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Carbon markets and climate policy - Opportunity in a decarbonising world

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.

 

References

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 info@paiaconsulting.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

Image by enriquelopezgarre from Pixabay

What companies in Singapore should know about the Carbon Tax

Singapore has passed the Carbon Pricing Bill on large emitters. Under the 2015 Paris Agreement and as part of a global effort to mitigate climate change, Singapore has pledged to reduce its greenhouse gas emissions per dollar of GDP by 36 per cent from 2005 levels by 2030. It has also pledged to stop any increase in its total GHG emissions by 2030.

Read more

Singapore’s 2019 Carbon Tax…does it matter to you?

Nurul Amillin Hussain.

A carbon tax on emissions of greenhouse gases (GHG) will be implemented in 2019, as announced on the 20th of February in the 2017 Budget, delivered by the Minister of Finance, Heng Swee Keat. This move towards carbon pricing follows other policy initiatives to reduce Singapore’s emissions intensity to 36% below 2005 levels by 2030, a target pledged under the 2015 Paris climate change pact.

This is not the first time the issue of carbon pricing has cropped up in Singapore’s agenda. In the 2016 Climate Action Plan, the Government said that carbon pricing was being studied as a method to enhance energy efficiency across industries.

What is carbon pricing?

Carbon pricing is a market-based method aimed at reducing emissions by charging emitters. The charge imposed on emitters is called a carbon price, which is the amount that must be paid for the right to emit one tonne of carbon dioxide into the atmosphere. There are 2 kinds of carbon pricing – a carbon tax, or cap-and-trade, which allow emitters to purchase permits to emit carbon dioxide.

Using carbon taxation to manage GHG emissions has been a strategy in the stable of environmental regulation for decades. Finland, for example, was the first country in the 1990s to impose a carbon tax. Other countries that have implemented a carbon tax include Zimbabwe, India, Japan, Denmark, Germany, the Netherlands, Norway, Sweden, Switzerland, the UK and Canada. There are also various countries within the Asian region and beyond where the carbon tax has been proposed, but not yet implemented – South Korea, Taiwan, South America, New Zealand and France are some examples. Larger users of carbon resources, such as the United States, Russia and China, have been actively resisting carbon taxation despite growing calls to engage in more market-based solutions to curb GHG emissions.

What does this mean for you?

The carbon tax that the Singapore government aims to implement in 2019 is aimed at curbing GHG emissions upstream, targeting power stations and other large direct emitters, rather than individual, domestic electricity users. The impact of the tax will be more significant in industries that are larger contributors to Singapore’s GHG emissions, such as the manufacturing sector. Making up 59% of total emissions in 2012, the sector has specifically been part of Singapore’s commitments towards reducing emissions, with a target set up to improve energy efficiency in the sector by 1-2% a year from 2020 to 2030.

Carbon pricing systems are a timely addition to larger, multi-lateral plans to reduce GHG emissions and address the pressing issues of climate change. It offers a balanced solution between addressing climate change risks and ensuring economies stay competitive in the long-term. Contact us if you would like to know more about how we can offer our customised help and strategic expertise in this area.