ENERGY ASIA: Asian carbon markets face herculean tasks to build legislations, interoperability

Asian countries still face herculean tasks to build comprehensive legislations and create interoperability across national boundaries, without which liquid and reliable carbon markets cannot be established, experts said at the Energy Asia conference, held in Kuala Lumpur, Malaysia, on June 16-18.

Asian countries are expected to be the most critical carbon market players on both the supply and demand sides.

Southeast Asian countries, such as Malaysia, Indonesia and Vietnam, have abundant forest areas, which means a huge potential to supply nature-based carbon credits. China, as the world's largest emitter, currently has the world's largest compliance Emission Trading Scheme, which might help to unlock regional demand once it opens to international carbon offsets. Meanwhile, Singapore and Japan are active buyer countries to scale up demand for the UN-backed Article 6 carbon markets.

However, to materialize these potentials, countries in these regions must address the fundamental challenges first, experts highlighted at the Energy Asia conference.

'Legislation, legislation and legislation'

Peter Zaman, Partner with HFW Law Firm, said the most critical task for countries is "legislation, legislation and legislation," emphasizing the importance of building up comprehensive policy instruments, and, currently, most countries are still at an early stage.

As a lawyer and policy adviser with decades of experience in supporting global carbon markets, Zaman highlighted that an overarching climate change act is far from enough to manage a country's carbon market, especially for developing countries that plan to sell their carbon credits overseas.

"Not one Climate Change Act is this magical thing that will fix it ... The people who are telling you that are telling you 'I want you to have an Article Six framework so I can buy credits.' And you have no idea what you're selling. That's what they're doing, because they have a vested interest in taking credits from you on the cheap before you realize what you're selling," he added.

He shared that, in the EU ETS, which is the world's most mature carbon market with a 20-year history, around 400 independent pieces of legislation of policy instruments had to be passed to change the country's emission reduction trajectory from the original pathway to the current one aligned with the 1.5-degree target.

"400 independent pieces of legislation of policy instruments had to be passed [only] to change the trajectory, not to introduce it [the carbon market] from scratch, which is where most countries are today," he highlighted.

Building comprehensive legislation needs to cover all sectors across society, have clear minimum requirements in terms of environmental integrity, set trading rules, set monitoring, reporting, verification, or MRV regulations, and introduce laws dealing with market abuse.

Headwinds against interoperability

Meanwhile, Zaman highlighted the importance of establishing policy instruments to create interoperability, adding that Asian countries have adopted different carbon pricing mechanisms due to different socio-economic conditions.

For instance, Singapore, as a small-sized city state, adopted a carbon tax regime, because a liquid compliance ETS needs to cover large emission volumes and a large number of compliance entities, Zaman shared.

In contrast, China, as a large developing country that has not peaked its carbon emissions, adopted an intensity-based approach to control the emissions under its ETS, which means no absolute cap has been introduced to actually curb the country's total emissions. However, such practice deviated from the EU's conventional cap-and-trade model, and it is difficult to build mutual understanding, he added.

Zaman told Platts, part of S&P Global Energy, on the sidelines of Energy Asia that China and the EU have been actively negotiating a trade deal to address the challenges brought by the US tariffs, and one bargaining chip is that the EU might work with China and shape the country into an active player in the international carbon market.

He added that China could become a buyer country for the UN-backed Article 6 credits, once they peak their emissions before 2030, as officially committed.

Wei-nee Chen, head of carbon markets with Bursa Malaysia, echoed that building an interoperable carbon market has also been an essential but challenging task for the ASEAN region.

Malaysia, Indonesia, Thailand and Singapore have established the ASEAN Common Carbon Market Framework to harmonize practices across the region. Chen shared that, theoretically speaking, building an ASEAN regional market is expected to help build a bigger pool of supply and demand, create stronger influences, and reduce marginal costs for emission reduction through achieving economies of scale.

However, she echoed Zaman's views on the need for strong public policies, adding that they are also a key enabler of creating such interoperable carbon markets.

She said the global energy markets start from a highly regulated ecosystem and gradually transition to a deregulated one after reaching a certain level of maturity. However, the carbon market's development used to follow a reverse trajectory, starting from a voluntary, deregulated ecosystem that had triggered lots of problems.