Carbon trading gains momentum in Southeast Asia

Carbon trading is gaining momentum in Southeast Asia. New spot market exchanges for buying and selling carbon offsets have opened their doors in recent years in Singapore, Malaysia and Indonesia. Although the volume of transactions is still small, the direction of this nascent market is clear.

Singapore, for example, has three carbon exchanges. AirCarbon Exchange (ACX), with satellite offices in the UK, Brazil, India and the UAE, started operations in 2019 and offers a platform for buying and selling voluntary carbon offsets.[1] The ACX also provides technology for other exchanges and serves as the technology provider for the Indonesian Carbon Exchange (IDX).[2] A second exchange, Climate Impact X (CIX), began operating in 2023. CIX offers standardized contracts for a suite of environmental commodities, including carbon offsets from forest conservation, cookstoves, reduced airline emissions and carbon removal.[3] Both ACX and CIX are spot market exchanges. A third exchange, Abaxx, recently began offering two futures contracts: one based on a portfolio of forest preservation and restoration offsets; the other on airline emission offsets.[4]

In Malaysia, the Bursa Carbon Exchange began operating in 2022 in Kuala Lumpur, offering forest conservation offsets and other products.[5] And the IDX in Jakarta, which began trading domestic carbon credits in 2023, recently allowed foreign investors to purchase credits from some Indonesian coal plants.[6]

“As carbon markets scale up all over the world, Southeast Asia is taking the lead. While trading is still fragmented, countries in the region can play a key role in establishing more standardized, liquid markets,” says Bjorn Fonden, international policy advisor for IETA, the International Emissions Trading Association.

All the countries in the Association of Southeast Asian Nations are expected to participate in this growth. ASEAN, an economic and political union, represents approximately 700 million people in 10 countries (see map). Each of the ASEAN nations signed the 2015 Paris Agreement, which requires countries to significantly reduce greenhouse gas emissions and submit reports every five years that describe how they will achieve their targets.

Several ASEAN countries have said they intend to rely on emissions trading to meet their Paris Agreement commitments and slow down projected increases in greenhouse gas emissions. Other nations, like Singapore, intend to rely primarily on carbon taxes. In 2019, Singapore imposed a tax on facilities that emit more than 25,000 metric tons of carbon each year. For the first five years, the rate was low: only $5 per ton. But the rate is now $25, and it will go up to $45 in 2026-27 with planned increases to $50-80 per ton by 2030. Companies can use international carbon credits to offset up to 5% of their taxable emissions.[7]

Despite those developments, ASEAN countries face formidable challenges. Most ASEAN nations rely on fossil fuel plants for electricity, the source of approximately 50% of ASEAN emissions. The three most populous countries – Indonesia, Philippines and Vietnam – have built dozens of fossil fuel plants in the last 15 years and more are on the drawing board to meet demand for power. Although ASEAN countries emit only about 9% of total global greenhouse gas emissions, the region includes some of the fastest-growing economies in the world.[8] In the absence of fundamental change, the member states are on a path to far exceed historic emissions.[9]

That was the impetus behind an important agreement signed in November 2024 in Baku, Azerbaijan at the 29th UN Conference of the Parties. Five business trade associations executed a Memorandum of Collaboration to promote carbon trading and facilitate cooperative approaches to reduce greenhouse gas emissions:

• Malaysia Carbon Market Association
• Indonesia Carbon Trade Association
• Thailand Carbon Markets Club
• Singapore Sustainable Finance Association
• ASEAN Alliance on Carbon Markets (based in Jakarta)

The primary goal of the MoC – called the ASEAN Common Carbon Framework (ACCF) – is to send the proper signals to companies in Southeast Asia to decarbonize and create high-quality carbon credits that align with the Paris Agreement.[10]

“This historic collaboration is a crucial step in advancing carbon market growth within ASEAN,” said Nik Nazmi Bin Nik Ahmad, Malaysia’s Minister of Natural Resources and Environmental Sustainability, at the signing ceremony.

The ACCF involves more than the voluntary offset market. It also includes the mutual recognition of carbon trading systems and standards. Indonesia, for instance, has said it plans to expand the scope of its emissions trading scheme. Thailand and Vietnam have proposed their own trading systems.[11] The ACCF does not contemplate uniformity but anticipates that domestic trading platforms can be integrated to facilitate cross-border transactions.

If ASEAN countries go down this path, as they are expected to do in stages, trading platforms will become more sophisticated to meet the demand for high-quality offsets.

Already, there are signs of progress. In February this year, the Stock Exchange of Thailand signed an agreement with the Intercontinental Exchange, operator of the world’s largest energy and environmental derivatives market, to develop trading platforms and other digital infrastructure for Thailand and Asia’s emerging carbon markets.[12] The SET has also signed a memorandum of understanding with ACX to offer Thai businesses access to carbon markets.

Another development that is likely to spur increased carbon trading is a provision in the Paris Agreement that allows countries to buy carbon credits to meet their emission reduction targets. Under the agreement, each of the 195 nations must develop their own “Nationally Determined Contribution” to reduce greenhouse gas emissions. There is no requirement for nations to trade carbon credits, but Article 6 gives them the option to do so. Article 6.2 authorizes bilateral, decentralized transactions in which a country buys credits (called Internationally Transferred Mitigation Outcomes) from another country. And Article 6.4 calls for the United Nations to establish a centralized crediting body to adopt standards and methodologies to ensure consistency and avoid double-counting.

Bilateral transactions under Article 6.2 have gained momentum in recent months. Singapore, for example, has signed implementation agreements with Papua New Guinea, Ghana and Peru, and it is currently evaluating proposed projects in Ghana and elsewhere.[13]

This is an exciting and challenging time for Southeast Asia’s carbon markets, says IETA’s  Fonden. “The markets can help drive investment, support regional cooperation and deliver green growth. But we have to work together to get this right.”