Looking ahead: Voluntary carbon markets in Asia

Yet, at the same time, investors and potential buyers are increasingly spooked by high-profile media reports that have emerged to shine a light on how the impacts of voluntary offsets might have been overstated. Recent investigative reports such as those published by the Guardian, allege that most carbon credit projects had no benefits to the climate, and threats to forests were overstated by fourfold on average. This has dampened investor confidence, leading to a decline in trading and prices despite the launch of new VCMs in Asia. Earlier this year, consulting giant Bain said that Asian companies are taking a “wait and see” approach when it comes to participating in VCMs. 

Carbon market experts broadly agree that while the heightened scrutiny has made investors more wary in the short-term, potential investors and carbon project developers in Asia are still likely to benefit from participating in VCMs. 

This report takes a closer look at the various factors that make Asia a potential hub for the development of carbon credits, how VCMs can help fund climate action in the region, and the key challenges and opportunities that lie ahead for facing carbon market actors. 

Asia is also a key centre for innovators and start-ups working on technology-based and engineered solutions such as carbon capture, said Mikkel Larsen, chief executive officer of Singapore-based carbon exchange Climate Impact X. The presence of established national frameworks and supporting infrastructure are likely to be key to determining which countries can ramp up their supply of carbon credits to meet international demand, he said. 

“Countries like Indonesia, India and Cambodia are natural supply powerhouses, but [the actual supply of carbon credits] depends on whether these countries have clarity around meeting their Nationally Determined Contributions (NDCs) – pledges made under the 2015 Paris Agreement – and whether they allow for the export of carbon credits,” said Larsen.  

All three countries have yet to establish their own voluntary carbon marketplaces, although Indonesia announced in early May that it would allow foreign entities to purchase carbon credits on its domestic market. Meanwhile, India has drafted a blueprint for a domestic cap-and-trade system, which provides for the introduction of a voluntary market.  

Currently, South Korea, China, Japan and Singapore are home to some of the most established carbon marketplaces in the region, mostly comprising a combination of compliance and voluntary carbon markets. Malaysia’s stock exchange operator Bursa Malaysia launched the country’s first VCM in December 2022. 

To offset or not to offset? 

There are strong and often divisive opinions as to whether carbon credits should be counted as “offsets” that can help companies meet their net-zero emissions goals. 

Proponents argue that it would be ingenuine to prevent companies, especially in hard-to-abate sectors, from investing in carbon credits to offset their emissions because these companies should be made to pay for their current emissions even as they plan to decarbonise. While companies should make decarbonising their own operations a priority, the reality is that some industries will have a harder time decarbonising quickly, pointed out Bedford. 

 “We aren’t just going to switch off coal, oil and gas tomorrow, so what can these companies do in the meantime? If they are not paying compensation for all their residual emissions by buying offsets, then they are cheating [on their decarbonisation goals],” he said, explaining that companies must still use offsets to account for residual emissions produced between now and the year in which they expect to reach net zero. 

But others say that offsets are simply a pay-to-pollute mechanism for heavy emitters.  

Given the challenge of accurately estimating the impact of carbon projects, even well-meaning companies should not use credits to claim carbon neutrality, said Dufrasne. “There are so many difficulties in meeting that promise of tonne-for-tonne compensation, whether it is the lack of permanence of credits, the difficulty in measuring them, the uncertainty in those measurements or the difficulty in assessing additionality,” he said, even for the most well-meaning actors. 

Some companies are sensitive to these challenges and are taking due action. Larsen said that an encouraging development he is seeing among clients is the growing understanding that the use of carbon credits to offset emissions should be in addition to ongoing decarbonisation efforts. “They view carbon credits for what it is, a partnership with the project developer or supplier to offer solutions that they cannot,” he said.  

Ultimately, the consensus among experts is that frameworks need to be developed that can assure that companies have done their best to reduce their emissions before they retire carbon credits as offsets. 

Another area in which there are significant opportunities for carbon capture is agriculture or soil. Moore said that there is significant potential for Asia’s agricultural sector to tap into carbon markets, as land use accounts for a big percentage of emissions. According to the Food and Agriculture Organisation, crops and livestock production accounted for 69 per cent of 2018 emissions in Asia, the highest contribution to emissions compared to other parts of the world. 

But agriculture-based carbon projects are also complex, requiring large areas of land to increase the scale of emissions reduction and potentially requiring multiple smallholders to be engaged, noted Moore. 

“We need to find models that work to reduce carbon in the agricultural sector so that we can start delivering finance to a sector which is critical from an emissions standpoint, but also critical for local livelihoods and sustainable development,” he said. 

“Soil carbon is not in the spotlight as much as blue carbon, but Australia has come up with methodologies for soil carbon that could work very well for highly agricultural countries such as Thailand,” said Lee.  

According to S&P Global, soil carbon can be increased through land management practices such as ensuring that there is no reduced or no tillage, prevention of overgrazing and ground cover maintenance. The Australian government has promoted soil carbon storage via grants and data programmes, as well as supporting farmers via the country’s carbon crediting scheme.

There is much more scepticism, however, over whether carbon credits should be used to fund renewable energy, large hydropower infrastructure and electric vehicles.  

Carbon Markets Watch’s Dufrasne describes these as projects that would have happened anyway, with renewable energy projects funded otherwise via existing financial instruments, such as government grants, bonds or loans, and that would not have required carbon market financing.  These projects do not meet the criteria of additionality, which refers to projects that would only exist because of funding from carbon credits. 

In 2019, two leading VCM standard setters, Verra and Gold Standard, decided to prohibit most renewable energy projects with some exceptions, such as for projects in least-developed countries.  

“The [projects] that need to be excluded from carbon credits are those that are not additional,” he said. “I think it's important for countries and voluntary market actors to see it as a way of kind of targeting projects that the host country would not be able to finance anyway.” 

While there is still hesitance over whether carbon credits bought on VCMs should contribute towards a host country’s net-zero emissions commitments, taking such an approach would help to provide some distinction between voluntary projects and government-funded activity that contributes towards a country’s NDCs, said Dufrasne. Article 6 of the Paris Agreement encourages countries to cooperate to achieve emissions reductions targets and refers to carbon credit transfers as a possible mechanism to do so. However, the provision does not refer specifically to credits traded on VCMs and how they should be accounted for, Dufrasne noted.  

Governments could put out guidance and issue a list of sectors and activities in which they welcome contributions from the voluntary market, and then develop frameworks to apply corresponding adjustments to those projects, he said. Corresponding adjustments are an accounting mechanism established under Article 6, which would allow for the carbon credits to be counted by the project developer or the buyer instead of the host country. This ensures that double counting of the emissions does not occur. 

On the other hand, governments could choose not to apply corresponding adjustments; buyers, instead of claiming carbon credits as offsets, could also communicate that they were helping the specific country reach its climate target instead, said Dufrasne. 

Carbon market participants should also be cautious when it comes to projects requiring large scale infrastructure, such as hydropower dams, said WWF’s Lee. Beyond flooding large areas of land and potentially disposing local communities, the construction of dams can also have detrimental and irreversible impacts on rivers, and as a result, affect freshwater systems.