Singapore’s ambition in novel bilateral carbon markets faces competitor, near-term supply hurdles

AJA’s reforestation project in Ghana’s eastern Kwahu region is going well, Mason said. The team is starting to source the logistics for regenerating 100,000 hectares of degraded land and writing up a project design report, after wrapping up community engagements. The eventual goal is for revitalised forests to help save 23 million tonnes of carbon emissions.

The Kwahu project is a potential source of carbon credits for Singapore to slash greenhouse emissions and meet its climate goals, via a nascent United Nations-backed system involving bilateral deals. The city-state, with limited renewables potential and currently generating most of its power using fossil gas, wants to peak emissions this decade and reach net-zero by 2050.

From next year, Singapore’s government is letting big emitters offset some of their carbon tax dues using international carbon credits, and Mason is looking to get the nod for AJA’s venture to be a supplier. Industry insiders expect Singapore and Ghana to seal a deal facilitating such trade this year.

But the catch is that tree saplings take time to grow, and the Kwahu project is only expecting to start issuing carbon credits – each representing a tonne of carbon dioxide emissions saved – in 2028. It is not clear if other carbon projects are in the pipeline. This means Singapore could find itself short on carbon credits in the coming years, even if the deals and paperwork are finalised earlier.

Singapore’s efforts show how important the country regards the international trade in carbon credits for its climate efforts. But the challenges also reflect the realities of being one of the front-runners in a fledgling market seeking to both expand and uphold quality.

Analysts say Singapore will also face competition from other buying countries such as Japan, which has a foot in the market and faces sky-high domestic carbon abatement costs. Eventually, the market could be oversupplied, which puts the onus on buyers to play fair – especially when there are still gaps in the current rulebook.

Big ambitions, tight timeline

Although there is a well-supplied voluntary carbon market, come next year, Singapore’s carbon tax payers can only choose credits from a list of host countries, carbon crediting programmes and methodologies that the city-state will issue later this year.

Such rules are to ensure that Singapore can also use these credits towards its own decarbonisation targets, through what is known as “Article 6.2” bilateral carbon trading, envisioned in the 2015 Paris climate agreement and put together in 2021.

In this system, host countries earn from marketing carbon credits, but need to strike off the emissions savings sold to avoid having its benefits counted twice. Projects likely need to be planned from the onset to follow design and accounting rules set by both countries, Mason said.

“It means [carbon credits] will come primarily through new pipelines. And that pipeline will need several years before verified credits can emerge from it,” he said.

Mason added it may be possible for some existing carbon projects to issue future credits made compliant for Article 6.2 trade – potentially speeding up supply – but older credits are out of the game. As it stands, Singapore has not said how many credits it expects to be available next year. Carbon tax payers have until around mid-2025 to decide on how many carbon credits to buy to offset their 2024 emissions.

Much will depend on the exact rules settled upon by Singapore and its trade partners. The city-state has substantively concluded negotiations with Ghana and Vietnam, though firm deals have not been signed with either country. The deal with Ghana was targeted for June 2023 according to the Ghanaian government, but has been pushed back.

Host countries will also need their own regulations around the sale and tracking of Article 6.2 credits. Ghana has the rules in place; Vietnam does not – making it another factor affecting the speed of carbon credit availability.

Singapore is not only pursuing a tight timeline, but also creating a sizable demand for bilaterally-traded credits.

In all, there could be a need for up to 2 million carbon credits every year from Singapore through Article 6.2 markets. The figure is an estimate from carbon tax payers being allowed to offset 5 per cent of their fees with overseas carbon credits. The carbon tax covers about 80 per cent of national carbon emissions, which was nearly 50 million tonnes in 2020. 

In comparison, frontrunner Switzerland, which already has three carbon projects with Ghana, Thailand and Vanuatu, only expects about 2 million carbon credits to be generated over 10 years.

Singapore and Switzerland are among a group of about 10 buyer countries looking to use overseas carbon offsets. Within Asia Pacific, Australia, Japan and South Korea are also in the game.

Japan could offer particularly strong competition. The country has a bilateral programme, the “Joint Crediting Mechanism” (JCM), running with several partners since 2013. The JCM has over 100 carbon projects in its fold, and Japan is looking to adapt the scheme for Article 6.2 trading.

“How long they will take is unclear, but with their JCM they have a starting point, which is a little ahead of Singapore because Singapore is starting from scratch,” said Peter Zaman, a climate policy expert and partner at law firm HFW.

Japan also has a particularly high internal carbon abatement cost, with studies expecting around US$1,000 per tonne by 2050 – possibly allowing it to stomach more expensive carbon credits in the future. 

But as it stands, Japan’s carbon pricing remains low, at just over US$2 per tonne of emissions. Singapore’s rates, meanwhile, will rise five-fold to US$18 next year, and then to US$33 in 2026.

