Carbon markets and climate policy – Turning Risk into opportunity in a decarbonising world
By Valerie Phua
At the 8th Singapore Dialogue on Sustainable World Resources, a range of perspectives across the public, private, and academic sectors converged into a key message: agribusiness and forestry must pivot towards sustainability to turn current risks into future opportunities.
In this article, Paia breaks down our key insights from the panel discussion.
Carbon credits will unlock decarbonisation opportunities in Southeast Asia
The tidal shift to a low carbon world has been palpable. With major corporations pledging their commitment to net-zero targets, carbon credits are gaining attention from investors and businesses alike.
What are carbon credits?
Carbon credits are verifiable and measurable emissions reductions from certified climate action projects. These projects reduce, remove or avoid greenhouse gas (GHG) emissions, in addition to multiple other benefits, eg. community empowerment, ecosystem protection, forest restoration, and reduced reliance on fossil fuels.
Carbon credits can be bought by companies, and provide a viable way for companies to offset unavoidable emissions in their net-zero transition. However, Paia recommends that carbon offsetting should always be employed in tandem with a range of other emissions reduction strategies.
The growing interest in carbon credits holds great opportunity for Southeast Asia. Being a global hotspot for blue carbon opportunities, but also a hotspot for deforestation risk, Southeast Asia’s carbon stores may offer the highest rate of return globally[i]. And the opportunity is perhaps greatest in Indonesia.
With one-fifth of the world’s mangroves and the third-largest area of peatlands globally[ii], Indonesia’s mangroves hold 3.14 million tonnes of carbon dioxide, and its peatlands store approximately 57 billion tonnes[iii].
What is blue carbon?
Blue carbon refers to carbon stored in marine and coastal ecosystems over decades, and deforestation not only releases these substantial carbon stocks, but also reduces the amount of carbon dioxide that these ecosystems could have removed.
With such huge carbon stores, the Indonesian government recognises the potential risk of losing these precious carbon sinks, and other vital accompanying benefits – mangroves protect coastlines from erosion and storm damage, sustain livelihoods of local communities, and are rich with biodiversity.
In 2021, Indonesia extended its ambitious campaign to restore 600,000 hectares of mangrove forest up to 2024[iv]. And efforts have admirably considered not only environmental factors, but the social realities of impacted communities. During the panel, Dr Ayu Dew Utari, Secretary of the Peat and Mangrove Restoration Agency (BRGM) in Indonesia, shared that the local government has embraced the inclusion of local communities in restoration projects. Dr Ayu emphasised that all initiatives should eventually be permanent and self-reliant, and strong community partnership involves villagers seeing the benefit of mangrove restoration to their quality of life as well.
With restoration projects well underway, Indonesia will be an attractive hotspot for carbon offset initiatives. Carbon credits will offer a way for local governments and communities to finance their climate action efforts, providing an economic incentive beyond environmental and social imperatives.
Carbon marketplaces will connect nature-based solutions with vital funds
Only last month, Climate Impact X (CIX), a new global carbon exchange and marketplace headquartered in Singapore, was launched. CIX is a joint venture by Singapore Exchange (SGX), DBS Bank, Standard Chartered, and Temasek, aiming to provide organisations with “high-quality carbon credits to address hard-to-abate emissions”[v].
With recent research showing that natural climate solutions could deliver up to one-third of the emissions reduction required to reach a 1.5 degree Celsius pathway by 2030[vi], there is a crucial need to connect these projects to the financing they will need.
What are nature-based solutions (NBS)?
An NBS uses tools already provided by nature to address issues resulting from poor land or resource use, climate change, or societal challenges. Solutions often enhance existing natural or man-made infrastructure, to spur long-term economic, social, and environmental benefits[vii]. Mangrove restoration is one such example of NBS.
However, as Mikkel Larson, Chief Sustainability Officer of DBS Bank, explained in the panel, inconsistent carbon credit quality and the lack of transparency in carbon pricing has limited market growth[viii]. The CIX aims to instil integrity in carbon markets through mapping carbon credit benefits in dollar terms, and introducing measures that prevent companies from avoiding the hard decarbonisation issues in their industry.
As the current risks associated with carbon credits are too high at present profit margins, Mr Larsen also explained that the CIX aims to facilitate investments in the lower denominations, thus improving access to the carbon marketplace for smaller corporations or investors.
With a more robust, trusted, and accessible marketplace, emissions reduction projects will see vital funds being channelled towards their scaling.
This will be especially true for nature-based solutions (NBS). As Professor Koh Lian Pin, Director of Centre for Nature-Based Climate Solutions at NUS, explained in the panel, NBS are presently the only commercially viable and scalable carbon capture solutions available.
