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INTERVIEW: Singapore's Climate Impact X to hold new carbon auctions, launch standardized contracts in 2022


Auctions process key to price discovery for carbon credits

High quality carbon credits likely to soon be in short supply

Convergence of compliance, voluntary carbon markets to drive growth

  • Author
  • Ivy Yin    Eric Yep
  • Editor
  • Wendy Wells
  • Commodity
  • Energy Transition
  • Topic
  • Energy Transition Environment and Sustainability

Singapore-based carbon exchange Climate Impact X or CIX plans to conduct new auctions for carbon credits in early 2022, followed by the launch of standardized carbon contracts, CEO Mikkel Larsen said in an interview.

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Larsen said the newly-launched platform will focus on the trading of high-quality carbon credits that are expected to soon be in short supply due to strong demand, and the next big driver for the carbon market will be a convergence of global compliance and voluntary markets.

Demand for carbon offsets is growing from companies seeking to meet net zero emissions targets, especially after COP 26 helped reaffirm the global push toward decarbonization.

CIX, a joint venture between Singapore Exchange, DBS Bank, Standard Chartered and state investment company Temasek Holdings, expects to make Singapore a carbon trading hub. It completed its pilot auction Nov. 1, involving eight projects and 19 buyers, with 170,000 mtCO2e of trade volume at an average price of $8/mtCO2e.

Besides the main investors, other companies that participated in the auction included shipping group Berge Bulk, energy companies ENGIE and SK Energy, commodity traders Mercuria Energy, Trafigura and Vitol, environmental commodities trader STX Group and several real estate and financial investors. On the supply side, the credits were sourced from eight reforestation and deforestation avoidance projects across Asia, Africa and Latin America, according to CIX.

Larsen said all the carbon credits offered were sold out and cleared above the prevailing market price. He said the main objective was to test the auction process for price discovery, which has been done for other commodities but not for carbon credits, especially the premium that buyers are willing to pay for co-benefits and a high number of Sustainable Development Goals associated with the carbon credits.

CIX plans to have another auction around the new year and one toward the end of the first quarter, Larsen said. "I think the next auction will look slightly different," he said, adding that CIX is working to allow suppliers to "tell the story" behind why their product should command a premium.

High quality credits

The pricing of carbon credits has been arbitrary and depends on a variety of factors ranging from their vintage to the mechanism for offsetting emissions. For instance, carbon removal projects that include both nature-based and technology solutions tend to be more expensive than avoidance projects.

Larsen said high quality credits are in strong demand and there was a very limited supply of removal nature-based credits at present.

"For the next two years, there's going to be a real shortage of quality supply. Full stop. Whatever way you look at it, technology or nature based, it's a real squeeze because it takes time for these things to come to market and they've been bought up everywhere right now," he said.

He said CIX plans to trade carbon credits globally, but it has been harder to market to Asian customers who lack familiarity with decarbonization strategies, while the narrative is a lot more advanced in the West.

"I think it'll take time to grow the Asian market. That's why we are global," he said.

CIX is also developing a platform called The Exchange that will enable two-way spot trade of high-quality credits through standardized contracts. Larsen expects standardized contracts to be launched in the second half of 2022.

Standardization of commodity contracts paves the way for exchanges like SGX to launch derivatives products like futures that lead to the financialization of commodity trading.

"I think the market's challenge at this point in time is to create standardized contracts which are liquid enough, but at the same point in time narrow enough so that everybody gets the same price," Larsen said.

"I think a lot of it boils down to how to define the core carbon principles because that's what we want to be focusing on in our secondary market deliverables," he added.

Larsen said that the inclusion of commodity traders and speculative market participants was "inevitable" because that is the reality of creating a liquid market, as long as there is transparency. "But I do think it will be a while before you get corporates to seriously engage in this spot market," he added.

Market convergence

Larsen said the carbon market was driven partly by the fear of missing out, but mostly by voluntary commitments and the emissions targets being set by companies.

"The real next wave of demand will come if you start to see convergence, where voluntary-based carbon credits can be used in lieu of paying carbon taxes or into a cap-and-trade regime," Larsen said. He echoed industry views that a hybrid carbon marketplace, where carbon credits are global and fungible, is the future.

"What we need to happen for the voluntary carbon market to become really big is we need to allow cross-border [trading]. So the day that a cross-border trade gets recognized, then you start to see the market pick up," he added.