spot trading and futures contracts. CIX's spot trading platform would try to bridge the Asia-Europe time zone and use incentive programs to bring in market makers and liquidity providers.

"They [market makers] are leading traders and financial institutions. These are all players that are not new to trading carbon credits. They [have] been around in this market for quite a while," Glossoti said.

Futures contract

CIX, jointly owned by DBS Bank, Singapore Exchange (SGX Group), Standard Chartered and Temasek's decarbonization investment subsidiary GenZero, has been working with SGX on a carbon derivatives product from the very start, Glossoti said.

He said liquidity on existing carbon futures contracts is very low and they're very lightly traded. Although CIX is trying to build a contract that the market can adopt relatively easily, the process could take a long time, he added.

"We're already deep in discussions with SGX on the mechanics of how this would work," he said, adding that currently trading spot carbon credits is an unregulated activity broadly across the globe, and while there are disclosure requirements, no regulator in any jurisdiction treats voluntary credits as a regulated traded instrument at the moment.

"As soon as you put a derivative on it, it becomes regulated," he said.

Glossoti said currently spot trading of carbon credits is not under Singapore's Securities and Futures Act or the Commodities Act either but is something that the Monetary Authority of Singapore is potentially looking at and for which working groups have already been put together.

"It is something that will be addressed and evolved in the future. We're not opposed at all to being regulated. But what we'd like is that it is thought through as it comes to market. It makes more sense for the market and is constructive to continue to grow the market and build a market," Glossoti said.

He said, with the convergence of the voluntary and compliance carbon markets, such as allowing Singapore's carbon taxpayers to use voluntary carbon credits to offset up to 5% of their tax-eligible emissions, the thinking around regulation will get more traction within the market.

Market impact

Glossoti said a regional spot carbon trading platform will help level the playing field for carbon traders.

"The market has been dominated by a couple of big players to date, but that's also because the market is still very young and the market is growing," he said, adding that anybody who meets the disclosure requirements can trade.

"We're not touching retail at the moment for obvious reasons of regulation and so forth, but we are trying to facilitate smaller trading houses coming to market and we've got a lot of positive traction from them because I think it's something they've struggled with in the past," Glossoti said.

However, the inclusion of some industry participants like project developers remains a little more challenging because they are not necessarily sophisticated financial market participants yet and will have access to other CIX platforms.

The CIX Exchange is also not dealing yet with the corresponding adjustment credits because the framework is still being worked out by regulators, he said, adding that the exchange's progress for accommodating correspondingly adjusted credits is still relying on the standards agency like Verra for the necessary project criteria.

Corresponding adjustment is the task assigned to project host countries of the carbon credits under the new Article 6 rules of the Paris Agreement. It requires them to decide which carbon credits to be sold to other countries and therefore should be adjusted to avoid double counting toward its own national emissions targets.

"I believe individual jurisdictions are going to evolve tremendously over the very near term on how these are looked at. I think corresponding adjustments are going to be critical in how the voluntary carbon credits are able to be used in the compliance market," Glossoti said.

Platts, part of S&P Global Commodity Insights, assessed nature-based avoidance carbon credit price at $5.6/mtCO2e on June 14.