Eventual buyers’ market

Still, the expectation is that Singapore will receive a healthy inflow of carbon credits over the longer term.

“The one thing Singapore has done, which no other country in Southeast Asia has managed is to set a price benchmark by announcing what its carbon tax rate will be for the next three to four years,” Zaman said.

“As soon as Singapore announces one Implementation Agreement, we will have a fairly good feel for how Singapore sees the Article 6.2 process, and like the Swiss arrangement before Singapore’s, you would expect the first agreement to be a template for all the other ones,” he added.

Switzerland had signed its first agreement with Peru back in 2020, and its deal with Ghana in 2021. Last year, a major sustainable rice project in Ghana was authorised for carbon credit transfers to Switzerland, more approvals have been issued since for other projects.

The Article 6.2 market is big enough to accommodate Singapore’s estimated demand for two million credits a year, said Ben Rattenbury, vice-president of policy at carbon credit rating firm Sylvera.

“There are medium to large projects that at the moment would issue 2 million tonnes [worth of credits] or more per year. So that volume of supply is not inconceivable at all,” Rattenbury said.

There is enough good quality in the market, based on Sylvera’s ratings, to support that level of demand, Rattenbury said, adding that most credit types are going for under US$10 a tonne.

Nonetheless, there will likely be top-ups to the selling price of offsets traded under Article 6.2. Countries would charge authorisation fees to cover their own administrative expenses – which reach up to US$5 for Ghana – and sellers could pitch their offerings as premium as national governments, and the UN, would have screened the credits for quality. Credit prices in Singapore will need to stay under US$18 in 2024 and 2025 to make economic sense in place of the carbon tax.

Zaman estimates that there are over 100 countries willing to sell carbon credits under Article 6.2.

“It is definitely a buyers’ market, buyers can basically pick selling countries; if one is too stubborn [about terms], there is always another country,” he said. 

Currently, there are already over 60 deals signed or being explored, with Sweden also among the prospective buyers. Apart from Vietnam and Ghana, Singapore is in talks with over a dozen countries, including Bhutan, Chile and Morocco, to buy carbon credits.

When these deals can be actualised could depend on host countries’ familiarity with Article 6.2 rules.

“Switzerland has been doing other countries like Singapore a favour by going to a lot of countries and helping them develop their Article 6 framework. Delays happen when you negotiate bilaterally with a country that has no Article 6 framework,” Zaman said.

Most of the countries Singapore is in talks with have some form of assistance with capacity building, either from Switzerland or other entities, except Sri Lanka and Papua New Guinea, according to UN data.

Imperfect system

Although enough has been negotiated between countries at the UN that Article 6.2 deals can now be made, several unresolved issues are still carried forward into the upcoming COP28 climate summit.

There are questions, for instance, around how much control host countries have in revoking authorisation of credits that are traded bilaterally. It could matter if the hosts find themselves lagging with their own climate targets, and need to keep offsets for domestic use. 

“Some countries are still rightfully a bit hesitant about engaging [the Article 6.2] process because it has implications for their NDCs,” said Jonathan Crook, global carbon markets expert at non-profit Carbon Market Watch.

Questions have also been asked about whether the UN has enough teeth to deal with problems, such as if countries consistently flout quality rules on the permanence of carbon savings or whether funds from the carbon credit really helped with additional climate action.

“There will be high-level rules for what [carbon credits] can and should count, but I think the likelihood of any stringent enforcement is fairly low. So the only real bar is whether you have a government that is willing to buy these credits,” Sylvera’s Rattenbury said.

“There are lots of supplies out there if you are willing to be flexible on quality,” he said, adding that he believes Singapore is instead seeking for quality trade.

The city-state recently published a list of principles it will use to screen carbon credits for quality.

The overarching criteria for quality would be transparency, Rattenbury said, because it would allow raters and independent groups to provide third-party assessments. As it stands, countries are allowed to keep parts of their Article 6.2 submissions to the UN confidential, and Crook believes pricing information would likely not be revealed.

Things could yet change when another global “Article 6.4” market, which involves multilateral trading on a UN platform, comes online in the next few years.

Quality control

Beyond UN-level trading, quality issues continue to dog the wider carbon market. Major certifier Verra suspended a method for calculating offsets from improving rice cultivation this year, after Switzerland and Ghana had signed their rice project agreement.

But interest in carbon trading between countries continues to grow. Mason from AJA partners says more African nations are keen to speak with Singapore; he has been in some of the talks himself.

Singapore, meanwhile, has said it is open to changing the proportion of carbon tax dues that can be offset with international carbon credits as the market develops.

Crook said the bar should not be set too high.

“Carbon credits are about trying to find the cheapest mitigation from different carbon projects, whereas a carbon tax is obviously not trying to do that. The idea is to price carbon effectively,” he said.

Correction note: Paragraph 29 has been edited for clarity.