But the research is still evolving, as estimates of carbon stocks and flows in natural ecosystems continue to be improved, Prof Koh emphasised. Another area of research would be the mapping of the co-benefits of NBS at the regional level, which an NUS project is currently working on. Prof Koh’s work will be essential to the verifiability and pricing of carbon credits, once again facilitating the success and expansion of voluntary carbon markets.
As corporate commitments to net-zero accelerate by the day, greater carbon market integrity and transparency can only be a promising development for the scaling of nature-based solutions.
Carbon regulations will shift business risks and opportunities
As climate policymakers ramp up their efforts to motivate the reduction of carbon footprints, carbon taxes may increasingly become a reality for agribusinesses to face.
One such policy that will have rippling effects across international trade is the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM). The CBAM will apply a carbon levy – mirroring the price of carbon in the EU’s cap-and-trade system – on embedded carbon in imports to the EU. In effect, this will extend the EU’s carbon market to the rest of the world.
What are carbon levies / carbon taxes?
A carbon tax sets a direct price on carbon by defining a tax rate on greenhouse gas emissions, or on the carbon content of fossil fuels. Carbon taxes capture some of the social costs of emissions that the public otherwise pays for, such as crop damage, health care costs, and property damage from flooding and sea level rise – and shifts the burden onto carbon emitters. In this way, carbon prices become a means of stimulating clean technology and market innovation.
In the panel, Mr. Pasquale De Micco, Policy Officer at the Directorate-General for Taxation and the Customs Union, a part of the European Commission, shared that the EU will be releasing its CBAM legislative package proposal in July. Crucially, Mr Micco emphasised that the CBAM aims to address the problem of carbon leakage – when businesses shift their operations to countries with laxer climate policies, leading to higher emissions, essentially kicking the can down the road.
Mr Micco also explained that the agriculture industry is unlikely to be included in this proposal, as the EU is focusing on the most carbon-intensive industries, that comprise 40% of emissions. Nevertheless, with the CBAM’s stated aims to raise global climate ambition and prevent carbon leakage[ix], it is expected that should the proposal be adopted, the CBAM will eventually be extended to all sectors.
The prospect of carbon levies will create business risks as profit margins stand to be impacted by rising carbon prices. But businesses will also have the opportunity to lay the groundwork that will enable them to thrive in a decarbonising world, through strong emissions reduction targets and immediate action.
Turning risk into opportunity
From the revitalisation of nature-based solutions in Southeast Asia, to shifting regulatory environments, the world is making a bigger bid for climate action than ever before. As governments and corporations awaken to the imperative of climate action businesses must adapt to changing risks, while capitalising on new opportunities. This has always been aligned to Paia’s approach, to help companies assess and manage the risks, and opportunities, that ESG, and climate change, pose to businesses.
Paia is a team of dedicated sustainability specialists, providing advisory on the business risks and opportunities that sustainability issues pose, and how best to apply those within existing company structures and strategies. To enquire about how we can help you, speak to us today at email@example.com.
[i] Market for carbon credits shows signs of recovery – The Straits Times https://www.straitstimes.com/asia/se-asia/market-for-carbon-credits-shows-signs-of-recovery
[ii] Indonesia pushes to restore peatlands and mangroves at the center of the climate crisis – ASEAN Today https://www.aseantoday.com/2021/01/indonesia-pushes-to-restore-peatlands-and-mangroves-at-the-center-of-the-climate-crisis/
[iii] Indonesia renews peat restoration bid to include mangroves, but hurdles abound – Mongabay https://news.mongabay.com/2021/01/indonesia-renews-peatland-mangrove-restoration-agency-brgm/
[iv] With stories and puppets, environmentalist battles to save Indonesia’s mangroves – CNA https://www.channelnewsasia.com/news/asia/indonesia-save-mangrove-environment-education-stories-puppets-14558740
[v] DBS, SGX, Standard Chartered and Temasek to take climate action through global carbon exchange and marketplace – SGX https://www.sgx.com/media-centre/20210520-dbs-sgx-standard-chartered-and-temasek-take-climate-action-through-global?utm_medium=display&utm_source=sgx-web&utm_campaign=alwayson&utm_term=20052021&utm_content=NR
[vi] Nature and Net Zero – World Economic Forum http://www3.weforum.org/docs/WEF_Consultation_Nature_and_Net_Zero_2021.pdf
[vii] What are Nature-Based Solutions? – NUS Centre for Nature-based Climate Solutions https://www.nus.edu.sg/cncs/research/overview/#:~:text=%E2%80%9CNature%2Dbased%20solutions%20are%20actions,well%2Dbeing%20and%20biodiversity%20benefits.
[viii] A blueprint for scaling voluntary carbon markets to meet the climate challenge – McKinsey https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge
[ix] Carbon levy on EU imports needed to raise global climate ambition – European Parliament https://www.europarl.europa.eu/news/en/press-room/20210201IPR96812/carbon-levy-on-eu-imports-needed-to-raise-global-climate-ambition
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