Singapore, Japan bet on distinct pathways for Article 6.2 implementation

Singapore and Japan, Asia's two pilot buyers for Article 6.2 carbon credits, have recently released policies that demonstrate their distinct pathways for generating and trading credits, both of which may encourage other potential buyer countries to follow suit, while supplier nations could struggle to align with these differing systems.

Singapore is leveraging existing Voluntary Carbon Market methodologies, such as those under Verra and Gold Standard, to issue Article 6.2 carbon credits. Conversely, Japan is establishing a tailored system called the Joint Crediting Mechanism, which currently accepts only bilateral methodologies developed and approved by Japan and its JCM partner countries.

Both pathways offer valuable experiences but face significant challenges.

In the past two years, some VCM projects have faced scrutiny regarding their environmental integrity, particularly in areas like REDD+ (reducing emissions from deforestation and forest degradation), enhanced rice cultivation, renewables and clean cookstove initiatives. For Singapore, the key challenge lies in carefully selecting the most reliable VCM methodologies and projects, market participants said.

Japan, on the other hand, must efficiently build the necessary rules and infrastructure to scale up supplies to meet the growing demand for emission reductions. The Japanese government aims for a cumulative supply of 100 million mtCO2e in JCM credits by 2030, yet only 700,000 mtCO2e of such credits had been issued by June 2024, according to MSCI data.

In June, both countries published new policies to guide local companies in carbon credit usage, reaffirming their distinct pathways for international carbon trading. Singapore's Ministry of Trade and Industry released a draft consultation document outlining the role of carbon credits in corporate decarbonization. This document emphasized that VCM credits selected by the government and listed on a whitelist should be used for Article 6 purposes, especially for carbon tax payers.

Japan's Financial Services Agency published a draft report on plans for the financial infrastructure for carbon credit trading. The FSA confirmed that Japanese companies could use JCM credits alongside emission allowances and domestically generated J-credits to fulfill compliance obligations under the national Emission Trading System, known as GX-ETS.

A positive signal for harmonization is that both policies stressed the importance of aligning with global meta-standards.

Japan's FSA indicated that companies should use carbon credits in line with the Integrity Council for the Voluntary Carbon Market's requirements. Singapore's MTI noted the importance of aligning with the ICVCM's Core Carbon Principles and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)'s eligibility criteria.

ICVCM's Core Carbon Principles were initially launched to label high-integrity VCM credits, and it will take time to introduce these labels to Article 6.2 markets, especially regarding jurisdictional programs like JCM.

Notably, there also exists an exception for GX-ETS to accept VCM credits, but that is limited to durable Carbon Dioxide Removal (CDR) credits, which are of small scale and highly priced, the Japanese government announced in 2024.

Suppliers and followers' choices

Within Asia, several countries, including Vietnam, Indonesia and Cambodia, have signed Article 6.2 partnership agreements with both Singapore and Japan. These project host countries must navigate their paths to collaborate with these two distinct buyers.

Notably, Cambodia, Indonesia and Vietnam were pilot JCM suppliers, accounting for over 80% of issued JCM credits, according to the official JCM website. They have also signed memorandums of understanding to collaborate with Singapore for Article 6.2 implementation.

"For each potential Article 6.2 project, we need to evaluate which buyer country to work with, carefully considering local carbon prices, lead times from project approval to credit issuance, and genuine demand signals," said a Singapore-based project developer involved in projects across Association of Southeast Asian Nations.

"Singapore has a clearer long-term price signal, with its carbon tax expected to reach S$45/mtCO2e ($35/mtCO2e) by 2026-27 from S$25/mtCO2e now and reach S$50-S$80/mtCO2e by 2030. We need such price trajectories to support our investment decisions," the developer said.

"Japan could represent a much larger market, given its annual emissions are 17-18 times those of Singapore. However, its GX-ETS will only become a mandatory system from FY2026. We need to assess the stringency of the ETS rules to gage genuine demand from Japanese buyers."

South Korea is emerging as a buyer country in Asia, adopting an in-between approach. Its Article 6.2 implementation framework requires ETS participants to use government-backed Article 6.2 credits, called i-KOCs, similar to JCM credits, but the government is open to using VCM methodologies to generate these credits, enhancing efficiency and aligning with Singapore's practices.

China, despite not yet issuing policies on Article 6.2 implementation, is expected to play a significant role in this market, Zhang Xiliang, Chief Architect of China's ETS, said in a recent interview with local media.

He indicated that China could contribute to both supply and demand sides, as it possesses the world's largest ETS and has the capability to develop various projects, like nuclear, forest management, and carbon capture and storage (CCS) initiatives.

China plans to leverage CCER (China Certified Emission Reduction) methodologies to attract foreign investments, he said.