Policy alignment needed to push APAC markets to unified carbon credits

ERM’s Peter Rawlings says the lack of alignment in the ‘complex’ region prohibits collaboration on carbon credits.

Carbon credit schemes supporting the energy transition are growing in the Asia Pacific, with different markets implementing their respective policies. However, challenges to the full rollout remain as there is a lack of policy alignment amongst markets.

Peter Rawlings, Global Industry Lead, Finance Sector, at Environmental Resources Management (ERM), said around 68 countries globally have implemented various forms of carbon trading mechanisms. China, Korea, New Zealand, Singapore, and Japan are amongst the notable markets in Asia that have such schemes, he said.

“We have to face the fact that it is a very complex region. Each country is very different in its own right. We have got to accommodate that diversity, the differing levels of maturity of the energy and power systems,” Rawlings told Asian Power.

“We have to figure out the mechanisms to support them. We need consistency and alignment, and that doesn’t exist at the moment. You have varying policies and varying approaches, and that is limiting that kind of intercompany region-wide collaboration,” he added.

Singapore, for example, has partnered with 15 countries to collaborate on carbon credits, including Bhutan, Cambodia, Indonesia, Mongolia, Papua New Guinea and Sri Lanka.

Rawlings also shared how the carbon credits scheme supports the ramping up of green financing in the region in this Asian Power exclusive interview.

Can you provide us with an overview of the carbon credit landscape in Asia Pacific, particularly in the power sector?

We are seeing a period of rapid growth in the carbon markets. A lot of that growth is aligned to agreements like the Paris Agreement. The voluntary carbon market in 2021 was worth about $2b. There are estimates that in 2030, that could be anywhere from $10b to $40b. You can see huge incremental growth there. Carbon markets in various guises certainly have a big opportunity to play in the region, given the growth that the region is seeing and the desire to move to net zero.

Which countries in the region are leading in terms of driving carbon credits?

It would be wrong for me to say who the leader is because that is picking one or another against them. But when you think about a place like Singapore, it naturally is a finance centre for the region. Thus, you can see countries like Singapore playing a very prominent role, given the finance that they’re helping to mobilise through the different incentives and innovative ways of implementation.

China has a major role to play simply based on its scale. There is already a lot happening there, and that will continue to grow. You have subtleties based on each country, but, for overall success, it is going to require all countries to be working and collaborating.

What are the challenges in adopting carbon credit schemes in the region? How can governments help in addressing them?

There are challenges; but with challenge comes opportunity. We have to face the fact that it is a very complex region. Each country is very different in its own right. We have got to accommodate that diversity, the differing levels of maturity of the energy and power systems. You have to acknowledge that we have got a lot of infrastructure that may only be five to 10 years old. For example, there is a cost associated with rapidly looking to phase out coal-fired power stations. As such, we have to figure out the mechanisms to support them. We need consistency and alignment, and that doesn’t exist at the moment. You have varying policies and varying approaches, and that is limiting that kind of intercompany region-wide collaboration.

What are some of the recent carbon credit schemes or transactions in the region particularly in the power sector?

There are a couple of things that are worth highlighting. The Asian Development Bank (ADB) has been very prominent in its desire to help facilitate and accelerate the transition. Their energy transition mechanism is one of the kinds of outputs that is encouraging a move from fossil fuels to renewables. Similarly, you have the same happening here in Singapore, and the government has looked to accelerate, encourage, and incentivise a very similar mechanism. They’re phasing out fossil fuel, particularly coal-fired power stations and, as a result, encouraging alternative lower carbon options.

How do you see the carbon credits market evolving in the next five years?

The defining factor is going to be the policy environment. The more we see international collaboration and alignment around carbon mechanisms, the better it will be — which will encourage much wider uptake. My view for the next five years is that we will see the importance of carbon markets. I think we will see nature-based solutions come to the fore, with a real focus on nature and climate. The acceleration, though, I think is the voluntary side. The real acceleration will be if we achieve alignment of policies.
 

How do carbon credit schemes support the acceleration of green financing in APAC?

So much of the power system relies on fossil fuels, particularly coal. That means that to attract finance into the region, we have to look at phasing out fossil fuels and bringing in alternatives such as renewables, hydrogen, and other forms of clean energy, so carbon credits have a role to play there.

They can help make that transition more attractive from a financial perspective and from a payback perspective, but also help support phasing out certain infrastructure and facilities earlier than their planned life. Because without that, there is no financial incentive to do so. The other thing I would say is carbon credits will have a role to play by simply acknowledging the cost that carbon has to our economy. With some form of carbon mechanism, it will make decarbonisation much more attractive and speed up the rate at which we decarbonise.

What are the challenges in securing green financing in the region?

If you look at where most flows of green financing go today, they are probably more towards the Organisation for Economic Co-operation and Development (OECD) countries. To make investments more attractive in the Asia Pacific region, we have to find ways to build a consistent approach so that there are common standards and approaches around green financing.

We need to think about building more capacity so that there is greater expertise, understanding, and knowledge. We need collaboration and stakeholders working together across all aspects. And then, importantly, we have to manage the risk. We have to find ways to use different forms of finance, bringing multilateral organisations and governments to the table that will help de-risk these investments. So, there are many different ways and mechanisms, and much of it is there [and] is already being applied and tested. We have just got to scale that to the next level.

Overall, what does the increasing carbon credits and green financing mean to the fossil fuel sector in the region?

There is a need for transition. There is an exciting opportunity in this new range of alternative energy solutions. For example, the Philippines: There is potential for the Philippines to become energy independent, rather than rely on imports of fossil fuels. That will apply to many other countries across the Asia region. That, in its own right, is quite a significant potential opportunity.

The second — but I think a really important piece as well — is that there must be a just transition. If we are looking at the fossil fuel industry potentially phasing out and being replaced by alternative renewable green energy solutions, we have to be very considerate of the socioeconomic consequences. How do we upskill, train and create a new workforce focused on these renewables? How do we create supply chains that now support this new range of technologies? Although we will see the phasing out of one industry, we are replacing it with other jobs. The economic and social benefits will remain.