For several years, the rapid growth of voluntary carbon markets (VCMs) around the world, filling trading gaps not covered by the compliance markets, was hailed as a strong success story. 

According to a report issued earlier this year by Shell and the Boston Consulting Group, global voluntary markets could reach up to $40bn in value by 2030, with Asia making up as much as $10bn, mostly in forestry and nature-based credits.

Malaysia and Indonesia have 55% and 53% forest cover respectively, followed by Vietnam at 47%, which creates significant potential for generation of carbon credits. In addition, South East Asia has the highest mangrove coverage in the world and considerable potential for marine related carbon projects.

Responding to these opportunities, Climate Impact X (CIX), one of Asia’s first voluntary carbon marketplaces, conducted an initial auction of nature based carbon credits in Singapore in 2021. FTIX, a carbon trading platform launched by the Federation of Thai Industries, has been offering trading services for carbon credits, renewable energy and renewable energy certificates since the beginning of the year, while Malaysia’s Bursa Carbon Exchange (BCX) completed its first round of carbon credit auctions in March 2023.  A trading platform for voluntary carbon credits, Core Climate, was previously launched by the Hong Kong stock exchange (HKEx) in late 2022.

Growing pains and media storms…

VCMs in Asia still face significant challenges in attracting investors at scale. Much has already been written about the problems burdening these nascent markets. Carbon credits offered by these exchanges, generated by activities as diverse as renewable energy, distribution of cook stoves, sustainable forestry and farming or preserving landscapes and coastlines, are not standardised. Collecting data from these projects can be difficult and the benefits are often not well understood. Lack of clear definitions around standards and the resulting poor quality of some offsets, inadequate transparency and high transaction costs undermine investor trust in VCMs and cause them to be cautious about participating. 

Earlier this year, heightened levels of concern were created by severe media scrutiny of the world’s largest certifier of carbon credits, the non profit Verra. In January, The Guardian newspaper published findings of an investigation which concluded that 94% of forest-related projects validated by Verra did not represent genuine carbon reductions. Following the report, the value of carbon credits from Verra registered projects fell by nearly a half.

To make things worse, potential investor appetite was further undermined a few months later, when Delta Air Lines, which had been advertised as “the world’s first carbon neutral airline”, became the target of a proposed class action lawsuit in the US, alleging that it had been buying carbon offsets that are largely worthless.

…holding down trading volumes

Poor confidence in VCMs, leading to reduced investor appetite, means that these markets will continue to lack the liquidity necessary for efficient trading and price discovery. A few months after its launch, BCX in Malaysia, for example, has seen very disappointing performance. Ten buyers participated initially, when trading began in September, exchanging 16,500 carbon credit units in the first two days, but volumes subsequently fell substantially, with no trading at all on some days.

CIX in Singapore and Core Climate in Hong Kong, which have both been making progress in signing up buyers to their platforms, report that most trade remains bilateral, rather than via standardised contracts, which play are important for providing liquidity and pricing data to the entire market. Due to continuing concerns about quality, investors often prefer to make over the counter purchases of credits from projects that have undergone due diligence by a third party, in addition to the required registry verification process.

Some analysts are confident that recent efforts by industry bodies such as the Integrity Council for the Voluntary Carbon Market (ICVCM) to improve transparency and create greater investor confidence in the quality of carbon credits on the VCMs will help to encourage investor appetite. Earlier this year, ICVCM released a global benchmark for high integrity carbon credits, the Core Carbon Principles, developed through consultations with carbon crediting and scientific experts.

But not everyone is convinced. The Net Zero Asset Owner Alliance, a group backed by the United Nations with a collective $11trn of assets under management, has said that it will ban its members from using carbon offsets in emissions reduction plans until 2030.

Future may lie in greater convergence between markets…

As prices have languished on several VCMs, with considerable gaps between standardised contracts and over the counter credits, some analysts are questioning whether there is a viable future for VCMs and if the solution might lie in allowing them to be partially absorbed into compliance markets. Already, the distinction between voluntary and compliance markets is softening, and their activities are becoming more interlinked.

For example, the Singapore government is introducing a mechanism that will allow companies in the city to use international carbon credits, traded on VCMs, to fulfil part of their mandatory carbon tax liability. Starting in 2024, companies can offset up to 5% of their taxable carbon emissions using carbon credits.  Singapore’s carbon tax was introduced in 2019 at S$5 per tonne and is expected to rise to S$25 next year.

China’s voluntary carbon market, the China Certified Emission Reduction (CCER) scheme, which was halted in 2017 after questions about quality and transparency, is expected to be relaunched in the near future. The CCER’s regulatory framework has been significantly strengthened, with stringent guidelines for eligible projects and more streamlined trading and settling of CCER credits. When the CCER reopens, China Beijing Green Exchange will be the only trading platform available, which is expected to improve efficiency and increase liquidity.

The relaunch of the CCER has the potential to reinvigorate carbon trading activity in the country, as companies in the mandatory Emissions Trading Scheme (ETS) will be able to use CCER carbon credits, generated by renewable energy, forestry, methane capture and energy efficiency projects, to offset 5% of their annual emission obligation – which could total as much as 200 million tonnes annually. This will expand the sector coverage of China’s existing carbon market and increase overall volumes.

…and regional consolidation

For the smaller carbon markets, which will never individually achieve the scale and liquidity of China’s ETS, the future may lie in cross border and regional collaboration.

HKEx hopes to leverage Core Climate to play a greater role in China’s Greater Bay Area, building on HKEx’s experience with the various Connect cross border trading schemes. Core Climate allows participants to purchase carbon credits in both Hong Kong dollars and Renminbi, allowing for greater flexibility and potentially reaching a wider range of investors.

In 2022, HKEx signed an agreement with Guangzhou’s China Emissions Exchange to explore the development of a voluntary carbon emission reduction programme in the Greater Bay Area and help to accelerate the internationalisation of China’s carbon market, and followed up with a Memorandum of Understanding with China Emissions Exchange Shenzhen to look at opportunities in cross border carbon market connectivity and climate finance.

Some analysts in South East Asia argue that the natural way forward would be the creation of a unified Association of South East Asian Nations (ASEAN) carbon market, which could leverage the region’s potential for natural climate solutions and make a material contribution to helping countries to achieve their emissions reduction commitments. Unfortunately, this is unlikely to be achievable in the near term, given the divergences between ASEAN member state economies, the ongoing challenges of monitoring, reporting and verification of emissions reduction and the level of maturity of individual VCMs in the region.

The cross border trend that is emerging more rapidly is bilateral agreements between countries which allow carbon credits to be traded internationally and to be counted as part of national emissions reduction commitments under the Paris climate agreement rules. For example, Singapore is close to finalising implementation agreements with Ghana and Vietnam, under which Singaporean companies can use international carbon credits generated in those countries to offset their taxable emissions. Singapore is in talks with a number of other Asian countries on similar arrangements.